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The World Economy and Emerging Markets: A View from Chile

Speaker: Felipe Larrain, Minister of Finance, Republic of Chile
Presider: Maria Bartiromo, Fox Business Network
January 17, 2014
Council on Foreign Relations


MODERATOR: Good afternoon. Good to see everyone. We are thrilled to be talking today to Felipe Larrain, the minister of finance of the Republic of China. A few housekeeping notes, as usual.


First, before we get into that, we ask, please, all the members completely turn off your cellphone, not just in vibrate motion, because it will interfere with the recording. And this is, of course, on-the-record, as you see the cameras and media here. So please turn off cellphones, BlackBerries, and all wireless devices to avoid interference.

The meeting is on-the-record. We will hear from the minister first broadly, his opening remarks. I will then follow up with some questions and then, of course, open it up to all of us so that we can have a nice dialogue, the members and the minister.

Minister Larrain, good to see you. Thanks for joining us.

LARRAIN: Thank you very much. I'm glad to know I have a new job, because you said minister of finance for the Republic of China, which I would very much like, because my term is ending, you know, March 11th of...


MODERATOR: Republic of Chile.

LARRAIN: But that's -- that's OK, you know? That's more than I expected, you know, for my next move. Anyway...

MODERATOR: I'm giving you a bigger audience.

LARRAIN: Anyway, the -- I prepared a few graphs and, you know, material that was distributed. Just to give you an idea of when -- you know, about the topic we'll be covering today, I would like to first say that I'm delighted to be here at the Council on Foreign Relations, and it's my first time here. And, you know, I'm glad I was able to respond to this nice invitation before my term ends. You know, and I was described this morning as the outgoing finance minister, and I am, you know, only two months before the end of our government.

Let me just give a few thoughts about the emerging world and then talk a bit about the -- you know, in general, the Chilean economy, so -- and then open it up.

The first thing is that I think we have seen quite an unprecedented change -- structural change in the world economy. We'd witnessed that. And I think for me, it's one of the most impressive things that have happened over the last few decades.

In 1980, the world economy, 35 percent was about 70/30, you know, 70 percent developed, 30 percent emerging, and the latest at purchasing power parity in 2013, you have that for the first time emerging economies account for more -- slightly more than half of the world economy, 50.4 percent against 49.6 percent.

And, of course, if you -- if you consider who has been leading global growth in the '80s and '90s, it was the developed economies. Of course, that was a time of the -- of the crisis, the crisis -- debt crisis of the '80s, and then you got in the '90s the Asian crisis, which caught Latin America in a different situation. Latin America got, I would say, relatively better, but not much better from the Asian crisis than it did at the worst time, which was the debt crisis of the '80s. And then much better in the so-called subprime mortgage crisis, where Latin America fared considerably better.

In terms of, you know, the global situation, we're looking at a 2014 which is better, according to our estimates, than what would be -- what has been 2013, slightly better, mainly because -- a little bit because of the emerging economies, but mainly because of the recovery in advanced economies, and mainly Europe and more -- more growth in the U.S., more solid growth.

For us, in the emerging world, this is quite significant, what has happened, because it's not only -- particularly in Chile, we have a very diversified export base, and Europe is our -- used to be our main trading partner. In 1980, close to 40 percent of our exports went to Europe. Now less than 20 percent of our exports go to Europe. And China is by far our main trading partner today.

So what happens in China is a very important thing. We're happy to see, though -- the U.S. is our second trading partner, so we're happy to see that the U.S. is recovering, that there is a stronger recovery than -- and the fact that the unemployment rate, you know, was quite a divergence between the U.S. and the euro area, with 6.7 percent unemployment and with better numbers in labor markets, which are certainly good news.

We are facing, though -- so it's good news on the growth front, and it's mixed news on the tapering, on the monetary front, because after this unprecedented monetary expansion, which have not tripled, but quadrupled the money base in the U.S. in a period of four years, we're seeing the beginning of, you know, the tapering starting in January of this year.

I'm not going to analyze the effect of tapering in this economy, but I will take a view of the emerging world, and this is going to be a very different response among different emerging markets. All emerging markets will be affected by tapering, as they were affected by QE, and mainly I criticize one part of the QE, because I understood that QE needed to happen, and it was an important issue in helping the U.S. economy in sustaining the U.S. economy, but then it had some unintended effects elsewhere in the developing world, in the emerging markets.

If you take the few countries where small economies, floating rates, and doing well, I mean, that combination got a big pressure and appreciation of the currencies. Now it's the opposite. Now that tapering's starting, now you get the depreciation pressures. And in some countries -- and I will put my country among those -- the situation is very healthy. We regard this as a healthy development, the fact that you have tapering.

A gradual -- taking out gradually this massive increase in liquidity is going to be good for countries that are strong fundamentals, you know, a strong fiscal position. In Chile, we have structural balance, a structural -- we have a small structural deficit, but our fiscal policy -- spending is based not on current revenue, but on long-term revenue. And this spending, it means that in the good years, if you have, you know, boom years, in terms of revenues, then you have a surplus. In the bad years, you run a deficit. And that's perfectly fine, because your target is based on structural revenues, long-term public revenues.

Other countries have a more -- will have a more complicated time with -- countries that have higher levels of -- I mean, high fiscal deficits, high current account deficits, and weaker fiscal positions will suffer more from the tapering. They will be able to resist less, you know, the depreciation. In our case, we regard as healthy the depreciation of the Chilean peso, because the appreciation had us in some trouble, mainly the competitiveness of our export sector, particularly manufacturing and agriculture, two very important sectors in our economy, which we're having a kind of a Dutch disease effect, compounded by the corporate price and, you know, the effects of the QE. So fundamentals will be a big difference on how emerging markets will respond to this tapering.

The other thing that I would certainly mention is the -- what is our main view on China? Well, China, significant slowdown in China, but the slowdown already took place. So we have to get used to a China that grows around 7.5 percent, not 9.5 percent to 10 percent. The years when China was growing 9.5 percent to 10 percent, copper reached $4.50 per pound. Now we are around $3.30 per pound. And we can live with that.

So commodities in general -- I mentioned copper, which is very important for many emerging -- several emerging markets, Chile, Peru, the most important few countries in Africa, but in terms of commodities, where we say the end of the supercycle, certainly there is the end of the supercycle, but there's no collapse of commodity markets. And I think the countries that were able to save during the good years, to have their sovereign funds replenished at the time that commodities were in a boom and were depending on commodities will be able to -- to withstand the tapering with a much better -- on a much better way than those that didn't.

I would point in Latin America to one interesting development that many of you -- or at least some of you may have heard, which is the Pacific Alliance. Pacific Alliance is something that happened over the last three years, a very young development. It's an alliance between four economies, four countries, Mexico, Colombia, Peru, and Chile. And combined, these four countries are about -- over $2 trillion of GDP, more than 210 million people. Combined, they are bigger than Brazil, both in terms of population, slightly bigger, and in terms of GDP.

And if you put together the stock markets -- and we have made that -- it's one of the things that we have pursued is MILA, the integrated stock market of Latin America, joining the stock markets of these four countries, already three in MILA, Mexico has passed a law in Congress that allows them to join MILA. So when MILA is with Mexico, this combined stock market will be larger than the Bovespa.

We have also agreed to eliminate all import tariffs between our economies. And the first step is -- before six months, we'll have 93 percent of all trade with tariff-free, will go tariff-free between our economies. We have also many agreements in terms of the exchange of tax information. You know, you know well about FATCA. We're doing our own FATCA in Latin America between these four countries. And the idea to -- is to have very close coordination. We also have -- among finance ministers, we have agreed to try to look at the treatment of foreign capital so we can make more homogenous the tax treatment of foreign capital, so really making a more integrated market. I think that by far this is -- this has been the most exciting agreement, you know, economic agreement in the Americas.

It goes beyond economics, the Pacific Alliance. I would also say that the Pacific Alliance is -- has a political issue. Countries are, you know, not all on the same side of the political spectrum, but they agree mainly on the overall framework of policies that are applied. But in terms of very practical issues, the -- we have established common embassies, so we have -- in some particular countries, we establish one embassy that serves the four countries.

So this is, you know, something that tells that this agreement goes beyond just, you know, economics. So I'm very -- I'm very keen on this Pacific Alliance. We have put a lot of, you know, effort in it. We've put a lot of enthusiasm in being members of this agreement. And we are very optimistic about the prospects of the Pacific Alliance.

Let me finish with a few words on Chile. We've had four years where we have been able to regain growth, and growth that used -- we used to grow at -- in the previous administration at 3.3 percent per year now grows at 5.4 percent, so it's over 2.1 percentage points additional than we used to grow, but that's a comparison that, you know, the time series comparison is one, but you can also say, well, how are we doing relative to another benchmark, which is the world growth?

Before 2010 and for about over a decade, Chile was growing about the same rate and the world economy. What we've been able to do is to start growing significantly more than the world economy in the last four years. In fact, we have grown 1.6 percentage points more than the world economy, and that's a way to catch up. We used to do that in the period '80, '86, '97, and we lost that after the Asian crisis, and we have been able to regain that, and we hope we can continue growing more than the world economy. The estimates, the projections of growth for 2014 are larger, are higher than the world economy.

This has gone with an increased -- the main driver of growth over the last four years has been investment, investment with a double-digit rate of growth. We now have investment at over 27 percent of GDP. This is not yet Asian rates. You know, there are many countries in Asia that have higher investment rates, but we do have the highest investment rate in Latin America, and this is the highest investment rate in Chile in at least half-a-century, since we have comparable information.

In terms of employment creation, we're very proud that we've been able to create since the start of the government in slightly over three-and-a-half years 905,000 jobs. That is a rate of job creation which exceeds 250,000 jobs per year. The previous rate of employment creation was about 100,000 per year, so we're able to multiply by two-and-a-half the rate of employment creation. And with this, we have been able to reduce the unemployment rate to 5.7 percent. This is the lowest unemployment rate in about three decades.

At the same time, real wages are growing at about 3 percent, and inflation is completely contained at the target rate of the central bank band, which is -- the target is 3 percent plus/minus 1 percent, so it's between 2 percent and 4 percent, being 3 percent the target, and last year, 2013, the inflation rate was precisely 3 percent, so we hit the target. We don't always hit the target, but the important thing is that we think we're within the band, between -- in this 3 percent plus/minus 1 percent.

So this combination is for us very important that we've been able to grow, significantly accelerate growth, accelerate even more the pace of employment creation, reach the lowest levels of unemployment in 30 years, with an increase in real wages of about 3 percent and inflation contained. This combination for us is very important. We're very keen on it.

In terms of the fiscal accounts, we've been able to consolidate the fiscal position Chile has. We share with the opposition, we share with the previous administration the structural rule. The structural rule was not implemented by us, by this government. It was implemented in the early 2000s during the previous government. And we completely share the view, except that the structural deficit went to over 3 percent in 2009, and we committed to reduce it to 1 percent. We were able to do it. We have now 2 percent, 2 percentage point reduction in the structural deficit.

And we have -- in terms of public debt burden, we have a public debt -- gross debt of 11 percent of GDP, but we have negative net debt, meaning that we are net creditors, negative net debt in excess of 6 percent of GDP. So the public sector in Chile is a net creditor at a tone of about 6.7 percent of GDP.

We're also -- one of the other points is that, in terms of government spending efficiency, this is World Economic Forum figures, we've been able to improve 27 points. We were number 40 in 2009. Now we are -- in 2013, we are number 13. We're also able to recover sovereign funds. We now have sovereign funds which were widely used at the time of the financial crisis. Now we have sovereign funds above the level that they were in 2008, the previous peak, so we have sovereign funds about $22.8 billion at the end of 2013. We have another, let's say, $10 billion, $12 billion in sovereign -- sorry, in assets, other public assets, plus $40 billion of central bank reserves. All in all, we have over $70 billion, considering central bank reserves, plus public sector assets, financial assets.

The -- the other thing, which, of course -- and with this, I will end -- the 2012 -- in fact, one of the reasons I came to New York was yesterday we were awarded the prize for the best -- the best sovereign issue of 2012-2013. That was the Chilean bond, sovereign bond, which was placed at a rate -- at a yield of 2.379, a 10-year bond, and with a spread of 55 basis points. That was the lowest rate in our history and so far, that I know, the lowest rate and the lowest spread of any emerging market on a comparable financial instrument.

Of course, there are many challenges to our economy. I've told a few things already, which is, of course, what are the achievements? We have -- we're still part of a very unequal region in terms of income distribution. We've been able to improve income distribution, but we still have, you know, a long way to go. Our Gini is probably around 0.51, the average -- the OECD is about 0.35. So we've been able to improve, but still there is a lot to do.

We've been able to improve poverty, but we still have about 14 percent of the population living below the poverty line. That is the lowest poverty rate in Latin America, but it means that still we have about 2.5 million Chileans living below poverty.

In terms of productivity, we were able to recover the last -- during the previous administration, productivity was -- growth was negative at around 0.5 percentage points per year. And during our administration, it has been positive, but less than 1 percent, around 0.8 percent. You know, and I think this is one area where we think -- we wanted to do more than that. We were not able to.

And, of course, I could not end but if all what I've said, you know, which are facts, but you may wonder why we lost the election. And, you know, economics doesn't go hand-in-hand with politics, we have discovered. I was just talking before coming in to Rich Clarida, and, you know, the academics we used to put, you know, these equations to predict political outcomes based on economic variables. If I would have done that, you know, I would have predicted a win for our coalition, and we lost.

Well, let me leave it here, and then we'll have time to talk more, but certainly this is one puzzle to me. I have explanations for that, but it's a little bit of a puzzle that you're able to deliver these results and still lose an election. Thank you very much.

MODERATOR: Thank you, Minister. Will you break down a bit more in terms of why this story is as positive as it is, in terms of the economic story of Chile? How have you been able to show such stability and growth in Chile, as some of your neighbors have stumbled, in particular, Brazil and Mexico, certainly Venezuela? What can you tell us in terms of what you would attribute, in addition to that investment that you mentioned?

LARRAIN: Yes. I would say one thing, that when we came -- and these are different emphasis of governments -- first, I think the fact that we have shared, you know, a policy framework. Every government goes in and establishes its own priorities, you know, and -- you know, the emphasis you give to particular things, but we have shared a framework.

And I think when we came to government, we said we will maintain many of the good things that were done in the previous government, but we want to restart the growth of the economy. I think expectations were on our side, and we saw those because we have the monthly polls of expectations, both business and consumer. And both business and consumer expectations had a big change when we came to government. That helped.

But we also changed the composition of fiscal policy. We were coming from an administration that was -- had a rate of growth of government spending of about 10 percent on average per year with the growth of the economy of 3.3 percent. And we said, we want to reverse that. We want the economy to grow more than government spending.

And because of doing that, and because we were able to do that, in spite of the earthquake, we had, as you know, a big earthquake in 2010 and we have to rebuild -- reconstruct the country. Reconstruction is finished by about 99 percent as the beginning -- as of the beginning of 2014.

But that was spending that we had to do that we had not counted on at the beginning of our government. And just to give you an idea, the cost of the earthquake, we estimated it at about 18 percent of GDP. We lost over 520 lives, among the people who died with the earthquake and those who disappeared with the tsunami, which was, you know, a big tragedy, but also the economic part of this, 18 percent of GDP was the cost of that. You know, not -- you know, less than half of that, $8.4 billion was the cost of rebuilding public infrastructure, plus social housing, and we had to do that, increasing the budget, so government spending had to increase a little more than we expected. But in the end, the overall figures for the four years is economic growth, 5.4, spending, government spending growth, 5.1.

With that combination, we were able to achieve lower interest rates, a more competitive exchange rate, and, you know, lower inflation, in the sense that you make it easier for the central bank to control inflation. The combination -- plus, we passed a few -- a few laws that, for example, exempted small businesses from the corporate tax for reinvested earnings, so small business had a big incentive to reinvest. And that was one issue.

We reduced significantly -- we couldn't eliminate -- we wanted to eliminate, but we didn't have the revenue, so it was not -- the credit tax, we have a so-called stamp tax, because it used to be a stamp that you put on a paper, but, you know, that's the name, but it's really a credit tax. Every loan pays this -- this tax. It was 1.2 percent when we arrived, and now it's 0.4 percent. We couldn't eliminate, because it's a big revenue raiser, but we were able to reduce it. Just to give you -- for every decimal of a percentage point, it's about $250 million of revenue. So if you -- for this -- if you get 8 percent -- 0.8 percent, which is what we did, that has cost us, you know, about $2 billion. You know, a full 1 percentage point will be $2.5 billion, you know? So that's the extent of the effect of reducing this.

We have now -- other things that we did was to allow companies -- now companies can incorporate in one day at zero cost. It used to be a very complicated thing, cumbersome, onerous in terms of time and money, and now we are -- you know, one day, and through the Internet, you can incorporate a company. And with that, we've had 200,000 new companies seeing the light in the last four years. So that's another part of the story.

And I would also say -- mention in terms of the things that have been behind the growth is, well, with this labor market that we had, a very vibrant labor market, we had consumption growing, because people started to change their sentiment. The unemployment rate was going down. Real wages were going up. You know, companies -- I mean, families that had one member working suddenly got a new -- a second member working, and that made a huge difference for them.

So I think that was -- and the other part was reducing the cost of capital that I described. We consistently pursued ways in which to reduce the cost of capital for both public and private companies. And coming to the international markets was one of those ways.

MODERATOR: And clearly, it has worked. Let me ask you, before we go into monetary policy from the U.S. and the impact, can you talk a bit about what some of your neighbors have done that perhaps -- as an outsider, I realize, looking in -- what mistakes they have made? I mean, you know, Brazil, for example, had been such a strong grower for the world and then completely reversed course. What kind of mistakes have you seen from afar in Brazil and Mexico, of course, Venezuela, that has really created the reverse in those economies?

LARRAIN: Well, at this stage, I will have to be shy on my opinions, you know. But I promise that, after March, I will be very blunt on my opinions. I will have to refrain myself.

But I think that there are things -- there are differences in the way that, you know, some of our neighbors treat, for example, foreign capital. We -- in Chile, we have difference with Argentina in terms of the treatment of foreign investors. We don't discriminate against foreign investors, and this is a policy that has been going on over very different administrations and over a period of four decades right now.

The foreign investment statute in Chile dates back to 1974, and you establish a contract, you sign a contract with the state, and you can have tax invariability if you want, at a higher tax rate, but you can have invariability. And that contract has always been fulfilled. You know, we haven't had, you know, cases -- I think there was one case, and it was taken to, you know, international arbitration and it was solved, so I think foreigners have -- you establish the rules.

We don't have our country on sale. We don't provide tax holidays to attract investors. We just say, look, guys, this country, you know, is serious, and we are -- and this is maybe a difference on the way foreign investors view different countries. You know, and we have respected property rights, and we even had -- there was -- you probably -- some of you may have followed, there was an important disagreement, you know, beginning of a conflict between the state-owned copper company, Codelco, and Anglo American, and it was resolved, you know? It was resolved in a good way. You know, before going to the courts, there was a settlement between the companies, and, you know, the state-owned copper company and Anglo American. And I think that is a difference.

The other thing is, you know, whether you have policies that are, you know, very, I would say, sectorial, in the sense that you have very different, you know, sectorial policies and you try to stimulate growth through very specific incentives for particular sectors or you have a more broad-based incentive. We believe in Chile more of a broad-based incentive to provide the environment so that business could grow, you know, in very different sectors. We don't determine which sector is the one that is going to have the most incentive. We try not to -- we try to level the playing field.

And, of course, we subsidize R&D, for example. We had a new law subsidizing R&D, a tax credit on R&D, which was important in stimulating R&D in our economies. But I think those are some of the differences.

The other difference I would say, I think it stands on fiscal policy. The fact that we have very few countries that have this sort of long-term view of fiscal policy, the structural rule that Chile has, and I think that is another way to communicate both to local and international investors that you really have a long-term horizon and that you can understand how fiscal policy is going to be conducted, you know, and what happens when revenues fall short and what happens if you have boom years. You know, how are you going to spend?

And this way -- for example, one of the things that, you know, some economic research has shown is that because of this kind of fiscal policy, you have lower volatility of growth. So you have growth being much less volatile, much more stable in time, when you have a combination of the structural fiscal rule, plus a floating exchange rate, I mean, those two things.

MODERATOR: What is -- what is your expectation in terms of U.S. monetary policy and the -- and the response from Chile? For example, we know that the tapering has begun. Look out toward 2014, the end of 2014, and tell us how significant you expect that tapering to be and what the biggest impact will be on Chile.

LARRAIN: The tapering has begun. And as I said, I think it's a healthy thing. And we regard the depreciation as healthy. The depreciation that has happened last year, depreciation was 9 percent, but we were coming from a big appreciation, so, I mean, we were reversing on unhealthy appreciation through the depreciation that came with the -- with the -- even the announcement, the original announcement. That's when -- you know, tapering started not only in January. It started when the announcement happened, you know, a few months -- you know, several months ago.

So then the markets reacted. And we'll see two things. We'll see a more competitive exchange rate, which is good, and what is probably not so good, but it will be part of the story, is higher interest rates. So those would be the main two things.

Of course, when you have higher interest rates, it -- there's a big difference if you're a net creditor or you're a net debtor, and that will make a difference between countries. And the -- also, but, anyway, the effect of higher interest rates, if it consolidates, and we already have seen part of that, but we will probably see more. I don't think anybody believes that this is sort of the long term, that we have already reached where, you know, interest rates will arrive. You know, I think this is -- and, of course, I won't ask the -- Stan Fischer knows much more than me about this, but he will refrain himself from saying anything.


So -- but I think -- I mean, the markets have already, you know, incorporated part of this into what the current level of interest rates are, but, still, you know, this is not a long-term level of interest rates. We're going to see, you know, higher interest rates. So in an environment with monetary policy that is less, you know, expansive, expansionary in the U.S., it's certainly part of the -- part of the game.

For example, in Chile, we are -- in the U.S., you are (inaudible) redoing the expansionary part. In Chile, we are on the other way around. We're in the process of reducing interest rates. But now the short-term interest rate in Chile is 4.5 percent, you know, after having two reductions of a quarter -- a quarter of a point each.

So countries will feel, on different sides of this -- of this kind of, you know, cycle, of the monetary cycle, because as you see, U.S. is on one side, and, you know, Chile's on the other, but...

MODERATOR: Are you expecting -- will you have to plan for -- recognizing that, you know, come March, it's a different story, but would you have to expect or plan for a slowdown in the current growth levels, given what's ahead in terms of rates?

LARRAIN: I think that Chile could maintain current growth. This year will end at about 4.2 percent. I think Chile could sustain and even improve over this, based on a more favorable international environment.

The one thing about the international environment that I'm more concerned is the issue of interest rates. So you have the effect of growth, and then you have the effect of interest rates, but I think that one is pushing in the positive direction, and higher interest rates is pushing in the opposite direction.

But on my view, a country like Chile could certainly -- and I think -- I think what I'm saying, to different extents, but it applies also to the Pacific Alliance. You know, countries are, you know, pretty solid basis on the four countries of the Pacific Alliance.

MODERATOR: Where do you see the growth around the world in terms of the demand picture for copper and other resources? If you were to look out the next year, where does the growth come from specifically, knowing that, you know, China has slowed and you're expecting that to stay at around that 7.5 percent level, 7 percent?

LARRAIN: This is the thing, because if you have the idea that China will significantly decelerate from the current levels, then you're talking about a different situation. If you think that China is going to -- one thing is saying, OK, China already decelerated, you know? It's come from 9.5 percent to 7.5 percent, you know, 7 percent, 7.5 percent.

But the other thing is saying, well, this process will continue, you know? And it goes to 6 percent. If China goes to 6 percent, that's a different scenario for commodity. It's a different scenario for emerging markets who are more dependent on commodities.

But if you take this current scenario with a China that basically stays around these levels of 7.5 percent for the next few years, I think that we can perfectly withstand that. We're probably going to see better -- slightly better growth prospects from places like Europe and the U.S., and that's certainly a good thing, but on the rest, there will be a wide divergence. You touched upon -- Brazil is growing very little right now. And Argentina will have a significant slowdown, not to mention other countries of Latin America, so that's why I said that there is a two-speed growth in Latin America, and one is on the Pacific side, and the other is on the Atlantic side. They're different growths.

And it doesn't necessarily have to do with the oceans, but it has to do with other -- interestingly for the Pacific Alliance, there are 20 countries which have observer status. We're only four members. There are 20 countries. And there is one that wants to apply -- I mean, two or three that wants to apply for membership. The one problem that we have is -- I talked to the finance minister, and the finance minister said, Minister, we want to apply for membership. I said, we have a little problem. You're in the Atlantic, you know? Because this is the Pacific Alliance. He said, well, that's a tiny detail.


MODERATOR: We will open it to the members shortly, but let me ask you about your expectations for the incoming regime. Are you expecting any change, significant change to the policies that you and your colleagues have put in place with regard to spending, with regard to the focus on low inflation and growth? What would you expect?

LARRAIN: Well, in terms of the inflation and monetary policy, it's carried out by an autonomous central bank. And you know that we just had -- we just nominated and it was confirmed by the Senate, you know, a new member of the board of the central bank, who is an MIT graduate who was a student of Stan. You know, Pablo Garcia (ph) I think was your student. No? OK, well, but still -- he still studied at MIT.

And I think that -- well, we have a fully autonomous board, so I think that is independent of the political cycle, and that's the good thing of institutions and I think building up institutions.

We have also done a few, I think, significant improvements in the institutions in Chile. For example, we have in place now the Financial Stability Council. It wasn't there before. We established it by decree in October 2011. It was approved by -- it will be approved in this week -- this coming week in the House, and we expect to get it to the Senate, and it will be a race to see whether we can do it by the end of our period have it by law.

We have a fiscal advisory board that advises the minister of finance, in terms of the application of the structural rules and the structural balance. And I think those are good things, so I think the -- the basis of our financial and fiscal structure, economic structure, will -- are more permanent than just one government. They do have -- I don't want to hide the fact that, during the campaign, there were wide differences. One of them was the fact that there will be a -- they promise a big tax reform, a tax reform about 3 percentage points of GDP, of tax increases, and, you know, this is a point where we disagree. You know, $8.5 billion a year.

We did -- and I say this -- yes, we were a center-right government. You know, I would say this from the outset. We did two tax reforms, two tax increases, one to finance part of the reconstruction, the other to put $1 billion per year additional in education, which we did. So we passed two tax reforms, and I think -- and we passed another law, which is very important, actually, last week, the electronic billing law. So now it will become mandatory for all companies to issue electronic bills. There will be some transition period for small businesses, but this will reduce evasion to the tune of about $700 million per year.

And that's another way to raise revenue. Then, of course, there are other ways to raise revenue that -- and this is a very efficient way to raise revenue, because you raise revenue without raising rates, you know? And -- and the -- an economic program has a tax increase of -- as I said, 3 percentage points. This has to be debated in Congress, so I will have to see what actually comes out. One thing what is proposed; the other thing is what is passed by Congress, what becomes law.

And I think that we should not -- the one thing that I would stress is that growth should always be an important part of any program, because growth is the main driver of tax revenue. We have calculated that for every percentage point of additional economic growth per year, we raise about $600 million of revenue. So if you take 2.5 percentage point difference between a government -- one government and the next, which is about what we had, that's about $1.5 billion on the first year, $3 billion, $4.5 billion, and $6 billion. All in all, it's about $14 billion of additional revenue in a four-year period. So that's why I say that the main driver of revenue will be growth, the main driver of employment and opportunities, and with good social policies, then you can have a combination to not only grow, create employment, but also to reduce inequality and poverty.

MODERATOR: So do you see any risk of some of the policies that your administration has put in place, such as encouraging foreign capital into the country, such as encouraging small businesses, do you see any risk of those reversing?

LARRAIN: It is -- I think in terms of foreign capital, Chile will always be a serious country and will respect contracts signed and, you know, rule of law will be applied, so I think that that's not at stake here. There will be differences in the treatment of capital, yes, capital -- not foreign capital, but, you know, treatment of earnings and taxes on earnings. That's a difference. And, of course, that's an area where you can disagree. And we have, you know, politely disagreed over the campaign, and then, of course, the new government has a mandate and, you know, they have a program.

But as I say, I'll have to see what comes out, because one thing is which you propose and the other thing is what you do and what you're able to do when you're -- and I think the other -- the other part is that reaching a broad consensus when you do major changes in fiscal policy and you do major changes in tax policy is a good idea, not just -- because you have a majority.

For example, fiscal policy, you do a tax change. You don't need to have a special quorum, meaning a special majority in the Congress. You can do it with 50 percent plus 1, you know?

But in other -- if you want to change the constitutions, you need two-thirds. So tax policy you can change easily, but it's advisable if you're going to do a major tax change that you get a more consensual type of approval, rather than imposing a majority that can change in the next -- in the next elections.

MODERATOR: Let's hear from the members.

QUESTION: Thank you very much (inaudible) Mr. Minister, my congratulations on such an outstanding job that Chile has done. It's an example for many other countries, as has been alluded to or implied. Would you perhaps take one of the differences that might exist with Brazil, Venezuela, maybe even Mexico, and talk about how successful Chile has been in the development of infrastructure and particularly draw some lessons from -- from a longer timeframe than what happened over the earthquake.

This has been -- I've been involved with Chilean toll roads, for example, and I've seen very successful negotiations with parties that were kept in because of foreign investors who are suffering demand declines, and this is an area where perhaps you have done better than other countries.

LARRAIN: On -- I think we have many things in common, as I say, I mentioned with Mexico, but Mexico has a very ambitious agenda right now, reform agenda, to open up, for example, the oil sector for private investment, which was, you know, something that was not possible before.

With Brazil, with Argentina, Venezuela, there are very significant differences in economic policy. And I think fiscal -- I mentioned at least two or three -- one thing is fiscal policy. We run this sort of long-term fiscal policy. We have different fiscal positions, you know, one -- this country's have a public debt, public net debt, you know, sizable public net debt, so we have a public -- we have a net credit or position.

In terms of the treatment of foreign capital, we have, you know, this sort of -- a very long view on -- for four decades, fulfilling commitments and signing contracts with foreign investors. I think that's another -- another difference.

And I would also stress just very briefly this -- the difference between across-the-board incentives that we've leveled the playing field and sectorial incentives that try to, you know, stimulate growth in particular areas. As of infrastructure, it's interesting, because that's an area where we need to invest more. And look at this. In 2009, 4.5 million Chileans took a vacation. Well, that was the year of the -- you know, we had a recession that year, but consider this. In 2013, 9 million people took a vacation.

So you doubled the rate of, you know, vacationing in the country. That means a stress on roads, a stress on airports, and we are now, with several different projects, trying to enlarge -- you go into Santiago, and Santiago is kind of tough to go, you know, almost every week, not at every hour, but, you know, you're going out, three lanes -- sorry, three -- per lane -- three spaces for cars per lane. You know, it's not enough. We need to enlarge, you know, the roads.

The airport, now we are -- we're opening probably a bid -- there is a bid to enlarge -- significantly enlarge the airport, you know, the main Santiago airport. It's a huge -- otherwise, it becomes a bottleneck, and it becomes a nightmare to travel, you know, at particular times of the year. So we'll have -- there will be very significant opportunities in roads, airports, and urban -- urban roads, also, you know, toll roads.

I mean, that was one of the things in Chile that we had the concessions and these toll roads, as other countries use it less so than we do. But I think that's going to be a big -- it's also an opportunity, because if you don't respond, it becomes a bottleneck. But then -- there are huge investments that will be needed to accommodate, you know, a country that has been growing at a tune of 5.5 percent per year, where people are coming out of poverty and into the middle class, demanding more goods, demanding more services. And I think with -- you know, we're not a huge country. We're a relatively small country, 17 million people, but if people start to travel, you know, you're going to see everywhere.

For example, let me just mention one last thing. With the enlargement of trade, we have a project to build a megaport by the end of this decade. Well, we start planning right now, and we're looking -- exactly where they should be located, there should be an international bidding to build this megaport will probably be Valparaiso or San Antonio, but maybe Valparaiso, and so those are some of the things.

And I didn't mention -- of course, I should -- energy. Huge issue. We need to invest much more on energy. We have one of the highest costs of energy in Latin America. So energy generation, we already had a law that allows the two -- to interconnect the two systems in the country, the system of the far north and the system of the central and south of country. Now there is a law that allows the interconnection of the two. Well, that will require about $1 billion investment in interconnecting the two, but you also need not only to interconnect, transmit, you need to generate, you know, more energy.

MODERATOR: That's interesting that you have talked so much about construction and investing in infrastructure, all at a time when you've completed tax reform, kept taxes low. What did you have to give on? I mean, what did you have to pull back on to be able to spend this money on infrastructure?

LARRAIN: The good thing is that, because of the revenues we got, first, we got, you know, $1 billion of revenue, but that was mainly for education. We got also significantly more revenue from growth that I mentioned, so the economy that is growing at 5.5 percent, as you know, that's a huge difference from an economy that's growing close to 3 percent. But also, many of these projects you don't need public capital, because they're concessions. So you save on the -- on the public resources that are needed, not all of them, but, you know, many of these, you just make a public bidding and you have concessions.

And what you provide in some of these cases is the minimum guarantee for demand, to limit the -- sort of the downside risk and to allow the companies who are bidding to have better terms on their financial offerings and their ability to raise capital on reasonable terms. So you say, OK, we guarantee a minimum demand, and with that, you know, you to the market, in many cases, it's not -- the guarantee's not necessary to -- you don't need to put money, but it's a contingent liability on the government, if demand does not go up to what we have committed.


QUESTION: Thank you. Earl Carr (ph). I recently spent six-and-a-half years at HSBC Bank, and when I was stationed in Shanghai, I had the pleasure of working very closely with the Chilean consulate. My question is relating to about in 2013, HSBC announced that they were withdrawing from a number of countries in Latin America, Chile included. Do you see the withdrawal of other international banks and/or financial institutions from Chile?

LARRAIN: It's interesting, because you have withdrawn, but you have been advising an adviser to the government in the last three bond issues in New York. So you may have withdrawn, but in a very peculiar way you're still very active in my country.

One thing is to have a retail bank. The other thing is to -- is to play the role of an investment bank. And we see a lot of interest. There are banks that are coming into Chile. It's a very competitive financial market. I see the opposite, you know, interest in coming into -- into our financial market and maybe even more so after the single law of funds was passed a few weeks ago, which is the most important financial -- change in financial legislation in over a decade, which allows Chile to be a center for the administrations of funds, and to eliminate -- it puts on an equal footing the treatment of capital gains from fixed income and from variable income than was before.

Just to give you an idea, with the single law of funds, right now, foreign investors hold about 1 percent of the bond issues that are done locally in Chile. And in terms of equities, it's about 35 percent to 40 percent. There's a huge difference in the treatment. Well, that was done away, but -- so that's another part. So I see a lot of interest is in going into the country.

Whether you want to go into the retail banking, that's a different thing. It's a very competitive retail banking. But when we have a good bank from outside, licenses are given out, you know, we do the due diligence, but licenses are given out, and we want to stimulate competition in the banking industry in Chile.

MODERATOR: Comments from the members, questions?

QUESTION: Hi, I'm (OFF-MIKE) Netherlands. Minister Larrain (OFF-MIKE) still call you that, thank you very much (OFF-MIKE) great presentation (OFF-MIKE) Chile. The question that perhaps I'm hoping you might have (OFF-MIKE) one thing that Chile has in common with other members of the Pacific Alliance is this very strong interest and commitment in bringing in more people and small businesses in your country into the full financial system (OFF-MIKE) to do just this. And (OFF-MIKE) and there's very interesting and (OFF-MIKE) evidence coming out (OFF-MIKE) gains (OFF-MIKE) for example, through government-to-people payments being done (OFF-MIKE)

But my question goes to, if Chile isn't yet seeing any evidence of the impact of bringing these very low-income households and very small businesses into the formal system, are you seeing a change in, for example, GDP? Is there any evidence that can yet be realized for something that's just (OFF-MIKE) to be trapped? It's not that it hasn't happened before, but perhaps that data hasn't been there. And it's a question that we get asked a lot, and we'd love to have some more evidence around (OFF-MIKE) and also just how you see that perhaps affecting other countries in a similar situation. Thank you.

LARRAIN: Well, thank you, Mina (ph). Well, this is an issue which is very, very dear to us, and in particular in the finance minister, financial inclusion is a huge area of work for us. Just to give you an idea of what we have done, I said there were 17 million people in Chile. And out of those 17 million -- when we went to government, the commercial bank, the state commercial bank had 3.4 million sort of debit cards. And now we have put goals to the state commercial bank, and we have now 6 million debit cards, you know, active debit cards.

For 70 percent of the people who hold a debit card, it's the only financial product they have, and it's their way to go into the financial system. And for those, you know, who were out of the system, getting paid through this card, being able to pay services through this card, or being able to withdraw cash with this card is a very important thing.

We have also done some several things in financial education, and we have a number of other, you know, initiatives in this area. We have -- as we committed with -- at the G-20 meeting, we have a national strategy for financial inclusion, which we have already put in place and we will have a -- soon a national council for financial inclusion with participation of ministers. So we put it in the -- institutionalize this framework of inclusion.

I have no doubt, although that's a very interesting aspect, you know, seeing whether this -- this financial inclusion is certainly partially behind the fact that we have such a strong growth in consumption. You know, people getting jobs, but also getting to be part of the -- of the market in a more efficient way allow them to participate and to probably get, you know, these people, people with debit card are better able to get a loan than you don't have a debit card, because when you get a debit card, you establish a relationship with the bank, and you become a customer.

And you're coming from -- many of these people, this sort of transit from poverty to middle class, you know, which allows people to completely change the way that they interact, and it's great in terms of, you know, ethically it's great, in terms of the welfare of their families. It's also great for the economy, because you get growth out of that.

And I think Brazil at a previous stage experienced a huge, you know, expansion of the middle class that was part of the source of growth. I think that to go beyond what I've said, we'll need to do a little more economics and econometric work to see how we can really isolate the effect of this financial inclusion from the other effect, if it's just mainly, you know, you see a more active and aggressive labor market. You know, but labor market like that, with or without financial inclusion I think will make a difference.

MODERATOR: We have time for one more question. David?

QUESTION: Thank you, Minister. Argentina is having severe trouble. Bolivia is. Could you discuss some of the impact of that and Brazil on Chile? And also, their decisions, is there any risk -- their relationship with investors has deteriorated, and I wonder, won't that have an impact on Chile as it thinks about state-owned companies, for example?

LARRAIN: This issue -- I mean, if you have -- it's better to always -- better to have your neighbors do well, you know? Always better. You know, because certainly you have some differences if you are in a neighborhood where everybody is growing strongly and, you know -- but having said that, I think the contagion which you're mentioning -- I mean, this is a kind of contagion -- is very limited in the case of Chile, although we know that contagion goes well beyond trade and contagion would happen through third parties. And the best example is when Russia defaulted in the -- during the Asian crisis. And then Brazil got hit, although trade was minimal, investment was minimal between these two, and it was through financial markets. So we do know that there is a contagion aspect.

But in the case of Chile, Chile is widely diversified in terms of its trade. About 45 percent of our exports go to Asia, 25 percent by itself to China, so trade with Latin America is limited. In Latin America, our main trading partner is Brazil, by far, with a big difference between Brazil and the others.

But the rest, you know, yes, we trade and it's important, but, you know, with Argentina, our trade is quite low as a share of total trade. And, in fact, it's the Argentineans who have a trade surplus with us and not the other way around.

We have different trade policies, you know? And they are -- they're more restrictive trade policies, and we see that sometimes in agriculture, and the beauty of, you know, economics is that, for example, they have a special prohibition or a quota in terms of the export of corn, you know? But then there is another product called crushed corn. So you crush it, so it's really to feeding livestock.

And that price, you know, collapsed, the price of crushed corn, because you couldn't export whole corn, you know? And we had to put a special tariff, you know? Because that was the effect of a policy inside -- sometimes we have some effects on particular sectors, not an overall effect. And I think investors would differentiate between the way we treat foreign investors and the way others treat foreign investors, so I think contagion will be limited.

In the case of Brazil, it's different, because we are -- Brazil is a more important trading partner for us. So it's in everybody's interest that Brazil does better.

MODERATOR: We want to end with this question here.

QUESTION: I'll be quick then. I was just curious how much of the growth you're having is from copper prices? And how well hedged are you from a big sustained drop in copper?

LARRAIN: Copper is certainly, you know, an important part of the Chilean economy, but less so than -- than people believe. Copper used to be almost 80 percent of our -- 80, 8-0 -- percent of our exports in the early '70s. Now it's about 50 percent. So it's still a lot, but it has, you know, declined in its importance, although it's still highly significant.

In terms of fiscal revenue, we've been able to put up with a massive reduction of the contribution from mining to the revenue. Let me give you the data. On 2006 and 2007, those were the record years. We got 8 percentage points of GDP of public revenue contributed by the mining sector. And by mining, I mean not only the state-owned copper company, but also the private mines, which pay corporate tax and the royalty. That's down to 2.5 percent of GDP, so we've had about a 6 percentage point decline in the contribution of copper.

How have we done? Well, we've put up through a reduction of evasion and through an expansion of the economy much more diversified revenue structure. In 2006-'07, mining revenues were 35 percent of overall public revenues. Right now, they are 12 percent, so it's one-third in the share of what they were.

So, yes, it is important, but I'm saying this because we are much more than copper, you know? And we are -- the fact that copper prices have declined and the exchange rate has taken part of the adjustment, so we have a depreciation of the exchange rate is giving an overall incentive effect for other sectors of the economy across the board, and which are much more intensive in labor. Labor intensitivity of mining is very low. And labor intensitivity of agriculture and manufacturing is higher, so we're expecting this to give some effect, you know, on other sectors.

Having said so, of course, in the -- at the margin, of course, higher copper prices are better than lower copper prices, but -- but, you know, but we can live with lower copper.

MODERATOR: Thank you to our members. Thank you very much, Minister Larrain.


LARRAIN: Thank you.

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