Friday, September 08, 2006

Is Chile weakening its ground? (I)

The recent data of GDP growth in the month of July (4,2%) has induced a wide spread feeling that some thing goes wrong with the aggregate economic variables. In the second quarter, April-june 2006),GDP grew 4.5%,and in the first six months Chilean economic growth is 4,9%, below the 6.9% at this time of last year. Although core inflation is 3.1% in a twelve month period, it is still within the range of Central Bank inflation target, however there some questions concerning the future pace of current adjustment in monetary policy of increasing interest rates, actually at the 5,25%,shifting the emphasis from controlling inflation to support growth .This is the current cruel dilemma of most of the Central Bank around the world economies .How to make the balance between controlling inflation with oil prices pressuring it up, and at the same time not to disrupt the economic growth pace ? .
The mood is increasingly worrisome even with the actual positive external conditions, beginning with export growth and copper prices, at such a high level of U$$ 3,2lb,as it has not been before. However, consumer confidence index dropped to 46.7 in august.
An healthy macroeconomic environment and saving at a 21.7% of GDP, (down from 22,8% in the same period last year),the expectation is to have a GDP growth of around 5%(it could be a bit less according to some forecast) at the end of the year 2006,also down from previous estimation slightly above 5,5%.So , there is a mix of cautious skepticism coupled with what it could be promising situation.
A month ago, there was a Government ´s package of supply side incentives , to small and medium size companies, lowering some taxes, delaying the time for mandatory payment taxes, all of which is expected to induce a better cash flow conditions for those companies. It is unlikely that these measures will have a strong impact in the short run to counterbalance current monetary restriction on growth , but it is rather more probably it will have so in the medium term. So ,it does not look like there are more difficulties ,other than the necessary tightening on monetary policy .-
A recent report from World Bank , (Doing business 2007),place Chile in the 28(down form 24 last year) preference among 175 nations to do business ,followed by Mexico (43), and Uruguay ( 64).
Where is the real Problem ?.I will develop this answer in two stages:
a.- Negative Expectations about the future course of the microeconomic reform needed to improve competitiveness. While Mexico and PerĂº moved aggressively forward on the microeconomic reforms , increasing facilities for private investment, lowering bureaucracy for doing business, Chile still maintain the 27 days period as a necessary condition to fulfil the legal requirement to open up a business. Therefore it is the proper time to go beyond the current state of affairs, concerning these reforms. But is it possible? .Unfortunately it is not likely in the shorter period of four years of actual Government .Besides the parliamentary forces are not so prone to make deeper support for markets and firms to do its job of creating wealth, because the current majority represent a moderate leftist views concerning the economy ,the state and the market . Social Protection grid issue is the priority right now , before moving on for more market flexibility .-
Business man are expecting to improve market flexibilities, because this way the economy can not only get higher competitiveness but also to take full advantage of new opportunities for growth ,given tough competition everywhere .Past reforms are already exhausted its positive impact,therefore it is necessary to move reforms one step further .

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