Felipe Larraín: “The government speech swings between blaming the previous administration and holding the international economy as responsible. Both sides of this diagnose are mistaken…”

Nobody argues that the Chilean economy is currently facing a deep slowdown. Investment has been falling during the past 12 months and initial indicators on the current trimester –numbers up to the mid of August- show a strong drop on the import of capital goods. Taking that into account it is very likely that we shall have a 5^th trimester of investment falls.

In order to face this complex situation with good chances of succeeding, it is mandatory to start from a correct diagnosis. The government speech swings between blaming the previous administration and holding the international economy as responsible. Both sides of the diagnosis are mistaken.
To begin with, the abrupt slowdown we see today did not start during 2012, as some authorities have stated. Numbers leave no place to doubts. Investment was growing strongly up to the second trimester of 2013 and started decreasing during last year’s the third trimester. This happened when the program on tax reform was presented and the state AFP and the constituent assembly were extensively discussed, among other issues. Back then, we gave warning about these issues and sincerely regret not been mistaken.

Expectations started to go down exactly at that time, as several business reliable surveys, such as IMCE of UAI/Icare and the ICE of the UDD/Diario Finaciero, reveal.  The GDP suffered a very important slowdown during the 4th trimester of 2013, when it only grew 2, 7% after having grow 5% in the previous trimester. Since last March, the announcement and procedure of a series of important reforms in the most diverse areas have increased the deterioration of expectations which nowadays reach consumers as well. Of course, these are not only reasons of the brake on economy, but they are the most significant.

Blaming the international economy is not correct either. The world will grow around 3, 6% (IMF projection) this year, increasing the 3% of 2013. And our commercial partners are growing more this year than they did during 2013. Besides, if the problem came from the outside, similar emerging economies would be suffering similar effects. But they do not. Why is it that the Chilean peso has been one of the most depreciated currencies in the world during 2014, only beaten by Ukraine, Kazakhstan and Argentina? And, how can we explain that Chile has been the Latin American country were investment has fallen the most during the past trimester, only been preceded by Venezuela?

However, the slowdown effects are not only in investment. The last numbers indicate that consumption has been growing at a much lower pace and that employment is starting to weaken. Since the past December-February trimester, 123, 576 jobs have been lost and the employment quality is starting to deteriorate, which is particularly serious. 241, 979 fulltime jobs have been destroyed, a fact that has been partially compensated by the creation of 70, 647 voluntary part-time jobs and 47, 757 underemployment positions –people who work less that 30 hours a week and would like to work more-. If we consider the numbers from another perspective, almost 160, 000 jobs have been lost, partially counteracted by the creation of 26,000 self-employed jobs.

To deal with this situation, we must start by doing a correct diagnosis. The reality, though it may be annoying for some people, is that reforms implemented by the government have strongly increased uncertainty and destroyed the trust of investors and employment creators as well as the trust of consumers. Currently, we can observe how this is affecting employment. By working adequately on the reforms that are currently been discussed and those to come, generating ample technical and political consent, the damage may be considerably mitigated.

Felipe Larraín B.
Director of Clapes UC

Source: El Mercurio.