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The author would like to thank Roberto Cardarelli, Eric Petersen, Jorge Roldos, and the participants of seminars at the IMF and at the Central Bank of Chile for their comments.
While the government’s 2015-18 reform agenda comprises many other measures, including reforms of the labor market, the constitution, and social security, this paper focuses only on policies that most directly affect Chile economy’s growth potential. In particular, I will consider the tax and education reforms, and the infrastructure plan within the broader Agenda de Productividad, Innovacion y Crescimiento that was announced by the government in early 2014, and started being implemented in the 2014 Budget Law. Also, this chapter does not address the potential impact on GDP from reduced inequality in the income distribution, an important objective of the reforms (see IMF, 2014).
An OECD (2010) report on the education system in Chile links the voucher system to increased education inequality. In contrast, Gallego (2013) finds that Chile’s education system became more unequal and segregated not because of the introduction of the voucher system in the early 1980s, but because of the absence of voucher schools in some geographical areas.
This is partly related to the mountainous nature of the territory and the resulting diffculty to connect main highways with local roads.
Different layers of agents in the production side of the economy are also useful to address the complexity of computational aggregation.
The model also yields a money demand function by incorporating a separable preference for money. However, since money enters the utility function in a separable fashion and monetary policy is specified as an interest rate rule, inflation has no distortionary effect on consumption and savings plans hence the money demand equation is redundant, and we skip the full-fledged version of the preferences with money in the utility function. For more details see Kumhof et al. (2010).
At 0.52, the income Gini coefficient for Chile points at an inequality at least 20 percent higher than in advanced countries.
Government spending in the model is both consumption and investment. Government investment spending augments directly the stock of publicly provided infrastructure capital, which is used in the production of the final output. I chose to calibrate the shock in infrastructure areas as a TFP shock because its nature is mostly related to a product market reform, which incentivizes private investment, especially in the energy and transportation sectors.
Within each time span, gaps are closed linearly with the exception of energy. Given the speed at which capacity has already been built up in 2015 (Bachelets speech, May 21), we assume that 40 percent of energy generation gaps are closed within the first 5 years. This implies that almost 30 percent of the overall infrastructure gap is closed in the first 5 years. The education gap is closed linearly but only after the first 5 years (that is, it begins to be closed only after 5 years) in order to capture the fact that education reforms generally have an impact on the quality of the labor force only after a number of years. I assume that at least they start accruing after students have finished one full cycle of secondary school.
Simulations consider a range of scenarios determined by independent combinations of credibility, effectiveness and speed of reforms. However, there could probably exist interactions between these three dimensions. For instance, for a given level of effectiveness and credibility, highly effective reforms could endogenously induce even higher levels of credibility or viceversa.
This scenario is quite realistic if we consider that energy projects in the pipeline at the Chiles Ministry of Energy promise to increase the generation capacity by more than 40 percent already by 2020. Also medium credibility seems to be underscored by business confidence being protectedly low for 2014 and 2015 and that this outcome has been connected to the state of uncertainty surrounding reforms. In general, this median scenario is consistent with characteristics and impacts of many of the structural reforms surveyed by Barnes et. al (2013), Lusinyan and Muir (2013) and Varga and in t Veld (2014).