To Boost Growth in Chile, Focus on Business Regulations
By Metodij Hadzi-Vaskov
Economies thrive when businesses thrive. This is because businesses play a vital role in the economy—spurring investment, competition, and job creation.
So, it is critical for economic growth, then, that policymakers choose the best policies to ensure that businesses are able to run smoothly.
In Chile, we find that continuing with reforms that help improve business practices can raise productivity and boost output.
In a recently published IMF staff working paper, our analysis finds that by closing the structural gaps with the 25th percentile of the Organisation for Economic Co-operation and Development (OECD) countries’ performance over five years, Chile can boost output by up to 6 percent, while potentially achieving a small net cumulative fiscal gain.
Chile has transformed itself into one of the most dynamic economies in the region, with solid fundamentals, robust institutional settings, and a sound track record of macroeconomic policies. As such, Chile typically outperforms peers in Latin America with respect to various structural indicators, for instance, infrastructure quality, access to electricity, and extent of employee training.
In addition, the country stands favorably globally in several areas relevant for economic performance and productivity improvements, such as connectivity—measured by mobile phone subscriptions—enrollment in tertiary education, adult literacy, and firms’ financial inclusion.
In these areas Chile is not only at the top in Latin America, but also ranks among the best performers in the OECD.
Thanks to prudent economic policies over the years, Chile has maintained a strong and stable economy. Yet, more can be done to improve the business environment and support growth.
Our analysis, using indicators from the OECD’s Structural Policy Indicators Database for Economic Research (SPIDER) dataset, identifies several policy gaps relative to the OECD peers.
For instance, we find that Chile is not only distant from the best performer, but also lags the OECD’s 25th percentile in business licensing and regulation, research and development (R&D) expenditure, and employment legislation.
Structural reforms that help move up Chile’s rankings and close the policy gaps correspond to regulations and policies that are found to be more conducive to productivity and growth. Hence, by closing the policy gaps relative to its OECD peers, Chile can reap significant economic benefits.
Key policies that would help close Chile’s policy gaps relative to the OECD’s 25th percentile and yield highest growth dividends include the following four areas:
- Top priority is to comprehensively streamline business licensing and regulation, by simplifying procedures (such as for issuance of business licenses and permits), improving coordination among different license-issuing institutions, and reducing involvement of notaries in many procedures to shorten time lags and lower costs for businesses.
- Further increase labor market flexibility, by reducing severance costs and dismissal procedures to increase job creation in the formal sector, and making eligibility for benefits more flexible to cover workers with precarious jobs.
- Enhance active labor market policies, particularly through allocation of more resources to training programs, and better targeting of those programs towards unemployed workers most in need.
- Strengthen capacity for innovation and R&D by providing incentives through tax credits subject to simplified certification procedures, clarifying eligibility for tax deductions, and focusing public policy on measures that yielded best results in the past (such as successful project at Fundación Chile).
Using estimates about the average output effect of typically observed reforms in these four areas in OECD countries, our analysis finds that output can be up to 6 percent higher after five years, although the output gains are likely to be backloaded. While initially these reforms will entail fiscal costs, eventually they should be more than offset through tax gains from the reforms’ positive effect on output, possibly resulting in a net cumulative fiscal gain of ½ percent of GDP over 5 years.
Metodij Hadzi-Vaskov is a Senior Economist in the IMF’s Western Hemisphere Department. He is currently on the Chile desk and previously worked on Panama and the Dominican Republic. His current research focuses on international macroeconomics, emerging markets, sovereign spreads, and trade. He holds a Ph.D. in Economics from Utrecht University in the Netherlands.