DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK REGIONAL OPERATIONS DEPARTMENT 1

CHILE COUNTRY STRATEGY 2006-2010

This paper was prepared by a team consisting of Cintia Guimaraes (RE1/OD1), Pablo Molina (RE1/OD1), and Juan Pablo Valenzuela (consultant). Inputs were provided by Felipe GmezAcebo (RE1/FI1), Nicols Uauy (RE1/FI1), Carmia Albertos (RE1/SO1), Toms Engler (RE1/SO1), Carlos Herrn (RE1/SO1), Huscar Eguino (RE1/SO1), Gabriel Montes (RE1/EN1), Adela Moreda (RE1/EN1), Paolo Valenti (RE1/SC1), Francisco Meja (RE1/SC1), Mauricio Mesquita-Moreira (INT), Juan Blyde (RE1/RE1), Eduardo Rojas (SDS/SOC), Ezequiel Cabezn (RE1/OD1), Diana Arteaga (RE1/OD1), Jorge Martnez Riva (COF/CCH), Gloria Coronel (COF/CCH), Francisco Lois (COF/CCH), Jorge Venegas (COF/CCH), Beatriz Lpez (RE1/SO1), Robert Daughters (SDS/SGC), Patricio Daz (COF/CCH), Mnica Rubio (RE1/SO1), and Edson Mori (PRI/OP1).

CONTENTS

EXECUTIVE SUMMARY I. KEY CHALLENGES TO ENHANCE SOCIAL EQUITY AND LOCK IN ECONOMIC GROWTH ........................................................................................................................... 1 A. B. Background ............................................................................................................ 1 The chief challenges to close development gaps with the advanced economies............................................................................................................... 2 1. Reduce opportunity gaps ............................................................................... 2 2. Reduce the competitiveness gap with the developed economies ................ 3 3. Make government more efficient and bring it closer to the citizenry.......... 5 Medium-range prospects for economic and social progress................................ 6 1. The governments agenda.............................................................................. 6 2. Macroeconomic outlook ................................................................................ 8

C.

II.

CHIEF LESSONS LEARNED IN IMPLEMENTING PREVIOUS COUNTRY STRATEGIES ........ 10 A. B. C. D. IDB financial relations with Chile, 1990-2005................................................... 10 Strategy programming cycles in the last decade................................................. 11 IDB funding to Chile: Portfolio characteristics and performance ..................... 11 Lessons learned .................................................................................................... 13

III.

THE BANKS STRATEGY WITH CHILE FOR 2006-2010................................................... 15 A. B. Objective............................................................................................................... 15 The main actions to address the challenges ........................................................ 16 1. Reducing opportunity gaps .......................................................................... 16 2. Reducing competitiveness and income gaps with the developed economies.................................................................................................... 19 3. Making government more efficient and bringing it closer to the citizenry....................................................................................................... 25 4. Crosscutting issues ....................................................................................... 29

IV.

IMPLEMENTING THE STRATEGY ..................................................................................... 30 A. B. C. D. E. F. G. H. Fiduciary risk status ............................................................................................. 30 Toward a new business model for IDB operations with Chile .......................... 31 Country financing parameters ............................................................................. 33 IDB exposure........................................................................................................ 33 Lending scenarios for 2006-2010........................................................................ 34 Support to the private sector ................................................................................ 34 Strategy implementation risks ............................................................................. 35 Country dialogue agenda ..................................................................................... 35

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TABLES

Table 1 Table 2 Table 3

Chile: Indicators Active operations and execution status at 15 October 2006 Country financing parameters

FIGURES

Figure 1

Evolution of public-sector debt to the IDB and undisbursed public-sector loan balances

ANNEXES

Annex I Annex II Annex III Annex IV Annex V Annex VI Annex VII Annex VIII

IDB operations program in Chile 2006-2010 Millennium Development Goals List of documents used as inputs in developing the Banks country strategy with Chile Nonlending products program Management actions addressing OVEs recommendations in its Chile country program evaluation: 1995-2005. IDB country strategy with Chile: Consultation process and dialogue Country strategy monitoring indicators References

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ABBREVIATIONS

CASEN CCLIP CFAA CGR CODELCO COF/CCH CPAR DIPRES ECLAC GDP IIRSA ITC MERCOSUR MIP MSMEs NIS OECD PROPEF PRI PRODEV R&D SENAMA SERNATUR SMEs SUBDERE UNDP WB

National Socioeconomic Survey Conditional Credit Line for Investment Projects Country Financial Accountability Assessment Office of the Comptroller General of Chile Corporacin Nacional del Cobre [Chilean Copper Corporation] IDB Country Office in Chile Country Procurement Assessment Report Budget Directorate, Ministry of Finance Economic Commission for Latin America and the Caribbean Gross domestic product Initiative for the Integration of South American Regional Infrastructure Information and communications technologies Southern Common Market Management improvement program Micro, small and medium-sized enterprises National innovation system Organization for Economic Cooperation and Development Project Preparation and Execution Facility IDB Private Sector Department Program to implement the external pillar of the Medium-term Action Plan for Development Effectiveness Research and development National Bureau for Older Adults National Tourism Service Small and medium-sized enterprises Regional and Administrative Development Department, Ministry of the Interior United Nations Development Programme World Bank

EXECUTIVE SUMMARY

Over the last 20 years Chile has posted high growth rates, kept its macroeconomy stable, and systematically reduced poverty. While steadily opening up its economy it continued its State modernization efforts. But despite impressive advances in those spheres the country still has some enormous challenges to manage if it is to catch up to the more advanced economies development level. Even though Chile cut its poverty rate in half between 1990 and 2003from 38.6% to 18.8%, its income distribution is one of the most uneven among countries at a comparable development stage, with virtually no improvement since the 1960s. Furthermore, the popular perception in Chilean society is that family background counts more than personal merit in deciding the opportunities an individual will have to better his or her lot (UNDP, 2004), and education, ethnicity, and geography overwhelmingly determine a persons social mobility prospects. Thus, while healthy economic growth rates are a must to combat poverty, Chile has seen that they are not enough to achieve more equitable development. Though the economy grew 5.7% annually, on average, between 1990 and 2004, Chileans per capita income is barely 30% of the U.S. figure and 40% of the OECD average. The productivity gap with the advanced economies is even wider than the income gap. This situation presents an opportunity and a strategic challenge for the country, since it suggests that productivity increases should be the chief tool to achieve lasting economic growth. Much of Chiles economic and social progress in the past 15 years can be ascribed to the quality of its public policies and strengthening of the State and to successful public-private sector coordination and partnering. This has helped earn it a place among the top-scoring countries for quality of public administration in the World Economic Forums 2005 ranking. But there still are major challenges in the State reform sphere, notably to strengthen subnational government institutions and management and to engage citizens more in public policy development and scrutiny. These elements are important both to improve the quality of territorial governance and to ease some sharp regional and local socioeconomic development disparities across the country. The Bachelet administration has unveiled its plan to usher in a new chapter in Chiles development. Recognizing what the country has achieved since 1990, the government proposes to bolster the social safety net, further develop social inclusion policies, create conditions to propel economic growth, strengthen government-citizen relations, and improve Chileans quality of life. Having tightly aligned its Chile country strategy to the new administrations stated priorities, the Bank proposes to be a strategic partner to help the country meet its key challenges as it approaches its 2010 bicentennial, selecting target areas and issues where the Bank can deliver significant value-added. As its first challenge the Bank intends to help Chile reduce opportunity gaps, focusing its support on such areas as expanding early childhood education and improving the quality of Chilean education, reducing poverty, and

- ii

bolstering the social protection system, including a package of measures to improve the pension system. Initiatives to promote inclusion and develop policies and programs targeting the countrys most vulnerable groups would come in for support as well. A second challenge will be to help Chile reduce competitiveness and income gaps with the developed economies. Here the Banks support targets will be innovation and technology development as key for raising national productivity; a new cycle of regulatory reforms and, as a special focus of attention, strengthening of medium- and long-term energy securitya concern that is creating great uncertainty as far as prospects for strong, lasting growth are concerned. The Bank also would support capital market strengthening, production capacity increases in micro, small, and mid-size enterprises, and strengthening of the external sector in areas that hold good potential for Chiles sustainable development, such as agricultural development, the tourism sector, and strengthening of environmental sustainability. As a third challenge the Bank proposes to assist Chile to make government more efficient and bring it closer to the citizenry. It will focus on areas in which it already has amassed valuable experience in Chile and elsewhere in the region: fostering territorial development and creating institutional conditions for its sustainability; devising more and better mechanisms for accountable and participatory governance, and improving national governance. These key challenges thus make it possible to propose an articulated strategy for the countrys development aimed at achieving greater economic and social opportunities to increase development opportunities for all Chileans and strengthening the level of equity and integration by reinforcing democracy, citizenship, transparent governance. Given Chiles development status, its prospects for continuing fiscal surpluses in the short and medium term, and its access to a wide range of international finance options, it is becoming more and more selective about the kind of support it seeks from the Bank, looking now to areas in which the Banks involvement offers a clear comparative advantage and can contribute high value-added. Since opportunities and challenges in Chile are constantly evolving the Bank will need a flexible strategy and a continuous learning process to be able to respond promptly to the countrys needs. With these considerations in mind and drawing on lessons learned from its work in Chile, the Bank is instituting a new business model for its operations in the country, built on three action pillars: (i) identify and expeditiously develop emerging windows of opportunity; (ii) make Bank loans more attractive, which will require lowering the transaction costs of Bank operations in Chile, concentrating new lending in the country in local currency, and coordinating the contribution of the Banks private sector arm in the multiple opportunities the country presents, and (iii) manage the portfolio for results and disseminate lessons learned, in Chile and across the region.

I.

KEY CHALLENGES TO ENHANCE SOCIAL EQUITY AND LOCK IN ECONOMIC GROWTH1

Background Thanks to macroeconomic policies2 and structural reforms brought in over the last two decades Chile has achieved robust economic growth rates, kept its macroeconomy stable, and systematically reduced poverty. A chapter of strong, sustained growth (1985-1997) was followed by a slower-growth period (19982003) which drove down employment levels, in part a spillover from the global economic downturn triggered by the Asia crisis (1997-1998). Between 1985 and 1997 the economy expanded 7.1% annually, far outpacing historical rates;3 in 19982003 the annual growth rate was barely 3.1%. Chiles economic rally in 2004 and 2005, featuring growth rates of 6.1% and 6.3% respectively, was fueled by buoyant international conditions which set world growth records and sent copper prices skyrocketing, but also by factors at homea rising investment rate and a series of fiscal and financial reforms put through during the Lagos administration (2000-2006). These factors, plus the new opportunities opening up for Chile under multiple trade accords with the leading global production centers, augur well for lasting economic recovery and make the country more resilient to any eventual global economic downturn. Different estimates put Chiles growth potential at around 5% annually. Such an increase would mean a 4% annual rise in per capita income, enough to double the current figure in 20 years and approach some advanced-nation income averages. Chile stands out in the region not just for its good macroeconomic management and sustained growth rates but also for its successful entre into the global marketplace and a set of social policies that couples economic growth with a determined attack on poverty. Between 1990 and 2003 the poverty rate fell from 38.6% to 18.8%; the indigence rate from 12.9% to 4.7%. But Chiles high income inequality indexes have remained virtually unchanged since the 1960s, leaving it with one of the most uneven distributions among comparable-income countries.4

A. 1.1

1.2

1.3

The diagnostic assessment in this section draws on the Policy Dialogue Paper Desafos hacia el Bicentenario (IDB, 2006) and a set of 11 Technical Notes delivered to the new authorities in March 2006. Over this span Chile combined fiscal austerity with strong doses of exchange rate flexibility and trade liberalization. More recently, this system was complemented by an inflation targeting system operated by an independent Central Bank and the unveiling of a rule or policy commitment mandating a predetermined structural surplus. The Chilean economy grew 3.2% annually in the twentieth century. United Nations Human Development Report 2005 (UNDP, 2005).

3 4

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B. 1.4

The chief challenges to close development gaps with the advanced economies Though Chilean society has made huge progress, the country is aware of the imperatives it needs to address to catch up to the more advanced economiesits prime medium- and long-range goal. The following section discusses some of the key challenges the Bank visualizes for the coming years, for which it could lend support. 1. Reduce opportunity gaps

1.5

Chile was able to keep up a 5.7% average annual growth rate between 1990 and 2004 and achieved the largest poverty and indigence rate reductions in the region during those years (ECLAC, 2004), but differences in individuals socioeconomic status and family background heavily influence how opportunities are shared in Chilean society. Education, ethnicity, and geography are some of the main determinants of inequality in the country (U. de Alcal, 2005; Santibez, 2006). Chronic, gaping income inequality is one manifestation of this. In 2003 Chiles Gini coefficient for pre-transfer household income was 0.57, placing it toward the bottom of the ranks of comparable-income countries for pre-transfer income distribution, and trailing at a distance countries with production patterns similar to Chiles (primarily natural resources-based) such as New Zealand (0.36), Australia (0.35), or Canada (0.33) (Human Development Report, 2004). 5 Achieving greater equality of opportunities is a very complex challenge for Chile, since there has been no improvement in its high income concentration since the late 1960s; even in the past 15 years the income share of the wealthiest 1% of households has been climbing. This same pattern of heavy concentration of personal development opportunities shows up in its intergenerational behavior: for example, a mere 4% of the current Chilean elite were born into the lower socioeconomic bracketsnine times lower than the German figure (UNDP, 2004). An income analysis shows that just 6% of children whose fathers were in the 40% of lowest-income households in their generation now form part of the wealthiest 20% of households. That rises to 50% if the father was in the wealthiest 20% of his generation. Some early studies indicate that progress in income distribution is expected in the new generational cohorts (Sapeli, 2005; Nuez and Risco, 2005). This opportunity gap has made for highly inequitable development in Chile. The picture is even worse when one looks at territorial components: output and income are heavily concentrated in a handful of regions, cities, and municipalities, and

1.6

1.7

1.8

This extreme inequality is somewhat attenuated through government social policy, by virtue of which the ratio of income of the top quintile to the bottom quintile has fallen from 14.3 to 7.6 (Ministry of Finance, 2004).

-3-

subnational government institutions are underdeveloped. Consequently, in the last 20 years Chiles economic performance has tended to create winner regions among them northern Chile and the Metropolitan Region, and others that are structurally disadvantaged, like regions VII, VIII, IX, and X (Universidad de Alcal, 2005). 1.9 Increased access to preschool education6 and early stimulation of low-income children are top priorities to reduce the structural causes behind the current opportunity gaps for future generations (IDB Poverty Report, 2006; World Bank, 2006). This will have the further benefit of facilitating more and better workforce participation of these childrens mothers.7 Early stimulation and preschool education are determinative to improve the quality of childrens basic and secondary education outcomes, to operate as a strategic driver of greater opportunity for a new generation of Chilean children and youth. Another imperative will be to enhance basic and secondary education quality and improve and develop the current facets of the social protection system and targeting of the most vulnerable groups, with special attention to low-income children under four, indigenous communities, people with disabilities, and older adults. 2. Reduce the competitiveness gap with the developed economies 1.10 As Chiles development level continues rising, moves to increase opportunities and enhance equity will need to be underpinned by strong, sustained economic growth, to make reductions in the opportunity gap sustainable and accomplish these improvements within timeframes that Chileans consider reasonable. The 1990s saw a dramatic rise in per capita GDP growth in Chile. Its 4.8% per capita annual increase was 3 percentage points higher than the rest of Latin America, 2.5 points above the U.S. level, almost a full point higher than the East Asian economies,8 and more than 3 points ahead of the rest of the world (De Gregorio, 2004). Though the average annual increase slipped to 2.5% between 2000 and 2004, it still topped those country group averages, with the exception of East Asia. According to an analysis of Chiles growth drivers, physical capital accumulation has been the chief engine of its rapid growth. However, in total factor productivity the country still trails the advanced economies at a distance, which suggests that there is huge potential for increasing its contribution to growth. An analysis of

1.11

1.12

Though it climbed from 21% in 1990 to 35.1% in 2003, the preschool enrollment ratio still is low (Marcel and Tokman, 2005). When women have good-quality child care options they can obtain more stable, higher-paying employment in the formal sector (Perticara, 2005). China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand.

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return to investment in physical capital comes to a similar conclusion. Generally, a high capital accumulation rate reduces returns to investment if the investment does not go hand in hand with substantial productivity increases. The risk is that a reduction in return to capital accumulation may ultimately slow future investment and jeopardize the sustainability of growthwhich has been driven predominantly and precisely by capital accumulation. In the long run, the sustainability of capital accumulation and, hence, of output growth will depend ultimately on the aggregate productivity gains the country can achieve. 1.13 There is a consensus among Chileans that more production-system innovation and technology development is the strategy of choice to boost national productivity (Larran, 2005; OECD, 2005; and Eizaguirre, N; Marcel, M., Rodrguez, J; Tokman, M., 2005). This would call for policies to encourage the use of better forms of production in every sector of the economy, and new technology development for selected sectors in which Chile is already very globally competitive, such as the forest industry, salmon culture, or mining. To achieve that objective Chile would need to considerably raise its low innovation and development expenditure as a proportion of GDP (currently just 0.7%), boosting the private sectors share in that investment and forging links between research centers and the production sector. Increasing secondary and postsecondary education enrollment ratios,9 improving education quality generally,10 and extending the reach of training and skills certification programs are three ways to raise labor productivity. As an essential adjunct, the private sectors leadership role in achieving higher, lasting increases in economic productivity has to be underscored. The priority tasks that this will entail are described in the Private sector development strategy developed by the Bank11 in consultation with several leading Chilean private sector organizations. Preeminent among these tasks are the development of a set of policies to help microenterprises and small and medium-sized businesses become more productive, thereby narrowing the current competitiveness gaps with large producing corporations and generating production linkages so these smaller businesses can position themselves more solidly in the global marketplace, and initiatives to increase workforce participation, of women and youth particularly (IDB Poverty Report, 2006, and Zahler, 2005). Other prime focuses for improving productive efficiency are further development of Chiles capital market, strengthening of public utility regulation (Zahler, 2005, Gmez-Acebo and

1.14

In 2003 Chiles secondary school enrollment ratio stood at 92.6%, its postsecondary ratio at 37.5% (Marcel and Tokman, 2005). In global measures of education quality Chile consistently scores lower than would be expected for a country at its income level. See Private sector development strategy.

10

11

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Ketterer, 2005, Fischer and Serra, 2006), and better equipping the country to achieve medium- and long-term energy security.12 1.15 Boosting international trade will be one key to closing competitiveness gaps with the advanced economies. This is fundamental in Chile with its resource-export based economic growth model. The main tasks going forward will be to: (i) further diversify the countrys export basket; (ii) develop, propel, and generate conditions to capitalize on the competitive advantages of each region, so that they can all profit fully from international trade; (iii) strengthen institutions and policies associated with Chiles mounting environmental commitments and ready them for potentially more stringent environmental requirements given the countrys stage of development, its deepening international engagement, and a growing number of commitments under multilateral environmental accords and free trade agreements; (iv) significantly boost agrifood output in view of the sectors comparative, competitive advantage; and (v) work toward further integration with the rest of the region (Mesquita Moreira and Juan Blyde, 2005; Quiroz, 2005; OECD, 2005), which complements the bilateral integration policy successfully carried out by the country. 3. Make government more efficient and bring it closer to the citizenry 1.16 Much of Chiles economic and social progress in the past 15 years can be ascribed to the quality of public policies and institutional strengthening of the Chilean State as well as successful public-private collaboration and coordination. Notable among the reform focuses since 1990 have been: (i) fiscal balance, a more independent Central Bank, and concession laws, which had an immediate positive impact on economic growth and price stability; (ii) public-utility regulation and the protection-of-free-competition law, which was intended to create a competitive playing field for businesses; (iii) reforms of the State and the judicial branch, which laid the foundations for future improvements in economic performance and social progress; (iv) changes in the health care system and creation of the Chile Solidario system (targeting extreme poverty), which helped enhance social equity; and (v) changes to labor system laws and environmental protection provisions to improve operating conditions in those sectors (Bensin, 2005). A set of public management reforms brought in over that same span have helped put Chile in the ranks of the highest-rated countries for quality of public administration (World Economic Forum, 2005).13

12

This diagnostic is echoed, in part, in the work of the Pro-Growth Agenda launched in 2001 to have the private sector work with government to identify growth-boosting opportunities. The World Economic Forums 2005-2006 Competitiveness Index ranks Chile 22nd out of 117 countries for quality of public institutions. Its showing is particularly strong for public expenditure efficiency (19th in the ranking) and low levels of corruption in connection with exports and imports (7th place) and with public-utilities access (12th place).

13

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1.17

These impressive advances notwithstanding, strategic reforms still are needed to equip the State to achieve sustainable economic growth with equity, along with policies to enable the private sector to operate efficiently. Some important items still on the reform agenda are: (i) the pension system, to increase competition and transparency in pension system services; encourage moves to bring in workers currently not covered, especially the self-employed; review the institutional structure and incentives of pension system organization, especially in the public sector; (ii) production-sector innovation; (iii) the labor market, to help make employment conditions more flexible and adjust social protection and training incentive systems; (iv) energy sector development; (v) capital market strengthening; (vi) strengthening of environmental protection; and (vii) improvements in judicialbranch administrative management and trade legislation (Bensin, 2005). The main governance and State reform areas calling for future action will be: (i) strengthening of management control and budget systems of municipal governments and other decentralized central government agencies, and (ii) institutional design for territorial management, especially of cities, transportation, and infrastructure. Though Chileans now have a stronger voice in how their economy and society function, there is one unfinished item on the public agenda: devise and adopt a more systematic, global approach in that regard, to bring government closer to the citizenry (Bensin, 2005). The two key challenges here are to: (i) engage citizens more in public-interest decisions and in scrutinizing government institutions performance, and create a citizen rights ombudsman; and (ii) strengthen subnational government institutions and management, to deepen participatory democracy. Medium-range prospects for economic and social progress 1. The governments agenda

1.18

1.19

C.

1.20

The Bachelet administrations overarching goal is to answer Chileans call for a new chapter in their nations development. This will entail acknowledging the impressive gains achieved since 1990, such as the entrenching of democracy, sustained economic growth, and a plummeting poverty rate, while managing serious challenges that will call for a new leadership and management style to be able to construct a more pleasant, inclusive society and a State that puts citizens at the center, thereby strengthening participation, increasing the transparency of government operations, and making the State accountable to its citizens. The chief challenges the new administration plans to tackle in its 2006-2010 term are outlined in the governments agenda paper and in President Bachelets message to the nation delivered in the Congress on 21 May 2006. The social challenge the new administration is taking up is to bolster the countrys social safety net, which should protect Chileans against the most common risks to

1.21

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personal and household quality of life and cushion the severe toll that negative shocks from elsewhere can take on an economy as globally integrated as Chiles. Aside from targeted programs and compensatory policies, this social reform would aim above all to get beyond a vision of discrete programs in separate sectors to construct a network system giving the population access to the range of government services and programs, ensuring minimum opportunities and rights, and dedicating particular attention to development of skills and opportunities so individual citizens and families can share in the fruits of progress. President Bachelet stated recently that during her administrations term in office there would be sweeping changes in two social spheres: comprehensive social security reform, and education system improvements, with a focus on early childhood education and raising primary and secondary education quality. 1.22 The government also plans to further develop social inclusion policies to eliminate all forms of discrimination, ensure human rights protection, foster development with identity of the nations aboriginal communities, and promote Chileans cultural development. In the fiscal and economic policy domain, the new administration is aiming for robust, lasting economic growth by way of a new development policy that would see Chiles development status on a par with some OECD countries by the end of the next decade. With the countrys current macroeconomic management and public-private coordination mechanisms as a starting point, that would mean identifying new production areas and operating policies to spur innovation, new technology adoption, production linkages, and export development; charting a new strategy to bolster micro, small, and medium-sized enterprises, and streamlining and better coordinating government operations and services to propel business development. Another facet of the plan is to seize the enormous opportunities afforded by the Chilean economys growing integration and economic globalization and technology changes. Deeper integration with other countries in the region will be one priority. With regard to citizenship and personal quality of life, the new administration proposes to bring government closer to the people by strengthening civil society and furthering decentralization, opening more and better avenues for citizen input into public policy decisions. Increased transparency, reporting, and accountability of local, regional, and national authorities to the public and to civic organizations is a central piece of the plan. To enhance quality of life the government is proposing approaches that take in the different levels of government, the private sector, and the citizenry to coordinate public policies and programs dealing with housing, security, transportation, infrastructure, and sports. Creating more pleasant neighborhoods that improve quality of life is an item high on the reform agenda.

1.23

1.24

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2. Macroeconomic outlook 1.25 The fiscal rule: Fiscal policy follows a methodology of structural balance, the goal of which has been to generate a structuralcyclically adjustedconsolidated central government surplus of 1% of GDP. This goal is structured such that the government saves its CODELCO copper sales revenues above a reference price and takes in more copper-related taxes from the private sector.14 The rule has been institutionalized through the Fiscal Responsibility Act (Law 20128, approved in August 2006). Since record-high copper prices in 2005 and 2006 have left Chile with sizable surpluses, at least during the life span of this country strategy its external borrowing requirements are likely to be limited by virtue of this revenue windfall. Potential and medium-term growth: Actual growth forecasted for 2006 is estimated at 5%, which represents a drop with respect to 2004 (6.2%) and 2005 (6.3%). For 2007, however, growth is expected to increase to 5.7%, above the potential GDP growth rate for the 2006-2010 period (5.3%). Growth rates are expected to remain the same at the end of the period (Table 1). By Ministry of Finance estimates, in the medium term the current account will balance (2009), with a fiscal surplus that will shrink as copper prices drop. In 2009, copper prices are expected to be at half the 2006 price. Inflation will remain in the 3% range for the 2006-2010 period. Medium-term poverty reduction prospects: If coupled with a slight improvement in the income distribution, Chiles robust growth and solid control of key macroeconomic variables could mean reductions in poverty and indigence rates. Assuming different scenarios regarding per capita growth rates and marginal changes in the income distribution (looking at the Gini coefficient), estimates were run (IDB Poverty Report, 2006) of how long it would take Chile to halve the poverty and indigence rates that came out in its most recent national socioeconomic survey (CASEN 2003). With a 4% annual rise in per capita income and no change in the current income distribution it would take Chile nine years to cut the poverty rate to 9.4% and the indigence rate to 2.3% (i.e., the 2012 numbers would be half the 2003 survey findings). But if the country could bring its high Gini coefficient down a single point it could achieve those targets by 2011 for poverty and 2010 for indigence, given the strong poverty effect of evening out the income distribution. In the best scenario2004-2005 growth rates and 2006 projections holding in 2007-2009Chile could reach the above-mentioned target toward the end of the

1.26

1.27

1.28

1.29

14

Including revenues from sales of molybdenum, a byproduct of copper mining.

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new administrations term (2009), taking the country into its bicentennial year with a single-digit poverty rate.
Table 1. Chile: Macroeconomic Indicators
19831997 19982003 2004 2005 2006e 2007f 2208f 2009f

GDP growth (%) Potential GDP growth (%)1 Inflation (%) Change in exchange rate (% end of period) Price of copper (US$/lb annual average) Curr. acct. balance (% of GDP) Central govt. balance (% of GDP)
1 2 2

6.8% 7.1% 15.5% 12.5% 0.95 -4.1% 2.1%

2.6% 4.1% 3.2% 8.5% 0.75 -1.0% -0.7%

6.2% 4.2% 2.4% -6.6% 1.30 1.7% 2.1%

6.3% 4.9% 3.7% -8.1% 1.67 0.6% 4.7%

5.0% 5.0% 3.7% 4.1% 3.05 3.6% 7.6%

5.7% 5.3% 3.0% 0.9% 2.75 2.2% 4.4%

5.5% 5.3% 3.2% -1.3% 2.40 1.8% 1.1%

5.4% 5.3% 3.0% -1.3% 1.48 0.0% 0.4%

The figures under the 1983-1997 column actually correspond to 1985-1997. The figures under the 1983-1997 column actually correspond to 1987-1997. Sources: Central Bank of Chile, Budget Directorate (DIPRES), IMF, and private sources

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II. CHIEF LESSONS LEARNED IN IMPLEMENTING PREVIOUS COUNTRY

STRATEGIES
A. 2.1 IDB financial relations with Chile, 1990-2005 IDB financing for Chile since the early 1990s can be divided into four stages. The first, from 1990 to 1993, saw numerous loan approvals for public-sector programs as the Bank helped the country tackle a host of challenges as democracy was reinstated. However, in light of the economys stellar performance the central government elected to systematically reduce its external debt, thereby halving the debt-GDP ratio from 19.1% in 1990 to 9.4% in 1994. In a second phase running from 1995 to 1998 which saw sizable annual budget surpluses the government continued to pare the external debt stock. Ultimately it canceled loans from the IDB and other multilateral organizations and prepaid a sizable share of the cumulative debt to these agencies. All the programs that the canceled loans had been funding proceeded as previously agreed with the Bank, the governments decision having been prompted strictly by the countrys financial condition and not the programs quality or relevance. During the third stage, 1999-2000, as the Chilean economy slipped into recession and the public sector went heavily into deficit, the Banks support took the form of four loans totaling US$443.5 million. The fourth stage, from 2001 to 2005, which began with the development of the Banks 2000-2006 country strategy, marked the close of Chiles countercyclical relation with the Bank that had characterized the 1994-2000 chapter. The Banks main role now was that of strategic partner, targeting its support to sectors where it had Chile. Evolution of public-sector IDB debt and undisbursed publicsector loan balances comparative advantages. Between 3,000 1,000 2001 and 2003 it Debt (left axis) 900 approved five new Undisbursed (right axis) 2,500 800 loans for public-sector programs. In 2004, as 700 2,000 the economy moved 600 into a new growth 1,500 500 phase, it approved 400 US$25.7 million in 1,000 300 loans for four 200 programs, followed in 500 100 2005 by US$40.6 million for five new programs. Over this span the Private Sector
Debt (US$ million)
Jun-06

2.2

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Undisbursed (US$ million)

- 11 -

Department (PRI) and the Inter-American Investment Corporation (IIC) successfully executed a series of private sector operations. A succession of technical-cooperation operations (financed by the MIF and other funds) and regional technical-cooperation projects also were approved over the 1994-2005 period. B. 2.3 Strategy programming cycles in the last decade In the decade of 1995 to 2005 the Bank produced two Chile country strategies. The first of these roadmaps, covering 1996-1998, was developed at a time when the government had canceled the bulk of its IDB loans; for the most part, the Bank delivered support by way of technical-cooperation operations and promoted financial transactions with the private sector. That first strategy had a fourfold focus: (i) private sector productivity; (ii) economic and physical integration; (iii) environment and natural resources, and (iv) modernization of the State and civil society. When it put together the subsequent strategy, for the period 20002006, the Bank was once again lending to Chile, having approved three sizable loan operations. In that most recent strategy the Bank viewed its role as being Chiles strategic partner in sectors in which it could offer comparative advantages. An added challenge was to develop direct lending operations to the private sector, which the previous country strategy had not achieved. The new strategy focuses were similar to the ones pursued in the previous strategy but with a heavier social emphasis. The strategy marked out three main action areas for the Bank: (i) competitiveness and integration into the new economy; (ii) reducing inequality and enhancing quality of life; and (iii) modernization of the State and civil society. IDB funding to Chile: Portfolio characteristics and performance Four features stand out in the Banks 1995-2005 portfolio. The first is the predominance of very complex projects, either because they were innovative operations for Chile (and at times for the Bank as well) or because of the large number of coexecuting agencies. Second, overall portfolio performance was good, though budget strictures or other project-specific factors did affect some operations. Third, there was a steady downtrend in the size of new approvals, Chiles priority being technical assistance from the Bank rather than loans. And, fourth, transaction costs for the country were high. Two points are notable in the latter area: (i) over the last decade Chile solidified a transparent, high-quality government procurement system (ChileCompra) which eventually became mandatory for all government procurements except those pertaining to IDB-funded operations; and (ii) supervision or auditing by Chiles Office of the Comptroller General of procurement and disbursement processes was not considered sufficient for the Banks purposes, so it continued to review them.

C.
2.4

- 12 -

Table 2: Active operations and execution status at 15 October 2006* (US$ millions) Operations in execution Loans Investment PROPEF PBL PRI1
2

No. of operations 16 14 2 2

Amount approved Amount approved US$ millions % portfolio 219.46 218.41 1.05 150.00 54.8% 54.6% 0.3% 37.5%

Amount disbursed US$ millions 75.50 75.50 -

% disbursed 34.6% 34.6% 17.4% 38.6% 27.7% 48.8% 20.75%

MIF 17 20.19 5.0% 3.52 3 IIC 32 10.48 2.6% 3.99 Nonreimbursable TCs Country specific 18 5.13 1.3% 1.38 Regional 14 5.35 1.3% 2.61 Small projects 67 400.13 100% 83.01 TOTAL Source: RE1/OD1 based on LMS50 at 15 October 2006 * Does not include IIC figures. 1 Excludes PRI-B 2 Includes regional MIFs assigned to CCH as the unit responsible for disbursement. 3 Active portfolio, comprised of operations in the process of being disbursed, or already disbursed but not repaid.

2.5

Table 2 lists active IDB public and private sector operations at 15 October 2006. The following are features of the public sector operations: (i) the portfolio is young: the oldest of the current projects was approved in 2001 and 12 of the 14 operations were approved between 2003 and 2005; (ii) several of the projects mark innovative ventures in such sectors as older adults, tourism, citizen security, indigenous communities, and digital economy; (iii) the Bank employed new lending modalities such as multiphase programs, innovation loans, and the Project Preparation and Execution Facility (PROPEF); (iv) small loans predominate (only three approvals since 2002 are for more than US$20 million); and (v) operations intended to reduce inequalities account for 63% of the total, programs supporting modernization of the State for 21%, and competitiveness operations for 16%. As for the private sector, active operations are currently comprised of two PRI guarantees and various IIC operations for amounts of about US$8 million.

- 13 -

D. 2.6

Lessons learned15 An analysis of the Banks operations with Chile and the country program evaluation produced by the Office of Evaluation and Oversight (OVE) covering 1995-2005 offer lessons to inform the Banks new country strategy for 2006-2010: High transaction costs for Bank programs: Much of the administrative work currently being done to supervise Bank operations overlaps with what government agencies are doing. If this inefficiency can be reduced it will be simpler for Chile to execute operations with the Bank and the associated transaction costs to both parties can be lowered. This will be achieved through intensive use of Chilean government procedures. For operations funded by the Banks private sector arm it is essential to become more competitive, since Chiles sophisticated and competitive financial system offers the Banks prospective client base a broad range of business finance options. Transaction costs with the Bank are high (environmental and financial requirements, hiring of external financial and legal experts) and its loan processing and approval times are longerall of which puts it significantly behind the competition. Flexibility in adding new country-work areas: Since 2001 the Banks relation with Chile has been very dynamic, requiring the capacity to address the governments multiple needs in new sectors for programs that can bring the country high value added. Programs supporting public building management, the digital strategy, citizen security, and strengthening of the Civil Service Directorate are examples of the very varied and complex portfolio developed to date. Country strategy preparation: The methodology adopted to craft the Banks country strategies and the strategy development exercise itself were more important than the end-document, especially for the 2000-2005 span, since they facilitated a participatory process to decide Bank priorities and development of country ownership of the strategy. Independence from the fiscal cycle: Since 2001 Chiles relation with the Bank has been independent of the fiscal cycle, centering instead on support to strategic sectors in which the Bank offers the country clear comparative advantages. Accordingly, the Bank now is administering a growing number of more complex and innovative programs, though loan amounts are smaller than in the portfolio it was managing up until the early 1990s. IDB value added for Chile: The Banks comparative advantages in this new relationship with the country lie in the following areas: (i) operations design, with

2.7

2.8

2.9

2.10

2.11

15

See Lecciones Aprendidas por el Banco en Chile 1994-2004, IDB Technical Note, 2006, and OVE, Country Program Evaluation: Chile 1995-2005. Annex V lists the recommendations set out in that country program evaluation and Managements ongoing or planned actions to address them.

- 14 -

heightened citizen input or engagement of organizations associated with the programs and the use of effective instruments to make a project better; (ii) operations management, providing for the design of cross-sectoral programs, improving coordination arrangements and reducing the operations risk of failure; (iii) the possibility of meshing efforts of the central government or decentralized public agencies with the private sector and/or civil society in strategic projects; (iv) the Banks technical expertise, built up in international experiences and in other operations in Chile; (v) the seal of quality the Bank provides, and (vi) the possibility of piloting innovative ventures. A keynote of the Banks dealings with Chile was the countrys strong leadership in program design and execution, the Bank having acted as strategic partner and collaborator. This deep sense of country ownership of programs would warrant further innovations in how the Bank manages its operations. 2.12 IDB local currency lending: Given the mounting foreign currency revenues of the Chilean State and of the economy overall, the countrys external borrowing arrangements should be exchange rate neutral so as not to weaken the economys external competitiveness. For the Banks part it will be essential to develop local currency lending products for Chiles public and private sectors alike. Success factors in IDB-funded programs: In addition to an executing agencys institutional capacity and prior experience in programs with the Bank, there are at least four key drivers of good outcomes: (i) sound institutional design of programs; (ii) project executing units designed to continue as permanent fixtures within the executing agencies; (iii) early engagement of areas of government that can make the programs sustainable, particularly municipal and regional governments; and (iv) special use of certain Bank instruments such as PROPEF operations, multiphase programs, and midterm project reviews. Challenges to deepen citizen and civil society organization engagement: One of the Chilean States overarching objectives is to engage citizens and civil society organizations more in public programs and policies. In keeping with that aspiration, most of the Banks new operations in Chile have had participatory components of different kinds, incorporating a learning process for the redesign of governance. But building such an approach into government actions sometimes increases their cost and implementation times, especially owing to the procedural-redesign learning requirements. Hence, the fact that the programs will be more complicated to run, will take time to yield results, and will require continuous discussion and learning is an important consideration in program planning. Potential for support to the private sector: The kind of operations that PRI and the IIC have been funding in Chile since 2001, and the MIF for longer, indicates that there are some large windows of opportunity through which the Bank can add value in private sector development and public-private collaborations. The Banks infrastructure concession guarantees are one example.

2.13

2.14

2.15

- 15 -

III. THE BANKS STRATEGY WITH CHILE FOR 2006-2010 A. 3.1 Objective The aim of the Banks 2006-2010 country strategy with Chile is to help the country pursue growth and, in particular, improve equality of opportunity and ensure the social inclusion of vulnerable population groups. This new strategy proposal has been constructed in a context of Chiles sustained economic and social gains and world-class macroeconomic management and the new administrations agenda of strategic priorities and reforms. Given this backdrop, what the Bank has learned in the past 10 years of work with Chile, and expectations as to the countrys sound financial and fiscal condition in the coming years, the Bank will have to operate a fairly flexible strategy to accommodate projects and initiatives that can articulate the challenges already identified and fit with the areas discussed in this paper and others that address new requirements or opportunities in the public or private sector. The strategy set out here proposes selective actions in strategic areas for Chile, with a good measure of flexibility for operations selection, design, and execution, employing the new lending instruments available and tightening country-work coordination across the Bank group. As the Bank pursues this strategy it will be applying its new business model in Chile, which is designed to improve the management and efficiency of its work and focus on value-adding components. The priorities will be to scale up work with territorial governments and the private sector and implement innovative initiatives that call for the public and private sectors to work in concert. The 2006-2010 strategy is the product of a collaborative effort of the Bank and the country and of a dialogue opened in 2005 that saw consultations organized with government officials and stakeholders from the private sector, the academic community, and economic research centers (see Annex VI). The considerable analytical work that went into the exercise looked at Chiles chief medium-term challenges and alternative action avenues. The 16 studies produced included a private sector development strategy (see Annex III); their main findings were consolidated in a Policy Dialogue Paper and a set of 11 technical notes. The dialogue has been deepening since the March 2006 special policy dialogue mission which featured discussions on childrens issues, pension reform, education quality, regional development, tourism, and other topics.

3.2

3.3

3.4

- 16 -

B.

The main actions to address the challenges 1. Reducing opportunity gaps

3.5

The perception among Chileans is that, in their society, personal development opportunities are determined more by the family one is born into and by income bracket than by personal merit. This perception is reinforced by the countrys incomplete social safety net which is too weak to help individuals and families manage socioeconomic risks such as unemployment, old age, or catastrophic illness. That diagnostic would make Chiles core development mission in the coming years that of enhancing equity and developing opportunities for all, especially groups that are far from partaking fairly in the fruits of progress. The aim is not just growth with equity but also pro-growth pro-equity efforts. Over the span of its 2006-2010 country strategy the Bank could work with Chile to narrow opportunity gaps on three main fronts: a. Close education opportunity gaps and improve education quality

3.6

3.7

Raising education quality and improving education equity is a countrys best avenue toward equity enhancement and equal opportunity for new generations. The government will be focusing strongly on improvements in early childhood education, comprehensive support and services for children under four, and education quality. The Bank will target its assistance to education quality improvements and implementation of the childrens policy proposed by the Presidential Advisory Council on childrens policies, created by President Bachelet, particularly to help: (i) extend the reach of early childhood education programs and services; (ii) strengthen the cross-sectoral perspective in childrens policies; (iii) develop and support cost-effective nonformal service alternatives; and (iv) revamp education system institutions and the sectors normative framework. b. Lower poverty rates and bolster the social safety net

3.8

3.9

Even though Chile cut its poverty rate in half between 1990 and 2003 and roughly 70% of all government expenditure has been going to social programs and services, close to one in five Chileans is still living in poverty. Furthermore, Chileans who find themselves facing one or more of a set of social risksunemployment, catastrophic illness, old age, or workplace accidents being some of the most commonare very likely to slip below the poverty line, and some families trapped in structural poverty cannot improve their lot without help. As these social risks have come to be acknowledged Chile has steadily woven a social safety net intended to cushion the economic and social toll of such hardships. Though this social protection system is continually being bolstered (for instance through the

- 17 -

Explicitly Guaranteed Universal AccessAUGE program, Chile Solidario, and severance insurance) it will be a major challenge for the country to expand it further in the coming years, mostly to deliver essential social services to large population groups who are slipping through the current net, such as the self-employed, youth, and indigenous people (IDB Poverty Report, 2006), and to coordinate the multiple facets of social policy so as to extend a true safety net under the population. The Bank could lend support in the following specific areas: 3.10 Pension reform: There are structural and institutional dysfunctionalities in Chiles pension system, some of which arise from the job market. The structural problems have to do with the systems effective coverage and financing, the institutional ones with its governance system, basic information organization, and compliance and oversight. According to currently available data on the system coverage problem, close to 40% of the workforce is not contributing regularly to a personal pension account and replacement rates are below expectations. Workers with noncontributory pensions and pensioners drawing the minimum pension or less are about half the number insured with pension fund management companies. Since modernizing the countrys pension system is so important the current administration has made this one of its four key reform pillars. The Banks assistance would center on technical support for development and implementation of Pension Reform Commission proposals. Strengthening the social security system: By way of technical assistance the Bank could help Chile to redesign the social insurance system, support government social security institutions, and improve selected facets of the system, such as unemployment insurance.16 Increasing female workforce participation: The Bank can continue to work with Chile on strategies to increase female workforce participation, especially in the lowest income quintiles. Important strategy focuses would be to: (i) expand and diversify preschool child care and preschool education services, primarily for the poorest and most vulnerable children and households where the woman has to or wishes to work; (ii) develop more flexible workday policies; (iii) change maternity leave, special child-related leave, and maternity allowance rules; (iv) promote a cultural change regarding parental, family, and community involvement and commitment to recognize the importance of early childhood education; and (v) foster female entrepreneurship (SMEs).

3.11

3.12

16

The authors have drawn here from the Inter-American Development Bank paper authored by Cowan and Micco (2005).

- 18 -

c. Promote inclusion of vulnerable groups and develop policies and programs targeting those populations 3.13 A third action focus to lower Chiles current poverty rate and close opportunity gaps in its society is the inclusion of population groups which, for a variety of reasons, are outside the mainstream and highly vulnerable and find it particularly difficult to secure a fair share of Chiles development gains. This shows up in their deeper poverty or in the greater roadblocks they encounter to participate and exercise their rights. The Bank has amassed a wealth of experience in Chile in areas concerning indigenous communities, people with disabilities, older adults, and communities affected by urban violence. It also is backing a set of research projects looking at the situation of children under four. Consequently, it could contribute a great deal to the design of future policies and government actions targeting these population segments.17 Indigenous peoples:18 Since 2002 the Bank has been assisting Chile in its pursuit of a public policy on indigenous peoples through a comprehensive indigenous communities development program (1311/OC-CH), better known as the Programa Orgenes. That initiative is seeking to improve living conditions and promote development with identity in the economic, social, cultural, and environmental domains in Aymara, Atacama, and Mapuche communities in rural parts of Chile. IDB support to the current administration to implement phase II of the Programa Orgenes will build on lessons learned from phase I. The guiding approach will be the sustainability of mechanisms to help indigenous communities work with private organizations and government agencies at the local, regional, and national level. The envisaged focuses are indigenous community and government institution-strengthening, participatory planning, and investment support to bridge opportunity gaps and strengthen indigenous peoples cultural identity. The Bank also will help explore partnerships with the private sector to develop indigenous entrepreneurship, and could work with the country: (i) to create avenues and forums for dialogue and consensus-building on the recognition of individual and collective rights of indigenous peoples, and (ii) for programs specifically targeted to urban indigenous people. Older adults:19 The Bank-funded program of innovative interventions for older adults (1574/OC-CH) has been assisting the government with capacity-

3.14

3.15

3.16

17

As discussed earlier, children under four are a particularly vulnerable group. According to the 2003 CASEN survey findings, children under six have the highest poverty rate and make up a sizable share of the total poor. Young children are the most strategic group from the perspective of closing opportunity gaps: investing in this age group will improve their future education outcomes and, when they reach adulthood, will see fewer of them living in poverty and improve the income distribution. See Pueblos Indgenas: Desafos para el Desarrollo con Identidad, IDB Technical Note, 2006. See Envejecimiento con Calidad de Vida, IDB Technical Note, 2006.

18 19

- 19 -

strengthening of the National Bureau for Older Adults (SENAMA) and innovative ventures to enhance government services delivery, build demand, and spur shortand long-term responses to improve the supply of, and access to, public and private services for this population. 3.17 Drawing on its experience in that program, the Bank could continue working with Chile to help: (i) increase the economic security of older adults through pensionsystem changes and create opportunities for nondiscriminatory access to paid employment and business finance; (ii) prevent and reduce illness and disability, promoting and investing in initiatives dealing with the physical milieu, lifestyles, and preventive health care and rehabilitation services; (iii) increase the supply of social services that enable people to age at home, creating supports for family and professional caregivers, and (iv) increase the civic engagement of older adults. People with disabilities:20 The current administration will be managing a threefold challenge: (i) address the absence of a structure of rights and operation of the crosscutting principle in public policy regarding people with disabilities; (ii) fill multiple gaps in legislation, notably to deal with employment-related issues such as positive discrimination measures, modify administrative-law health requirements, and give businesses incentives to hire persons with a disability; and (iii) remove access and transportation barriers for persons with disabilities (urban accessibility, housing policy with architectural accommodations, uniform standards), and develop capacity-building programs for disability-related nongovernmental organizations. To work with Chile on these issues the Bank could develop a pilot program of comprehensive support for persons with disabilities in selected municipalities. Populations vulnerable to urban violence: An IDB study (2005) on public security management in Chile identified some of the challenges for the coming years, among them: (i) too few and inadequate strategies and programs developed around secondary preventive interventions (targeted to at-risk groups); and (ii) a weak institutional base and insufficient technical capacity in agencies with direct responsibility in this domain. To address the latter concern, President Bachelet has pledged to create a Ministry of Public Safety. The Bank, which is already assisting the country through the A Safer Chile program, could help with that and other initiatives in this sphere. 2. Reducing competitiveness and income gaps with the developed economies 3.20 The World Economic Forums recently published (2005) 2005-2006 Global Competitiveness Index rankings point up some of the factors that put Chile behind the more advanced economies for competitiveness. These findings could inform

3.18

3.19

20

This section draws from papers by Cisternas (2005) and Cisternas and Tortuero (2005) produced as part of the IDB technical-cooperation operation for Chile dealing with persons with disabilities.

- 20 -

national pro-growth agenda priorities. Chile performed impressively on macroeconomic management, where it was top-ranked among the countries evaluated in the study, and earned scores comparable to the high-income OECD countries21 for such factors as market efficiency, health system coverage, and primary education enrollment. But it trails that country-group average at a distance for innovation (-27.5%), infrastructure (-20.9%), postsecondary education and training (-18%), technological readiness (-17.8%), and business sophistication (-13.2%). 3.21 The new administration aims to make Chile one of the 15 most competitive economies in the world (2005 Bachelet administration agenda). The Bank could assist in that effort through support for government proposals, strategies for publicprivate coordination and partnering, or private entities directly, in some key strategic areas like the following, to make the nation more competitive and lay foundations for sustained productivity increases in the coming years.22 a. Innovation and technology development as key to productivity increases 3.22 Prompted by recent studies that diagnose weaknesses in Chiles science, technology, and innovation sectors,23 the government has set a research and development (R&D) target for the nation: over the next five years, raise R&D spending as a percentage of GDP from the current 0.7% level to over 1%.24 The Mining Royalty Law passed by the Chilean Congress in 2005 created a specific tax on mining operations and established a public-private National Council on Innovation for Competitiveness, with a mandate to administer these additional resources and a say in how public funds are budgeted for these purposes. Building on lessons found in implementing the technology development program (1286/OC-CH), the Banks support to Chile in this area in the coming years could focus on the following: Develop an institutional base for innovation: Help create a technical support base for the National Council on Innovation for Competitiveness, particularly to better coordinate Chiles national innovation system (NIS) and help it operate more efficiently. Such support would focus on the Council and its technical bodies, aiming to turn it into the NIS articulating agent and promoter of policy

3.23

21

According to the World Bank, high-income OECD countries are economies with per capita gross national income higher than US$10,066 in 2004 (Chile: US$5,390). Following consultations with business representatives, union leaders, government officials and analysts the Bank developed a proposal on the main private sector development focuses. Including studies conducted as part of the technology development program (CH-0160) funded in part by the IDB and by other Chilean agencies, the World Bank, and the OECD. On average, the OECD countries spend roughly 2.5% of GDP on R&D.

22

23

24

- 21 -

coordination. It would track and evaluate NIS funds and institutions using a coordinated information system to monitor development instruments and their impact, consolidating current technology prospecting efforts, fostering sector dialogue and analysis forums and arrangements, acting as catalyst to help shape public-private agendas, and leading a systematic diffusion effort. 3.24 Strengthen regional organizations and innovative clusters: The Bank is backing a program in Chile to set up and build capacity in regional development agencies, to strengthen regional actors engaged in the areas of entrepreneurship, innovation, and science and technology and thereby give them access to public funds, including mining royalties. In the process the program will enhance the quality and efficiency of subnational innovation agencies, spur regional strategy development in the sector, and help regional governments develop production in their respective territories. As a further focus the Bank, working with the leading natural-resources clusters and clusters in other competitive sectors in Chile, could assist in the design and eventual implementation of a program to develop consensus-based strategies to make such clusters more competitive, encouraging linkages and creation of technology companies that can deliver related products and services. b. Support a new cycle of public-utility regulation reforms and strengthen medium- and long-term energy security 3.25 Regulation. Many of Chiles public utility companies now are in private hands and, to judge from the evidence, privatization has worked (Fischer and Serra, 2005). Thanks to mounting investment in the different utility sectors, more of the population now has access to a greater variety of better-quality services. Efficiency improvements, showing up in sustained labor productivity increases, are a further gain. Though private sector entry and regulatory reforms have enhanced public utility services, there still is room for further regulatory strengthening especially in the telecommunications and gas industries and for port services. The Bank could provide technical assistance to help Chile remedy regulatory weaknesses in sectors in need of bolstering. The harmonization of gas sector regulations is another prospective support focus, under the IIRSA umbrella and, generally, through regional integration agreements. Energy security: Electricity demand is expected to rise 6% annually over the next few years, with slightly higher increases for natural gas. Since Argentina began restricting natural gas exports to Chile in 2004 there have been service interruptions in Chiles main power grids, creating uncertainty about medium-term power supply and jeopardizing robust economic growth prospects for the coming years. In this highly uncertain climate it would be well to explore a range of ways to lessen these risks. That could mean a shift in the makeup of the countrys energy matrix, currently 37% crude oil, 24% natural gas, 18% hydroelectricity, 8% coal, and 13% fuelwood and other.

3.26

- 22 -

3.27

As a long-term response the Chilean authorities propose to seek alternative energy sources, looking at: (i) a variety of domestic natural gas substitutes; (ii) incentives to boost hydropower and nonconventional power generation; (iii) regionally based alternatives, envisioning a regional energy ring in MERCOSUR; and (iv) liquefied natural gas imports transported by sea. The Bank could assist Chile with technical analysis of the menu of options and funding to increase and diversify energy sources. Chile also could slow the increase in power demand through more efficient energy use, with a potential saving in the range of 1.5% to 1.9% annually, in the manufacturing, mining, services, transportation, and household sectors particularly. The country already has launched a national energy efficiency program. Bringing to bear its experience in this area, the Bank could provide input as Chile tackles the complex task of transforming the energy market, with the attendant energy savings from the new dynamic created as more energyefficient plant and equipment is adopted. The Bank also could assist Chile in developing an electrification program to take in the 8% of rural residents who are not connected to the grid. Because this is the countrys most remote and scattered population, the program would have to contemplate a variety of energy alternatives. The Bank currently is funding a rural electrification program in Chile (1475/OC-CH) aimed at increasing renewable energy use, and has carried out similar projects in other countries. c. Strengthen and develop the capital market

3.28

3.29

3.30

A number of flaws in Chiles capital market are constraining its potential demand and making it hard for medium-sized and large companies to obtain financing, and could be a major roadblock for private enterprise to continue on its growth track (Gmez-Acebo and Ketterer, 2005). At the crux of the problem are certain stockmarket infrastructure nodes that are not up to international standards. Consequently, there is weak demand for paper in the market, since: (i) global operators are all but absent in the local government debt, variable income, and corporate debt markets, and (ii) other than in the pension fund manager and insurance company segments, domestic demand is very subdued. The end-goal of the needed capital market reforms would be to increase competition, specialization, efficiency, and security in the spot and derivatives markets, so new demand can attract new offerings and markets will be wider and more liquid. The changes would have to be sufficient to: (i) enable the country to take a huge leap, situating its markets in a model equivalent to the one that has allowed Europe to make its markets globally competitive, and (ii) enable companies to secure a capital base that would position them to become true regional or even global multinationals (Gmez-Acebo and Ketterer, 2005).

3.31

- 23 -

3.32

To help bring in the sweeping changes Chiles capital market requires, the Bank could support a comprehensive program encompassing: (i) technical studies to determine changes needed in institutions and legislation to remedy the flaws referred to above; (ii) investment loans and possibly sector loans; and (iii) pesodenominated debt issues by the IDB and by the private sector (via partial guarantees). The Bank also could lend support in a number of specific areas to create innovative initiatives and financial solutions for some of the above-mentioned problems in Chiles capital market, among them: (i) capital market access for medium-sized enterprises, by clustering similar companies so they can borrow from institutional investors; (ii) support for internationalization of large Chilean corporations, to reduce some of the specific operational risks associated with their inroads into other countries in the region; (iii) development of loan securitization products in selected areas (postsecondary education and hospitals); (iv) development of the carbon bond market, and (v) support for social housing finance vehicles. d. Boost production capacity of micro, small, and medium-sized enterprises (MSMEs)

3.33

3.34

Recent diagnostic assessments of MSMEs productive capacity indicate that productivity levels in these economic unitsparticularly microenterprises and small businessestrail those of larger companies. Furthermore, these smaller concerns account for only a minimal share of export business and opportunities arising from free trade agreements. Tapping the experience it has built up in Chile in recent years with MSME-targeted innovative projects the Bank could help the country tackle several of the foremost challenges, particularly through the Inter-American Investment Corporation (IIC). The aim of such support would be fivefold: (i) continue encouraging different-sized businesses to join forces to conduct interfirm transactions that add value to a given good or service destined for a specific market (industry clusters); (ii) on the financing side, support partial guarantees for the public sector and/or private financial institutions and, when apt, promote securitization of SME lending; (iii) reduce bureaucracy and streamline administrative procedures; (iv) help this segment of the economy do more to seize the business opportunities created by free trade agreements; and (v) further the decentralization and territorial coordination of MSME-related agencies and instruments.

- 24 -

e. Strengthen the external sector so it can continue to drive economic growth25 3.35 Unfinished items on Chiles international trade and integration agenda are for the most part second-generation issues, principally: (i) increasing export variety and service exports; (ii) deepening Chilean regions global trade inroads; (iii) continued pursuit of the countrys multipronged trade strategy with an emphasis on exports of services; and (iv) transportation cost policies, particularly as regards intraregional trade. There are three strategic sectors via which Chile could strengthen its external sector to advance its economy, in which the IDBs experience in the country could prove very useful: Promote agricultural development:26 Chiles agriculture-sector challenges in years ahead consist in seizing emerging opportunities in Latin American and world markets and moving into new lines such as meat (pork, lamb, and beef) and dairy products, olive oil, etc., and new markets like China, India, and Japan. Chilean exports are forecast to rise from US$7.5 billion today to some US$10 billion in 2010 and close to US$14 billion in 2014. Small and medium-sized producers should be part of this leap, as should regions that have the potential to contribute significantly to agroexport development but have yet to do so. The Bank can bring its experience to bear to help Chile achieve the abovementioned goals through support for: (i) modernization of institutions, to consolidate and diversify agrifood exports; (ii) irrigation and drainage, for the design and financing of medium-scale irrigation works; (iii) livestock development, to help boost meat exports, working to improve productivity and marketing; quality management, and food safety, and to implement livestock product traceability systems; and (iv) forestry development and biodiversity preservation, including management capacity building in sector institutions, forestry initiatives in mediumsized degraded areas, and native forest preservation in national parks and protected areas. Other prospective support focuses are the development of forest-backed securitization schemes like the one launched by Fundacin Chile, and testing of contract logging systems. Spur tourism sector development:27 In 2004 Chile took in close to US$1.396 billion in inbound tourism revenues, up 26% from 2003. This was almost on a par with its salmon and trout export receipts and topped its wine export earnings (SERNATUR, 2005). Though the tourism industry has grown steadily in recent

3.36

3.37

3.38

3.39

25 26 27

See Trade and Integration, IDB Technical Note, 2006. See Desarrollo Agroalimentario: Desafos y Propuestas de Accin, IDB Technical Note, 2006. See Fomento al Turismo, IDB Technical Note, 2006.

- 25 -

years, a set of structural weaknesses are holding back its true potential to be one of the economys leading sectors. 3.40 Building on its extensive tourism-sector experience elsewhere in the region and what it has learned since 2004 in its first tourism development operation in Chile (1507/OC-CH), the Bank could work with the country in three priority areas to strengthen it as a tourism destination: (i) innovative supply-side efforts, creating new tourism products and nurturing entrepreneurship around special-interest tourism; (ii) comprehensive destination management systems to bolster tourism sector institutions and encourage tourism development stakeholders to work in concert; and (iii) making tourist businesses more competitive through quality technology improvements, skills upgrading, and adaptation to environmental quality technology innovations. Strengthen environmental sustainability: Environmental preservation issues are coming in for growing attention in Chile for two reasons: its people are demanding greater care for nature, and its developed-world trading partners and the rising number of multilateral environmental accords it has signed on to are imposing more and more stringent environmental protection requirements. The Bank could assist Chile in several areas: (i) biodiversity and ecosystem inventorying, as sound underpinnings for new policies; (ii) improving compliance monitoring, which will mean a review of institutional and budget dimensions, in the biodiversity area particularly; (iii) securing funding to continue programs that have operated well to date apart from certain noncompliance situations (ozone layer protection, for example); and (iv) analysis and adoption of economic instruments to protect biodiversity, as an adjunct to command and control instruments. This would call for at least three work focuses: defining of property rights over the resources in question; incentive creation, and analysis of requirements in Chiles export destination markets. 3. Making government more efficient and bringing it closer to the citizenry 3.42 In the coming years the Bank proposes to frame its support for State reform processes in Chile around three elements. The first is assistance to the government in bolstering subnational governance capacity, with territorial development strengthening as the guiding perspective. This process should leverage the countrys successes and gains to datefinancial management, human resources, e-government, and public-asset management issues being as important if not more important at the subnational leveland draw on the Banks valuable storehouse of experience from its completed and ongoing operations in Chile. The second focus will be modernization and development of institutions that bear on accountability mechanisms for government services and employees, and creation of more and better avenues to give civil society organizations and individual citizens a voice in the public policy cycle. As a third component the Bank would continue providing support on critical national governance issues in which it could, in the

3.41

- 26 -

governments view, perform a catalytic role, just as it has backed improvements in the civil service, public property management, and e-government in the past. a. Foster territorial development and create institutional conditions for its sustainability28 3.43 Opportunity gaps in Chile are the result of huge disparities between regions, between municipalities, and between urban and rural parts of the country. Peoples prospects for quality of life improvements thus depend heavily on where they live. Recent studies on Chiles territorial growth patterns show that despite steady improvements in socioeconomic indicators the country still faces serious challenges to achieve more harmonious, balanced development across the nation. Based on the Banks diagnostic assessment, it could work with the country in the following areas: Foster territorial development: The aim here would be to help forge institutional partnerships between the public sector, private sector, and civil society so they can actuate territorial development strategies and programs to optimize local production potential, endogenize economic development gains, link local economies into the global economy, create employment opportunities, and reduce poverty. Along with the technical assistance it currently is delivering to set up regional economic development agencies the Bank could consider support in the following areas: (i) territorial development strategies and projects; (ii) technical assistance and funding to create or strengthen industry clusters and production chains; (iii) institutional seed capital finance to stimulate local private investment; and (iv) training of local leaders, professionals, and technical experts in territorial management and local economic development. International experiences and Bank-backed ventures in the region provide a solid base on which to draw for this purpose. Instill good territorial governance: The Bank could help bolster regional and municipal government capacity, enhance intergovernmental cooperation and coordination arrangements, and improve the decentralization/deconcentration policy framework. The Bank has broad experience in this area, ranging from support for decentralization processes to implementation of managing-for-results models. In the specific area of increasing local government efficacy,29:some proposed support focuses are: (i) coordination of the work of regional governments and

3.44

3.45

3.46

28

See Impulso al Desarrollo Territorial: Integrando el Desarrollo Productivo con el Buen Gobierno, IDB Technical Note, 2006. See Mayor Eficacia del Gobierno Municipal: el Estado ms cerca de los Ciudadanos, IDB Technical Note, 2006.

29

- 27 -

municipalities (or municipal clusters) to strengthen territorial management; (ii) strengthening of municipal clustering; (iii) comprehensive city development programs (see Technical Note); (iv) a quality assurance system for local management units; (v) development of a local government innovation fund and mechanisms to expeditiously replicate municipal best practices; (vi) various initiatives to increase local government transparency and fiscal responsibility and to strengthen citizen engagement, local e-government, municipal human resources, and municipal education; and (vii) redesign of current incentive mechanisms, gearing them more toward municipal service efficiency and quality. 3.47 Comprehensive development of urban areas:30 This initiative comes out of the recognition that cities are a prime target for territorially focused programs, such as the recent Bank-funded Valparaiso municipal development program (1703/OC-CH). The aim is to help cities build capacity to attract and generate private investment and achieve more sustainable development. The Bank could support: (i) urban-asset improvement or remediation (particularly heritage areas) through technical assistance to instill new management and financing approaches; (ii) improvement of urban utilities management; (iii) improvement of land use regulations and master plans so these can facilitate private property development and keep pace with the business dynamic; (iv) improvements in city government financial and institutional performance, to create conditions for gradual access to finance; (v) rehabilitation of social housing and social housing neighborhoods and improvements in how they are managed;31 and (vi) strengthening of the coordination/partnering function needed for city governments to boost private and public investment. Metropolitan area management also needs strengthening so government investment decision makers will be guided by a shared urban development strategy. b. Foster accountable, participatory governance 3.48 Historically the Chilean States governance model was top-down, and the rigor with which that model was applied is not unrelated to Chiles low capture and cronyism levels relative to other countries. To tackle todays development imperativesclose opportunity gaps, improve territorial cohesion and balance, bring public services to the neediest, and create spaces for public-private collaborationa less vertical model for the design and workings of government is called for. The twin priorities here will be to strengthen the role and capacity of regional and local governments to manage public services for local development, and take immediate moves to bring government closer to the people, opening new avenues with civil society organizations.

30 31

See Hacia un Desarrollo Urbano Integral, IDB Technical Note, 2006. See Viviendas Sociales: Rehabilitacin y Gestin Eficiente, IDB Technical Note, 2006.

- 28 -

3.49

The Bank could, as a strategic partner, work with Chile on actions to: (i) make government more adaptive and responsive by creating an interdepartmental service quality assessment unit or body; (ii) raise standards of public access to public information and increase public disclosure requirements; (iii) devise clearer rules governing civil servants abstention, recusation, or conflict of duty or interest, developing a code of ethics; (iv) modernize internal and external audit services and bodies so they can do more to ensure that the public sector operates efficaciously and by the rules; (v) develop participation avenues to give civil society organizations and individuals more of a say in the public policy cycle; and (vi) establish new institutional arrangements for input into policy design and resource allocation and thereby enrich democratic deliberation in the State, without interfering with the functions proper of representative institutions. c. Improve national governance

3.50

In recent years the Bank has been supporting catalytic actions regarding governance issues at the central government level, and it could continue assisting Chile in this sphere. For instance, the key early support it provided as the country began setting up its new civil service system could be broadened to take in additional human resources levels in the central government and decentralized agencies. At present the Bank is backing a pilot public-building management initiative which could signify major reforms in how national government fixed assetsand eventually municipal government propertyare managed. That programs strategy envisages the possibility that, in the long run, this sector may need institutional and regulatory reforms; this is one potential focus of Bank assistance. The Bank also has been supporting innovative e-government projects that form part of the digital strategy or call for heavy investment in information and communications technologies. Current Bank loan and technical-cooperation operations are assisting in the following areas: (i) digital strategy (1585/OC-CH); (ii) government procurement (ATN/ME-9077-CH); (iii) tax administration (e-invoicing, ATN/MT-9120 CH); (iv) digital literacy; (v) digital health (ATN/ME-9538-CH); (vi) institution-strengthening, (vii) public administration modernization (support for implementation of the Administrative Proceedings Lawintegrated platform); (viii) local e-government; (ix) strengthening of parliamentary operations (legislative branch) (1625/OC-CH); and (x) e-business development capacity. The chief opportunities in this regard would entail support for municipal e-government and institutional capacity development, information and communication technologies to make businesses more competitive, and development and implementation of initiatives coming out of phase II of the 2006-2010 digital agenda program. The Bank-backed pilot program for public building management (1573/OC-CH) could be expanded at the national and municipal government levels, as could the program to institute the new civil service system (1621/OC-CH).

3.51

- 29 -

4. Crosscutting issues 3.52 Gender. The Bank will keep up the gender equity dialogue to help Chile advance on gender parity, with six main action focuses: (i) monitor, evaluate, and disseminate information on social and gender equity management and outcomes in Chile under the Bachelet administration, the first in Latin America to have equal numbers of men and women in the cabinet; (ii) disseminate the findings of the IDB-World Bank Chile Country Gender Assessment produced as an input for development of the new strategy; (iii) assist Chiles efforts in the area of adolescent reproductive health by way of a technical-cooperation operation (CH-T1003already approved), which will begin implementing under the current administration; (iv) take specific moves to bridge the structural workforce participation gap and the gender unemployment gap to help women become employable; some activities already under way are a study on the impact of labor market intermediation on female employment and work with the country to expand comprehensive child services, through a loan operation currently in preparation; (v) help instill a crosscutting gender perspective in pension reform; and (vi) help the government promote gender parity in the private sector through actions addressing issues of corporate social responsibility. Environment. As one piece of its strategy the Bank proposes to assist Chile in solidifying its environmental institutions and regulations, with an emphasis on facets that have implications for an export-driven economic growth strategy. Though Chile has clear environmental policies in place and is adequately complying with its own environmental laws and its international environmental commitments, some of its current challenges have a definite environmental dimension. The Bank can lend support in three key areas: (i) pursue solutions to the Metropolitan Santiago pollution problem, which is taking a heavy toll on residents health and creating negative externalities for competitiveness and for global market environmental imperatives, the Santiago pollution situation being sharply at odds with Chiles clean country image; (ii) enlist small and mediumsized companies and communities in the sustainable use of forest, marine, and other resources and create more and better avenues to engage civil society in environment-impacting policies and projects; and (iii) explore economic-incentive options to spur innovation in alternative energy sources, and bring in regulations and policies to encourage energy saving in sectors such as transportation and housing.

3.53

- 30 -

IV. IMPLEMENTING THE STRATEGY A. 4.1 4.2 Fiduciary risk status Three IDB and World Bank analyses rate Chiles fiduciary risk as low. The following are the main findings. The joint IDB-World Bank Country Financial Accountability Assessment (CFAA) that came out in 2005 found the inherent risk in Chiles public finance system to be low, its financial management arrangements being sound on the fiscal discipline, transparency, and operational efficiency fronts. Underlying all financial management transactions are clear rules, strict adherence to the rules, and dedicated and qualified staff and management that rewards ethical and efficient behavior. Responsibilities and accountability are being apportioned in accordance with the decentralization of financial management to the service agencies. It is this solid basis of clear rules and behavior in line with the rules that will enable Chile to attain the standards of public financial management that it has targeted (accrual-based fiscal reporting and OECD budget practices). But there still are some outstanding issues regarding implementation of the new financial management systems (SIGFE) and to produce an explicit audit opinion on general-government sector financial reports. On the matter of internal and external audits, the CFAA notes that Chiles well-respected Comptroller Generals Office (CGR) has played an important role in helping to build the countrys justifiably high reputation for probity and transparency in public finance and government procurement system management. The second study, the World Banks 2004 Country Procurement Assessment Report (CPAR) for Chile, found the inherent risk in the countrys government procurement system to be low. It identified the systems strengths and pointed up some weak areas, notably in legislation and regulations. Since that report came out the Chilean government has brought in a number of changes, among them the launch of the ChileCompra e-procurement platform for government purchasing, now mandatory for all government procurement, except with respect to a few public institutions that have their own specific regulations, such as the Ministry of Public Works and the Armed Forces. In recognition of these advances, the IDB and the World Bank agreed in May 2006 to the use of ChileCompra in procurements they fund, introducing, where necessary, the pertinent contractual modifications. By request of the Chilean government the two institutions will produce a new CPAR early in 2007, which will reflect changes made to laws and regulations and the adoption of the ChileCompra system. The third analysis, the IDBs January 2006 evaluation of fiduciary risk in four of its active operations, confirmed the risk to be low. This cleared the way for a pilot program in these projects which consists in using the ChileCompra e-procurement

4.3

4.4

- 31 -

platform, and agreement to supervision by the CGR as independent auditor of all IDB-funded operations in Chile. A midterm review of this pilot initiative is planned for the start of 2007. 4.5 Despite the low fiduciary-risk finding, the Bank is providing technical-cooperation support using PRODEV resources to strengthen the management control system, called the Management Improvement Program (MIP). Its specific aims are to: (i) evaluate the effects of MIP implementation in government service agencies; (ii) assist with the external certification process, ISO modality, in MIPs; and (iii) strengthen the MIP coordinating agency. The end intent is to further improve and standardize public management. Toward a new business model for IDB operations with Chile Because of Chiles development status, its prospects for continuing fiscal surpluses in the short and medium term, and its access to a wide range of international finance options, it is becoming more and more selective about the kind of support it seeks from the Bank, looking now to areas in which the Banks involvement offers a clear comparative advantage and can contribute high value added. Since opportunities and challenges in Chile are constantly evolving the Bank will need a flexible strategy and a continuous learning process to be able to respond promptly to the countrys needs. With these considerations in mind and drawing on lessons learned in its work with Chile, the Bank is instituting a new business model for its operations with the country, built around three action pillars: (i) identify and expeditiously act on emerging windows of opportunity; (ii) make Bank loans more attractive, and (iii) manage the portfolio for results. Be more proactive in seeking out and developing windows of opportunity, using lending products more strategically. To identify and maximize such opportunities there needs to be a fluid country dialogue, starting at the Country Office level with a team with the right skills profile. At a second level the dialogue would be enriched by the participation of Headquarters specialists and/or specialized consultants. To make this happen the Bank would need to: (i) allot sufficient financial resources to the Country Office to be able to mobilize support from Bank specialists or external consultants as and when needed; (ii) align the Country Offices human resources profile and organization to have the skills and agility needed in priority areas for the country dialogue, and (iii) use nonlending products more strategically, as a tool to identify and develop new opportunities with Chile. Make IDB loans more attractive to the country. This could be achieved in four ways:

B. 4.6

4.7

4.8

- 32 -

a. Lending in local currency 4.9 The Bank could substantially boost the value added it delivers to Chile by raising funds on the Chilean capital market and offering local currency finance, for two main reasons: (i) given its dollar fiscal surplus Chile is less keen on foreign currency borrowing, since the ensuing further appreciation of the peso would make it less competitive internationally; and (ii) local currency debt issues would help deepen the domestic financial market, a consideration addressed recently by the Finance Minister in the Chile Compite program. Accordingly, it is essential that the Bank develop a local currency lending option as quickly as possible to be able to operate a significant public and private sector portfolio. b. Lowering transaction costs 4.10 There is a pressing need for the Bank to bring down its transaction costs by simplifying procedures and using country systems wherever practicable and pertinent (procurement, Comptroller Generals Office, project evaluation system of the Finance Ministrys Budget DirectorateDIPRES) in operations it co-funds in Chile. Given those systems low risk levels, the idea in the short term is to scale up the current pilot program32 to take in all active projects and future approvals. In the Banks private sector lending, a reduction in transaction costs (outlays to satisfy environmental and financial requirements and pay for consultants and legal counsel) is vital to be able to shorten loan processing and approval times. This would make the Bank more competitive vis--vis other financial institutions, which are able to operate much more nimbly since their in-house technical teams can work with private companies on a loan project from the design stage right through to approval. c. Coordinating the work of the Banks private sector arm to deliver timely support 4.11 In view of the potential for increasing operations with Chiles private sector, two IIC specialists and two MIF specialists have been assigned to the Country Office. The work of Bank teams at the local level and with the public sector arm needs to be well coordinated to efficiently and effectively act on opportunities in Chiles private sector and pursue new public-private partnerships. d. Using the new lending instruments 4.12 The Bank should tap the huge potential for its new lending instruments in Chile, including conditional credit lines for investment projects (CCLIP) and performance driven loans (PDL).

32

The pilot experience under way is referred to in paragraph 4.4 above.

- 33 -

e. Managing the portfolio for results and disseminating lessons learned 4.13 Managing the Banks operations in Chile for results would be more in tune with the countrys own approach, particularly in DIPRES,33 and would move the Banks focus to areas in which it can truly add value. It proposes to support or take the following actions: (i) use and complement the DIPRES project evaluation system; (ii) adjust the Country Offices professional staff profile to equip it for these functions; and (iii) through a continual Bank-country learning and feedback system, quickly identify lessons found and any in-process adjustments needed in active projects or in portfolio execution. In addition, the Bank should be even more proactive in disseminating lessons learned from its Chile operations, by way of intraregional and regional technical-cooperation operations, systematization of good practices, and other avenues. Country financing parameters The country financing parameters34 (CFPs) agreed on with the Chilean authorities, which provide a very flexible general framework for Bank lending, are as follows.

C. 4.14

Table 3 Country financing parameters Category Cost-sharing and local cost financing Recurrent cost financing Financing of taxes and duties Parameter Up to 100% No limit No exclusions

D. 4.15

IDB exposure At end-June 2006 Chiles debt to the Bank stood at US$536 million (Ordinary Capital), which is 1.1% of the Banks portfolio and approximately 6% of the countrys public debt stock. The Bank is a marginal finance provider for Chile, and the proposed lending scenario would not significantly alter that status for any value within the established range. Though Chiles IDB debt would increase in nominal terms, in practical terms it would hold at around 0.5% of GDP in 2009.

33

DIPRES management improvement program in place since 1998 consists in managing the budget of the various areas of government for predetermined results. This represents an incentive system where departments and agencies (and their staff) are rewarded for efficiently managing their budget and achieving the agreed results. See Country financing parameters-Chile.

34

- 34 -

E. 4.16

Lending scenarios for 2006-2010 A US$480 million target public-sector lending scenario has been posited for the life span of the strategy. It assumes progress on lowering transaction costs through the use of Chilean administrative systems and the possibility of local currency lending. Were these conditions not to materialize the lending scenario could drop to US$350 millionroughly the sum total of operations currently in preparation or identified in the priority areas agreed with the authorities. A substantial portion of this scenarios operations program (see Annex I) is expected to be approved during the first part of the current administrations term. Private-sector loans and guarantees would add to the range established for the public sector. The finance volume would depend on such factors as: (i) reducing extraneous costs that today leave the Bank at a disadvantage to other lenders, and (ii) a change in the current international and local liquidity situation and a resulting rise in interest rates. Support to the private sector Private Sector Department (PRI): PRI will continue exploring opportunities for local market development, infrastructure, the financial market, and other priority areas for the Banks efforts in Chile.35 Prospects exist for energy and transportation infrastructure ventures. To help develop local markets, PRI will continue to support initiatives aimed at channeling domestic saving to housing, manufacturing, and service-sector finance, including asset securitization products such as home mortgage and lease contracts targeted to the medium- and low-income population, and corporate bond placements by Chilean companies which at present cannot tap the capital market for funding. As it has done to date, PRI will explore regional integration opportunities, for instance Latin American corporate bond issues that can trade in Chiles corporate debt market. To further develop the finance market PRI will continue inviting local banks to join the Regional Trade Finance Facilitation Program as confirming banks, as the network of issuing banks in the region expands. MIF: Chile is fertile ground for MIF piloting of innovative projects that have replicability potential in the region. It has a multitude of public and private sector actors with the institutional strength to deliver such projects and a relatively favorable political and economic environment for implementation success. The Bank and the region have already benefited from lessons found in numerous MIF-funded pilot projects in Chile (concessions model, commercial arbitration, job

4.17

F. 4.18

4.19

4.20

35

As defined in the Integrated business plan for non-sovereign guaranteed operations (document GN-2400-10).

- 35 -

skills certification, and sanitary regulation, to cite a few). Going forward, MIF operations should align themselves generally to the Banks strategy with Chiles private sector, the central vector being support for measures needed to equip Chilean businesses to compete internationally. The MIF can assist with short- and medium-term interventions in the following areas: (i) unfinished microeconomic reforms, for instance concession regulation; (ii) business innovation; (iii) production development in Chilean regions; and (iv) opportunities for the majority, such as microfinance and social housing. 4.21 Inter-American Investment Corporation (IIC): The IIC will continue to offer supply chain finance and loans for specialized SME finance institutions (factoring, microleasing). It also will lend for environmental projects, agribusiness export ventures, and working capital finance for export companies and will provide refinancing for tenor and term adjustments. Strategy implementation risks The two specific risks for the 2006-2010 strategys implementation have to do with Chiles healthy macroeconomy and with how quickly the Bank can adapt itself to act on emerging opportunities. On the first point, the rapid rise in government revenues could mean a shift away from external borrowing, prompted by an eventual continuation of copper price windfalls, large fiscal surpluses, heavy pressure on exchange rate competitiveness (appreciation), and high financial saving levels. Peso-denominated debt issues would ease much of that pressure, with a twofold benefit for the country: development of a local peso market and neutralization of the currency risks that come with traditional loans. With regard to the Banks adaptability, slow progress in lowering transaction costs and in reshaping the Banks relation with Chile could result in a scaling back of the operations program envisaged in the country strategy. However, there is every confidence that the ongoing process to instill a new business model, and that processs fit with the Bank realignment exercise, would adequately cover this risk. Country dialogue agenda Three items dominating the governments first-year agenda will be articulating the country dialogue and Bank-Chile relations. The first two are: (i) the urgent need to launch processes and measures to quickly begin delivering on presidential campaign pledges, in order to accomplish concrete results in a four-year term, and (ii) the need to develop effective responses to pressing demands of Chilean society. Accordingly, a top item on the country dialogue agenda will be the Banks ability to act with the requisite flexibility and agility and bring the necessary technical expertise to bear to help Chile move forward on priority areas in the near term.

G. 4.22

4.23

H. 4.24

- 36 -

4.25

A third important focus of attention in Bank-Chile relations in the coming years will be the countrys hefty fiscal surplus. The Banks ability to offer local currency finance will be key in such a surplus scenario to be able to operate a significant Chile lending portfolio. This item thus will figure prominently in the country dialogue. Talks with the authorities should address several other issues of importance in Bank-Chile relations. One is the reduction in transaction costs by agreeing to the use of country systems such as ChileCompra, CGR, and the DIPRES project evaluation system. A second involves creating a country-work dynamic that will expedite the identification and development of priority areas for Bank support; this will call for more strategic use of its nonlending products. A third item is the new CPAR to be produced with the World Bank in 2007.

4.26

Annex I Page 1 of 2

IDB OPERATIONS PROGRAM IN CHILE (MILLIONS OF U.S. DOLLARS)

Tentative public-sector lending program 2006-2010 Reducing opportunity gaps CH-L1014 CH-L1022 CH-L1024 Integral development of indigenous peoples (phase II) approved Preschool education and education quality program Pension reform support program I Reducing competitiveness gaps with the developed economies CH-L1019 CH-L1021 CH-L1023 Regional productive development agencies CONAF modernization and management capacity strengthening Strengthening Chile as a tourism destination Making government more efficient and bringing it closer to the citizenry CH-L1028 CH-L1018 Total
1

45.2 50.0 10.0

20.0 10.0 40.0

Support for digital agenda (phase II) Subnational management support

1

10.0 50.0 235.2

Part of a CCLIP for US$400 million.

PRI lending program 2006 CH-L1017 CH-L1016 Total Securitizadora Security GMAC-RFC S.A. (US$35 million guarantees) Charrua-Temuco transmission line 75.0 16.0 91.0

IIC lending program 2006-2007 Pre-pipeline Under appraisal Appraised Appraised Financial Services Financial Services Financial Services Wood, Pulp and Paper Rabobank Int. Chile Fondo Garantias Pequea Empresa Eurocapital S.A. Infodema 30.0 30.0 3.0 5.5

Annex I Page 2 of 2

CH-T1014 CH-T1016 CH-T1018 CH-T1021 CH-T1020 CH-T1017 CH-T1015 CH-T1026 CH-T1024 CH-T1029 n/n CH-T1032 CH-T1013 CH-T1022 CH-T1019 CH-T1030 CH-T1033 CH-T1034 CH-T1010 CH-T1027 CH-L1023 CH-T1028 CH-T1031 CH-T1035 CH-T1025 Total

Tentative technical cooperation program 2006-2007 (US$000) Reducing opportunity gaps Program to support the social dialogue in Chile Dissemination of Chile Country Gender Assessment findings Indigenous people social capital strengthening Integration of gender perspective in pension system reform in Chile Aracauna Aprende: Improving outcomes in low-income schools Strengthening gainful employment skills of women victims of violence Economic analysis of Phase II of the Programa Orgenes Programa Orgenes (CH-L1014)Information, monitoring, and evaluation systems Participatory development of a public urban indigenous policy Program to develop opportunities for socially at-risk youth Impact of job intermediation services on female employment Social integration of people with disabilities Reducing competitiveness gaps with the developed economies Entrepreneur failure analysis and re-entrance procedures design Workshop on strengthening Chile as a tourism destination Charrua-Temuco transmission project SERCOTEC training for urban and rural small businesses and microenterprises Program for Banco BICEs small hydroelectric plants Program to promote tourism in Chile Making government more efficient and bringing it closer to the citizenry Risk management in Valparaiso Emergency in Chile Integrated digital platform of services and opportunities Chilean registry system: registry deficit and proposals for reform Dialogue on the special administration statute for Easter Island Early warning center program Analysis of state of municipal government finances and proposal of instruments and policies to strengthen them

146.0 25.0 118.0 12.0 150.0 149.0 75.0 750.0 150.0 144.2 51.0 650.0 109.0 17.4 146.0 20.0 450.0 320.0 150.0 100.0 300.0 50.0 30.0 1,000.0 147.0 5,259.6

MIF program 2006-2007 (US$000) CH-M1010 CH-M1011 CH-M1009 CH-M1007 Total Ethnotourism, culture, and amazing natural resources in Araucana Volunteer initiative to promote microenterprises Promotion of clean energy market opportunities Program to create a commodities exchange 1,800.0 450.0 975.0 1,500.0 4,725.0

Annex II Page 1 of 1

MILLENNIUM DEVELOPMENT GOALS

Goal 1 Eradicate extreme poverty and hunger Poverty, percent of population whose income is less than one dollar a day Poverty headcount ratio average percent below $1 day purchasing parity power (PPP) (World Bank) National income share of lowest quintile (World Bank) Under-five population moderately or severely underweight, percent (UNICEF estimates) Malnutrition, percent of total population (FAO estimates) 2 Achieve universal primary education Education, net primary enrollment ratio (UNESCO) Education, percent of first grade entrants who reach fifth grade (UNESCO) Literacy rate, people aged 15 to 24 (UNESCO) 3 Promote gender equality Ratio of girls to boys, primary and secondary educ. (%) (WDI) Women to men parity index, as ratio of literacy rates; people age 15-24 (UNESCO) Women, paid work in nonagricultural sector as percent of total nonagricultural workforce (ILO) Proportion of seats held by women in national parliaments, percent (Interparliamentary Union) 4 Reduce child mortality Under-five mortality rate, per 1,000 live births (UNICEF*) Under-one infant mortality rate, per 1,000 live births (UNICEF*) Proportion of 1-year old children immunized against measles (UNICEF estimates) Improve maternal health Maternal mortality ratio, per 100,000 live births (WHO, UNICEF, UNFPA) Births attended by skilled health personnel, percent (WDI) Combat HIV/AIDS, malaria and other diseases HIV prevalence rate, female (percent of age 15-24 population) Tuberculosis, incidence per 100,000 population (WHO) Tuberculosis cases detected under DOTS, percent (WHO) Tuberculosis cases cured under DOTS, percent (WHO) HIV, new cases annually per 1,000,000 pop. (PAHO) HIV, number deaths annually per 100,000 population (PAHO) Ensure environmental sustainability Forest area, percent of land area (FAO estimates) Protected areas, percent of total land area (from UNEP data) Energy supply (apparent consumption, kg of oil-equivalent) per $1,000 GDP (2000 PPP) (WB) Carbon dioxide (CO2) emissions, tons CO2 per capita (CDIAC) Water, proportion of population with sustainable access to improved water source, total (WHO-UNICEF) Sanitation, percentage of total population with access to improved sanitation facilities, total (WHO-UNICEF) Develop a global partnership for development Youth unemployment rate, ages 15-24 (WDI) Fixed line and mobile phone subscribers per 1,000 pop. (WDI) Personal computers per 1,000 population (WDI)

1990 3.5 2.1 4.4 8.0 87.7 98.1 101 100.4 36.2 19 18 82 65 ... 90 ... ... ... ... 21.0 ... 179 2.7 90 85 13.1 6.7 9.4

1995 0.9 0.9 5.0 87.3 100 98.5 100.3 100.4 36.2 8 14 12 97 33 99.5 ... ... 73 79 ... 2.3 ... 18.9 162 3.1 ... ... 11.5 141.2 33.2

2001 2.0 0.5 3.3 0.8 4.0 88.8 101.2 98.9 99.6 100.3 36.6 11 12 11 99 31 99.8 0.1 18 102 82 36.1 3.1 20.7 18.9 165 3.5 d 95 d 92 18.8 568.1 106.5
c

2003 1.8 4.5 37.3 13 9 8 99 ... 17 115 86 37.6 ... ... 18.7 ... ... ... ... ... 658.6 d 119.3

2015 target 1.0 0.5 4.0 100 100 100 100 100 12.7 5.3 97 8 100 0.05 ... ... ... ... ... ... ... ... ... 95 ... ... ... ...

Source: World Bank, from United Nations (Statistics Division) and official data. Notes a For 1994 and 2000 corresponds to 0-71 month segment. For 2003, corresponds to 0-6 year segment. b For 1995. c For 2000. d For 2002.

1 2 3 4 5 6 7 8

Goal Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for development

Target 2015 target = halve (1990) poverty and malnutrition rates 2015 target = 100% net enrollment ratio 2005 target = complete gender parity 2015 target = reduce (1990) by two thirds the under five mortality rate 2015 target = reduce (1990) by three quarters the maternal mortality ratio 2015 target = have halted and begun to reverse the spread of HIV/AIDS etc. 2015 target = various 2015 target = various

Source: World Development Indicators (WDI), 2004.

Annex III Page 1 of 2

TECHNICAL PAPERS USED AS INPUTS IN DEVELOPING THE BANK'S COUNTRY STRATEGY WITH CHILE

I.

Policy Dialogue

Inter-American Development Bank (2006), Desafos hacia el Bicentenario. Analytical synthesis of the socioeconomic development challenges facing Chile and what might be the best economic policy options to manage them. This document drew on a number of technical papers prepared specifically to help the Bank develop its Chile country strategy, which are listed below by thematic area. II. Lessons Found in the Banks Work in Chile

Inter-American Development Bank paper (2005), Informe sobre logros y lecciones aprendidas en la ejecucin de las estrategias del Banco en Chile: 19942004. Juan Pablo Valenzuela. Inter-American Development Bank Technical Note (2006), Lecciones aprendidas por el Banco en Chile, 1994-2004. III. Reducing Opportunity Gaps

Inter-American Development Bank papers: o o o o (2006) Perfil de la pobreza en Chile. Claudio Santibez. (2005) Chile: Estudio sobre alternativas de atencin integral a la niez menor de 4 aos. Informes I y II. Asesoras para el Desarrollo. (2005) Empleo femenino: Oferta laboral y cuidado infantil. E. Acosta, M. Perticara, and C. Ramos. (2005) Evolucin, lecciones y desafos de las polticas de desarrollo regional/territorial en Chile. Universidad de Alcal. Instituto Universitario de Anlisis Econmico y Social. (2005) Informe sobre el estado de situacin de la poltica chilena en materia de discapacidad. Mara Soledad Cisternas. (2006) Envejecimiento con calidad de vida. (2006) Pueblos indgenas: Desafos para el desarrollo con identidad. (2006) Viviendas sociales: Rehabilitacin y gestin eficiente.

IDB Technical Notes: o o o

Annex III Page 2 of 2

IV. Reducing competitiveness and income gaps with the developed economies Inter-American Development Bank papers: o o o o (2006) Diagnstico institucional sobre sistema de pensiones chileno y propuesta de recomendaciones. Final report. Fernando Grafe. (2006) Estrategia de desarrollo del sector privado (PSDS) para Chile. Roberto Zhaler. (2005) Crecimiento, empleo y estabilidad del ingreso en Chile: Propuestas de reforma al seguro de desempleo. Kevin Cowan and Alejandro Micco. (2005) Efectos de la privatizacin de servicios pblicos en Chile: Casos sanitario, electricidad y telecomunicaciones. R. Fischer and P. Serra. Estudios Econmicos y Sociales series. (2005) Fortalecimiento de la gestin ambiental para cumplimiento de acuerdos multilaterales ambientales (AMUMAS). Preliminary report. Jorge Quiroz. (2005) Innovacin en Chile: Anlisis y propuestas. Felipe Larran. (2005) Innovation Shortfalls: IADB Technical Notes. W. Maloney and A. Rodrguez-Clare. (2005) Trade and Integration Sector Note. Mauricio Mesquita. (2006) Desafos institucionales del sistema de pensiones chileno. (2006) Desarrollo agroalimentario: Desafos y propuestas de accin. (2006) Fomento al turismo. (2006) Hacia un desarrollo urbano integral. (2006) Trade and Integration.

o o o

IDB Technical Notes: o o o o o

V.

Making government more efficient and bringing it closer to the citizenry Inter-American Development Bank papers: o o (2005) Anlisis prospectivo de las capacidades institucionales y de gestin de los gobiernos subnacionales en Chile. Juan Pablo Valenzuela. (2005) Las reformas del Estado en Chile a partir de la dcada del noventa y sus lecciones. Alberto Bensin. (2006) Impulso al desarrollo territorial: Integrando el desarrollo productivo con el buen gobierno. (2006) Mayor eficacia del Gobierno Municipal: El Estado ms cerca de los ciudadanos.

IDB Technical Notes: o o

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NONLENDING PRODUCTS PROGRAM

Title/Topic 2006 Preschool education challenges in Chile New territorial development challenges and lessons learned by the Chilean Regional Development Fund (FNDR) Presentation of the study Preschool education challenges in Chile to the Childrens Policy Advisory Council Toward comprehensive urban development Social housing: rehabilitation and efficient management Poverty and inequality in Chile: foundations for construction of a social protection system Aging with quality of life Indigenous peoples: challenges for development with identity International trade. Implementing environmental requirements for free trade Agrifood development: challenges and action proposals Tourism development Trade and integration Prospective analysis of subnational government institutional and management capacity in Chile Institutional challenges for Chiles pension system Fostering territorial development: Integrating productive development and good governance More efficient municipal government, closer to the citizenry Chile: Policy dialogue paper Lessons learned by the Bank in Chile, 1994-2004

Product

Completion date

Study Study Presentation Technical Note Technical Note Study Technical Note Technical Note Study Technical Note Technical Note Technical Note Study Technical Note Technical Note Technical Note Paper Technical Note

Mar-06 Mar-06 Apr-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06 Mar-06

Annex IV Page 2 of 2

Title/Topic 2006 Presentation of the study Institutional diagnosis of the Chilean pension system and proposed recommendations to the Presidential Advisory Council on Pension Reform Presentation by four international experts to the Presidential Advisory Council on Pension Reform Workshop on pension reform (with the World Bank, ILO, and Presidential Advisory Council on Pension Reform) Workshop on regional development agencies (with CORFO) Country Gender Assessment (with the World Bank) Innovation in Chile: Analysis and proposals Population with physical and mental disabilities Workshop on citizen government (with Chilean Government Communications Office) Environmental strategy for Chile Workshop on physical and mental disabilities (with FONADIS) Chile: Measuring child care and child development Workshops to disseminate Country Gender Assessment findings Workshop on income distribution in Chile (with U. of Chile and DIPRES) 2007 Effectiveness of employment intermediation services in Chile in reducing job market discrimination Country Procurement Assessment Report Immigration in Chile: Impact and challenges Informal employment and self-employment in Chile Income distribution in Chile Socioeconomic effects of adolescent motherhood and its association with income distribution Effects of intrafamily violence on economic opportunities of women and their families

Product

Completion Date

Presentation Presentation Workshop Workshop Study Study Study Workshop Study Workshop Study Workshop Workshop

Apr-06 Apr-06 May-06 May-06 Jun-06 Jun-06 IV-2006 IV-2006 IV-2006 IV-2006 IV-2006 IV-2006 IV-2006

Study Paper Study Study Book Study Study

2007 2007 2007 2007 2007 2007 2007

Annex V Page 1 of 2

MANAGEMENT ACTIONS ADDRESSING OVE'S RECOMMENDATIONS IN ITS "CHILE COUNTRY PROGRAM EVALUATION: 1995-2005"

Recommendations Recommendation 1: Initiate a proactive search for business development opportunities. A proactive search for business may require flexibility in the location of front office and back office activities between Headquarters and the Country Office, particularly, but not exclusively, for private sector operations (PRI, IIC, and MIF). The private sector emphasis made reflects that the probability of significantly increasing public sector operations may be limited. However, the limit may be partially overcome to the extent that the future program attempts to exploit synergy effects by offering a coordinated mix of instruments for development problems in which the solutions involve both public and private actors. However, this will require effective intra-Bank coordination between the different lending arms of the Bank that has proved elusive so far. Recommendation 2: Make IDB loans financially more attractive. One option is to eliminate exchange rate risk for Chile by issuing peso denominated debt in the local market and to support issuing Chilean peso denominated bonds in the international market. The options should be explored for both public and private sectors. For the private sector, the marketing of cross-border debt instruments to regional investors also could be explored. Another option is to eliminate unnecessary transaction costs for both the public and private sector arms of the Bank. This can be achieved by replacing most components of the Banks precautionary ring fence by the countrys systems. In practice, this will require moving beyond the traditional project approach towards a generalized budgetary and sector budgetary support, options that would also reduce transaction costs. Such steps would go a long way towards fulfilling the harmonization and alignment aid effectiveness agendas.

Management actions Agreed. The country strategy proposes to institute a new business model for the Banks work in Chile, consisting broadly in: (i) identifying and nimbly developing emerging windows of opportunity; (ii) keeping up fluid, high-quality dialogue on selected issues, and (iii) lowering the countrys transaction costs with the Bank. Good coordination of timely work of the Banks private sector arm will be a special focus of attention as the strategy is implemented. Two concrete steps taken to develop the potential for more private-sector operations and bolster their share in the IDB Chile portfolio in the coming years are the transfer of programming to the Country Office (COF/CCH) and the assigning of two IIC and two MIF specialists to work in the field. To act more efficiently and effectively on opportunities offered by Chiles private sector, a review of resource allocations to COF/CCH is being proposed to ensure that they are adequate. Agreed. The possibility of local currency lending is a pillar of the new business model. The Bank can deliver significantly more value added to Chile by capturing resources on the Chilean capital market and offering local currency finance. Consequently, it is vital that local currency lending to Chile be made workable as quickly as possible. Reducing transaction costs is equally crucial in the new model. To that end, procedures will be streamlined and country systems (procurement, Office of the Comptroller General, and DIPRES project evaluationManagement Improvement Program) will be used wherever practicable and pertinent in operations the Bank co-funds in Chile. Considering the country systems low risk level it is being proposed that the current pilot program in this area be extended to all current projects and future approvals. This would be done as quickly as possible.

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Recommendations Recommendation 3: Measure the development effectiveness of the programs. In practice this will require connecting the outcome performance indicators of existing and new projects to the countrys information gathering and evaluation system not only to generate information for process evaluations but also for impact (treatment effect) evaluations. An evaluation work plan agreed with the Budget Directorate of the Ministry of Finance would be a desirable feature of the next country strategy, as would an in-house evaluative expertise. The latter point indicates that the new business model will require a different skill mix to that which exists today. The experience gained by the Bank in implementing the plan would provide valuable lessons for the Banks own managing-for-results agenda, not just for accountability purposes. Such actions will move the Bank significantly towards the managing-for-results aid effectiveness agenda. Recommendation 4: Maximize the knowledge gained in the Chilean program by providing a regional platform for Chile to export innovative solutions to given problems, thus not only making explicit and efficient the Banks cross-client fertilization role but contributing to the Banks learning and lessons found agenda.

Management actions Agreed. This is contemplated in the procedures-streamlining process whereby country systems would be used (procurement, Office of the Comptroller General, DIPRES project evaluation) in operations the Bank cofinances in Chile. Additional steps being proposed are to: (i) review and adjust existing capacities so the COF/CCH team is equipped for the requisite work with the country, and (ii) reduce the COF/CCH specialists workload associated with supervising operations procedures so they can devote themselves to managing for results, among other tasks. As well as tapping DIPRES current project evaluation capacity in the coming years, the Bank is supporting strengthening of the management improvement program by way of a PRODEV technical cooperation operation. Agreed. A prominent feature in the proposed business model is the Banks expertisethe body of knowledge built up in international experiences and lessons learned from other operations in Chile. This enables the Bank to pilot innovative initiatives with replicability potential elsewhere in the region. Good practices and lessons learned in Chile are already being exported at different levels (PRI, MIF, regional TCs, operations with the public sector) and will figure even more strongly in the new strategy. PRI, for its part, will continue exploring regional integration opportunities, for example, Latin American corporate bond issues that can trade in Chiles corporate debt market.

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IDB COUNTRY STRATEGY WITH CHILE 2006-2010 CONSULTATION PROCESS AND DIALOGUE A. Consultations

First round of consultations (March 2005). The dialogue about features of the Banks new strategy with Chile and priority issues was launched in 2005 with a round of contacts with government officials and representative stakeholders from the private sector, civil society, academe, and economic think tanks. Their views were elicited on issues they saw as priorities for the Banks new Chile country strategy and areas where the Bank could add more value, looking at its work in Chile in the previous 10 years. The consultation findings were an important input when selecting priority issues for analysis during the strategys preparation. Consultations for the development of studies, technical notes, and the policy dialogue paper. The 16 studies produced came out of consultations with a host of Chilean and regional stakeholders about the countrys main challenges in specific areas, lessons learned, good practices, and suggested avenues of solution. To cite one example: some 200 Chilean officials and other stakeholders were contacted for the study on municipal government management capacity, including 130 municipal department heads. The views of many people were sought for other studies as well, among them Territorial Development and Lessons Learned by the FNDR and Evaluation of the Banks Work in Chile. In addition to the studies, 11 technical notes and a dialogue paper were prepared, on which consultations were held subsequently. Consultations on the documents produced. Between 23 and 29 March and 15 and 19 June 2006 consultation sessions were organized in the cities of Santiago and Concepcin to elicit views and perspectives from a range of stakeholders (including government, civil society, academics, politicians, and private sector actors) about the chief challenges awaiting Chile, possible action avenues, and priorities for Bank support as Chile approaches its bicentennial. Interviews were held with government officials, mayors and their advisors, and representatives from civil society, unions, the academic community, and research centers, among others. At each event the mission delivered a presentation on the object of the consultation, the strategy preparation process, the Banks work in Chile, lessons learned, challenges identified to date, and current and planned tracking activities. Materials developed by the Bank and discussed at the meetings were distributed to participants ahead of time, except in regard to meetings with government officials. Participants also were informed that all the materials would be available on the Banks Web page in Chile. In addition to the general issues discussed, participants were asked three specific questions: (a) in which areas could the Bank become more relevant; (b) how could the Bank improve what it does in Chile, and (c) were they interested in receiving information on the outcomes of Bank activities in Chile.

Annex VI Page 2 of 5

The following were the central themes discussed and comments elicited in these sessions. B. Outcomes of the dialogue with organizations

Local development: The overwhelming consensus that came out in consultation sessions, not just at the regional level, was that local development is a paramount concern both as a way of closing opportunity gaps and to make government more efficient. The need to help improve municipal management was underscored, be it by way of information technologies or municipal reforms. Generally, participants stressed that the Bank has to understand local processes to be able to help find real solutions to problems at that level, such as scant municipal participation in regional governments and boards, which at the moment makes them mere resource administrators rather than a voice for local and regional needs. Other issues mentioned as impacting local development are a lack of consultation at the regional level; centralized operation of the Office of the Comptroller General; a dearth of analysis of territorial diversity (urban versus nonurban centers) such as would increase attention to and respect for the particularities of each; the absence of investment planning and coordination methodologies with a comprehensive regional perspective; and lack of a regional lead agency, the regional governments having little autonomy. Labor: (a) informal employment: To contribute to efforts to shrink inequality gaps it was suggested that the Bank fund a study of conditions in Chiles informal workforce, looking at the self-employed as well as outsourcing or labor market flexibility issues; (b) job creation: it was suggested that a study be done of the job creation potential of a second export phase in Chile, to be able to visualize concrete actions that could increase Chileans job opportunities and thereby reduce poverty; (c) training: analyze the role of the National Training and Employment Service (SENCE), since training grants currently are available only for people who already have some technical training, not for workingclass people for skills upgrading; (d) privatization: the Bank heard criticisms of the role it had played in privatization processes in Latin America, in terms of providing more resources for severance compensation than for job training to help people back into the workforce; and (e) social legislation: the Bank was urged to consider, in its programs to assist small and medium-sized enterprises, imperatives regarding payment of workers legally mandated social benefits, to see that businesses comply. Civil society: The following are some of the main issues that came out in the consultation sessions:

Strengthening civil society organizations: One concern voiced in the meetings was that social and union leaders are not sufficiently knowledgeable or are otherwise underequipped and thus may have trouble gaining recognition as valid interlocutors. With the current installed capacity, resources, and technical expertise these individuals cannot sit down to discuss, as equals, the issues that concern them. A strong civil society can help drive public policy.

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Civil servants: Another element affecting the State-civil society dialogue is government employees insufficiently trained in this sphere. For one thing, they are reluctant to release information to civil society even though they are mandated to do so; and public consultations sometimes are skipped so as not to hold up project approvals. Spaces for dialogue: At present, entry points for dialogue are created by individual citizens determination, not by any permanent structure or policy. Ground gained thus is lost. Private sector engagement in the dialogue: One area in which the Bank can assist Chile is in creating spaces for dialogue between government, civil society, union organizations, and the private sector. Studies on citizen engagement and social observatory to ascertain Chiles current status (baseline) and decide how to move forward from there, and compare this with other international experiences. Citizen government: It was suggested that the Bank do a study to assess the extent of this models application and political resistance to it, and look at mechanisms needed to put it into practice. Projects cofinanced by the IDB: The Bank should assure that there are public consultations for these projects, since this encourages citizen involvement, and that the project evaluations can be accessed.

Academia and research centers: The following were the main topics discussed and suggestions offered:

Focus areas for IDB engagement: Though questions were raised about the number and variety of prospective work focuses presented by the Bank, some interviewees suggested that it add other areas relevant for Chile, in which the Bank could bring value-added. It was proposed that research work be organized into the following areas: short-term challenges and problems; long-term strategy responses; shortterm unforeseen developments and situations; and work methodologies to be used. Research: The value-added that the Bank contributes in its Chile research work was underscored and the following topics were suggested: higher education finance; postsecondary technical education (employability of professionals); institutional design of natural-resource rights (transfer to private individuals); education quality (models, advisory support); pension system cost, taking account of Chiles shifting demographics; labor flexibility; womens access to public life; technical discussion on employment; technology innovation (decide on the best models for Chiles situation); decentralization or regionalization; the next export-development phase; and social investment priorities (youth versus the elderly).

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Migration: Consultation participants said that this issue will become more and more important in the coming years and the Bank should study it in depth. They felt that Chile has not really gauged the migration problem that awaits it, not just because of employability concerns but because of the rights that immigrants will be acquiring, migration policy development and implementation, etc. IDB projects: It was suggested that the Bank document and publicize the outcomes of projects in which it has engaged and disseminate the associated studies. There was particular interest in learning the outcomes of the project to strengthen the Civil Service Directorate, because this affects government efficiency and transparency. Regional issues: The Bank was urged to: (a) help create regional internships so Chileans can learn about the situation of other countries and vice versa, cross political barriers, set up networks and thereby enrich the intercountry dialogue; (b) spark a debate on Latin American country development strategies; and (c) build regional knowledge on the long-term problems with which countries are contending. Modernization of the State: It was commented that the governments modernization agenda is unfinished, changes in recent years having dealt with processes, not structure and public policies.

Environment: The Bank can assist by way of: (a) a study to help develop an energy policy (for example, there is no spatial planning as a country undertaking, and the regional authorities are subordinate to central government decisions); (b) a study on renewable energy sources (wind, geothermal, solar, nuclear, etc.); and (c) a study on realignment of the primary production phase to move into a new phase featuring an environmental perspective. Policy dialogue paper: Consultation participants praised the content and quality of the policy dialogue paper but said that some issues had not been addressed as forcefully as they deserved, notably: (a) the environment; (b) citizen engagement; (c) microenterprise; (d) social capital; (e) informal employment; (f) health; (g) migration; and (h) postsecondary education. IDB information: All the participants acknowledged that there is a widespread lack of knowledge about what the Bank does in Chile. They were very surprised to learn how many projects the Bank has financed in Chile and how many studies it has done on the country. They appreciated having been approached for their input and said they would like to receive information from the Bank in future. The following are some of the recommendations received on this matter: (a) the Bank should mass-distribute to Chilean universities the studies produced as inputs for development of the new country strategy; (b) the Bank should apprise the political class of these and other studies; at present, politicians do not have the technical information needed to inform decisions; (c) regional

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dialogue and consultation meetings are needed to help instill a regional perspective in Bank projects; and (d) the Banks dissemination work should be more permanent. C. Consultations by way of thematic workshops

To enrich the thematic discussion and elicit more detailed topical perspectives, the Bank ran a series of workshops in conjunction with Chilean institutions: Workshop on pension system reform May 2006 Workshop on regional development agencies (with CORFO) May 2006 Workshop on tourism sector challenges and alternatives (with SERNATUR) June 2006 The following new events are planned to continue the dialogue and thematic consultations in Chile: Workshop on citizen government (with the Chilean Government Communications Office) slated for fourth quarter 2006 Workshop on physical and mental disabilities (with FONADIS) slated for fourth quarter 2006 Workshops to disseminate the Country Gender Assessment findings (with SERNAM) slated for fourth quarter 2006 Workshop on income distribution in Chile (with University of Chile and DIPRES) slated for fourth quarter 2006 In response to requests received from consultation participants, the launch of the IDB Chile Country Office Web site was expedited (July 2006). This will be a permanent channel of communication between the Chilean public and the Bank.

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COUNTRY STRATEGY MONITORING INDICATORS

STRATEGY MATRIX Development focus areas and objectives Government strategy Other agencies strategies and actions IDB action IDB strategy In progress and completed In preparation or potential Outcome indicators

A. Reducing opportunity gaps 1. Bolster the social safety net Emphasize skills and opportunity creation so individuals and families can share in the nations progress Construct a network system to give the population access to the whole range of government programs and services Ensure that the entire population has rights and access to core social services Revamp and implement a preschool education system that takes in all children in the poorest 40% of the population Improve education quality Revamp the pension system WB. Continue implementation and consolidation of education system improvements by executing the Chile Califica program and the Tertiary Education Finance for Results project Help the country narrow the preschool education opportunity gap and improve education quality Help the country design and implement pension reform Strengthen the social security system Promote female workforce participation Two studies on preschool education (completed) Study and technical note on pension reform (completed) Study on Chiles current social safety net Operation CH-L1022 to improve early childhood education and education quality (in preparation) Operation CH-L1024 to support implementation of pension system reform Increase in preschool enrollment rate of children in poorest 40% of households Increase in Education Quality Measurement System (SIMCE) outcomes for 4th year basic, and narrower differences in these outcomes by student socioeconomic status Pension reform implemented Increased female workforce participation in 20082010 owing to effective comprehensive child care and education mechanisms

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STRATEGY MATRIX Development focus areas and objectives 2. Further develop social inclusion policies Government strategy Eliminate all forms of discrimination Guarantee human rights protection Facilitate development with identity of aboriginal peoples Foster cultural development of all Chileans Other agencies strategies and actions IDB action IDB strategy Promote inclusion and policy and program development for vulnerable groups In progress and completed Phase I of indigenous peoples integral development program (1311/OC-CH) Technical notes on indigenous peoples and the older adult population (completed) Studies on people with disabilities (in progress) Innovation loan for A Safer Chile program (1495/OC-CH) Program of innovative interventions for older adults (SENAMA) (1574/OC-CH) In preparation or potential CH-L1014 Phase II of indigenous peoples integral development program (in processing) International workshop on people with disabilities Outcome indicators Reducing the opportunities gap has strengthened indigenous peoples cultural identity. Crosscutting public policy instituted to protect people with disabilities

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STRATEGY MATRIX Development focus areas and objectives Government strategy Other agencies strategies and actions IDB action IDB strategy In progress and completed In preparation or potential Outcome indicators

B. Reducing the competitiveness gap with the developed economies 1. Instill conditions for accelerating Chiles economic growth Apply policies that spur innovation and new technology adoption in production sectors Identify new production areas Seize opportunities afforded by the Chilean economys deepening global integration Develop exports Strengthen integration with other countries in the region Launch new institutional base for science and technology and innovation and design a new policy in these domains Create regional development agencies in Chiles 13 regions to coordinate government MSME support programs Improve telecommunications regulation to make that sector more competitive Assure and diversify the countrys energy sources and develop an energy security plan Deepen the Chilean economys financial integration with the rest of the world WB project. Science for the knowledge economy WB project. Sustainable land management WB program. Ozone layer reduction WB program. Sustainable transport and air quality for Santiago Support innovation and technology development as key to productivity increases Support a new cycle of publicutility regulation reforms Strengthen Chiles energy security in the medium and long term Strengthen and develop the capital market Help Chile boost MSMEs productive capacity Technology development and innovation program (1286/OC-CH) Seed capital facility for development of technology-based enterprises Technical notes on agrifood development and on trade and integration (completed) Technical note on tourism development (completed) Community-based tourism development in Chilo-Palena (1507/OC-CH) Program to support regional productive development agencies (CH-L1019, in preparation) Program to promote clean energy market opportunities (CH-M1009) Program of nonconventional energy source innovations and studies on renewable energy source identification, opportunity inventorying, and preinvestment PRI operations for portfolio purchase and credit guarantees to develop private housing market MIF program Volunteer initiative for microenterprise creation (CH-M1011) R&D spending is 1% of GDP in 2010 (baseline: 0.7%) 13 regional development agencies created and operating 15% of the increased electricity generation in 2010 is achieved through renewable nonconventional energy sources Liquefied natural gas project materializes on schedule National energy efficiency program implemented Agrifood exports in 2010 worth US$10 billion (baseline: US$7.5 billion in 2005) Tourism destinations developed

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STRATEGY MATRIX Development focus areas and objectives Government strategy Make financial services more competitive Narrow huge productivity disparities between MSMEs and medium-sized and large companies Make Chile a major agrifood force by 2010, through institutional, sectoral, and human capital investment changes Foster tourism development as a leading economic driver Develop a new, more modern and stricter environmental policy built around the concept of sustainable development, with national and regional goals Other agencies strategies and actions IDB action IDB strategy Foster export development: agriculture, tourism, environment In progress and completed Study on implementation of environmental requirements for free trade Study on an environmental strategy for the country In preparation or potential CONAF modernization and management capacity strengthening (CH-L1021) MIF program to create a commodities exchange (CH-M1007) Strengthening of Chile as a tourism destination (CH-L1023) MIF ethnotourism program (CH-M1010) National workshop on the environmental strategy Outcome indicators

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STRATEGY MATRIX Development focus areas and objectives Government strategy Other agencies strategies and actions IDB action IDB strategy In progress and completed In preparation or potential Outcome indicators

C. Making government more efficient and bringing it closer to the citizenry 1. Strengthen Statecitizen relations Further decentralize government Increase local, regional, and national government transparency, reporting, and accountability to the public and to civic organizations Increase civil society input into public policy decisions Gradually transfer to regional and municipal governments responsibility for territorial management and, at the regional level, a large share of production development functions Put service to the public at the center of municipal development, by way of a Fiscal Pact between the government, municipalities, and citizens Develop new institutions and new capacities in the regions, using a differentiated strategy Renew governments commitment to the citizenry WB program. Infrastructure for rural territorial development WB project: Installation of a public finance management system (SIGFE) WB program: Territorial development infrastructure support Strengthen territorial development Help instill good territorial governance Strengthen mechanisms for accountable, participatory national governance Support modernization of national governance Regional investment management and efficiency program Study on territorial development challenges and lessons learned by FNDR Study of subnational government management and institutional capacity (completed) Technical notes on municipal development and on integrating productive development and good governance (completed) Support for subnational management in Chile (CCLIP) (CH-L1018) Study on the state of municipal finances and future prospects Develop and support setup of regional productive development agencies (CH-L1019) Workshop on citizen government (in preparation) Digital Agenda support program (phase II) Regional and municipal governments have been given more responsibilities The 13 regional development agencies are set up and operating Municipal management evaluation and incentives system implemented Formal citizen participation processes adopted as national investment system requirements Greater public engagement in the Environmental Impact Assessment System and for highimpact projects

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STRATEGY MATRIX Development focus areas and objectives Government strategy Heighten citizen engagement in public policy design, implementation, and evaluation Achieve excellence in public services for all Develop a 20062010 Digital Agenda aimed at developing ITC opportunities with greater equity Other agencies strategies and actions IDB action IDB strategy In progress and completed International workshop on experiences of regional productive development agencies Civil Service Directorate strengthening program (1622/OC-CH) Digital strategy strengthening program (1585/OC-CH) Program to modernize Office of the Comptroller General (1391/OC-CH) Public building management program (1573/OC-CH) DIRECON institutional capacity strengthening (1621/OC-CH) In preparation or potential Outcome indicators Evaluation systems adjusted, now including indicators relating directly to service quality One million persons become digitally literate between 2006 and 2010 All municipalities can deliver services online Broadband connectivity developed, linking all government services

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STRATEGY MATRIX Development focus areas and objectives Government strategy Other agencies strategies and actions IDB action IDB strategy In progress and completed Program to strengthen Administrative Corporation of the Judiciary (1666/OC-CH) National Congressional Library support program (1625/OC-CH) Valparaiso municipal development program (1703/OC-CH) Technical note on comprehensive urban development (completed) Technical note on social housing (completed) Possible support for low-income neighborhood consolidation, primarily social housing, and social housing quality improvements Core housing for the poorest 20% of the population achieved between 2006-2010 Program designed and implemented to eliminate the housing deficit by 2014 In preparation or potential Outcome indicators

2. Enhance personal quality of life Develop a comprehensive approach for implementing public policies and programs involving housing, security, transportation, infrastructure, and sports Coordinate work of the different levels of government, private sector, and citizens for implementation of actions in the selected focus areas

Develop public policies that assure access to quality housing and avoid territorial segregation Improve lowincome neighborhood and housing quality in the country

Support comprehensive development of urban areas

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STRATEGY MATRIX Development focus areas and objectives Government strategy Other agencies strategies and actions IDB action IDB strategy In progress and completed In preparation or potential Outcome indicators

D. Implementing the Banks new business model with Chile Reduce transaction costs of Bank operations in Chile Offer local currency finance option in Bank operations Adjust COF/CCH capacities Improve coordination of the Banks private sector windows to promote new operations in Chile Pilot program to use the countrys administrative systems in executing and supervising Bank operations in Chile Employ local currency debt vehicles for operations with Chile Expand the pilot program to all current operations and to new ones % of new operations with Chile that are in local currency (baseline: 0%) % of new operations with Chile using the countrys procurement, audit/control, and evaluation systems (baseline 2005: 0%, 0%, 0%) COF/CCH team adjusted and trained; performing its new functions satisfactorily

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REFERENCES

STUDIES PRODUCED FOR THE POLICY DIALOGUE PAPER Acosta, E., M. Perticara, and C. Ramos (2005), Empleo femenino: Oferta laboral y cuidado infantil. Inter-American Development Bank paper. Asesoras para el Desarrollo (2005), Chile: Estudios sobre alternativas de atencin integral a la niez menor de 4 aos. Inter-American Development Bank paper. Bensin, Alberto (2005), Las reformas del Estado en Chile a partir de la dcada del noventa y sus lecciones. Inter-American Development Bank paper. Cisternas, Mara Soledad (2005), Informe sobre el estado de situacin de la poltica chilena en materia de discapacidad. Inter-American Development Bank paper. Cowan, Kevin, and Alejandro Micco (2005), Crecimiento, empleo y estabilidad del ingreso en Chile: Propuestas de reforma al seguro de desempleo. Inter-American Development Bank paper. Estudios para el Desarrollo (2005), CHILE: Estudio sobre alternativas de atencin integral a la niez menor de 4 aos (I Fase). Inter-American Development Bank paper. Fischer, R., and P. Serra (2005), Efectos de la privatizacin de servicios pblicos en Chile: Casos sanitario, electricidad y telecomunicaciones. Estudios Econmicos y Sociales series, Inter-American Development Bank. Grafe, Fernando (2006), Diagnstico institucional y propuesta de recomendaciones. Informe final. Inter-American Development Bank paper. Inter-American Development Bank (2006), Desafos institucionales del sistema de pensiones chileno. IDB Technical Note.
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(2006), Desarrollo agroalimentario: Desafos y propuestas de accin. IDB Technical Note. (2006), Envejecimiento con calidad de vida. IDB Technical Note. (2006), Fomento al turismo. IDB Technical Note. (2006), Hacia un desarrollo urbano territorial. IDB Technical Note.

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___ (2006), Impulso al desarrollo territorial: Integrando el desarrollo productivo con el buen gobierno. IDB Technical Note. ___ (2006), Lecciones aprendidas por el Banco en Chile, 1994-2004. IDB Technical Note. ___ (2006), Mayor eficacia del gobierno municipal: El Estado ms cerca de los ciudadanos. IDB Technical Note.
_____ _____

(2006), Perfil de gobernabilidad: Chile. (2006), Perfil de la pobreza en Chile. Claudio Santibez. Draft Technical Note.

Annex VIII Page 2 of 12

_____

(2006), Pueblos indgenas: Desafos para el desarrollo con identidad. IDB Technical Note. (2006), Trade and Integration. IDB Technical Note. (2006). Viviendas sociales: Rehabilitacin y gestin eficiente. IDB Technical Note. (2005), Diagnstico del sector turstico en Chile. IDB Technical Note.

_____ _____ _____

Larran, Felipe (2005), Innovacin en Chile: Anlisis y propuestas. Inter-American Development Bank paper. Maloney, W., and A. Rodrguez-Clare (2005), Innovation Shortfalls. IDB Technical Note (June). Quiroz, Jorge (2005), Fortalecimiento de la gestin ambiental para cumplimiento de acuerdos multilaterales ambientales (AMUMAS). Preliminary report. Inter-American Development Bank paper. Ses Sarasti, E. (2005), Anlisis de las polticas y programas de desarrollo econmico local en Chile. Inter-American Development Bank paper. Universidad de Alcal (Spain) (2005), Evolucin, lecciones y desafos de las polticas de desarrollo regional/territorial en Chile. Instituto Universitario de Anlisis Econmico y Social. Inter-American Development Bank study. Valenzuela, Juan Pablo (2005), Anlisis prospectivo de las capacidades institucionales y de gestin de los gobiernos subnacionales en Chile. Inter-American Development Bank paper.
______

(2005), Informe sobre logros y lecciones aprendidas en la ejecucin de las estrategias del Banco en Chile: 1994-2004. Inter-American Development Bank paper.

Zhaler, Roberto (2006), Estrategia de desarrollo del sector privado (PSDS) para Chile. Inter-American Development Bank paper. OTHER LITERATURE REVIEWED Acemoglu, Daron, and Fabrizio Zilibotti (1997), Was Prometheus Unbound by Chance? Risk, Diversification and Growth. Journal of Political Economy 105 (4), 709-751. Agosin, Manuel (2005), Trade and Growth: Why Asia Grows Faster than Latin America. Paper prepared for the seminar organized by the Economic Commission for Latin America and the Caribbean (ECLAC), with support from the Ford Foundation and the German Agency for Technical Cooperation (GTZ).
______

(1999), Trade and Growth in Chile. ECLAC Review 68 (August).

Aitken, B., and Ann Harrison (1999), Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela. American Economic Review 89. Alexeev, Michael, and Robert Conrad (2005), The Elusive Curse of Oil. Draft, at http://ssrn.com/abstract=806224.

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Alvarez, R., and G. Crespi (2000), Exporter Performance and Promotion Instruments: Chilean Empirical Evidence. Estudios de Economa 27(2) (December), 225-245 Antweiler, Werner, and Daniel Trefler (2002), Increasing Returns and All That: A View from Trade. NBER Working Paper No. 7941 (October). Aschauer, D. (1989), Is Public Expenditure Productive? Journal of Monetary Economics 23. Bedregal, P., M. Pardo, and P. Gonzlez (2004), Desarrollo infantil temprano y derechos del nio. UNICEF (April). Behrens, Kristian (2004), International Integration and Regional Inequalities: How Important is National Infrastructure? Universit Catholique de Louvain, manuscript. Bentolila, S., and A. Ichino (2004), Unemployment and Consumption Near and Far from the Mediterranean, mimeo. Bergoeing, R., and A. Repetto (2004), Copiar No Es Malo. Policy Brief, Expansiva (March). Berlinski, J., and C. Romero (2001), Comercio internacional de servicios: Una perspectiva desde la Argentina. Working paper prepared for Fundacin Argentina para el Desarrollo con Equidad (FADE). Berlinski, J., and R. Soifer (2002), Dimensiones del comercio de servicios de Argentina. Siglo XXI de Argentina Editores. Bertranou, F., C. Solorio, and W. van Ginneken (eds.) (2002), Pensiones no contributivas y asistenciales - Argentina, Brasil, Chile, Costa Rica y Uruguay. Santiago, Chile: ILO. Bhagwati, Jagdish (1958), Immiserizing Growth: A Geometrical Note. Review of Economic Studies 25 (June), 201-05. Blattman, Christopher, Jason Hwang, and Jeffery G. Williamson (2004), The Impact of the Terms of Trade on Economic Development in the Periphery, 1870-1939: Volatility and Secular Change. NBER Working Paper No. 10600. Blomstrom, M., R. Lipsey, and M. Zejan (1992), What Explains Growth in Developing Countries? NBER Working Paper No. 4132. Blum, Bernardo, and Edward Leamer (2004), Can FTAA Suspend the Law of Gravity and Give the Americas Higher Growth and Better Income Distributions? in A. Estevadeordal, D. Rodrik, A. Taylor, and A. Velasco (eds.), FTAA and Beyond: Prospects for Integration in the Americas. David Rockefeller Center for Latin American Studies, Harvard University Press. Boisier, S. (2001), La odisea del desarrollo territorial en Amrica Latina. Mimeo, Chile. Borensztein, E., J. De Gregorio, and J.-W. Lee (1998), How Does Foreign Direct Investment Affect Economic Growth? Journal of International Economics. Caballero, Ricardo (2002), Coping with Chiles External Vulnerability: A Financial Problem. Paper prepared for the Central Bank of Chile.

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Caballero, R., K. Cowan, E. Engel, and A. Micco (2004), Effective Labor Regulation and Microeconomic Flexibility. NBER Working Paper No. 10744. Cabezas, M., J. Selaive, and G. Becerra (2004), Determinantes de las exportaciones no minerales: Una perspectiva regional. Central Bank of Chile, Working Paper No. 296. Calderon, Cesar, and Luis Servn (2004), Trends in Infrastructure in Latin America, 19802001. World Bank, manuscript. Centro de Estudios y Atencin del Nio y la Mujer (CEANIM) (2005), Sistematizacin de la experiencia de cuidado infantil de los Centros Comunitarios de Atencin Preescolar (CCAPs). Santiago. Centro de Estudios de Desarrollo y Estimulacin Psicosocial (CEDEP) (2005), Instalacin del Nuevo Currculum en Jardines de Fundacin INTEGRA: Evaluacin de la primera cohorte. Santiago (January).
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(2005), Resumen de estudios, investigaciones y publicaciones. Evaluacin externa de Jardines de INTEGRA, primera cohorte.

CEDEP-MINEDU (1999), Evaluacin de programas de educacin parvularia en Chile: Resultados y desafos. Centro de Estudios Pblicos (CEP), La calidad de la educacin chilena en cifras. Santiago. Chilean Navy. Maritime Territory and Merchant Marine Directorate (DIRECTEMAR) (2003), Boletn Estadstico Martimo, at http://www.directemar.cl/estadisticas/ maritimo/2003/2003.htm Chile. Law 19253 (1993), Proteccin, Fomento y Desarrollo de los Indgenas. Published in Official Gazette of 5 October. Cisternas, Mara Soledad (2005), Anlisis y evolucin de la legislacin chilena en discapacidad: particular enfoque en materia laboral. Inter-American Development Bank paper. Cisternas, M. S., and J. L. Tortuero (2005), Informe sobre propuestas de lineamientos de polticas y recomendaciones en materia de discapacidad. Inter-American Development Bank. Clark, Ximena, David Dollar, and Alejandro Micco (2004), Port Efficiency, Maritime Transport Costs and Bilateral Trade. NBER Working Paper No. 10353. Coe, David, and Elhanan Helpman (1995), International R&D Spillovers. European Economic Review 39. Comisin Nacional de Riego (2005), Formulacin de un Programa para la Ejecucin de la Poltica Nacional de Riego y Drenaje, November. Contreras, D., and G. Elacqua (2005), El desafo de la calidad y equidad en la educacin chilena. En foco. Expansiva, Santiago.

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Contreras, D., and G. Plaza (2004), Participacin femenina en el mercado laboral chileno. Cunto importan los factores culturales? 2004 meeting of Sociedad de Economa de Chile. Villa Alemana, Chile. Contreras, D., D. Bravo, and E. Puentes (1999), Tasa de participacin femenina: 19571997. Un anlisis de cohortes sintticos. Universidad de Chile, Working Papers. Corden, Max (1984), Booming Sector and Dutch Disease Economics: Survey and Consolidation. Oxford Economic Papers 36(3), 359-380. De Gregorio, Jos (2004), Economic Growth in Chile: Evidence, Sources and Prospects. Central Bank of Chile, Working Paper No. 298.
______

(2003), The Role of Foreign Direct Investment and Natural Resources in Economic Development. Central Bank of Chile, Working Paper No. 196.

Deardorff, Alan (1985), Comparative Advantage and International Trade and Investment in Services, in R. M. Stern (ed.), Trade and Investment in Services: Canada/US Perspectives. Toronto: Ontario. Daz, J. (2002), Convergencia-divergencia regional en Chile: Posibles causas y efectos. Divisin de Planificacin Regional, MIDEPLAN, Santiago. Daz, R., A. Pardo, and P. Meller (2002), Anlisis econmico-descriptivo de las regiones chilenas. Universidad de Chile, CEA, Working Paper No. 133. Duncan, R., and J. R. Fuentes (2005), Convergencia regional en Chile: Nuevos tests, viejos resultados. Central Bank of Chile, Working Paper No. 313. Dynarski, S., and J. Gruber (1997), Can Families Smooth Variable Earnings? Brookings Papers on Economic Activity 1. Easterly, William (2001), The Elusive Quest for Growth. Cambridge: MIT Press. Easterly, William, and Ross Levine (2003), Tropics, Germs, and Crops: How Endowments Influence Economic Development. Journal of Monetary Economics 50, 3-39. ECLAC-Intl. Transport Database (BTI) at http://www.eclac.cl/transporte/perfil/Chile_ITTPLAC2000.pdf. Engler, T., and M. Pelez (eds.) (2002), Ms Vale Por Viejo. Washington, D.C.: IDB-PAHO. Evans, J., R. Myers, and E. Ilfeld (2000), Early Childhood Counts. A Programming Guide on Early Childhood Care for Development. Washington, D.C.: World Bank. Eyzaguirre, N., M. Marcel, J. Rodrguez, and M. Tokman (2005), Hacia la economa del conocimiento: el camino para crecer con equidad en el largo plazo. Centro de Estudios Pblicos, Estudios Pblicos No. 97 (summer). Feenstra, Robert C., and Hiau Looi Kee (2004), Export Variety and Country Productivity. NBER Working Paper No. 10830. French-Davis, Ricardo (2002), The Impact of Exports on Growth in Chile. CEPAL Review 76 (April).

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Fischer, R. (2004), Trade Liberalization in Latin America: The Case of Chile. Paper prepared for the conference The Future of Trade Liberalization in Latin America. Fondo Nacional de la Discapacidad (FONADIS) (2004), Primer Estudio Nacional de la DiscapacidadICF. Santiago. At http://www.fonadis.cl/index.php?seccion= 9&parametro=79#centro. Foxley, Juan, and Jos Luis Mardones (2000), Port Concessions in Chile. Public Policy for the Private Sector. World Bank. Note No. 223, Private Sector and Infrastructure Network (October). Funke, Michael, and Ralf Ruhwedel (2001), Export Variety and Export Performance: Empirical Evidence from East Asia. Journal of Asian Economics 12(4), 493-505. Fundacin Chile (2005), Conectividad rural, mimeo (December). Fundacin Chile 21 (2004), Hacia una mayor igualdad social: Atencin integral de la infancia. Propuestas pblicas, Santiago (November). Fundacin Educacional Arauco/Centro de Estudios de Desarrollo y Estimulacin Psicosocial (FUNDAR/CEDEP) (2003), Evaluacin del Programa Sembrar Municipio de Los lamos. Fundacin para la Innovacin Agraria (2004), Memoria Anual 2003-2004. Santiago (December). Gillitzer, Christian, and Jonathan Kearns (2005). Research Discussion Paper 2005-01. Reserve Bank of Australia, Economic Research Department. Gmez-Acebo, Felipe, and Juan Ketterer (2005). Principales problemas del Mercado de Capitales que afectan al desarrollo del sector privado en Chile. Government of Chile (2004), Joint Feasibility Study on a Free Trade Agreement between Chile and China. Santiago (October).
______

, Palacio de la Moneda (2004), Poltica Indgena de Nuevo Trato, in Nuevo Trato con los Pueblos Indgenas.

______

(2004), Memoria Seminario Internacional Desarrollo Econmico Territorial y Empleo, Chile.

Government of Chile. Instituto Nacional de Estadsticas (INE) (2005), Estimaciones y proyecciones de poblacin por sexo y edad 1990-2020, Santiago.
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(2005), Programa Orgenes (MIDEPLAN/IDB). 2002 Census, Santiago. INE-MIDEPLAN. Estadsticas sociales sobre pueblos indgenas. 2002 Census (March). (2001), Una Poltica de Estado para la agricultura chilena, perodo 2000-2010. Santiago (October).

Government of Chile. Ministry of Agriculture (2005), Poltica de riego y drenaje.

_____

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_____

, Agricultural Research and Policy Office (ODEPA) (2005), Agricultura Chilena, 2014. Santiago (October).

Government of Chile. Ministry of Economy, Foreign Trade Department (2004), Quinto Catastro Nacional sobre Barreras Externas al Comercio-2004. Santiago. Government of Chile. Ministry of Education (MINEDU) (2005), Educacin preescolar: Estrategia Bicentenario. Santiago.
______

Unidad de Educacin Parvularia (1999), Evaluacin de programas de educacin parvularia en Chile: Resultados y desafos. Santiago.

Government of Chile. Ministry of External Relations (2003), Informe de pas sobre cumplimiento de normas Protocolo Adicional de San Salvador. Santiago.
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, Directorate for International Economic Relations (DIRECON) (2005), Comercio Exterior de Chile (August).

Government of Chile. Ministry of Finance, Budget Directorate (DIPRES) (2005), Oferta laboral femenina y cuidado infantil. Study commissioned by the IDB from Universidad Alberto Hurtado, at the request of DIPRES. Santiago.
______

Alternativas de atencin integral a la niez de 0-4 aos. Study commissioned by the IDB from Asesoras para el Desarrollo, at the request of DIPRES (in progress; final report expected in March 2006).

Government of Chile. Ministry of Health (MINSALUD), Normas Tcnicas de Estimulacin Temprana. Government of Chile. Ministry of the Interior (2004), Un Municipio para Vivir Mejor.
______

, Regional and Administrative Development Department (SUBDERE) (2005), Documentos tcnicos sobre desarrollo territorial de Chile, at www.subdere.gov.cl.

Government of Chile. Ministry of Planning (MIDEPLAN) (2005), Sistema de Proteccin Integral a la Infancia, Propuesta de instalacin (draft), MIDEPLAN-FOSIS (February).
______

, (2003), Informe de la Comisin de la Verdad Histrica y Nuevo Trato de los Pueblos Indgenas. , Encuesta CASEN 2000 / IDB-MECOVI program. Santiago.

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Grupo de Accin Digital (2004). At www.agendadigital.cl. Grupo Mxico (2005). Presentation at the Institute of The Americas Conference, San Diego (August). Gylfason, Thorvaldur, and Gylfi Zoega (2002), Inequality and Economic Growth: Do Natural Resources Matter? Center for Economic Studies and Institute for Economic Research Working Paper 712(5). Hachette, Dominique (2000), La reforma comercial, in Felipe Larran and Rodrigo Vergara (eds.), La transformacin econmica de Chile. Santiago: Centro de Estudios Pblicos.

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Harrison, Glenn W., Thomas F. Rutherford, and David G. Tarr (2003), Chiles Regional Arrangements: The Importance of Market Access and Lowering the Tariff to Six Percent. Central Bank of Chile, Working Paper No. 238 (November). Hejazi, W., and E. Safarian (1996), Trade, Investment and United States R&D Spillovers. Canadian Institute for Advanced Research Working Paper, ECWP-56. Helpman, Elhanan (2004), The Mystery of Economic Growth. Cambridge: Belknap Press of Harvard University Press. Herzer, D., and F. Nowak-Lehmann (2004), Export Diversification, Externalities and Growth. Ibero-American Institute for Economic Research, Georg-August-Universitt Gttingen, Goettingen, Germany. Discussion Paper No. 99 (August). Hoekman, B. (1996), Assessing the General Agreement on Trade in Services, in W. Martin and L. A. Winters (eds.), The Uruguay Round and the Developing Countries. Cambridge, U.K.: Cambridge University Press. Hoekman, B., and C. Primo Braga (1997), Protection and Trade in Services: A Survey. Open Economics Review 8. Hogar de Cristo. Informacin institucional sobre cobertura, ingresos y gastos de las diferentes modalidades de atencin.
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, (2005), Orientaciones para el trabajo con prvulos en condiciones de marginalidad social. , Evaluacin social de programas para lactantes y nios en edad preescolar. Pontificia Universidad Catlica de Chile, Escuela de Ingeniera.

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Hummels, David (1999), Towards a Geography of Trade Costs. University of Chicago, manuscript. Hummels, David, and Peter Klenow (2002), The Variety and Quality of a Nations Trade. NBER Working Paper No. 8712. Huntzinger, H., and R. Prud'homme (2004), Decentralization and Development of Cities in Chile. Consultant report, IDB. Imbs, J., and R. Wacziarg (2003), Stages of Diversification. American Economic Review 93(1), 63-86. Informe Final de la Evaluacin de desempeo de la Primera Fase del Programa Orgenes, Tiempo 2000, Chile, November 2005. Informacin institucional sobre los programas de la Fundacin INTEGRA. INTEGRA, Cifras de cobertura y costos variables por modalidad de atencin. Inter-American Development Bank (2005), Las reformas del estado en Chile a partir de la dcada del noventa y sus lecciones. IDB Technical Note (April). ____International Seminar, Evaluacin de Programas de Desarrollo Infantil en Amrica Latina y el Caribe, Washington, D.C., 27 September 2005.

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____ (2001), Subnational Development Strategy. Inter-American Development Bank/Pan American Health Organization (2000), SABE (Survey on Health, Well- Being, and Aging) study. Buenos Aires, Santiago, and Montevideo. Isham, J., M. Woolcock, L. Pritchett, and G. Busby (2003), The Varieties of Resource Experience: How Natural Resource Export Structures Affect the Political Economy of Economic Growth. Middlebury College Economics Discussion Paper No. 03-08. Jorge Quiroz y Consultores Asociados (2005), Fortalecimiento de la gestin ambiental para el cumplimiento de los acuerdos multilaterales ambientales. Consultant report for the IDB Preliminary report (December). Junta Nacional de Jardines Infantiles (JUNJI), Normativa y Programas. JUNJIUNICEF, Seminar: "0 a 4 aos: Un desafo pas." Santiago, 14 and 15 September 2005. Kalirajan, K. (2000), Restrictions on Trade in Distribution Services. Productivity Commission Staff Research Paper, Ausinfo, Canberra (August). Kalter, E., et al. (eds.), Chile: Institutions and Policies Underpinning Stability and Growth. IMF Occasional Paper No. 231. Washington, D.C. Keller, W. (2001), The Geography and Channels of Diffusion at the Worlds Technology Frontier. NBER Working Paper No. 8150. Lall, S. (2000), The Technological Structure and Performance of Developing Country Manufactured Exports, 1985-98. Oxford Development Studies 28(3), 337-69. Larrain, Felipe, Jeffrey Sachs, and Andrew Warner (2000), A Structural Analysis of Chiles Long-term Growth: History, Prospects, and Policy Implications. Paper prepared for the Government of Chile. Leamer, Edward (1984), Sources of International Comparative Advantage. Cambridge, Massachusetts: MIT Press. Leamer, E., H. Maul, S. Rodriguez, and P. Schott (1999), Does Natural Resource Abundance Increase Latin American Income Inequality? Journal of Development Economics 59(1), 3-42. Lederman, Daniel, and William F. Maloney (2003), Trade Structure and Growth. World Bank, Policy Research Working Paper No. 3025 (April).
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(2003), R&D and Development. Washington, D.C.: The World Bank, mimeo.

Limo, Nuno, and Anthony J. Venables (2001), Infrastructure, Geographical Disadvantage, Transport Costs, and Trade. The World Bank Economic Review 15(3), 451-479. Manzano, Osmel, and Roberto Rigobon (2001), Resource Curse or Debt Overhang? NBER Working Paper No. 8390 (July). Marcel, Mario, and Carla Tokman (2005), Cmo se financia la educacin en Chile? Estudios de Finanzas Pblicas, Ministry of Finance of Chile.

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Mattos, J. C., and M. J. Acosta (2003), Maritime Transport Liberalization and the Challenges to Further its Implementation in Chile. Comercio Internacional Series, 43. Santiago, Chile: ECLAC. McGuire, G., and M. Schuele (2000), Restrictiveness of International Trade in Banking Services, in C. Findlay and T. Warren (eds.), Impediments to Trade in Services: Measurement and Policy Implications. London and New York: Routledge. McGuire, G., M. Schuele, and T. Smith (2000), Restrictiveness of International Trade in Maritime Services, in C. Findlay and T. Warren (eds.), Impediments to Trade in Services: Measurement and Policy Implications. London and New York: Routledge. Mesquita Moreira, Mauricio (2005), IIRSA Economic Fundamentals. IDB/INT, processed. Mesquita Moreira, M., and J. Blyde (2005), Chile: Trade and Integration Sector Note. InterAmerican Development Bank paper. Micco, Alejandro, and Natalia Perez (2001), Maritime Transport Costs and Port Efficiency. Paper prepared for the seminar Towards Competitiveness: The Institutional Path, Santiago (March). Inter-American Development Bank. Misas, M., M. Ramrez, and L. Silva (2001), Exportaciones no tradicionales en Colombia y sus determinantes. Banco de la Repblica de Colombia. Moncayo E. (2001), Evolucin de los paradigmas y modelos interpretativos del desarrollo territorial. ILPES, Chile. Nguyen-Hong, D., and R. Wells (2000), Restrictions on Trade in Education Services. Productivity Commission Staff Research Paper, Ausinfo, Canberra (August). Nez, Javier, and Cristina Risco (2005, Movilidad Intergeneracional del Ingreso en Chile. En foco Series, 58; Expansiva. OECD (2003), OECD Economic Survey 2003, Chile. Pacheco, P., G. Elacqua, and J. Brunner (2005), Educacin preescolar: Estrategia Bicentenario. Government of Chile (MINEDUC, INTEGRA, JUNJI), Universidad Adolfo Ibez. Pardo, A., and P. Meller (2002), El rol de las exportaciones en el crecimiento econmico regional. Universidad de Chile, CEA, Working Paper No. 143. Pontificia Universidad Catlica de Chile, Escuela de Ingeniera Industrial, Ampliacin de la cobertura para lactantes y preescolares del Hogar de Cristo buscando el lugar ms necesitado y la mayor rentabilidad social a nivel comunal. Prebisch, R. (1950), The Economic Development of Latin America and its Principal Problems. Lake Success, N.Y: United Nations Department of Social Affairs. Prieto, Francisco (2003), Fomento y diversificacin de las exportaciones de servicios. Comercio Internacional Series, 38. Santiago, Chile: ECLAC.

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Romero, Sabine (2005), Modalidades de cuidado infantil temprano: Dilemas, preocupaciones y hallazgos. UNICEF (April).
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(2005), Modalidades de cuidado infantil temprano. Seminar on Early Education. UNICEF Chile, Santiago (April).

Romero, Sabine, and Loreto Salinas (2005), Sistematizacin de experiencias de cuidado infantil temprano. UNICEF (March). Rosales, Osvaldo (2004), Chiles Multidimensional Trade Policy, in V. Aggarwal, R. Espach, and J. Tulchin (eds.), The Strategic Dynamics of Latin American Trade. Washington, D.C.: Woodrow Wilson Center Press; Stanford, California: Stanford University Press. Ross, Michael (2001), Does Oil Hinder Democracy? World Politics 53 (April), 326-361. Rutter, Michael, and Marjorie Rutter (1992), Developing Minds: Challenge and Continuity across the Life Span. London: Penguin Books. Sachs, J., and A. Warner (1997), Fundamental Sources of Long-run Growth. American Economic Review, Papers and Proceedings 87, 184-88.
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Smarzynska, Beata (2004), Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages. American Economic Review 94. Soto, R., and A. Torche (2002), Spatial Inequality after Reforms in Chile: Where do we Stand? Pontificia Universidad Catlica de Chile. Stijns, Jean-Philippe (2003), An Empirical Test of the Dutch Disease Hypothesis using a Gravity Model of Trade. Paper presented at the 2003 Congress of the EEA, Stockholm (July). UNCTAD (2005), World Investment Report. Geneva. UNDP (2004), Desarrollo humano en Chile. El poder: Para qu y para quin? Universidad de Alcal (Spain), SERVILAB (2005), Evolucin, lecciones y desafos de las polticas de desarrollo regional/territorial en Chile. Consultant report for the IDB. Universidad de la Frontera (Chile) (2003), Informe del Programa de Derechos Indgenas, Instituto de Estudios Indgenas, Los derechos de los pueblos indgenas en Chile. Venables, Anthony (2005), Regional Disparities in Regional Blocs: Theory and Policy. Paper prepared for the IDB project Deeper Integration of Mercosur, Dealing with Disparities. Villafuerte, Mauricio (2004), Export Specialization and Economic Growth, in E. Kalter et al. (eds.), Chile: Institutions and Policies Underpinning Stability and Growth. IMF Occasional Paper No. 231. Washington, D.C. Warren, T. (2000), The Identification of Impediments to Trade and Investment in Telecommunications Services, in C. Findlay and T. Warren (eds.), Impediments to Trade in Services: Measurement and Policy Implications. London and New York: Routledge. World Bank (2005), Chile Development Policy Review. Draft. Washington, D.C.
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