VZCZCXYZ0000
RR RUEHWEB

DE RUEHSG #0028/01 0111128
ZNR UUUUU ZZH
R 111128Z JAN 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC 2639
INFO RUEHBO/AMEMBASSY BOGOTA 1911
RUEHBR/AMEMBASSY BRASILIA 0123
RUEHBU/AMEMBASSY BUENOS AIRES 0730
RUEHLP/AMEMBASSY LA PAZ JAN LIMA 5400
RUEHQT/AMEMBASSY QUITO 1792

UNCLAS SANTIAGO 000028 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB PGOV CI
SUBJECT:  AMBASSADOR REVIEWS ECONOMIC THEMES WITH NOBEL PRIZE WINNER 
AND CENTRAL BANK PRESIDENT 
 
 
¶1. (SBU) SUMMARY: The Ambassador hosted Dr. Robert Solow -- 1987 
Economics Nobel Prize winner -- and Central Bank President Jose De 
Gregorio at the residence on January 8 to discuss economic issues in 
Chile.  The conversation focused largely on the distinctive elements 
that make Chile and its economy and labor market so different from 
those in the region.  Dr. Solow, who visited Chile to participate in 
a GOC-hosted seminar on "Labor and Equity," is impressed with the 
country's focus on problem areas and the quality and seriousness of 
his Chilean interlocutors.  Dr. Solow noted that he would be 
consulting Harvard and MIT economists on a specific question posed 
to him by Finance Minister Andres Velasco the previous day about 
collective bargaining.  End Summary. 
 
¶2. (SBU) The Ambassador invited Economics Nobel Prize recipient Dr. 
Robert Solow to the residence on January 8, taking advantage of his 
presence in Chile for a seminar hosted by the GOC Presidential 
Advisory Board on Labor and Equity.  Chile's new Central Bank 
President Jose De Gregorio (appointed in December 2007) also 
participated in the discussion.  He is a former student of Dr. Solow 
and earned a PhD in economics from MIT. 
 
Need for Labor Flexibility 
-------------------------- 
¶3. (SBU) Both Dr. Solow and the Central Bank President agreed that 
Chile needed a more flexible labor market to advance the country 
further.  Instead of seeking only to secure existing jobs, labor 
unions needed to focus more attention on the creation of new jobs 
and industries with higher incomes, noted the retired MIT professor. 
 Working with the private sector, labor should seek the production 
of value added products (e.g., production of furniture with Chilean 
wood or cables with Chilean copper) that would generate better 
salaries. 
 
¶4. (SBU) De Gregorio said there is a tendency of some in government 
to look toward European labor standards.  He warned that the tax 
burden is already high in Chile and citizens do not receive benefits 
from those taxes, as in Europe.  To best help its workers, Chile 
needed to generate higher incomes, he said.  Dr. Solow indicated 
that with changing technologies, workers change jobs more 
frequently, unlike in the past, and need to be adaptable and 
well-educated.  Both the professor and Bank President agreed that 
severance payments are a disincentive for businesses in Chile to 
hire new workers and foster new industries. 
 
¶5. (SBU) De Gregorio said that Chilean students are increasingly 
more skilled utilizing new technologies.  As an example, he noted 
students were surprisingly organized during demonstrations against 
the Bachelet government in its first month in office.  The students 
coordinated blockades and warned each other of arriving security 
forces by using text messages.  De Gregorio contrasted his 
experience as a student protesting against the Pinochet regime, when 
organizing students with limited means of communication and 
information was a problem. 
 
Sub-Contracting Dilemma 
----------------------- 
¶6. (SBU) The Ambassador raised the dispute over subcontracting at 
CODELCO, the world's largest copper company, noting that the issue 
has become a top labor concern for the Bachelet administration.  De 
Gregorio said much of the problem stems from the differentiated 
treatment of the firm's permanent employees and its temporary 
 
contract workers.  The Central Bank President indicated that some 
contract workers perform the same duties as the permanent ones, but 
receive different benefits.  The problem is not easily resolved. 
 
Why is Chile different? 
----------------------- 
¶7. (SBU) Dr. Solow stated he had been impressed with Chile and the 
seriousness and desire of his Chilean interlocutors to solve 
problems.  Noting that Chile is implementing sound economic 
policies, the retired MIT professor wondered what made Chile so 
different from other countries in the hemisphere.  De Gregorio 
explained that Chile has always had strong institutions, even under 
the military dictatorship of General Pinochet.  The country had 
largely refrained from populism, with the exception of the 
disastrous Allende administration.  He theorized that corruption had 
been held in check in Chile, unlike in other Latin American 
countries, because of its strong institutions.  He noted, for 
example, that Argentina has yet to recover from Peron's reign, which 
had largely disintegrated the country's institutions. 
 
Consulting Academia 
------------------- 
¶8. (SBU) Dr. Solow said he met the previous day with Finance 
 
Minister Andres Velasco, whom he described as exceptional.  One 
topic raised by Velasco concerned the optimal size for negotiations 
between management and workers of a firm.  In a Chilean company 
there can be as many as 100 separate categories (e.g. cashiers, 
shelf stackers, and janitors in a grocery store all negotiate 
separately with management).  The Finance Minister explained his 
team found no academic studies on the optimal size for inter-firm 
negotiations in collective bargaining.  Dr. Solow said he promised 
to consult Harvard and MIT economists on the subject and for any 
relevant research.  De Gregorio commented that Velasco does an 
excellent job linking what is relevant in academia with the 
political side of operating a government. 
 
MIT Mafia in Chile 
------------------ 
¶9. (U) The Central Bank President noted that there are many MIT 
graduates working Chile, but they are not as well known as the 
University of Chicago "Boys."  After 45 years at MIT, the retired 
professor said there are several former students in influential 
government positions in different countries, including three or four 
Chileans who later became Central Bank Board Members.  He indicated 
he is always pleased to see former students playing important roles 
in society. 
 
SIMONS