1. MINISTRY OF FINANCE How to Reform and be Re-elected? Chiles Experience and Future Challenges Rodrigo Álvarez Zenteno Undersecretary of Finance of Chile

2. MINISTRY OF FINANCE Presentation Overview About Chile: an Economic background Chiles Reform How to be Re-elected?

3. MINISTRY OF FINANCE About Chile: an Economic background Chiles Reform How to be Re-elected?

4. MINISTRY OF FINANCE The current economic scenario Population: 17,1 MM (2010 estimate) GDP 2009: Total: US$164 bn Per capita (current dollars): US$9.525 Per capita (PPP): US$14.341 Human Development Index 2007: 0,878 (high, rank: 44/182, 1st in Latin America) Life expectancy at birth (years): 78,5 Adult literacy rate (% aged 15 and above): 96,5

5. MINISTRY OF FINANCE 5 Quarterly Economic Growth Source: Central Bank of Chile Highest growth rate in the last 5 years

6. MINISTRY OF FINANCE Monthly Economic Activity: Highly Dynamic Source: Central Bank of Chile Immediate effect of the earthquake Highest monthly growth rate since July 1996

7. MINISTRY OF FINANCE Strong Employment Creation Source: INE Since mobile quarter January-March 2010 data are based on the New National Employment Survey. Due to the conceptual differences between the new survey and the older one, data can not be spliced. Employment creation since January-March: 164.780

8. MINISTRY OF FINANCE Inflation Source: Central Bank of Chile, Monetary Policy Report, September 2010 Average 2000-2009: 3.3%

9. MINISTRY OF FINANCE Inflation: Total and Long range Fuente: INE Inflación Septiembre: 0.4% Inflación en 12 meses: 1.9% Inflación Acumulada 2010: 2.7%

10. MINISTRY OF FINANCE Fiscal Deficit During Global Recession Source: Eurostat, OECD, IMF and DIPRES

11. MINISTRY OF FINANCE About Chile: an Economic background Chiles Reform How to be Re-elected?

12. MINISTRY OF FINANCE The old Reform A huge first step to reform our economy was given on the 80´s 90´s, when an extensive program of privatizations and State modernization. During the last 20 years there was stability and development. As a result we have a solid and healthy Public Finance All is reflected in todays Chiles economic performance…

13. MINISTRY OF FINANCE Chile´s Declining Macroeconomic Volatility Source: Own elaboration based on Central Bank of Chile

14. MINISTRY OF FINANCE Chile´s Very Favorable International Credit Conditions Source: JP Morgan and Bloomberg

15. MINISTRY OF FINANCE Public Debt Burden: A Comparison Source: Eurostat, OECD, IMF and DIPRES

16. MINISTRY OF FINANCE The Government of Chile: A Net Creditor Source: DIPRES

17. MINISTRY OF FINANCE Chiles Economic and Social Stabilization Fund (Sovereign Fund) Source: DIPRES July 2010: 11.1

18. MINISTRY OF FINANCE The Budget: Structural Balance Rule The SBR isolates the impact of the economic cycle on public finances The SBR commits to a balanced budget (zero deficit) when The economy grows at its potential rate Copper price is at its long-term level In practice, this means Saving during economic booms, when extraordinary revenues are received Dissaving in downturns, when fiscal revenue drops

19. MINISTRY OF FINANCE Central Government Balance 1987-2009 Before the Structural Balance Rule After the Structural Balance Rule Source: DIPRES

20. MINISTRY OF FINANCE The new Reform The overall Chiles experience in crisis situation is positive The world face us with new challenges Preventive measures should be considered within political reform schemes

21. MINISTRY OF FINANCE 21 Modernization of the State Human Resources (Senior Public Management (ADP) and Civil Service) Evaluate new services to be incorporated Review advertising and requirements for applications to increase turnout in contests

22. MINISTRY OF FINANCE 22 Reforming Chilean Administration New State comission for the reform of Public Administration. Delivery Unit to fulfill the Government compromises New agency for the revision of Public Policies

23. MINISTRY OF FINANCE Strong reforms on Analisys : Reform of the Corporate Governance for Public Companies Reform of the Corporate Governance for Private Companies Reform of the Regulatory Agencies: Financial, Banking, Capital Market Strong Policy in The International Arena. We will continue the negociations regarding free trade agreements and tax treaties

24. MINISTRY OF FINANCE Bicentennial Market Capital Reform Institutional reform Middle class and Small and middle Companies Transparency and information Risks and Financial Stability Tax Markets and new financial models Consumer protection

25. MINISTRY OF FINANCE 25 Tax Incentives for R&D Tax incentive which allows companies to use 35% of expenditure in R&D (extramural) in contracts with research centers registered as a tax credit (established 2008) Only generated 19 contracts totaling US$ 1,5MM Will create an additional tax incentive for private investment in R&D conducted within the enterprise (intramural) Will extend the limit of investment tax credit for extramural R&D

26. MINISTRY OF FINANCE About Chile: an Economic background Chiles Reform How to be Re-elected?

27. MINISTRY OF FINANCE Chile choose to change From 1990 until 2010 a center-left coalition governs. People wants a new political performance, a new way of govern President Sebastián Piñera, assumed his position on 11 march 2010.

28. MINISTRY OF FINANCE GOVERNMENT PROGRAM 2010-2014 Grow at 6% average annual rate Create 200.000 jobs annually (2010-2014) Increase investment (Gross Fixed Capital Formation) from 21% of GDP (2009) to 28% of GDP in 2014 Eliminate extreme poverty by 2014 Lay the ground to become a developed country by 2018

29. MINISTRY OF FINANCE RECOVERY OF THE CAPACITY OF GROWTH AND JOB CREATION OF CHILE Recover investment Accelerated depreciation Tax incentives for small businesses Reduce costs of bureaucracy Increase employment Incentives to hire Emergency jobs National training plan Adaptability of the workforce Protection of labor rights Improve productivity Promotion of science and technology Promotion of innovation and entrepreneurship Modernization of the state

30. MINISTRY OF FINANCE Basic Principles Financing the government program does not require tax increases A temporary tax increase is only needed to finance about one third of the reconstruction effort

31. MINISTRY OF FINANCE Resources Needed for the Government Program Government Program: US$9.3 bn

32. MINISTRY OF FINANCE Chiles Road to Development by 2018

33. MINISTRY OF FINANCE High Economic Growth Expected in 2011 Source: IMF, Consensus Forecast and Central Bank of Chile 2009: -1.5%

34. MINISTRY OF FINANCE How to Reform and be Re-elected? Chiles Experience and Future Challenges Rodrigo Álvarez Zenteno Undersecretary of Finance of Chile