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Framework conditions for rural development in Chile

Chile’s sound macroeconomic conditions have been a key factor of its resilience to the global financial crisis

Chile has experienced an important process of modernisation, bringing greater economic prosperity and lower poverty. Per capita income more than doubled over 20 years, to be the highest in Latin America. Chile enjoys a prudent fiscal policy and strong inflation-targeting framework, features that have been well-recognised by sovereign rating agencies. The financial sector is healthy, and the government has sought to broaden the productive base of the economy and to boost entrepreneurship and innovation through investments in education and the reduction of product-market entry barriers.

Macroeconomic stability has been a key factor of growth. Macroeconomic stability was reinforced by the adoption in 2001 of a structural fiscal rule which forces the government to maintain a surplus equivalent to 1% of GDP. Balanced fiscal accounts have been complemented by low inflation, an open trade regime and favourable legislation for foreign direct investment (FDI). This stability and openness reduced uncertainty, increased business confidence and helped attract investments.

Figure 1.5. The OECD Better Life Index shows a mixed picture

Note: Each well-being dimension is measured using one to three indicators from the OECD Better Life indicator set. Normalized indicators are averaged with equal weights. Indicators are normalised by re-scaling (linearly) to be from 0 (worst) to 10 (best).

How to read this figure: Compared to the OECD average, Chile scores relatively poorly on income and the environment, but highly on life satisfaction.

Source: OECD Better Life Index, www.betterlifeindex. org.

Chile was well prepared to respond to the global economic recession of 2008-09 and to the natural disasters of February 2010 (earthquake and tsunami) thanks to its sound macroeconomic policy framework and strong institutions; consequently, economic growth rebounded quickly. GDP growth averaged 5.8% annually from 2010 to 2012. The post-earthquake reconstruction expenditure and a commodity price boom benefiting Chile’s main export products - notably copper, agriculture, forestry and fisheries - partly explains this good outcome, in addition to sound macroeconomic, financial and structural policies, and domestic and external confidence in the country’s prospects.

The process of modernisation entails a transition from agricultural-based economic activities to the services-oriented sector. Chile, as many OECD member countries, is currently undergoing a structural change, reducing the size of agricultural activities toward a service-oriented economy. Over the past 20 years, the employment share in the agricultural sector and value added to total GDP has halved in size. Currently, the agricultural sector represents 10.6% of total employment and adds to 3.4% to total GDP. In contrast, the service sector currently represents two-thirds of total employment and adds to 57% of total GDP.

Figure 1.6. Potential and the output gap

Source: OECD (2013a), OECD Economic Surveys: Chile 2013, OECD Publishing,

http://doi.dx.org10.1787/eco surveys-chl-2013-en; OECD Economic Outlook (database), http://doi.dox.org/10.1787/eo-data-en, (accessed on 10 December 2013), updated with recent information; Budget Directorate - Government of Chile.

Figure 1.7. Employment and value added in agriculture

Note: Agriculture corresponds to ISIC divisions 1-5 and includes forestry, hunting and fishing, as well as cultivation of crops and livestock production. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs.

Source : World Bank, World Development Indicators.

As is the case in other OECD countries, Chile has a bi-modal agriculture, with a relatively small share of large-scale, internationally competitive farms accounting for the majority of agricultural production and a large share of small sub-commercial size farms contributing a relatively small share of agricultural output. Many commercial scale farms in Chile have become major contributors to exports, particularly for horticultural crops, and create significant amounts of rural employment, especially if first-stage processing activities are considered. Unlike most OECD countries, agricultural support policy in Chile does not distort production decisions on these larger farms. Agricultural support in Chile focuses on the smallest, most economically disadvantaged farms that are weakly connected to markets with the twin goals of improving their competiveness and enhancing family incomes.

The opening of the economy has centred primarily on resource-based sectors. Chile’s small resource-based economy underwent a profound policy shift from import substitution to exports. A series of trade reforms, along with favourable international conditions, such as high copper prices, raised the ratio of exports to imports to GDP from 45.7% in 1976-84 to 60.3% in 1995-2002. The opening of trade-related productive activity gave rise to new industries based on primary goods, such as the agro-food sector. An important share of overall exports is driven by primary and first-stage processing activities. Chile’s economy relies heavily on natural resources. It produces almost a third of the world’s copper, representing more than half of Chile’s exports. It is also the world’s second largest producer of salmon and the fourth largest wine exporter.

Despite these positive developments, the process of modernisation is far from finished. Chile’s economy needs to further spur dynamism in order to maintain the positive outlook in the medium and long term. In addition to advancing in a number of key areas such as strengthening green growth, labour market inclusiveness, entrepreneurship and innovation (OECD, 2013a), regions need to continue advancing in unlocking the growth opportunities in their territories. National growth will be strengthened as the country advances in its national urban policy framework (OECD, 2013b), it’s place-based approach adapting policies to the specific and varied characteristics of different Chilean regions (OECD, 2009), and finally in the prospects of rural areas. There is a need to shift the vision from currently lagging regions depending on social programmes and sectoral agricultural policies towards a comprehensive rural development programme. This report will focus on this latter policy framework.

 
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