Chile: Interview with Gemines, Le Fort Economía y Finanzas and Fynsa

The 15–16 May constitutional convention election threw up a major surprise, with independent candidates winning a large share of the vote, and the right-wing coalition failing to obtain the one third of seats needed to form a blocking minority. Delegates now have a maximum of 12 months to draw up a new constitution, which could shift the country towards a profoundly different socioeconomic model. To examine the implications of the vote, and the outlook for Chile’s economy going forward, we spoke to Alejandro Fernández Beroš, chief economist at Gemines, Guillermo Le Fort Varela, CEO of Le Fort Economía y Finanzas, and Nathan Pincheira Guzmán, chief economist at Fynsa.

- Alejandro Fernández Beroš has been chief economist at Gemines since 1993. He is in charge of macroeconomic projections and carries out the political analysis associated with the authorities’ decisions that have an impact on the economy. 

- Guillermo Le Fort Varela is CEO of Le Fort Economía y Finanzas, and is also a professor at the Universidad de Chile and president of the Center of Studies for Democracy and Development. He has a PhD from the University of California, Los Angeles (UCLA).

- Nathan Pincheira Guzman has been chief economist at Fynsa since 2017, and before that worked for Banchile Inversiones. He holds degrees from the Universidad de Chile.

  • FocusEconomics: What will the new constitution look like? 

Alejandro Fernández Beroš: Although no political sector obtained a third that would allow it to veto, the majority are from the radical left, so this composition of the constituent convention will be clearly reflected in the new constitution. It is difficult to specify in what precise terms, but it should not be forgotten that a plebiscite must approve or reject the proposed text, which should moderate its content to some extent.

Guillermo Le Fort Varela: The new constitution will be long and full of entitlements and guaranteed rights seeking to please everybody or at least every group supporting the changes. The markets will remain in operation, but much restricted by government intervention. The government and parliament that will shape the implementation of these rights and entitlements are of key importance.

Nathan Pincheira Guzman: More anti-market, I think the state will be much more involved in certain decisions which today are the responsibility of the private sector. This, together with “guaranteed rights” that could necessitate a higher tax burden. I think there are risks [to Central Bank independence], but it is possible that we see changes to the Bank’s objectives rather than the erosion of its independence per say.

  • FE: Which parts of the current Chilean economic model will likely be most affected? 

AB: Water rights will go from being private property in perpetuity to being state-owned, which will grant use rights conditional on human use and for a limited time. In addition, the state will play a more active role in the economy and some basic services and resources will probably be subject to greater control (for example, mining). [Moreover] it is likely that [the Central Bank’s] composition and objectives will be modified and it will be subject to greater government control, although all this is a matter of law. The concept of independence will remain in the constitution.

GV: We can expect a much larger participation of the public sector, particularly in services: education, pensions and health. Some weakening of the fiscal responsibility rules, including government control on expenditure. And even the loss of Central Bank independence. The complete independence of the BCCh that exists today is very unlikely to remain in place. Some limitations will likely be imposed including other objectives for monetary policy besides inflation, and some form of government oversight or even participation on the Board. The impact on BCCh inflation effectiveness is uncertain and depends on the details.

NG: Mainly the role of the state. In the current constitution the state has a subsidiary role, whereas in the new constitution it will likely have a more active role in the economy.

  • FE: How much could growth potential be affected? 

AB: The constitution itself probably does not affect potential growth too much, but with a larger state, more intervention in economic decisions and with a clearly higher tax burden, it is very likely that potential growth will be negatively affected.

GV: Growth potential in Chile is already quite low (2% pa), and most likely will remain low or even lower depending on implementation.

NG: This is very uncertain, especially as it is not clear how pre-pandemic phenomena such as large immigration have affected potential growth. On top of that we have to consider the reallocation of resources due to the pandemic, the constitution debate, and the presidential elections at the end of the year.

  • FE: What will be the impact on the economy while the constitutional process is ongoing? 

AB: There will be a negative impact while the tone in which the constitutional discussion will take place is defined and while there is uncertainty regarding the proposals in the economic sphere. Investment will be lower in the second half of this year.

GV: The uncertainty associated with the constitutional process has already reduced investment. The economy will continue recovering from the pandemic in 2021, but in 2022 a slowdown in growth is expected.

NG: Quite minor if the process runs smoothly. I think that more than the process itself, the risk lies in certain sectors that want to hijack the debate and encourage people to mobilize in the streets, rekindling violence.

  • FE: Will the recent vote on the constitutional convention impact the result of November’s presidential election? 

AB: It may have to the extent that it has revealed in practice the discontent with the entire political class that, previously, was manifested only in the polls, but it is not clear that it will clearly benefit any particular sector. The difference in the results of the different elections that were held on May 15 and 16 and those of the constituent convention make it more difficult to draw definitive conclusions in this regard.

GV: They are two different elections. The constitutional convention registered a strong protest vote against the whole political system; with high support for independents and strong critics, like the extreme left, and significant abstention and invalid votes. The presidential election will imply a positive selection within the alternatives presented, rather than the rejection of the system. Here new faces with a coherent message have a chance against rupturism.

NG: Without a doubt. The center-right and traditional center-left parties have been severely weakened. The political center has almost disappeared. As a result, the main candidates hail from the conservative right and the communist party.

  • FE: Do you see the convention reaching an agreement on a new constitution by the deadline? 

AB: It is difficult to know. It will depend on how long it takes to agree on a regulation for the operation of the convention (which is the first thing they must agree on) and the magnitude of the differences regarding the text of the constitution itself. If the expected 12 months turn out to be insufficient, I do not think there will be problems to extend its operation through a constitutional reform that allows it.

GV: Most likely an agreement will be reached, however this is not certain, and before the convention begins to operate it is difficult to determine how rational the process is going to be. The rational outcome is an agreement on a very long constitution with rights and entitlements to please everybody. What will be lacking is the way to set priorities and conform to the availability of resources or to the budget constraint.

NG: No. In all likelihood, 12 months will not be enough. Looking at the experiences of other countries, the mere process of establishing the convention takes several months. However, I don’t see this is a negative, if this eventuality is contemplated in advance and a broad agreement is reached to take more time.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: June 23, 2021

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