Chile falls in global economic freedom rankings for second year in a row

RIO DE JANEIRO, BRAZIL – Chile’s seventh-place ranking in the Economic Freedom Index in 2013 appears to be receding further and further into the distance in the annual report prepared for the national case by the Heritage Foundation in collaboration with Libertad y Desarrollo (LyD). Since then, the country has experienced ups and downs and has suffered repeated setbacks in the last two years, leaving it only in 20th place in 2022.

With 74.4 points, Chile far outperforms its Latin American peers, followed by Uruguay in 34th place with 70 units, while the world leaders, Singapore, Switzerland, Ireland, New Zealand, and Luxembourg, score over 82 points.

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Soledad Monge, an economist at LyD, explains that the new national crash is due to “the growing fiscal imbalance, which is reflected in a significant increase in public debt.” In her opinion, this is also due to “greater inflationary pressures,” as the country is usually characterized by price stability.

“Unfortunately, the agenda of the future government includes elements such as higher taxes, stricter labor regulations, the creation of several public companies and much more, which will significantly limit our freedom of action and therefore our growth potential.”

The Heritage Foundation, a U.S. think tank whose mission is to “formulate and promote public policies based on the principles of free enterprise, limited government, individual liberty, traditional American values, and a strong national defense,” considers four categories in its index, one of which is “size of government,” according to its website.

The latter category, in particular, shows significant differences from the national result in the 2021 ranking. While it remains virtually unchanged at 72.4 units in the “tax burden” subcategory, the score for “government spending” drops from 80.4 to 78.1 and even more significantly from 90.4 to 75.3 for “fiscal solidarity.”

This result is due to the analysis, which notes that in Chile, “the top tax rate for individuals is 40% and the optional tax rate for companies is 27%. The total tax burden is equivalent to 20.7% of total national income,” the report states. They also note that public spending amounted to 20.7% of total output (GDP) in the last three years, and budget deficits averaged 3.8% of GDP. Public debt is equivalent to 32.5% of GDP.”

In the “Regulatory Effectiveness” category, “Monetary Freedom” decreased from 85.5 to 79.4 points, while “Employment Freedom” decreased from 62.5 to 58 points. The slight increase from 75.1 to 76.2 points in the subcategory “freedom of enterprise” stands out positively.

In the analysis, the report is a bit stricter, pointing out that “environmental regulations have become costly and unpredictable” and that “labor laws are somewhat rigid”, although they qualify by pointing out that the latter “are applied uniformly”, that “the government increased many subsidies in 2021, especially for green energy projects”.

On the other hand, this item highlights the Ministry of Economy’s Unified Approval System (SUPER), which is “designed to facilitate obtaining permits for investment projects.”

In the “rule of law” category, on the other hand, subsidies predominate. It is most noticeable in “judicial effectiveness,” where the score rises from 68.4 units to 91.4. The “property rights” score also rises from 74.5 to 73, and only “government integrity” drops from 74.5 to 71.4.

“Chile has a sound legal framework, and private property rights are generally respected. Secured rights to real estate are recognized and generally enforced, and expropriations are rare,” the report states.

It also notes that “the judiciary is independent and courts generally have jurisdiction to enforce property and contract rights and are free from political interference.”

Finally, on “market openness,” the subcategories “free investment” and “financial freedom” remain unchanged at 70 points, while “free trade” drops from 83 to 78 points. In this context, the report notes that “the openness of the market to investment and a relatively efficient regulatory framework have provided the basis for the economic dynamism of recent decades” and that “the competitive financial system allows high banking penetration and efficient access to finance.”