Long-term Gain, Short-Term Pain: Assessing the Potential Impact of Structural Reforms in Chile

IMF Working Papers, December 29, 2015

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The 2015-18 structural reform agenda in Chile has the potential to significantly increase Chile’s long-run GDP.
The reform agenda may have some negative effects in the short term.
A smooth transition to a higher productive potential depends on three key dimensions:
- the credibility of the reforms,
- their effectiveness in closing structural gaps,
- and their speed of implementation.
Badly designed reforms that remove only a very small fraction of the existing structural gaps, at a slow speed, and with little credibility, can greatly reduce the positive impact of the reform agenda on GDP.

Analysis uses the IMF dynamic general equilibrium model (GIMF).
Focus is on potential economic impact of the 2015-18 structural reform agenda in Chile.
Subject areas covered include: Consumption, Education, Human capital, Infrastructure, Labor, Macrostructural analysis, National accounts, Structural reforms.
Keywords noted: Asia and Pacific, capital factor share parameter, Chilean economy, Consumption, cost of capital, education quality, human capital, Infrastructure, infrastructure network, investment goods, macroeconomic analysis, school voucher system, structural reforms, telecommunication industry, telecommunication infrastructure, utility function, WP.

Credibility of reforms: central to realizing long-run gains.
Effectiveness in closing structural gaps: reforms must remove a meaningful fraction of existing gaps to generate intended GDP gains.
Speed of implementation: faster implementation increases positive impact; slow implementation can substantially reduce benefits.
Design quality: poorly designed reforms (small gap-closure, slow speed, low credibility) can materially diminish GDP effects and may produce short-term costs.

Prioritize design features that maximize credibility of reform commitments.
Target reforms to effectively close measurable structural gaps rather than implementing marginal changes.
Implement reforms at a sufficient pace to capture transition benefits and limit prolonged short-term costs.
Evaluate trade-offs between short-term adjustment costs and long-run productivity gains explicitly when sequencing policies.