About five years ago, when the heat from the so-called “social uprising” that began in October 2019 had yet to subside, political uncertainty was one of the main topics in economic discussions. Since then, the landscape has changed considerably. Two constitutional processes that failed to reach a conclusion left the Magna Carta unchanged; the government and the opposition reached a Fiscal Pact, easing some anxieties related to tax reform. More recently, the pension reform reaffirmed private pension fund administrators at the heart of the system.
The question of what Chile needs to resume growth remains relevant, shaping economic debates and taking center stage at various investment seminars.
Figures from the Central Bank of Chile show quarterly annualized GDP expansions of around 5% between the early 2000s and the global financial crisis. After recovering from that recession, the country returned to those levels of dynamism until the end of 2012. Since then, there has been a trend of weakening. Aside from the post-COVID-19 economic rebound, figures have hovered closer to 1% and 2%, and the future does not look much better. The Central Bank’s Economic Expectations Survey for February projects that growth will remain around 2% through 2027.
In exploring the outstanding elements needed to promote growth, Funds Society spoke with economists from Bci Estudios, Fynsa, Credicorp Capital, CG Economics, and Itaú Chile to address a simple yet complex question: What is missing?
Uncertainty Persists
“The pension reform largely reduces one of the sources of political uncertainty that took hold since October 2019,” states Juan Ángel San Martín, senior economist at Bci Estudios.
The law, which the expert describes as “the most important structural reform Chile has undertaken since the 1980s,” significantly reduces one of the uncertainties established in October 2019. Moreover, the economist claims that this reform would lead to a 0.4% increase in long-term GDP growth, raise pension replacement rates, and validate the individual capitalization system.
However, the economists consulted by Funds Society agree that uncertainty has not entirely disappeared.
“The approval of the reform opened the door to maintaining a viable and sustainable pension system over time. It is not a complete reform, in the sense that some adjustments will need to be made along the way, depending on its impacts on the labor market and growth, for example. Is it going in the right direction? Yes. Does it eliminate uncertainty? Not at all,” comments Nathan Pincheira, chief economist at Fynsa. In this regard, more than the changes to the pension system themselves, he values the political agreement that made a reform possible after 15 years of attempts.
Today, according to local market observers, priorities are very different from those seen five years ago. In the words of Klaus Kaempfe, Executive Director of Portfolio Solutions at Credicorp Capital: “Chile faces very different problems than it did in 2019. The latest surveys show growth and security as the main concerns of the population. In 2019, these issues were considered ‘resolved,’ but today they are once again priorities.”
While all five economists interviewed believe it is possible for Chile to return to a growth trajectory, they agree that there is still much to be done, with a wide range of variables impacting the country’s economic dynamics.
The Burden of Bureaucracy
When listing the main obstacles, one word appears frequently: “permisología” (permit bureaucracy). This refers to the bureaucratic processes required to obtain authorization for investment projects.
Kaempfe agrees with this diagnosis, emphasizing that the time needed to obtain construction permits is measured in years rather than months. “There is no lack of investment ideas, but bureaucracy has crushed projects. There are iconic cases where more than ten years have passed before a final decision is made,” he warned.
However, there is a glimmer of hope in this area. The government, regardless of political orientation, is now prioritizing change. “Post pension reform, Chile’s most left-leaning government to date now considers new legislation on ‘permisología’ a priority, aiming to unlock projects and reduce costs,” adding that this “would have been unthinkable in 2019.”
The Security Dilemma
Security has become a major topic in the public agenda in recent years. According to the Ministry of the Interior’s National Public Security and Crime Prevention Plan, crime, theft, and assaults have become central public concerns. Additionally, violent crimes and homicides have been on the rise since 2016, accelerating in 2020, with drug trafficking increasingly drawing attention.
This situation has left a mark on the economy. “The growing concern over crime has created an atmosphere of uncertainty that affects both citizens and investors,” explains Carolina Godoy, founder and Managing Director of CG Economics. This climate of insecurity, she warns, “discourages investment and negatively impacts the business environment.”
In this vein, the economist asserts that it is “essential” to implement effective public policies to combat crime. “The government has enacted a new anti-terrorism law to tackle crime with better tools. Even so, the effectiveness of this measure has yet to be proven,” she notes.
Taxes and Private Investment
For Andrés Pérez, chief economist at Banco Itaú Chile, one of the reasons for the productivity contraction in the country is the deterioration of private investment.
One of the variables he highlights is taxation. “Recurring tax reform proposals to fund increased public spending affect the cost of capital and discourage investment,” he says.
From Bci Estudios, San Martín recommends reducing the cost of capital use by lowering the corporate tax rate from 27% to the OECD average of 23%. “An alternative and plausible scenario is to reduce the corporate tax rate to 20%, the pre-2014 level where a structural change in private investment is evident,” he adds.
According to the economist’s calculations, such a tax cut would raise the GDP level by between 0.6% and 0.8%. However, this would not be enough to offset the lower tax revenue, making it necessary to adjust public spending and modernize the state. “The IDB estimates that inefficiencies in Chile’s public spending amount to around 1.8% of GDP, enough to provide fiscal room for a measure like this,” he states.
Managing Public Finances
Another area of deterioration has been public finances. Figures from the Budget Office (Dipres) as of December 2024 showed a weaker situation than anticipated. The fiscal deficit stood at 2.9% of GDP, and gross debt ended the year at 42% of GDP—falling short of the Ministry of Finance’s expectations of a 2% deficit and 41% debt.
For Godoy, last year’s budget execution revealed a disconnect between the ministry’s projections and reality. “This situation reflects the financial stress of the public sector, limits the government’s ability to drive economic growth, and complicates the estimation of long-term rates, country risk, among other variables,” she notes.
From Itaú, Pérez shares the concern. “A reduction in public spending in Chile would help lower upward pressure on long-term rates, thereby facilitating a faster recovery in sectors particularly sensitive to long-term financing,” he adds.
Looking ahead, the CG Economics economist emphasizes the need to manage the risks posed by fiscal projections for the coming years. “It is crucial to implement responsible fiscal policies that balance public spending with revenues, avoiding unsustainable increases in debt,” she states.
Political Validation
For Pincheira, from Fynsa, regaining growth requires “clear rules” and the “public’s validation that growth is necessary.” Perhaps some emblematic projects could serve as milestones.
But it is also necessary to strengthen the institutional political system. Pérez identifies this deterioration as having begun with the 2015 reforms, which ended the binominal electoral system and introduced a proportional mechanism. “Since then, polarization and fragmentation in Congress have made it difficult to reach broad agreements based on technical criteria, and have manifested in short-term policies like the withdrawal of pension savings,” he explains.
Godoy adds that the World Bank’s governance indicators have shown a decline since 2019 in various aspects, including rule of law, political stability, and regulatory quality. “This institutional weakening erodes investor confidence and hinders economic growth,” says the CG Economics founder.
Structural Lags
In addition to all the above, Chilean economists identify a range of long-term factors impacting the country’s growth capacity. “Raising economic productivity, as clichéd as that may sound, is vital,” according to Pincheira.
This includes—not just regulatory frameworks and investment conditions—but also training. “Improving the pre-school and primary education systems, as well as continuous education programs, is essential,” says the Fynsa economist.
Beyond merely attracting investment, Godoy adds that Chile must strengthen its growth through innovation and workforce training. “Policies that promote technological development, business digitalization, and improved human capital skills can increase productivity and strengthen the economy in the medium and long term,” she states.
This includes addressing the effects of the demographic crisis, she emphasizes. The low birth rate and aging population will impact the labor market and the sustainability of growth. “Work-family reconciliation policies, such as access to childcare services and flexible schedules, can increase labor participation and mitigate the demographic impact on the economy,” she adds.
The Value of Having a Plan
As a unifying element of economic efforts, economists diagnose that the country lacks a roadmap.
“Chile’s period of greatest growth was marked by a development plan in which macroeconomic adjustment, along with economic openness and market modernization, lifted Chile out of poverty. Today, Chile, now a step further along, no longer knows where to go next,” describes Kaempfe, of Credicorp Capital.
In this sense, although public pressure appears to be aligning the political sphere around growth, defining a strategic plan for the next 30 years is “key.”
From Bci Estudios, San Martín adds that it is necessary to diversify the sources of growth in the Andean country. In this regard, green hydrogen is seen as a promising candidate, given Chile’s wealth of natural energy resources. “It is estimated that if this advantage is leveraged, over the next 20 years, this industry could represent about 20% of GDP and generate over 100,000 jobs. This, along with greater investment in science and technology, will drive long-term growth,” he explains.
This article was originally published in issue 42 of Funds Society Americas magazine. To access the full content, click here.
