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UNCLAS SECTION 01 OF 03 SANTIAGO 000751 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC, DRL/ILCSR--RIGG 
LABOR FOR ILAB--GAY 
 
E.O. 12958: N/A 
TAGS: PGOV ECON ELAB SOCI CI
SUBJECT: CHILE A DEVELOPED COUNTRY BY 2018:  FREI'S 
ADVISORS ESPOUSE AMBITIOUS AGENDA 
 
REF: SANTIAGO 565 
 
SANTIAGO 00000751  001.5 OF 003 
 
 
¶1.  (SBU) Summary:  Advisors to presidential candidate 
Eduardo Frei advocate pushing Chile into the ranks of 
developed countries within 10 years via pro-business reforms, 
pro-labor measures, and support for entrepreneurs.  The 
advisors, part of a progressive policy network known as 
"Oceanos Azules," also support educational improvements, a 
"bicentennial constitution" featuring numerous reforms, 
modernizing the state, and new approaches to incarceration 
and citizen security.  They will present the proposals to 
Frei in early August.  End Summary. 
 
¶2.  (U) The Ambassador hosted key members of the "Oceanos 
Azules" policy team, which is supporting Concertacion 
candidate Eduardo Frei's candidacy, for a lunch and policy 
discussion on July 29.  Attendees included Pablo Ruiz-Tagle 
(domestic policy); Juan Pablo Hermosilla (domestic policy); 
Sergio Henriquez (economics); Jose Moles (energy and 
environment); Raul Troncoso (economics); and Paula Ahumada 
(constitutional reform).  Reftel reports on a similar event 
the Ambassador held with opposition candidate Sebastian 
Pinera's "Grupo Tantauco" policy team in June. 
 
The Big Idea:  Chile a "Developed Country" by 2018 
--------------------------------------------- ----- 
 
¶3.  (SBU) Oceanos Azules's central proposal, which they will 
formally present to Eduardo Frei on August 5, is a 
far-reaching effort to stimulate political participation and 
push Chile into the ranks of developed countries within 10 
years.  Sergio Henriquez, a member of the Oceanos Azules 
Steering Committee and the Minister of Housing in Frei's 
first administration, said that with a current per capita 
income (adjusted for purchasing power parity) of over USD 
14,000 per person, Chile could realistically reach USD 
20-25,000 per person -- the bottom rungs of the developed 
country ranks -- by 2018.  Chile should also eliminate or 
drastically reduce poverty at the same time.  In order to 
accomplish these goals, the state needs to lead an intensive 
effort in which all members of society -- businesses, 
workers, public institutions, and individuals -- take on new 
commitments.  Keenly aware that Frei will have just one 
four-year term to make a dent in this 10-year effort, Oceanos 
Azules hopes that intensive public engagement now about this 
and other goals will enable the Frei administration to start 
quickly on the development effort. 
 
¶4.  (SBU) Improving the business environment -- while 
balancing workers' demands and employers' interests -- will 
be a key part of development push.  Jose Moles, a former 
telecommunications CEO and Oceanos Azules advisor, said that 
the group's plan calls for creation of a National Council on 
Economic and Social Dialogue, a public-private partnership 
that will examine questions about labor rights, worker 
productivity, and business regulation while proposing ways to 
combat inflation and unemployment.  Oceanos Azules would seek 
to promote greater consistency and stability in government 
regulation of the private sector.  On the employment front, 
the policy network seeks to increase the number of Chileans 
in the work force, strengthen workers' rights to organize, 
and facilitate and expand collective bargaining.  They also 
support pro-business policies like greater labor flexibility 
and increased productivity. 
 
¶5.  (SBU) Promoting entrepreneurship will be a substantial 
push of the economic development strategy, Moles reported. 
Bachelet's policies have been very successful at lifting 
people out of poverty, Raul Troncoso noted, adding that now 
the government should expand these efforts to the middle 
class by increasing support to entrepreneurs.  Small, medium 
and micro enterprises account for 80% of employment in Chile, 
yet they receive relatively little state support and 15-20% 
of them fail each year.  The state should provide better 
training and create entrepreneurial networks to support this 
sector, Troncoso advocated.  Raising the total tax take by 
about 2-3% of GDP -- still well below OECD levels -- could 
finance the expanded social programs. 
 
SANTIAGO 00000751  002.2 OF 003 
 
 
Higher Taxes:  Footing the Bill for a Developmental Leap 
--------------------------------------------- ----------- 
 
¶6.  (SBU) Such an expansive effort to promote development 
would be expensive, and Oceanos Azules leaders were upfront 
that Chilean businesses and individuals would need to bear 
the cost via increased taxes.  Developed countries have 
higher taxes, they assert, with OECD members having tax rates 
of 30% or more, while the global average is 16-18%.  (Note: 
Although not explicitly stated, Henriquez seemed to be 
referring to personal income tax.  End Note.)  In Chile 
today, business profits are taxed at 17% while personal 
income is taxed at rates of up to 40%.  The poor pay 
relatively little tax and the rich exploit the disparity in 
personal and business tax rates to hide their earnings, 
leaving the middle class to foot an inappropriately large 
share of the tax burden, advisors said.  Oceanos Azules 
proposes preventing tax fraud and placing more of the tax 
burden on the wealthy by narrowing the gap between personal 
and business tax rates. 
 
Frei's Rallying Cry:  Better Education 
-------------------------------------- 
 
¶7.  (SBU) Improving education will be the rallying cry of 
Frei's campaign, Henriquez said.  Should he win the election, 
educational reform will be Frei's signature initiative, much 
as President Bachelet has emphasized strengthening and 
expanding the social safety net and former president Ricardo 
Lagos promoted better health care.  In the early 1990s, Chile 
made a leap in education by increasing the number of years of 
mandatory education from eight to 12 and lengthening the 
school day.  Today, Chile needs to make a similar leap, not 
by providing more hours of instruction (as the 1990s change 
did) but instead by improving the quality of education and 
breaching the digital gap between rich and poor. 
 
¶8.  (SBU) Differences in class and wealth are even more 
harmful to today's students than they were in years past, 
Henriquez said.  A decade ago, a rich student might have more 
school supplies and books than a poor student, but today 
divergent levels of access to computers creates a deep class 
divide in computer skills and employability.  Chile should 
emphasize digital literacy and consider ways to give every 
school age child a computer, email account, and internet 
access, Henriquez commented. 
 
A More Modern, More Productive State 
------------------------------------ 
 
¶9.  (SBU) Other elements of Oceanos Azules' development 
strategy call for state modernization, including developing a 
more productive civil service.  Government employment is 
bloated by many older, poorly paid and relatively 
unproductive workers who can't afford to retire.  Due to 
Pinochet-era decrees guaranteeing jobs for life, these people 
have been kept on in their jobs even though many of them 
contribute little to their workplaces.  Oceanos Azules 
proposes new policies to improve retirement benefits while 
rationalizing the workforce, ensuring that less productive 
workers are removed from the rolls while securing their 
financial well-being. 
 
Crime and Punishment:  Looking for New Approaches 
--------------------------------------------- ---- 
 
¶10.  (SBU) Chileans have a paradoxical relationship to crime 
and society:  despite relatively low crime rates, Chile has 
an intense societal fear of "delincuencia" and the second 
highest number of prisoners per capita in the hemisphere. 
(The United States has the highest number.)  Oceanos Azules 
hopes to re-examine law enforcement policies, such as the 
incarceration of drug users, and re-cast the public debate 
about violence, focusing more on structural issues such as 
domestic abuse, alcohol abuse, and lack of options for young 
people.  Hermosilla requested the Embassy's help in linking 
Oceanos Azules advisors with American expertise, perhaps at 
the Department of Justice. 
 
SANTIAGO 00000751  003.3 OF 003 
 
 
Reinvigorating Democracy:  A Bicentennial Constitution 
--------------------------------------------- --------- 
 
¶11. (SBU) Lawyer Paula Ahumada briefly described efforts to 
move past the 1980 constitution designed by military dictator 
Augusto Pinochet with a series of constitutional reforms 
collectively dubbed the "Bicentennial Constitution" in honor 
of Chile's upcoming anniversary.  Key proposed changes 
include eliminating Chile's unusual binomial electoral system 
for parliamentary seats, extending voting rights to 
expatriate Chileans, and allowing for greater participation 
by small political parties.  Ahumada hopes that such changes 
would help re-invigorate popular participation in politics, 
which has been dropping for the past two decades. 
 
Comment:  Different Routes to Similar Goals 
------------------------------------------- 
 
¶12.  (SBU) Policy development teams for leading presidential 
candidates Eduardo Frei and Sebastian Pinera demonstrate a 
surprising degree of agreement on the central challenges 
facing the next Chilean administration.  Both groups want to 
eliminate or drastically reduce poverty and promote economic 
development via the middle class.  They agree that supporting 
entrepreneurship, increasing productivity and participation 
in the work force, and reforming education are the keys to 
achieving this goal, and both are well on their way to 
finalizing serious, responsible proposals to share with the 
public.  Nonetheless, the two teams diverge on how to realize 
these goals.  The progressives, not surprisingly, are more 
pro-labor, more willing to raise taxes, and advocate a larger 
role for the state, while a strong belief in free markets was 
the consistent thread in conversations with Grupo Tantauco 
(reftel).  Both campaigns will be challenged to engage the 
public's attention with these sober proposals after allowing 
leftist independent candidate Marco Enriquez-Ominami to 
dominate the limited policy debate thus far with his 
controversial calls to legalize gay marriage, give Bolivia 
access to the sea, privatize the state-owned copper company, 
and permit abortion.  End Comment. 
SIMONS