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WORLD ECONOMIC FORUM: Chile, a Host with Headaches of Its Own

Daniela Estrada

SANTIAGO, Apr 23 2007 (IPS) - The World Economic Forum (WEF) for Latin America will kick off this week in the Chilean capital amid harsh criticism by ruling coalition legislators of the free-market policies followed by Finance Minister Andrés Velasco.

“The Forum should debate the situation faced by Chile, which, despite low inflation and good macroeconomic indicators, is growing at a slow pace and has serious inequality problems, just like the rest of the region,” University of Chile economist Ricardo French-Davis, who won the national social sciences prize in 2005, told IPS.

“The inequality arises from the country’s economic policies: the wage gaps, precariousness of employment, and growth of informal labour. In 2006, Chile grew just four percent because of the inefficiency of the Central Bank and Finance Ministry,” said French-Davis, who is also chairman of the Social Economic Council of the co-governing Christian Democratic Party (PDC).

The Wednesday-Thursday Forum will bring together representatives of governments, business, academia and civil society organisations from around the world to discuss global growth and energy trends and questions of regional integration.

The continuing impact of China’s explosive growth on Latin America, 10 percent of whose exports now go to the Asian giant, will also be debated by the participants in the Latin American edition of the WEF, whose global meeting draws the world’s political and economic movers and shakers every year to the Swiss resort town of Davos.

The Forum’s organisers say Latin America’s democratically elected governments committed to change could help to carry out a “positive regional agenda” to narrow the social gap and reduce inequality.

“I don’t believe that debates that are meaningful to Chile or Latin America will emerge from the Forum,” Hugo Fazio, director of the Centre for National Studies on Alternative Development (CENDA), told IPS. “Very interesting issues might be proposed, but the problem is the angle from which they will be approached.”

The Forum is happening at a time when Finance Minister Velasco has come under fire from lawmakers in the Concertación for Democracy, the centre-left coalition that has governed Chile since 1990, which is made up of four parties: the PDC, the Socialist Party (PS), the For Democracy Party (PPD), and the Radical Social Democrat Party (PRSD).

The attacks began after Velasco sent Congress a bill for the accelerated depreciation of investments in fixed assets for the 2007-2008 period, which would result in tax benefits for companies choosing to make investments now. However, the bill was rejected by the Senate on Apr. 17 with “No” votes from the rightwing opposition and three Concertación lawmakers.

The three disaffected legislators argued that the bill only benefited large companies -which back the draft law – rather than small and medium companies, which generate 80 percent of jobs in Chile, and which are opposed to the bill.

In a successful political manoeuvre, the rightwing opposition alliance maintained that the bill was “good but insufficient” for small and medium companies, even though the alliance’s legislators had backed it in the lower house of Congress and in the Senate finance committee.

Political analysts say the opposition’s strategy was two-pronged: helping to trip up the government, and appearing to distance itself from the economic interests of big business, with which it has always been associated.

“Anyone who says this bill benefits the rich hasn’t read it or hasn’t made the effort to understand it,” retorted the finance minister. “This is an effort aimed at stimulating investment among companies of all sizes, and it would directly create employment; saying otherwise is plain ignorance.”

The bill is an essential part of the “Chile Invests” programme, launched by Velasco in March with a flurry of measures to boost growth. Although it should now go before a mixed commission of deputies and senators for further study, Concertación lawmakers have already called on the government to permanently shelve the initiative.

Juan Eduardo Coeymans, head of the Inter-American Applied Macroeconomics Programme at the Catholic University of Chile, said that the logic behind Velasco’s bill was to promote investment in the short term with large companies as the driving force.

In his opinion, some small and medium enterprises are capable of investing, so they too could benefit from accelerated depreciation. “When the economy is reactivated, an optimistic climate could be generated which stimulates investment even further,” Coeymans said.

On the other hand, CENDA’s Fazio, also an economist, argued that the bill “is a tax gift that favours specific companies: mining and electricity generating operations, which have big investment plans, and are going to carry them out, with or without accelerated depreciation.”

“The proof of that is that the government persuaded the large companies to lobby the right wing, so that the bill would be approved,” he said.

Underlying the controversy is deep discontent among some sectors of the Concertación over the excessive power they consider Velasco has within the administration of President Michelle Bachelet, who has publicly backed him in office.

Some members of Congress, dissatisfied with the overly free-market policies implemented by the finance minister, accuse him of being “arrogant” and uncommunicative with the parties that make up the Concertación.

PS Senator Carlos Ominami, one of the members of Congress who voted against the bill, said on Sunday Apr. 22 in the newspaper El Mercurio that “the government is experiencing a serious contradiction between the president’s wish to make social protection the hallmark of her administration, and its fiscal policy. The two are inconsistent with each other.”

“I’m very critical of the ultra-conservative fiscal policy that means putting copper revenues into a piggybank instead of investing them productively or for social ends,” the congressman said. He added that the bill’s rejection was a defeat mainly for “neoliberalism within the Concertación.”

The executive branch’s main fear is that this setback may affect passage of the government’s star proposal: reform of the individual capitalisation pension system introduced in 1981 by the dictatorship of Augusto Pinochet (1973-1990).

Velasco lived in the United States since 1976, when his father, lawyer Eugenio Velasco, was exiled by the Pinochet regime. He is a full professor at Harvard University, and is on a four-year leave of absence to serve in the Bachelet administration.

In February, Velasco won the Inter-American Development Bank Award for Excellence in Research. However, some political analysts have said that Velasco, who is not a member of any political party, lacks political savvy.

The finance minister said he enjoys the full support of the president and the heads of the four Concertación parties. He also said that his ministry will shortly launch a package of measures tailored for small and medium businesses, scheduled for the second half of the year, to reinforce the accelerated depreciation bill.

According to Fazio, under Velasco “the same (free market) economic model is being followed, but the orthodoxy with which it is implemented is increasing. Velasco has overstepped the mark in applying the model, because no amount of taxes is going to change Chile’s productive structure,” which is based on exports of natural resources, he said.