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E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI
 
SUBJECT:  CHILE'S COMPETING ECOMOMIC VISIONS:  A POSSIBLE PREVIEW OF 
THE PRESIDENTIAL CAMPAIGN 
 
¶1. (SBU) SUMMARY:  The Chile 21 Foundation (a think tank affiliated 
with Chile's Socialist party) organized a seminar late last month to 
discuss the current global economic situation and its impact on 
Chile.  Minister of Finance Andres Velasco reviewed the GOC's 
economic policy designed to combat the effects of the crisis. 
Socialist Senator Carlos Ominami, President of Chile 21, called for 
"new fundamentals" in the national economy, as well as a new 
international financial architecture.  Noted economist Felipe 
Larrain provided an opposing view, emphasizing the need to increase 
the national economy's competitiveness and productivity. 
Disagreement broke out between representatives of labor and private 
business over who will "pay" for the costs of the economic downturn 
in Chile.  The conference offered a possible preview of the 
candidates' competing economic views in the upcoming presidential 
election.  END SUMMARY. 
 
Economic Backdrop:  Sailing in Choppy Seas 
------------------------------------------ 
 
¶2. (SBU) Chile 21's conference comes amid a series of gloomy 
predictions and expectations for the economy in 2009.  Analysts, 
economists, politicians, academics, and "the man on the street" all 
agree that the year will be difficult for all sectors of the 
economy.  In November 2008, the Central Bank forecast that Chile's 
GDP will grow at 2-3% in 2009, a view shared by many experts. 
However, the more pessimistic view predicts growth of 1-1.9%. 
Consumption is expected to experience a dramatic slowdown from 9.2% 
to about 0.6%.  Most economists also expect that private investment, 
for the first time in years, will contract significantly due to 
restrictions in credit and less appetite for risk. 
 
¶3. (SBU) Many experts believe unemployment will break the 10% 
threshold, in part driven by the decrease in demand for Chilean 
exports and the contraction in investment.  The real economy is 
already feeling the effects with double-digit drops in exports, 
housing and real estate sales, car sales, and purchases at 
supermarkets and retail chains.  Inflation is easing, but new risks 
may emerge such as price deflation, which could result from 
depressed global demand and the end of the commodity boom. 
 
The GOC's Fiscal Policy:  We Are Keynesians 
------------------------------------------- 
¶4. (SBU) Minister Velasco was the key note speaker.  He emphasized 
that Chile is an open economy and cannot avoid the effects of the 
crisis.  However, the country enjoys advantages that can soften the 
brunt of the crisis.  He noted Chile has managed to maintain a 
healthy fiscal position with low public-sector debt (only 4.1% of 
GDP), a significant surplus (13.3% of GDP), and a low country-risk 
premium (between 220 to 400 basis points). 
¶5. (SBU) Velasco explained that the sound fundamentals of the 
economy will allow Chile to react to external shocks with 
counter-cyclical policy.  The GOC can stimulate domestic demand, 
offset the contraction of external demand, and implement more 
expansive fiscal policy through its recently unveiled US $4 billion 
stimulus plan.  In 2009, Government spending will increase and, due 
to a temporary reduction in the structural surplus rule (from 0.5% 
of GDP to 0%), it will likely run a deficit.  However, Velasco 
stressed the majority of the GOC measures will be temporary.  He 
said the goal is to "beat the crisis."  [Note:  Although, some with 
a more cynical mindset see the goal as mitigating the effects of the 
crisis in a year of presidential elections.  The issue of economic 
stability could prove to be a decisive factor for voters. End 
note.] 
In This Corner:  Empower the State 
---------------------------------- 
 
¶6. (SBU) Socialist Senator Carlos Ominami, President of Chile 21, 
began his presentation by saying: "The fall of Wall Street is to 
deregulated capitalism what the fall of the Berlin Wall was to 
communism."  Ominami faulted the lack of appropriate international 
regulation and supervision for the crisis.  Chile's regulations have 
helped assure its financial system is not at risk.  The response to 
a global crisis should include a new international financial 
architecture and a rethinking of the risk classification system. 
 
¶7. (SBU) Ominami cited several major risks for Chile:  a 
deterioration in the quality of public policies, a tendency to 
promote short-term answers to long-term problems, and a drop in the 
degree of social cohesion (including unemployment, a decrease in 
 
pensions, an increase in poverty, and widening income inequality). 
The State was key in promoting solutions.  However, the GOC needed 
reforms to increase transparency, efficiency, and professionalism. 
The Ministry of Finance needed to strengthen counter-cyclical 
policies, reinforce employment, and create a universal, 
non-discriminatory unemployment system.  Ominami said Chile 21 is 
working on a proposal for the platform of probable Concertacion 
presidential candidate Eduardo Frei. 
 
And In This Corner:  Empower Business 
------------------------------------- 
 
¶8. (SBU) Felipe Larrain, well-known economist and influential 
advisor of Alianza presidential candidate Sebastian Pinera, offered 
an opposing view.  He argued that temporary measures such as tax 
breaks, investment incentives, and lower costs for liquidity, should 
be made permanent.  Chile had suffered a significant drop in its 
productivity and competitiveness.  Larrain noted that the loss of 
Chile's economic dynamism dated back to the Asian Crisis, when 
Eduardo Frei was President.  Average growth over the last decade had 
been 3.8%, but was greater than 7.0% before the Asian Crisis. 
 
¶9. (SBU) Larrain believed Chile would experience at least four years 
of consistently lower growth, with increases in investment and jobs, 
but with lower and lower returns.  He faulted rigidities in the 
labor market, lack of qualified labor, and excessive dependence on 
exports of commodities, as much as the crisis.  Almost 70% of 
Chile's exports were natural resources, and copper and molybdenum 
alone accounted for 59% of the total.    The GOC would need to help 
the private sector by creating a more flexible labor market, 
facilitating access to credit for small- to medium-sized 
enterprises, and relaxing monetary policy. 
 
Workers vs. Employers: Who Will Pay? 
--------------------------------------- 
 
¶10. (SBU) A disagreement broke out between the president of the 
Association of Public Employees (ANEF), Raul de la Puente, and the 
president of the Confederation of Production and Commerce (CPC), 
Rafael Guilisasti.  Quoting President Obama, de la Puente held that 
the crisis was caused by a lack of market supervision, which caused 
over 20 million layoffs around the world.  The GOC had not been able 
to guarantee stable employment or workers' rights in Chile.  He 
called on businessmen to lower their profit margins and prevent 
layoffs.  Guilisasti countered by warning against a loss of trust 
and confidence.  He thought an antagonistic stance by the workers 
would only worsen the social climate.  Unemployment insurance, 
training that would permit the rapid re-conversion of the labor 
force, and direct employment subsidies, were the best way to face 
unavoidable unemployment in 2009. 
 
Comment:  A Possible Preview of the Campaign 
-------------------------------------------- 
 
¶11. (SBU) Chile 21's seminar gives us a first glimpse of the 
economic issues that could dominate the debate during the 
presidential campaign this year.  Pinera and Frei (the likely 
opposing candidates) probably will not change most current economic 
policy or Chile's overall model.  However, the public's rising 
discontent with the political class will be exacerbated by the 
economic downturn.  Solutions to the crisis will occupy a 
significant portion of the presidential campaigns and the GOC's 
political agenda in 2009. 
SIMONS