## wp18285 - Section VII contains some concluding remarks.

## Source details

**Canonical URL:** [wp18285 - Section VII contains some concluding remarks.](https://www.imf.org/-/media/files/publications/wp/2018/wp18285.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2018/wp18285.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2018/wp18285.pdf.json)

---

### II. Comparison of structural indicators: Chile, Latin America and OECD
- Data sources: World Bank’s World Development Indicators, Ease of Doing Business, and Education Statistics; World Economic Forum’s Global Competitiveness Indicator; International Labor Organization’s Employment Protection Legislation Database.
- Indicators adjusted so that higher values imply better outcomes.
- Areas where Chile stands favorably (top in Latin America and among best in OECD):
  - Connectivity (e.g., mobile phone subscriptions).
  - Gross enrollment in tertiary education.
  - Adult literacy.
  - Faster access to electricity connection (time to get electricity).
  - More competitive labor taxes and contributions.
  - Higher level of financial inclusion (share of firms with checking or savings accounts).
- Areas where Chile outperforms Latin America but lags OECD:
  - Product market regulation and competition.
  - Labor market policies.
  - Innovation capacity and R&D.
  - Education and training.
- The paper focuses on those four relatively weak areas and quantifies effects of policy reforms in them.

### A. Product market and competition — key findings
- Market structure and perceptions:
  - Market concentration perceived worse than Latin American peers and OECD; large companies dominate several domestic market segments (WEF, 2017).
  - Anti-monopoly policy perceived as more effective than in other countries in the region and broadly in line with many OECD countries.
- Infrastructure and digital readiness:
  - Quality of road, railway, and air transport infrastructure: top in Latin America, considerably below OECD.
  - Internet penetration (broadband subscriptions, internet users, internet access in schools): higher than regional peers, but below OECD.
- Business regulatory burden:
  - More procedures needed to start a business or register property than in three quarters of OECD countries.
  - Cumbersome procedures constrain competitiveness and market entry.

### B. Labor market — key findings
- Labor regulation and flexibility:
  - Redundancy costs higher in Chile than most countries in Latin America and OECD.
  - Hiring and firing legislation provides considerably less flexibility than most OECD members and similar to about half of Latin American peers.
- Participation and training:
  - Female labor force participation: at the median of LA countries and among the lowest levels of OECD countries.
  - Extent of staff training: favorable relative to the region but lags behind OECD, possibly due to inefficient allocation of training resources.

### C. Innovation and R&D — key findings
- Spending and capacity:
  - Registered R&D spending by Chilean companies and capacity for innovation are lower than or at Latin America’s median and at the bottom among OECD members.
  - Industry-university collaboration and innovation/sophistication factors: better than Latin American peers but considerably below most OECD countries.
- Composition of R&D financing:
  - Most R&D and innovation spending comes from public funds; private sector contributions are limited.

### D. Education — key findings
- Spending and outcomes:
  - Overall government spending on education (share of GDP) is at the top in Latin America.
  - Expenditure per tertiary student (share of GDP per capita) among the lowest in the region (expected to change with recent education reform).
  - Share of engineering graduates: at the very bottom in Latin America.
  - PISA mean score in mathematics: better than regional peers but below most OECD countries.
  - PISA scores in reading and science show very similar results as mathematics.

### III. Identification of policy gaps — methodology and principal gaps
- Data and indicators: OECD’s Structural Policy Indicators Database for Economic Research (SPIDER) including ETCR, PMR, EPL, OECD Main Science and Technology Indicators.
- Indicators summarized (scale/measurement preserved as in source):
  - ETCR Aggregate Index, 0-6, 6 strictest.
  - ETCR Entry barriers Index, 0-6, 6 strictest.
  - ETCR Public ownership Index, 0-6, 6 strictest.
  - PMR Licenses and permits system Index, 0-6, 6 strictest.
  - Expenditure on R&D Percent of GDP.
  - Employment protection legislation Index for regular contracts, 0-6, 6 strictest.
  - Unemployment benefit replacement rate Percent of wages earned when employed.
  - ALMP spending on unemployed Percent of GDP per capita.
  - Minimum wage Percent of median wage.
  - Family benefits in kind Percent of GDP.
  - Legal retirement age Legal age for pensions.
- Visualization: Chile marked by a red diamond; OECD top performer by a black diamond. Bars show OECD 25th–50th percentile (lighter) and 50th–75th percentile (darker). Signs adjusted so upper values correspond to regulations/policies more conducive to productivity and growth (adjustments applied to business licensing and regulation; ETCR; EPL; minimum wage as percent of median wage).
- Major policy gaps identified:
  - Business licensing and regulations: Chilean businesses are considerably more burdened than all OECD countries; large potential benefits from streamlining to reach OECD 25th percentile.
  - Regulation in energy, transport, and communications: limited potential benefits since Chile aligns with the OECD median.
  - Labor market:
    - Employment protection legislation (high severance payments and lengthy dismissal procedures) constrains job creation.
    - Active labor market policies (ALMP) spending (as percent of GDP per capita) is significantly lower than most OECD countries.
    - Minimum wage adjustments may be binding for SMEs; changes should be accompanied by targeted social safety net expansion to offset poverty impacts.
    - Policy gaps in family benefits in kind (childcare) and retirement age are considerably smaller; current plan to provide universal childcare access (sala cuna) may strengthen Chile’s position.
  - R&D and innovation: persistent underspending relative to OECD; private sector contribution limited.

### IV. Quantifying growth and fiscal impact of policy measures — approach and results
- Baseline scenario: closing Chile’s policy gaps to the level of OECD’s 25th percentile.
- Policy gap defined as Δi = (Xi* − Xi), where Xi is Chile’s value of the structural indicator in reform area i, and Xi* is the value at the OECD 25th percentile.
- Output effects:
  - Rely on estimates from Égert and Gal (2016, 2017) and OECD (2018).
  - Marginal impact on output of each structural policy change (∂Y/∂Pi) based on average output effect of typically observed structural policy reforms over a 5-year period.
  - Output impact of reform i: ΔY_i = (∂Y/∂P_i) × (Xi* − Xi).
- Uncertainty caveat: considerable uncertainty exists about output effects due to measurement, empirical specification, and omitted variables; quantitative results should be taken cautiously and may overestimate true effects.
- Focus of quantitative analysis: indicators with largest policy gaps — business licensing and regulation; R&D expenditure; active labor market policies; employment protection legislation and minimum wage (last two grouped as labor market regulations).
- Main quantitative results:
  - Streamlining business licensing and regulations accounts for the largest impact on output level, reflecting a significant policy gap and high output effect per unit change.
  - Output dividends from business licensing reforms materialize mainly over the first 5 years in this setup (with Duval and Furceri (2018) suggesting gains may be backloaded toward the end of the 5-year horizon).
  - R&D and innovation expenditure effects take longer to fully materialize (over 10 years) consistent with time lags in innovation and R&D.
  - Higher labor market flexibility and enhanced ALMPs take several years to deliver their full impact.
- Scenario note:
  - Baseline closes gaps to OECD 25th percentile.
  - A more ambitious scenario closing gaps to OECD median is presented in Box 1.

### Box 1: Structural measures to close gaps with OECD’s 25th percentile — policy recommendations and quantitative targets
- Streamline business licensing and permits
  - Objective: move Chile from score 6 to score 4 on PMR licenses and permits system indicator.
  - Actions: reform and simplify procedures; improve coordination among license-issuing institutions; introduce a single point (single window) for business procedures and licenses; reduce involvement of notaries; strengthen “silence is consent”; fully implement law for starting a business in one day.
- Enhance active labor market policies (ALMP)
  - Targets and fiscal envelope:
    - Increase spending per unemployed worker from current equivalent of 3 percent of GDP per capita to 8 percent of GDP per capita (amounting to a cumulative increase in spending of about 0.5 percent of GDP over 5 years) and make them strictly conditional on following training courses and active search for job opportunities (level of 25th percentile in the OECD); ensure funding through redirection of funds due to improved targeting and eligibility controls.
  - Operational recommendations: enhance targeting towards unemployed workers; strengthen evaluation of ALMPs effectiveness; enhance selection and certification.
- Increase spending on innovation and R&D
  - Quantitative targets:
    - Increase spending from current 0.4 percent of GDP to 1.2 percent of GDP in line with the 25th percentile in the OECD.
    - Aim to increase business R&D expenditure from current 0.1 percent to 0.7 percent of GDP.
  - Measures: provide incentives to businesses through tax credits (application of current 35 percent deduction) and simplified certification procedures; clarify eligibility for tax deductions in cases of acquisition of innovative companies; improve recording of innovation and R&D expenditure, particularly by private sector; strengthen assessment of public policy effectiveness and focus on measures that yielded best results.
- Increase labor market flexibility to the level of OECD’s 25th percentile
  - Directions:
    - Reduce severance costs and dismissal procedures to increase chances of jobs creation in the formal sector.
    - Lower severance costs to align with 25th percentile in OECD, which implies to about ½ or less of the current level.
    - Simplify dismissal procedure to lower legal uncertainty.
    - Lower the eligibility threshold (of one year) for benefits coverage and allow proportional coverage of workers with precarious jobs.
    - Adjust minimum wages to avoid binding constraints, particularly for SMEs.
- Policy actions for specific demographic groups
  - Examples and estimated impacts:
    - Increase of family benefits in kind, such as childcare spending, to the level of the OECD median (increase of about 0.1 percent of GDP) is estimated to result in 0.1 percent higher output over 5 years.
    - Alignment of the legal retirement age for male and female to 65 has been estimated to result in 0.4 percent higher output level over 5 years.
    - Note: In Chile the effect of retirement-age alignment is likely to be more limited given that a large share of female employees continues to work after the legal minimum age of 60 because they do not receive all pension benefits before the age of 65.
- Fiscal impact of the reform package
  - Dynamics and magnitudes:
    - Initial fiscal impact: following an initial deterioration of the fiscal balance (down by close to 1 percent of GDP) due to direct costs of some policy measures (such as higher fiscal spending on ALMP, or larger public resources devoted to R&D).
    - Medium-term fiscal effect: the package of reforms is likely to pay for itself through higher output over the medium term, with net positive impact on the fiscal balance of about ½ percent of GDP.
    - Assumption: estimates of the full fiscal impact is based on a unitary elasticity of revenues to output.
- Impact across factors of production
  - Role of specific reforms:
    - Streamlining business licensing and regulations plays a dominant role for all factors.
    - Higher R&D and innovation spending works fully through total factor productivity (TFP).
    - Enhanced labor market flexibility mainly contributes to faster capital accumulation.
    - Impact of ALMPs is shared between higher employment and TFP.
  - Indicators referenced: TFP refers to total factor productivity, L and K to employment and capital stock, respectively, N to labor force, and Y to output.
- Education quality and complementarities
  - Education reforms not quantified in the paper but identified as having overarching impact to support other reforms.
  - High-payoff areas:
    - Focus on technical and engineering education with revamped curricula (programing skills, ICT, etc.) to address skills shortages and help adoption of productivity-enhancing technology.
    - Further integration of practical training in formal education curricula to support labor market reforms.
    - Strengthen assessment of education quality and open the possibility to explicitly link teachers’ remuneration and/or school funding and management performance to student achievement scores.

### Alternative scenarios
- A. Reform Scenario Based on International Experience (typical reforms observed over five years)
  - Output impact: results in considerably lower output gains after 5 years (in the range of 1½-2 percent) compared to the baseline scenario.
  - Fiscal and factor impacts: direct and indirect fiscal effects, and impact on factors of production, are much smaller than in the baseline.
  - Note: typical scenario includes reforms in some areas in which Chile already ranks favorably to the 25th percentile (or higher) of the OECD.
- B. Reaching the OECD Median (more ambitious)
  - Output impact: closing all structural gaps with respect to the current median of the OECD group is likely to result in substantially higher output level, estimated at over 10 percent after 5 years (and double this impact after full convergence).
  - Fiscal impact: such a set of reforms is estimated to result in direct fiscal costs of about 1½ percent of GDP, which is likely to be more than offset by more revenues due to higher output, resulting in a positive net fiscal effect of about 1 percent of GDP after 5 years.
  - Factor impacts: TFP will be the factor experiencing the largest gains over this period.
  - Feasibility caveat: requires an unprecedented set of policies that substantially exceeds international experience and may be politically and institutionally difficult to implement.

### Reform synchronicity
- Historical evidence (1960-2013, SPIDER database):
  - Degree of synchronicity differs across reforms; some reforms are more likely to be implemented jointly due to complementarity or political economy considerations.
  - Examples:
    - Licensing and regulatory reforms were more likely to coincide with active labor market policies, minimum wage and pension reforms, though less likely to come along with an increase in R&D expenditure or employment protection reforms.
    - Employment protection reforms seem to have taken place simultaneously with increases in R&D expenditure and pension reforms.
  - Methodological note: correlations are calculated over 45 countries and more than 4 decades; correlations are on sign-adjusted structural indicators so that positive changes reflect a growth-enhancing reform.
- Recommendation: further analysis on reform synchronicity and complementarity is valuable to design feasible reform packages.

### Concluding remarks
- Expected benefits of the baseline package (closing gaps with OECD’s 25th percentile over five years):
  - Possible benefits can be up to 6 percent higher output level and a cumulative net fiscal gain of about ½ percent of GDP, although the output gains are likely to be backloaded.
- Policy priorities:
  - Comprehensive streamlining of licensing and permit procedures and better coordination among regulatory institutions should be centerstage given significant growth dividends with minimal initial fiscal outlays.
  - Higher labor market flexibility, enhanced and better-targeted ALMPs, and strengthened capacity for innovation and R&D can play a positive role with limited fiscal costs.
- Implementation note:
  - Alternative reform scenarios illustrate trade-offs between ambition, feasibility, and potential impact; further work on synchronicity and complementarity can inform practical roadmaps for reform packages.

*Source: wp18285 - Section VII contains some concluding remarks.*

### Section VII contains some concluding remarks.

### wp18285 - Section VII contains some concluding remarks.

### II. COMPARISON OF STRUCTURAL INDICATORS: Chile, Latin America and OECD
- Data sources: World Bank’s World Development Indicators, Ease of Doing Business, and Education Statistics; World Economic Forum’s Global Competitiveness Indicator; International Labor Organization’s Employment Protection Legislation Database.
- All indicators adjusted so that higher values imply better outcomes.
- Areas where Chile stands favorably (top in Latin America and among best in OECD):
  - Connectivity (e.g., mobile phone subscriptions).
  - Gross enrollment in tertiary education.
  - Adult literacy.
  - Faster access to electricity connection (time to get electricity).
  - More competitive labor taxes and contributions.
  - Higher level of financial inclusion (share of firms with checking or savings accounts).
- Areas where Chile outperforms Latin America but lags OECD:
  - Product market regulation and competition.
  - Labor market policies.
  - Innovation capacity and R&D.
  - Education and training.
- The paper proceeds to focus on those four relatively weak areas and quantifies effects of policy reforms in them.

### A. Product market and competition — key findings
- Perceptions and structure:
  - Market concentration perceived worse than Latin American peers and OECD; large companies dominate several domestic market segments (WEF, 2017).
  - Anti-monopoly policy perceived as more effective than in other countries in the region and broadly in line with many OECD countries.
- Infrastructure and digital readiness:
  - Quality of road, railway, and air transport infrastructure: top in Latin America, considerably below OECD.
  - Internet penetration (broadband subscriptions, internet users, internet access in schools): higher than regional peers, but below OECD.
- Business regulatory burden:
  - More procedures needed to start a business or register property than in three quarters of OECD countries.
  - Cumbersome procedures constrain competitiveness and market entry.

### B. Labor market — key findings
- Labor regulation and flexibility:
  - Redundancy costs higher in Chile than most countries in Latin America and OECD.
  - Hiring and firing legislation provides considerably less flexibility than most OECD members and similar to about half of Latin American peers.
- Participation and training:
  - Female labor force participation: at the median of LA countries and among the lowest levels of OECD countries.
  - Extent of staff training: favorable relative to the region but lags behind OECD, possibly due to inefficient allocation of training resources.

### C. Innovation and R&D — key findings
- Spending and capacity:
  - Registered R&D spending by Chilean companies and capacity for innovation are lower than or at Latin America’s median and at the bottom among OECD members.
  - Industry-university collaboration and innovation/sophistication factors: better than Latin American peers but considerably below most OECD countries.
- Composition of R&D financing:
  - Most R&D and innovation spending comes from public funds; private sector contributions are limited.

### D. Education — key findings
- Spending and outcomes:
  - Overall government spending on education (share of GDP) is at the top in Latin America.
  - Expenditure per tertiary student (share of GDP per capita) among the lowest in the region (expected to change with recent education reform).
  - Share of engineering graduates: at the very bottom in Latin America.
  - PISA mean score in mathematics: better than regional peers but below most OECD countries.
  - PISA scores in reading and science show very similar results as mathematics.

### III. Identification of policy gaps — methodology and principal gaps
- Data and indicators: OECD’s Structural Policy Indicators Database for Economic Research (SPIDER) including ETCR, PMR, EPL, OECD Main Science and Technology Indicators.
- Indicators summarized in Table 1 (scale/measurement preserved as in source):
  - ETCR Aggregate Index, 0-6, 6 strictest.
  - ETCR Entry barriers Index, 0-6, 6 strictest.
  - ETCR Public ownership Index, 0-6, 6 strictest.
  - PMR Licenses and permits system Index, 0-6, 6 strictest.
  - Expenditure on R&D Percent of GDP.
  - Employment protection legislation Index for regular contracts, 0-6, 6 strictest.
  - Unemployment benefit replacement rate Percent of wages earned when employed.
  - ALMP spending on unemployed Percent of GDP per capita.
  - Minimum wage Percent of median wage.
  - Family benefits in kind Percent of GDP.
  - Legal retirement age Legal age for pensions.
- Visualization approach in Figure 7:
  - Chile marked by a red diamond; OECD top performer by a black diamond.
  - Bars show OECD 25th–50th percentile (lighter) and 50th–75th percentile (darker).
  - Signs adjusted so upper values correspond to regulations/policies more conducive to productivity and growth (adjustments applied to business licensing and regulation; ETCR; EPL; minimum wage as percent of median wage).
- Major identified policy gaps:
  - Business licensing and regulations: Chilean businesses are considerably more burdened than all OECD countries; large potential benefits from streamlining to reach OECD 25th percentile.
  - Regulation in energy, transport, and communications: limited potential benefits since Chile aligns with the OECD median.
  - Labor market:
    - Employment protection legislation (high severance payments and lengthy dismissal procedures) constrains job creation.
    - Active labor market policies (ALMP) spending (as percent of GDP per capita) is significantly lower than most OECD countries.
    - Minimum wage adjustments may be binding for SMEs; changes should be accompanied by targeted social safety net expansion to offset poverty impacts.
    - Policy gaps in family benefits in kind (childcare) and retirement age are considerably smaller; current plan to provide universal childcare access (sala cuna) may strengthen Chile’s position.
  - R&D and innovation: persistent underspending relative to OECD; private sector contribution limited.

### IV. Quantifying growth and fiscal impact of policy measures — approach and results
- Baseline scenario: closing Chile’s policy gaps to the level of OECD’s 25th percentile.
- Policy gap defined as Δi = (Xi* − Xi), where Xi is Chile’s value of the structural indicator in reform area i, and Xi* is the value at the OECD 25th percentile (values visible in Figure 7).
- Output effects:
  - Rely on typical estimates in the literature: Égert and Gal (2016, 2017) and OECD (2018).
  - Marginal impact on output of each structural policy change (∂Y/∂Pi) based on average output effect of typically observed structural policy reforms over a 5-year period (Égert and Gal (2016, 2017)).
  - Output impact of reform i: ΔY_i = (∂Y/∂P_i) × (Xi* − Xi).
- Uncertainty caveat: considerable uncertainty exists about output effects due to measurement, empirical specification, and omitted variables; quantitative results should be taken cautiously and may overestimate true effects.
- Focus of quantitative analysis: indicators with largest policy gaps — business licensing and regulation; R&D expenditure; active labor market policies; employment protection legislation and minimum wage (last two grouped as labor market regulations).
- Main quantitative results (Figure 8 summary):
  - Streamlining business licensing and regulations accounts for the largest impact on output level, reflecting a significant policy gap and high output effect per unit change.
  - Output dividends from business licensing reforms materialize mainly over the first 5 years in this setup (with Duval and Furceri (2018) suggesting gains may be backloaded toward the end of the 5-year horizon).
  - R&D and innovation expenditure effects take longer to fully materialize (over 10 years) consistent with time lags in innovation and R&D.
  - Higher labor market flexibility and enhanced ALMPs take several years to deliver their full impact.
- Scenario note:
  - Baseline closes gaps to OECD 25th percentile.
  - A more ambitious scenario closing gaps to OECD median is presented in the next section (not detailed in this excerpt).
- Policy actions to close gaps are outlined in Box 1 (referenced in the text; content not reproduced here).

*Source: wp18285 - Section VII contains some concluding remarks.*

### Box 1: Structural measures to close gaps with OECD’s 25

### Box 1: Structural measures to close gaps with OECD’s 25th percentile

### Streamline business licensing and permits
- Objective: move Chile from score 6 to score 4 on PMR licenses and permits system indicator.
- Recommended actions:
  - Reform and simplify procedures for business licenses and permits, and lower permit status uncertainty.
  - Improve coordination among different license-issuing institutions (central government, municipalities, sectoral authorities), possibly by introducing a single point (single window) for business procedures and licenses.
  - Reduce involvement of notaries in many procedures to shorten time lags and lower business costs.
  - Strengthen the “a silence is consent” principle for administrative procedures by tackling challenges in its current application (reduce perceived stigma by regulator to encourage economic agents to use it; reduce chances of procedural limbos).
  - Fully implement in practice the law for starting a business in one day.

### Enhance active labor market policies (ALMP)
- Targets and fiscal envelope:
  - Increase spending per unemployed worker from current equivalent of 3 percent of GDP per capita to 8 percent of GDP per capita (amounting to a cumulative increase in spending of about 0.5 percent of GDP over 5 years) and make them strictly conditional on following training courses and active search for job opportunities (level of 25th percentile in the OECD); ensure funding through redirection of funds due to improved targeting and eligibility controls.
- Operational recommendations:
  - Enhance targeting towards unemployed workers, who face serious hurdles to access adequate re-training programs.
  - Strengthen evaluation of ALMPs effectiveness, enhance selection and certification.

### Increase spending on innovation and R&D
- Quantitative targets:
  - Increase spending from current 0.4 percent of GDP to 1.2 percent of GDP in line with the 25th percentile in the OECD.
  - Aim to increase business R&D expenditure from current 0.1 percent to 0.7 percent of GDP.
- Recommended measures:
  - Focus on providing incentives to businesses through tax credits (application of current 35 percent deduction) and simplified certification procedures.
  - Clarify eligibility for tax deductions in cases of acquisition of innovative companies.
  - Improve recording of innovation and R&D expenditure, particularly by private sector.
  - Strengthen assessment of public policy effectiveness and focus on measures that yielded best results (such as successful projects at Fundación Chile).

### Increase labor market flexibility to the level of OECD’s 25th percentile
- Main policy directions:
  - Reduce severance costs and dismissal procedures to increase chances of jobs creation in the formal sector.
  - Lower severance costs to align with 25th percentile in OECD, which implies to about ½ or less of the current level.
  - Simplify dismissal procedure to lower legal uncertainty.
  - Lower the eligibility threshold (of one year) for benefits coverage and allow proportional coverage of workers with precarious jobs.
  - Adjust minimum wages to avoid binding constraints, particularly for SMEs.

### Policy actions for specific demographic groups
- Examples and estimated impacts:
  - Increase of family benefits in kind, such as childcare spending, to the level of the OECD median (increase of about 0.1 percent of GDP) is estimated to result in 0.1 percent higher output over 5 years.
  - Alignment of the legal retirement age for male and female to 65 has been estimated to result in 0.4 percent higher output level over 5 years.
  - Note: In Chile the effect of retirement-age alignment is likely to be more limited given that a large share of female employees continues to work after the legal minimum age of 60 because they do not receive all pension benefits before the age of 65.

### Fiscal impact of the reform package
- Dynamics and magnitudes:
  - Initial fiscal impact: following an initial deterioration of the fiscal balance (down by close to 1 percent of GDP) due to direct costs of some policy measures (such as higher fiscal spending on ALMP, or larger public resources devoted to R&D).
  - Medium-term fiscal effect: the package of reforms is likely to pay for itself through higher output over the medium term, with net positive impact on the fiscal balance of about ½ percent of GDP.
  - Assumption: estimates of the full fiscal impact is based on a unitary elasticity of revenues to output.

### Impact across factors of production
- Role of specific reforms:
  - Streamlining business licensing and regulations plays a dominant role for all factors.
  - Higher R&D and innovation spending works fully through total factor productivity (TFP).
  - Enhanced labor market flexibility mainly contributes to faster capital accumulation.
  - Impact of ALMPs is shared between higher employment and TFP.
- Indicators referenced:
  - TFP refers to total factor productivity, L and K to employment and capital stock, respectively, N to labor force, and Y to output.

### Education quality and complementarities
- Education reforms not quantified in the paper but identified as having overarching impact to support other reforms.
- High-payoff areas:
  - Focus on technical and engineering education with revamped curricula (programing skills, ICT, etc.) to address skills shortages and help adoption of productivity-enhancing technology.
  - Further integration of practical training in formal education curricula to support labor market reforms.
  - Strengthen assessment of education quality and open the possibility to explicitly link teachers’ remuneration and/or school funding and management performance to student achievement scores.

### Alternative scenarios
- A. Reform Scenario Based on International Experience (typical reforms observed over five years)
  - Output impact: results in considerably lower output gains after 5 years (in the range of 1½-2 percent) compared to the baseline scenario.
  - Fiscal and factor impacts: direct and indirect fiscal effects, and impact on factors of production, are much smaller than in the baseline.
  - Note: typical scenario includes reforms in some areas in which Chile already ranks favorably to the 25th percentile (or higher) of the OECD.
- B. Reaching the OECD Median (more ambitious)
  - Output impact: closing all structural gaps with respect to the current median of the OECD group is likely to result in substantially higher output level, estimated at over 10 percent after 5 years (and double this impact after full convergence).
  - Fiscal impact: such a set of reforms is estimated to result in direct fiscal costs of about 1½ percent of GDP, which is likely to be more than offset by more revenues due to higher output, resulting in a positive net fiscal effect of about 1 percent of GDP after 5 years.
  - Factor impacts: TFP will be the factor experiencing the largest gains over this period.
  - Feasibility caveat: requires an unprecedented set of policies that substantially exceeds international experience and may be politically and institutionally difficult to implement.

### Reform synchronicity
- Observations from historical evidence (1960-2013, SPIDER database):
  - Degree of synchronicity differs across reforms; some reforms are more likely to be implemented jointly due to complementarity or political economy considerations.
  - Examples:
    - Licensing and regulatory reforms were more likely to coincide with active labor market policies, minimum wage and pension reforms, though less likely to come along with an increase in R&D expenditure or employment protection reforms.
    - Employment protection reforms seem to have taken place simultaneously with increases in R&D expenditure and pension reforms.
  - Methodological note: correlations are calculated over 45 countries and more than 4 decades; correlations are on sign-adjusted structural indicators so that positive changes reflect a growth-enhancing reform.
- Recommendation: further analysis on reform synchronicity and complementarity is valuable to design feasible reform packages.

### Concluding remarks
- Expected benefits of the baseline package (closing gaps with OECD’s 25th percentile over five years):
  - Possible benefits can be up to 6 percent higher output level and a cumulative net fiscal gain of about ½ percent of GDP, although the output gains are likely to be backloaded.
- Policy priorities:
  - Comprehensive streamlining of licensing and permit procedures and better coordination among regulatory institutions should be centerstage given significant growth dividends with minimal initial fiscal outlays.
  - Higher labor market flexibility, enhanced and better-targeted ALMPs, and strengthened capacity for innovation and R&D can play a positive role with limited fiscal costs.
- Implementation note:
  - Alternative reform scenarios illustrate trade-offs between ambition, feasibility, and potential impact; further work on synchronicity and complementarity can inform practical roadmaps for reform packages.

*Source: IMF staff calculations and Box 1 text (wp18285).*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18285.pdf_