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DE RUEHSG #0046/01 0151156
ZNR UUUUU ZZH
R 151154Z JAN 10
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC 0528
INFO MERCOSUR COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
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RUEHQT/AMEMBASSY QUITO

UNCLAS SANTIAGO 000046 
 
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E.O. 12958: N/A 
TAGS: ECON ETRD EINV ELAB PGOV SOCI CI
SUBJECT: A/S VALENZUELA DISCUSSES CHILE'S ECONOMIC STRENGTHS AND ROLE 
IN THE REGION WITH MINISTER OF FINANCE 
 
¶1.  (SBU) SUMMARY:  A/S Valenzuela met with the Minister of Finance 
on January 12 to discuss Chile's accession to the Organization for 
Economic Cooperation and Development (OECD), the state of Chile's 
economy, and plans for the next Chilean administration.  The 
discussion ranged from innovation to education to economic 
instability in Venezuela and Argentina.  Two key issues were 
Inter-American Development Bank (IDB) capitalization for the 
region, which Chile characterized as "miniscule" considering the 
region's economy, and a push from Ministry of Finance senior 
officials to sign a bilateral tax treaty the first week in 
February, in Washington DC.  END SUMMARY. 
 
 
 
¶2. (U) On January 12, A/S Valenzuela met with Minister of Finance 
Andres Velasco and International Affairs Coordinator Raul Saez. 
The Ambassador, Senior Poloff and E/Poloff (notetaker) accompanied 
A/S Valenzuela. 
 
 
 
OECD Accession:  An Opportunity for Expanding Views 
 
--------------------------------------------- ---------------------- 
--- 
 
 
 
¶3. (SBU) In response to A/S Valenzuela's congratulations on Chile's 
pending OECD membership (the Accession Agreement was signed the day 
before on January 11), Velasco commented that Chile would be an 
additional voice in the organization's Asia-Pacific Economic 
Cooperation (APEC) group and will provide some balance against the 
influence of European countries.  He also expressed appreciation 
for strong U.S. support in Chile's accession process.  Saez noted 
that Chile, as well as being willing to learn from other members, 
has a fresh perspective to add to the OECD dialogue. 
 
 
 
Chilean Economy Will Be Strong in 2010... 
 
--------------------------------------------- --------- 
 
 
 
¶4. (SBU) Expressing concern about the economic policies and high 
inflation of both Argentina and Venezuela, Velasco solicited A/S 
Valenzuela's views on the economic direction of the region.  This 
lead to a broader discussion of the boom-bust cycle. 
When asked about the state of Chile's economy, Velasco explained 
Chile had a "good" year in 2009 for several reasons:  it had no 
finance/credit problems, economic production in Chile was not 
dislocated as it was elsewhere, local consumer demand increased, 
and the country continued to have strong exports. 
 
 
 
¶5.  (SBU) Velasco stated that the impact of the global financial 
crisis was tempered in Chile because the productive sector was not 
disrupted.  He elaborated that businesses were able to get credit, 
consumers continued to spend, and unemployment was not a large 
problem.  He characterized exports as "strong," specifically citing 
copper, fruit and wood and Chile's significant market share in the 
U.S., Europe and China. 
 
 
 
...and There Will Be an Investment Boom 
 
--------------------------------------------- ------ 
 
 
 
¶6.  (SBU) Velasco projected that the Chilean economy would fully 
recover in 2010, and that it will experience a "boom" in investment 
compared to previous years.  He said investment is essential for 
Chile to maintain growth at 5-5.5 percent and asserted that the 
country's development agency, CORFO, was doing an excellent job of 
both promoting innovation - an important strategy for growth - and 
 
 
increasing investment.  Velasco strongly emphasized the importance 
of education, especially advanced education, to raising economic 
growth. 
 
 
 
Recommended Priorities for Next Administration:  Education, Taking 
on Teachers' Union 
 
--------------------------------------------- ---------------------- 
------------------------------------------ 
 
 
 
¶7.  (SBU) Responding to Velasco's comment that Chile intended to 
send 2,000 PhD students abroad a year, A/S Valenzuela noted that 
the split between public and private education, at all levels, is 
an "Achilles' heel" for the country.  Velasco responded that there 
had been "huge strides" in providing education in the past 20 
years, citing that 97% of the population completes primary 
education, over 90% start secondary education, and nearly 80% 
graduate from high school.  Velasco said it is "revolutionary" that 
four out of 10 Chileans now attend university (an increase from one 
in 10) and pointed out that by 2010 this is projected to be six out 
of 10. 
 
 
 
¶8.  (SBU) Velasco gave credit to both Chilean President Michelle 
Bachelet and presidential candidates Eduardo Frei and Sebastian 
Pinera for not giving in to demands during the recently-concluded 
lengthy teachers' strike, which started out with 80% participation 
and dwindled to 8% at the end.  Saying that public school 
enrollment is "collapsing," he suggested that proactively taking on 
the teachers' union and its claim that the government owes it an 
"historic debt" (deuda historica), should be a priority for the new 
Chilean president, even though it may result in a 1-2 month strike. 
He further commented that education is an issue that will make or 
break the next administration. 
 
 
 
Chile Wants to Sign Bilateral Taxation Treaty in February 
 
--------------------------------------------- ---------------------- 
--- 
 
 
 
¶9.  (SBU) Calling resolution of the double taxation issue an 
important outcome of Chile's OECD accession process, Velasco said 
the GOC would like to find a date during the first week of February 
to sign the bilateral tax treaty with the U.S.  Mentioning that 
this has been an issue for almost two decades, he indicated that 
signing taxation treaties with the U.S. (and Australia) is critical 
to demonstrate Chile's commitment to high investment standards, 
especially in the context of OECD membership.  Saez stated that the 
text will be ready at the end of January, and Velasco said he could 
travel to Washington DC for the signing in first week in February. 
 
 
 
Concerns about IDB (Under-) Capitalization for the Region 
 
--------------------------------------------- ---------------------- 
------ 
 
 
 
¶10.  (SBU) Velasco said he was concerned about the IDB's ability to 
support contracyclical adjustment programs, given its liquidity 
line of only about $6 billion, an amount he described as 
"miniscule" in view of the combined GDP of countries in the region. 
Velasco conveyed a sense of urgency because of the level of 
unrealized losses due to the financial crises and upcoming 
meetings. 
 
 
 
¶11.  (U) The Assistant Secretary cleared this cable. 
SIMONS