95 proposals presentation ksh atr 171013

Klaus Schmidt-Hebbel and Andrea Tokman!

Grupo Res Publica Chile!

IMF, Washington, DC! October 17, 2013!

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95 Proposals for a better Chile!

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Outline! !

1. About us: Grupo Res Publica Chile!

2. Chile’s risks and challenges!

3. 95 Proposals: selective overview! !

About us!

Who we are and how we worked

!

Andrónico Luksic invited us in October 2011 to form a working group comprised by people with different political positions:!

• to think about Chile’s main challenges, and!

• to develop public policy proposals that could contribute to a better Chile!

• funded by A. Luksic and endowed with full independence from him!

Grupo Res Publica Chile:! !

• group of professionals of diverse political standings and expertise!

• motivated by the commonwealth or “public matter”– res publica!

• to the benefit of República de Chile!

GRPC worked for 18 months:! ! !!

• thinking about our country!

• identifying its mayor challenges !

• considering technical and political restrictions, formulating policy proposals and reforms!

We want Chile to be:! !

!

• • • •

more broadly developed! socially more inclusive! politically more stable and well represented! with happier communities and individuals!

How we worked!

Weekly meetings:! ! ! !

• debating, rejecting, revising, and

accepting reform proposals!

• prepared by subgroups!

• critically evaluated by all group members !

• enriched and reviewed by some 100 external experts and politicians!

Output! !

• 95 proposals in 4 sections and 18 chapters!

• responsibility of their authors, but after a

year of internal debate and review!

• not a government program!

• excludes many key policy areas!

• no estimate of aggregate fiscal impact!

Chile’s risks and challenges!

Chile’s risks and challenges!

• Chile records significant achievements!

• Yet our country faces today a fragile political and socio-economic balance • Chile is transiting towards the summit – defined as broad development – on a narrow mountain cliff that separates two deep abysses! !

• Simplifying a complex reality, we identify two risks (falling into one abyss or the other) and a challenge (moving toward the summit at a quick, steady pace), along a path of virtuous development towards a more prosperous and egalitarian society!

Gini Coefficient!

Chile’s risks and challenges!

PIB per capita (2005 US$ PPP) !

Gini Coefficient!

Chile’s risks and challenges!

PIB per capita (2005 US$ PPP) !

Gini Coefficient!

Chile’s risks and challenges!

Turkey 1987

PIB per capita (2005 US$ PPP) !

Gini Coefficient!

Chile’s risks and challenges!

Turkey 1987

Turkey 2012

PIB per capita (2005 US$ PPP) !

Gini Coefficient!

Chile’s risks and challenges!

Turkey 1987

Turkey 2012

PIB per capita (2005 US$ PPP) !

Gini Coefficient!

Chile’s risks and challenges!

Turkey 1987 Turkey 2012

PIB per capita (2005 US$ PPP) !

Gini Coefficient!

Chile’s risks and challenges

Turkey 1987

Turkey 2012

Chile 2030 Risk I PIB per capita (2005 US$ PPP) !

Chile’s risks and challenges

Gini Coefficient!

Chile 2030 Risk II

Turkey 1987

Turkey 2012

Chile 2030 Risk I PIB per capita (2005 US$ PPP) !

Chile’s risks and challenges!

Gini Coefficient!

Chile 2030 Risk II

Virtuous Development

Turkey 1987 Turkey 2012

Chile 2030 Risk I PIB per capita (2005 US$ PPP) !

Political system, regions and the State!

Economic development, markets and environment!

3 Chapters

6 Chapters

9!

Proposals

39!

Proposals !

Social development and inequality!

7 Chapters

33!

Proposals !

Crime and drugs!

2 Chapters

14!

Proposals !

A. Political system, regions and the State!

1. Three reforms to reinvigorate the Chilean

political system!

2. Decentralized Chile: more development, more democracy!

3. Modernization of the State: a necessary agenda!

B. Economic development, markets and environment!

4. Middle income trap: how to grow more!

5. A new energy deal!

6. More competition and effective consumers protection!

7. Tax reform for efficiency and equity!

8. Citizen commitment with a clean and sustainable environment!

9. Efficiency and efficacy of urban transportation!

C. Social development ! and inequality!

10. More and better employment to reduce poverty

and inequality!

11. Everybody wins: labor code reform!

12. Income tax: a progressive and efficient reform!

13. More than income inequality: voice, dignity and social capital!

14. The mother of all battles: assuring access to quality education!

15. A health system for the XXI century!

16. Social housing integrated to the cities!

D. Crime and drugs!

17.  Crime: the main concern for Chileans!

18.  Recognizing the failure of the war against drugs: towards legalization!

Today’s presenta2on: 9 out of 18 chapters 1. Three reforms to reinvigorate the Chilean political system ! !

4. Overcoming the middle income trap: how to grow more!

5. A new energy deal! !

7. and 12. Two alternative tax reforms! !

10. More and better employment to reduce poverty and inequality!

14. The mother of all battles: assuring access to quality education!

17. Social housing integrated to the cities! !

18. Recognizing the failure of the war against drugs: towards legalization!

1. Three reforms to reinvigorate the Chilean political system

1. Proposals!

1. Adoption of a parliamentary government system!

!

Our political system is eroded by loss of popular adhesion and political participation! !

Legitimacy of political autorities is weakened and voluntary electoral participation is weak! !

Without fundamental political reform, Chile faces the risk of declining toward a dysfunctional democracy and, eventually, transiting toward instability, “caudillisimo”, and populism!

2. Public funding of political parties in exchange for their adoption of high standards of transparency, internal democracy, and representation!

3. Two alternatives for the binominal (“two-past-the-post) voting system: (a) election by simple majority in uninominal (“one-past-the-post) districts or (b) a combination of uninominal districts and with a second vote for candidates on a national list!

4. Overcoming the middleincome trap:! how to grow more!

Growth is a necessary (but sufficient) condition for attaining broad development and higher levels of welfare and happiness of people! !

Chile’s aggregate growth performance is acceptable but not stellar. And Chile’s aggregate productivity growth is very low ! ! !

The country requires a stronger commitment to raise aggregate and especially productivity growth! !

The policy agenda presented here aims at raising aggregate growth by 1 pp. and R&D expenditure from 0.3 to 1.5% of GDP in the medium term!

Chile’s growth return to the mean!

8

7.6

GDP Growth (%)

7

6

5.5

5

Mundo 4

3.6 3.2

3.4

3.7

3.7

3.1

3.2

1986-­‐1997

1998-­‐2011

LaFnoamérica Chile

3

2

1

0

1986-­‐2011

Note: The GDP CommiBee of the MoF esFmates future trend

GDP growth at 4.8% per year

Chile’s productivity stagnation!

Total Factor Produc2vity Growth (%)

3%

2.8%

2%

1%

0.9%

0.0%

0% 1992-­‐2011

Source: Villena y Magendzo (2012)

1992-­‐1997

1998-­‐2011

!

Proposals (A)! !

(1) Raising pension savings (and pensions) by: higher mandatory contribution rate (from 10% to 13%), higher retirement ages, and other measures!

(2) Raising fiscal CAB ratio to GDP from -1% to 0, complemented by fiscal institutional reforms (fiscal council, counter-cyclical fiscal rule, transparency)!

(3) Controlled immigration reform: limited for unskilled, open doors to skilled labor!

(4) Two new independent government agencies: (i) social evaluation of public projects and programs, (ii) Productivity Commissi贸n (like AUS) ! ! !

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! !

!

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Proposals (B)! !

(5) Reduce red tape and barriers to starting new firms; new bankruptcy law; more efficient concessions for infrastructure!

(6) Raise public spending on R&D and strengthen tax incentives to privately-funded R&D! (7) Lift barriers to investment in renewable natural resource sectors, strengthen property rights, strengthen adoption of frontier technology !

(8) Incorporate government enterprises, privatize 1/3 of each (profitable) public enterprise ! !

! !

! !

!

!

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Proposals (B)! !

(9) Many other pro-growth reform proposals presented in other chapters, including education, labor markets, education!

(10) Finally, we do NOT favor vertical industrial policies (and explain why not) – instead we favor horizontal or neutral industrial policies AND lifting sector-specific barriers and hindrances to development! ! !

!

7 and 12. Two alternative tax reforms !

w Â

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Chile’s tax system has many strengths but also exhibits weaknesses that affect economic efficiency (lower saving and investment, inefficient resource allocation) and progressivity (horizontal and vertical unfairness)! !

GRPC presents two alternative tax reform proposals! !!

Both aim at more equity and higher efficiency, but with diferent weights and focusing on different instruments!

7. A tax reform for efficiency and equity !

Proposals!

34. Â

" (A) Adopt a consumption-based system for individual income taxes, " (B) Adopt seven other tax reform measures: improve incentive structure of corporate taxation and personal income taxation (close loopholes and inequities), raise taxes on gasoline-diesel-tobaccoalcohol-legalized drugs in the future, eliminate import duties, uniform treatment of taxfavored donations, raise marginal tax on real estate, improve IRS (SII) control of donations among people that are alive (inter-vivos)"

12. Income taxes: an efficient and progressive reform !

Proposals!

61. !

!

(A) Reform the tax system by changing from the current personal income tax based on distributed profits to accrued profits for business owners and eliminate the tax accrual fund (FUT)" (B) Raise the corporate tax rate from 20% to 25%" (C) Unify the small-business tax" (D) Replace preferential treatments of savings by a general policy that exempts their “normal” return"

18.

Acknowledging defeat in the war on drugs: toward legalization! ! !

!

World-wide and Chilean evidence shows that the war on drugs has been lost on four fronts:! ! (i) Medical evidence! (ii) Links to crime! (iii) Increasing fiscal costs! (iv) Spreading of drug production, trade, and consumption since the 1970s!

Medical evidence: alcohol and tobacco among most harmful drugs!

Statistical evidence: illegal drug trafficking associated to more crime in the world!

Source: Loayza & Schmidt-Hebbel (2013), forthcoming!

18.

Acknowledging defeat in the war on drugs: toward legalization! ! !

!

Proposals!

94. Within two years develop a

new naFonal strategy for drug legalizaFon and regulaFon, including review of internaFonal treaFes and short-­‐term legalizaFon of a limited set of drugs like marijuana, subject to adopFon of a regulatory and taxaFon framework similar to those for tobacco and alcohol.

95. Within 3-­‐10 years, legalize all drugs following a mulFlateral review of internaFonal treaFes, subjecFng them to strict regulaFon and taxaFon in line with scienFfic evidence on damage, while implemenFng public educaFon and health policies for prevenFon of drug use and treatment of drug addicFon.!

5. A new energy deal

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1. The problem!

2. Our “package” solution!

The energy problem in Chile • Supply has not reacted to increased demand. Prices soar.

– Competitiveness is lost, industries and consumers are affected – Environment suffers as well

• Last 2 years: almost all energy investments have been stalled

350 300 250 200 150 100 50 0

150% higher than Brasil SIC Mg Cost

210% higher than Colombia 370% higher than Perú 1.700% higher than ArgenFna

abr/87 nov/89 jun/92 ene/95 ago/97 mar/00 oct/02 may/05 dic/07 jul/10

USD/MWh

à Increasing marginal cost

A consumer in Chile pays on average 75% more than in the other countries of the region and 27% more than a consumenr in OECD countries.

Sources: CDEC SIC, IEA and Montamaz and Asociados.

0

Fuente: CDEC SIC, IMF y CEPAL. oct/12

abr/12

oct/11

abr/11

oct/10

abr/10

oct/09

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oct/08

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oct/07

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oct/06

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oct/05

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oct/01

abr/01

oct/00

abr/00

oct/99

abr/99

oct/98

abr/98

oct/97

abr/97

oct/96

350

abr/96

oct/95

abr/95

oct/94

abr/94

oct/93

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oct/92

abr/92

oct/91

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oct/90

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oct/88

abr/88

oct/87

abr/87

USD/MWh

What happened?

• The electrical system is based on a competitive market of energy generation (free entry).

• Designed in the 80´s with a totally different society • It is a political problem, not a technical one: A new deal is required SIC Mg Cost

300

250

200

150

100

50

5. A new energy deal

!

21. Natural gas as expansion technology (with the government taking active part in diplomacy, regulation, and promotion).!

22. Coal as an infra-marginal alternative (the government participates in identifying thermoelectric development sites, feasibility studies, and environmental approvals for tender to the private sector, capturing rents and returning them to users).!

23. Promoting non-conventional renewable energy sources through bidding for energy blocks with price insurance.!

24. Compensation equivalent to 1% of investment costs paid to local communities of all investment projects approved by environmental impact assessments.!

25. Strategic recognition of large hydro-electric power sources (specially in the south, definition of conservation areas, public-private transmission line).!

10. More and better employment to reduce poverty and inequality!

1.  The problem: persistent income inequality related to employment opportunities!

2.  Proposed solutions !

rate!

Tasa de Empleo por Employment Deciles de Ingreso del Hogar, CASEN 2011

(fracción de pin oblación de 15 años o más que está ocupada; media=0.52) (% of employed 15 years and more population, mean=0.52)!

0.80 0.71 0.70 0.60 0.60

0.63

0.66

0.56 0.52 0.47

0.50 0.42 0.40 0.30

0.36

0.23

0.20 0.10 0.00

i

ii

iii

iv

v

vi

vii

viii

ix

x Source: Casen 2011.

HH income deciles.

Distribución de Salario Mensual por Jornada de 45 Horas/Semana Wage distribution forCASEN full 2time equivalent workers!

011 5000000

P25: 199 mil P50: 307 mil P75: 559 mil 4000000

Promedio: 538 mil 3000000

2000000

1000000

0

0

10

20

30

40

50

60

70

80

90

100

Source: Casen 2011.

Chilean Pesos.

Proposed solutions promote: 1. Formal employment (reduce unemployment and inactivity) 2. Productivity 3. Wage improvements

Main instruments: 1. Redirect social transfers to benefits linked to employment 2. Reformed and integrated training and labor intermediation system

Complemented by other policy changes proposed in labor regulation, education, housing, growth, care of the elderly, etc…

10. More and better employment to reduce poverty and inequality!

49. Simplify the welfare pillar (unique incentive-compatible subsidy).!

50. Strengthen the workfare pillar (redesign subsidies to labor income of vulnerable women, increasing its scope, maintaining benefits over time, moving towards an alternative focalization “from above�).!

51. Reform the worker training system (double government spending, redirection towards lagged workers, individual funds, quality assurance related to outcome, Sector Competency Councils, Qualification Framework). !

52. Reform the public labor intermediation system (graduated services according to need with a special unit for disadvantaged workers, privatepublic provision)!

14. The mother of all battles: assuring access to quality education!

• Diagnosis: Important improvements but relevant lags persist!

• Proposals on all levels of education in resources, institutional framework and regulations

Sweet and sour results • The sweet:!

• High access to education (slow increase in earlier stages)!

• Improved cognitive skills (Simce,TIMMS, PISA), especially in most vulnerable students!

• Institutional update: National education council, Quality Agency, Superintendence, teacher career bill!

• Increased resources (including SEP and new funding for higher education grants and scholarships)!

Sweet and sour results

• The sour:!

• Low quality for international standards, with marked inequality in results!

• Low level of expenditure (6-15 yrs old in OCDE US$ 78.615 vs US$ 20.192)!

• High segmentation (in part due to high inequality levels and spatial segmentation)!

• Professional-technical secondary education serves with very low quality and resources mostly underprivileged students!

• Post secondary education: heterogeneous and unobserved quality of programs, negative returns for some!

• All/most of the system is based on cognitive skills!

14. The mother of all battles: assuring access to quality education!

65. Expand the educational focus to include social-emotional skills.!

66. A new early childhood institutional framework (ministerial rank, one public provider junji/integra, authority to Agency and Superintendent).!

67. Raise the value, redefine its allocation criteria, create a new school voucher (adjust preferential vouchers, and adopt a special voucher for schools with public education features).!

68. New teaching career bill (pre-school teachers, measurement and development of SESkills, recognition of teachers in vulnerable contexts).!

69. Improve management of public schools (regional school boards).!

70. Special quality-assurance requirements for professional-technical secondary education (labor market outcome).!

71. Raise the quality and flexibility of post-secondary education (access system, differentiated accreditation processes, mobility, integration, stimulating teaching by postgraduate fellows in regions).!

16. Social housing integrated to the cities!

Social housing issue today is not only a matter of quantity, it is also a matter of quality in a more holistic sense, including social homogeneity, neighborhood effects, networks, safety, etc! !!

• Highly segmented cities (first places in OECD)!

• Large percentage of populaFon lives isolated in urban gheBos • Socio-spatial integration is key and is achieved by a mixed territorial-urban approach!

• Goal: access to “good quality” location, enhances social mobility, social cohesiveness, better quality of life, improved opportunities…!

SoluFons for new housing requirements that are integrated to the ciFes: IncenFves, new subsidies, social rent, public land, condiFoned urban expansion

How do we integrate exisFng houses?

Intensive mulF-­‐sector investment, housing, urban design, service access, incenFve for social heterogeneity

16. Social housing integrated to the cities!

77. Intensive multi-sector investment in vulnerable neighborhoods (demolishing unrecoverable social housing units, improving recoverable units, and intervening urban areas).!

78. Better residential integration of cities (incentives for real-estate developers, social lease policy, and better management of public land).!

79. Improve management of the Solidarity Housing Fund by encouraging family involvement and facilitating application and assessment of technical projects.!

80. Adopt a new institutional framework for neighborhoods with actual ministerial coordination capacity to carry out high-impact comprehensive projects.!

81. Strengthen community participation in social interventions, using Neighborhood Roundtables as a coordination mechanism between the community and municipalities.!

Final thoughts!

We believe that if our country …! !

!

• discusses and improves these proposals!

• attains political and technical agreement on the need for such reforms, and!

• implements reforms along these lines in subsequent years ....!

... we will live in a Chile that will be:! !

!

• • • •

more broadly developed! socially more inclusive! politically more stable and well represented! with happier communities and individuals!

Klaus Schmidt-Hebbel and Andrea Tokman!

Grupo Res Publica Chile!

IMF, Washington, DC! October 17, 2013!