Chile’s Finance Minister Marcel Discusses Reform On-Campus at SIPA

Chile's Finance Minister Mario Marcel visited Columbia mid-July to have a discussion with SIPA Professor Gray Newman, addressing issues such as the country’s newly proposed constitution, the government's planned social programs and the tax reform being considered to fund those programs.

The live on-campus event, entitled “Chile at Crossroads: Finding its Path to Inclusive Development,” was chaired by Mauricio Cárdenas, Director of the MPA in Global Leadership at SIPA, and was co-sponsored by NGO InBest, the Columbia Business School Alumni Club of Chile, Columbia SIPA’s MPA in Global Leadership, the Institute of Latin American Studies (ILAS) and the Santiago Center. Marcel was in New York in the context of Chile Day to promote the country’s capital markets.

To begin the conversation, Newman – former Managing Director and Chief Latin America Economist at Morgan Stanley - commented on Chile’s current situation as he sees it. “For many years, I’d describe Chile as the [Latin American] paradigm. The Chilean model was market friendly with economic policies, strong growth, macroeconomic stability. That’s the Chile I heard about and studied for decades, but you don’t hear much about the Chile paradigm today,” he said. “I’d suggest the Chilean paradigm has been replaced by the Chilean paradox, which is why, despite all the policies put into place during the paradigm, we’ve seen this kind of socio-political upheaval that led to the protests in 2019 and more importantly to a new constitution. In a few weeks, Chileans will be going to the polls to vote in favor of or against the new constitution…I always tell my students that before you look forward to see where we’re headed, you need to look at what happened to bring us to where we are today. Starting points matter.”

In response, Marcel reviewed the country’s current economic situation, saying that growth potential slowed from 5.5% per year in 2005, to 2.5% today, to which he attributed human capital, deceleration and productivity stagnation – which affected Chile’s natural resource-based industries, such as mining, with a physical factor of mine decline as they get older, as well as industries that are very intensive in water and energy.

“The way we were growing became exhausted over time and we needed to change to diversify production and generate a renewed insertion into the world economy. Part of that is happening: 20 years ago, we were heavily dependent on imported oil and fossil fuels, but 10 years ago our energy matrix started to change,” he said. “Previously only about 5% of energy came from renewable sources but we are now at 25% and in the next 5-7 years we’ll get to 50%. In 10 years from now, we may go from being entirely dependent on what you can say are dirty sources of energy, to being entirely dependent on clean energy sources and we may even become an exporter of energy.”

Chile is now in a production transition, in the middle of which it hit a number of bottlenecks, he added. “Chile’s growth has slowed down not because of bad policies, but because our basis of producing and growing has gotten increasingly exhausted… All of us have to learn to live in a different social and economic environment from the one we were familiar with.”

He also recognized that changes were coming, including a new constitution – “either the one proposed by the constitutional body, perhaps with some amendments, or a new process that will lead again to a new proposal. That’s something you can bet safely on” – and a significant tax reform that looks to bolster government coffers by 4% of GDP by 2026.

“What can a finance minister do in this environment? Given all the expectations set on this process – not only the constitutional process but also this new administration – you need to ensure that this change that people expect is done in an effective, structured, and sustainable way. In Latin America, we have plenty of experiences of attempts at reform because either the economy moved into a crisis or public finances were unable to fund the cost of reforms,” the finance minister noted. However, “one of the Chile paradigms is fiscal discipline and respect for macro-equilibrium,” he ensured the audience.

To close the event, SIPA’s Cárdenas – himself a former finance minister in Colombia - reviewed the situation that both Chile and his home country are currently going through: a progressive outsider is elected president with an agenda that is a clear mandate to reduce inequality, an experienced technocrat is appointed finance minister that gives assurances to the market and business, and an ambitious tax reform is proposed aiming to significantly increasing revenues. “So maybe we’re in search of a new paradigm here – the paradigm of how to have governments with a more inclusive agenda, bridging inequalities, giving the state more capacity, especially on the fiscal front, but at the same time providing comfort and stability to markets and to investors” he noted.

“Finance ministers always have a difficult job, but being at the crossroads of an ambitious, progressive agenda with groups in government that have been historically underrepresented but have big ambitions, while also considering limited resources, and at the same time understanding to fulfill those expectations, you need more revenue. There’s nothing more tense and difficult in the job of a finance minister than enacting tax reforms,” Cárdenas added.

At the same time, the country needs to keep investment flowing and the private sector engaged, for which a clear, well-articulated message is essential. “This is a paradigm in construction, and it couldn’t be in better hands than with Mario Marcel at the helm of the finance ministry in Chile,” he said.