Felipe Larrain - Finance Minister of Chile HARDtalk

That is the summary. Now on BBC News, it is time for HardTalk.

It is South America's boom economy. Growing at a rate which almost

echos that of China. That may not be surprising when you realise the

country is Chile, and its key commodity is copper. China the

biggest importer - a perfect marriage. Except that China is

losing its ap piet and Chile risks feeling the effect. How will it

cope? That depends on Chilean Finance Minister, Felipe Larrain.

Students are taking to the streets in droves to protest the cost of

education. He is trying to attract investigators.

Major power generation schemes are thwarted. Is Chile's economy

Welcome to Hardtalk, Felipe Larrain. What do you think explains Chile's

economic success? Well, it is a country - a country that works, an

economy that works. Predictable, stable policies, institutions which

have been in place for a long time, and that, you know, foreign

investors can look at them and say, "I can trust this country." This is

why in the middle of an international recession in the

first half of this year, we attracted over $12 billion of

foreign direct investment, all in the first semester. It increased 0%.

This year we will have a record foreign investment into Chile. The

economy will keep moving but we will decelerate. We have said this.

The deceleration will be gradual. We won't be losing jobs but

creating jobs. Real wages are growing so people are feeling more

purchasing power. The economy is moving, the consumption is doing

well, investment is doing well. Exports are decelerating.

Europe for us is 20% of our market. We are feeling a decline in exports

to Europe, as you can imagine, with the situation that you have - the

economic situation in Europe. lessons are there for Europe in how

Chile has prepared itself for a slowdown? Let me point to one

particular issue. There are many things, and they are lessons also

that we can take from Europe. Among them, the integration that you have

been able to have over since 1957, the Treaty of Rome, leading into

the European Union. This is something where we are struggling

to integrate more in a trade treaty, not just a single market, which

have very far away from us. But there's one thing, and it is fiscal

policy. Let me mention why. The common route behind the crisis that

you find in almost all the countries that are struggling now

is a policy that became fiscal policy that became unsustainable,

high deficits, high levels of debt. The markets became nervous,

interest rates increased. So, in order to finance the cost of

government debt, you have to spend more and this becomes a vicious

circle. In Chile, we have a very low level of debt. In fact, less

than 0% of output is gross -- 80% of, but it is gross public debt. We

have more foreign assets than foreign liabilities. It is a unique

situation. There is a country in Europe which has it also, which is

Sweden. If you have solid public finances, and here spending not

according to your current revenue, but according to structural revenue,

having a long-term view, so in the good times, you save, and you dis-

save when a rainy day comes. you save abroad. You have sovereign

wealth funds with any of your investments outside of Chile and

South America. That is correct. is that? Why not keep your money at

home? Well, because we would like to, in a way - what happens, if you

face a downturn, and local economy, you know, goes down, then it

cushions the effect that you have your investments abroad. Because

they are not suffering. But, on the other hand, it also happens that

the exchange rate moves. It acts - it increases the value of your

foreign funds when things are going bad at home. So there is a mix of

reasons. Also, the effect that these are very important funds in

terms of volume. We have $20 billion for the size of our economy.

That is, about 8% of our gross national product. In only two

sovereign funds. We have government assets for another $14 billion, in

addition to international reserves at the Central Bank of another $40

billion. So altogether, Chile has more than $70 billion for a $270

billion economy. Now you are going to need them, aren't you? The

Central Bank is forecasting what growth somewhere between four and

three quarter percent and five and a quarter percent compared to 6.5%

in 2011. The economy is slowing. is, but at a very smooth pace. That

is why I mentioned that Chile is among the five fastest-growing

economies in the first half of the year, this year, with 5.4%. China

is growing more. Indonesia is growing more, and, you know, a

couple of other countries, and we are growing obpar with India.

president made a promise. He said that he would aim for average

growth during his term of 6%. That looks optimistic when he made the

pledge at election time. It looks unachievable now, doesn't it?

in the first two years we over- achieved that figure because in

2010 and tweb 11, the average growth is -- 2011, the average

growth is over 6%. Then we will be over 6%. Probably around this year

we will be five and next year a little bit less. When you make your

prediction, it is based on a world that is growing, not booming, but

growing. You said in August he hoped that you would hope that you

would surpass the previous growth. But circumstances are changing, and

fast. One of the big changes has to be, presumably, you are dependent

so far on China. That is correct. It is an interesting change. Over

the last 10 years, China was not among the top 10 of our export

partners. About 15 years ago. Now, it is No. 1. We export about almost

a quarter of our exports go to China. We are trying to diversify

away from copper into other exports. We also - European Union is 20% of

our export, the US is 11%, Japan is 11%. Latin America is $15%. We have

a diversified pace. This is not on your control. China is experiencing

these problems. Imports down from China down 2.6%.

The slowdown pressure is growing. Chinese factory output down 10%

five months in a row. It will hit you and hard. What are you doing to

prepare for that shift? Well, first of all, we have contingent

programmes that we have developed over - it is in a shelf in the

finest ministry. You pluck it off the shelf?

pluck it off the shelf, you know. But we have not been in the need to

use it. We hope we will use it. If we do, we have plans to protect

employment first. We have plans to protect credit. The problem is that

when you see in the financial markets, a credit squeeze, a credit

crunch, that will will kill an economy's growth. What we do there

- we had a minor issue last December. We acted in co-ordination

with the Central Bank, and we averted the problem in a few days.

The Central Bank governor has said that if he has to intervene again,

it could be very expensive to repeat it. And the pressure is

growing. Exporters are saying, "Look, the peso has surged 9.2%

against the dollar." It is causing them problems.

The fruit exporters, what, 5% of China's exporters of fresh fruit

saying with a strong peso no-one wants to vaez in Chile. There are

two types of intervention. One is to intervene to preserve liquidity

in the market. The other is to maintain the exchange rate. You buy

dollars. The Central Bank bought $12 billion, $1 billion per month.

What happened after that, it accumulated $12 billion over the

year. It is an expensive proposition to keep doing that. The

Central Bank has not precluded doing it again, but it is not

committed to doing it, because it has - you know, it is not like, you

know, a win-win situation, the intervention. We are at the level

of the finest ministry. We don't buy dollars. But when we do, we

have a responsible moderate increase in government spending.

And that supports the exchange rate. Supporting in the way that you know

we wanted to depreciate, not to appreciate too much, so that when

exchange, you appreciate everybody in the short term, feels happy.

Tourists that go abroad, they can purchase more with their pesos, our

local currency. But in the end, you squeeze exporters and you don't

want to do that. And the question raised by the fruit exporters was

investment. Let's speak with investment, because one of the big

issues you face is investment in your infrastructure in Chile. A

year ago, September 2011, there was a major power blackout. You had,

what, nearly half of the population affected by this. Traffic lights

not working. Mining production halted because there was no power.

How big a wake-up call for Chile do you think that day was? Well, it

was a wake-up call, but in a way, it was only a few hours and it has

not repeated. We have... So far. We have a challenge in

energy generation. We don't want to hide it. We, nrd to keep growing at

the rate we are growing, 6%, we need to double generation capacity

over the next decade. And this is something that with imply doing

hydroelectric, thermal projects and renewable, alternative renewable

energies. That is one of the things that we have discussed here with

the UK businessmen. There is a lot of expertise in some, like, sea

waves, wind and, you know, not hereers but similar energy are also

component or the metrics in Chile. That all sounds fine. But then the

investors do their research. And they discover that there is a

problem, don't they? That is that when Chile has big projects

proposed, they get blocked. We have had a series of them blocked just

in the course of the summer of this year. You know, we had the one back

in June that was going to be a major investment of coal-powered

thermo electric plant rejected by your own environmental commission.

In May, one in Patagonia, and blocked. Another one in August,

again blocked because of environmental problems. Investors

must be going on? Of course, that is a challenge. Part of the reason

is that we have independent powers in Chile. We respect the judicial

court. We need to go through the system, respect the environmental

laws, we are trying to expedite the process. Spite of all you are

saying, during this government we have had more approvals that - more

than double the approvals that during the previous government.

There are important projects. The latest one blocked by the Supreme

Court. We need to work in the other projects. We have, you know, tens

of projects, and very significant projects in the pipeline. Let me

tell you one very important thing. This is not a problem for our

government. The shortages, and a possible problem and bottlenecks

will not happen occurring our period. We are working for the next

government, for the Chilean people. This will happen - either a problem

for 2015, 2016. One of your ministerial colleagues, the deputy

Energy Minister has said that the increase in appeals is prohibiting

investment. If you ask me what the main challenge, it is...

You imported it, something like three quarters of all your energy

needs? It is already dependent on external actors. Some of your

regional neighbours have not been helpful. Argentina turns off the

taps, complicated prices. We import 98% of our needs. We produce very

little in Chile. 98% imported in oil and derivatives. In terms of

electricity, we have done a couple of things. One in the far north of

the country and the other in the centre and south. And they are

appealing Congress to interconnect them, meaning to trade energy,

generate in one part, trade it and send it to the other. A 600km line

will be built to integrate both systems. All of these things depend

on the outside world. Whether you're importing energy or

persuading an investors to come and build the capacity for you. One of

the biggest of those investors is the Brazilian billionaire Batista,

who had a plant proposed rejected, the one I was talking about in

August. He Tweet "to invest in Chile is becoming impossible. If

they don't want us there, we will go, by, bye." My answer to that is

look at the $12.3 billion foreign direct investment materialised in

the country with a record number. This year we will be over 120

million dollars... People who are respected figures. A

man who, think I, already contributes to 20% of Chile's

electricity project. They are saying that this is not the country

to do business in. They should look at doing business, you know,

reports of the World Bank, it is very high. And the investments that

are going into the country - of course, I mean, I understand that

he must be not satisfied that the Supreme Court blocked, but we do

have institutions that we must respect in Chile. There are ways in

which he can continue this investors and others, with the

project he needs to do a new environmental study.

And reapply. Whether he wants or not, that is his own decision. But

we are - I tell you, everything can go smoother, you know, you can

always think we can do better. Yes, we can do better. But we need to

One other area you might describe as a self-inflicted problem for

Chile is education. We have had now 16 months of protests over the high

cost of being educated. The government wouldn't meet protesters

for the first six months. Why was that? Yes, we had protests in the

streetment what they are saying, we agree. We agree we need to increase

the quality of education and the cost of loans we inherited from the

previous government was too high. 5.6%. We just had approved in

Congress a bill that reduces that cost from 5.6 to 2%. So in effect

we are subsidising people to study. For a 2% loan, they are not

available on the market. The government has to find the

difference between the 2% and the market rate. We already have that.

Society is growing. We have reached 19,000 dollars per capita in

purchasing power party - parity terms. There is a middle income

trap. We don't want to get in the middle income trap. Some people get

anxious and want the benefits now. But as a government we have to be

responsible and say we can't have everything now. Indeed your

President says nothing in life is free. Someone has to pay. But who

pays? At the moment in Chile the burden of the cost of education

seems to be borne disproportionately by people

themselves, by families and households, not by the state or

indeed wealthyer taxpayers. In the EOCD of which you became a member

recently, the average state sending 17% of the cost on higher education.

This Chile it's 16%. That's a big difference. What is it about

Chile's attitude to higher education that's so different?

Firstly, there has been a tremendous increase in the coverage,

in the amount of people that could go to higher education. A decade

ago huh? 150,000 people going into higher education. Now you have a

million people. That expanded in a way that now 70% of those people

are first generation in higher education. So we're having a

tremendous social change in Chile. People who didn't have access now

have access. But in terms of our public budget, the biggest budget

of all ministrys is education, 12 billion out of 60 billion. 12 per

cent, one pound out of every five we spend as a government goes into

education. There are people who say that's as it should be because it's

a common good, not just a thing to make people happier and more

engaged with the world around them but also something that helps your

economy, which is what you need to develop. That's what we're doing.

We received a budget short of $9 billion. Over three years we have

increased it to $12 billion. Education was not the highest

spending item. Now it is. Why? 60 months of protests. Children

barricading themselves into schools and not letting teachers in. It's

not just higher education but secondary education too. And also

preschool education. We need to consider the people in the streets

but also those not in the streets. The young children are not in the

streets. We are doing 60% of the most vulnerable part of the Chile -

they will have universal coverage, free education, for the 60% most in

need. This is what we're doing. It's not because they are in the

streets, it's because that we believe this order to give people a

fair chance they need intervention N education, access to education at

the beginning. All studies say you need to give people at the very

gining in preschool and kindgar ten and even before in nurserys, you

need to have a scheme that allows them to get a good start. You have

put up taxes to help pay for this? That's right. The corporate tax

rate up to 20%. It was 18.5%. So it's not a great increase. What has

been the reaction from business and industry to this higher tax? When

you told them it is to pay for education? Firstly, we are a centre

right government, as you know. But we have done tax reform to increase

net revenue for education. You're right it's 18.5. But it was going

to go down to 17. So really the increase is from 17 to 20 - three

points. At the same time we have reduced taxes on people. Personal

income tax has been reduced. Corporate income tax was increased.

We are also reducing the tax on loans from 1.2% to 0.4% on loans.

So we are getting the reaction from industry and business people - it's

that they understand that we need to do a bigger effort for education.

So nobody really wants to pay more taxes, but they have been

understanding. Our economy keeps growing, investment keeps growing.

We are seeing a good response from them. Is it down to you as a

government to make the case to business and industry. You said

they are not happy to pay more tax but that they accept they have to

pay it. Stkpwhru But that this is about their future. Global

competitiveness, the report for this year, says about Chile that

the lack of quality education is preventing your country making the

next step in its development. Low quality scientific educations -

institutions and poor quality education hinder the capacity to

generate and use knowledge that could be brought into the market in

the new - in the shape of new products or services. I had to

comment on that in terms of the rankings. The worst ranking we get

is in primary education. Quality of primary education, we get a 74. 74

in the ranking. Precisely this is why we are doing this tax reform.

Let me tell you what we are doing the tax reform for. Preschool

education - 60% of the most vulnerable will get it for free.

Primary and secondary school education - we will increase the

subsidy of the state so we can increase the resources of those

schools. For higher education, grants for 60% most vulnerable,

with 2% rates for the rest. Do you think that perhaps this might

explain the problems with education, the persistence of inequality in

Chile? First of all, Latin America is the region with the highest

income inequality in the world. It's not the poorest region. The

poorest region is Africa. Africa has leapt in equality. Within Latin

America Chile is average, not the highest, not the lowest. We have

had more progress in reducing poverty than reducing inequality.

This is one of the challenges. So how do we do it? Firstly, jobs,

jobs to people who are most in need, poor people, they can maintain

those jobs. That's one. Secondly, education. Training programs. Those

are the main way this is which we can reduce inequality but we can

only do it gradually. This is a key question. How do you do that? Could

it than education will be the way that helps you diversify the

economy? Helps you get that soft landing? Helps you move again back

up and recover? Absolutely. Education - the only thing you have

to consider is that education n order to give the returns on

education, it will take time. But we need to do it and we are doing

it. Yes, Chile depends on copper, it's over half our exports. But

there are some interesting areas like services, remote services,