Publish in Perspectives - Wednesday, June 18, 2014
Chile should boost ties with India, which is expected to increase demand for imports thanks to growth policies of new Prime Minister Narendra Modi, the author points out. (Photo: Twitter account of Narendra Modi)
Instead of lamenting the tax changes that lie ahead, Chile should boost ties with India.
BY WALTER T. MOLANO
Heavily
laden clouds hover over the wintry skyline of Santiago, mimicking the general
mood of pessimism. The landslide election of Michelle Bachelet heralded the introduction of new wave of
legislation that will transform the country.
The heart of the new measures consists of tax and education reforms that go
hand in hand. The tax reforms consist of aligning corporate and personal income
taxes. Many of the loopholes that were used by individuals to reduce their
income tax bills will be eliminated, thus generating an estimated 3 percent of
GDP or $8 billion in additional revenue. The higher taxes will primarily be
used to overhaul the education system.
EDUCATION: MAKING IT WORSE
In addition to earlier reforms that expanded the use of government grants to
fund higher education, the government is proposing radical changes to education
at the primary and secondary levels. Chile's public schools are poor, despite
being the most prosperous country in Latin America. For decades, the government
has recognized that the key to its future development will be through
improvements in productivity. This requires significant upgrades in education
and infrastructure. However, a well-organized and militant teachers union has
successfully blocked all attempts to reform the system. That is, until now.
Unfortunately, the proposed reforms may only make the situation worse.
Approximately, 8 percent of Chilean students attend private schools, which offer
top rate education. The rest is split between public and subsidized schools.
The latter consists of institutions that are privately owned, but also use
public funds. Tuition tends to be minimal, but families are willing to pay a
little in order to offer their children a better education. The public schools
are considered to be the worst. The problem is that the government hopes to use
approximately $5 billion of the new tax revenues to buy out the subsidized
schools and transform them into public schools. Therefore, the reforms may do
more harm than good. The remaining funds will be used for improvements in the
public health system and to help reduce the fiscal gap. The reforms will be
implemented gradually in order to avoid having too much of an adverse impact on
economic activity.
ECONOMIC SLOWDOWN
Unfortunately, the Chilean economy is already grinding to a halt. Declining
copper prices, tighter consumer credit conditions and the hangover from the
housing frenzy are producing constant downward revisions of economic
projections. Most Chilean economists forecast a growth rate of 3 percent to 3.5
percent y/y GDP growth rate in 2014, but the economy will be lucky to end the
year above 2.5 percent y/y. In April, the IMACEC index of economic activity
expanded only 2.3 percent y/y, and it will be in a similar range going forward.
Moreover, a new sense of militancy and arrogance is being displayed by Bachelet
and her leftist allies. With a strong majority in the two chambers of congress,
all debate and discussion has been virtually eliminated. New bills are
introduced and summarily passed, without giving the opposition much chance to
voice their concerns. The left always complained of the arrogance of the right
in earlier times, but they are demonstrating the same flaws. The tax changes
and air of hostility towards the private sector has brought investment to a
screeching halt, which only adds to the country's economic woes.
HOPE: THE NEW INDIA
Yet, there is a ray of hope for Chile and most of the emerging world. Most
Chileans bemoan the slowdown in China, but few are noticing the revolution that
is about to sweep India. The resounding election of Narendra Modi stands to turbocharge a country of more than a
billion consumers.
The result could be similar to the process that transformed China. The
modernization of infrastructure and the construction of new highways, bridges
and rail lines across the subcontinent will push up the demand for commodities.
India's GDP is similar to Russia and Brazil, but with five times the
population. Therefore, the urbanization process that will take place as the
country modernizes and grows will lead to a building boom that will be in line
with what China saw during the last decade.
Therefore, Chile needs to change its focus. Instead of lamenting the tax
changes that lie ahead, it may be time to start making commercial ties with
Delhi, Mumbai and Bangalore and Hyderabad because a new commodity super cycle
may be close on the horizon.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.