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Cablegate: Ambassador Reviews Economic Themes with Nobel Prize Winner

VZCZCXYZ0000
RR RUEHWEB

DE RUEHSG #0028/01 0111128
ZNR UUUUU ZZH
R 111128Z JAN 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC 2639
INFO RUEHBO/AMEMBASSY BOGOTA 1911
RUEHBR/AMEMBASSY BRASILIA 0123
RUEHBU/AMEMBASSY BUENOS AIRES 0730
RUEHLP/AMEMBASSY LA PAZ JAN LIMA 5400
RUEHQT/AMEMBASSY QUITO 1792

UNCLAS SANTIAGO 000028

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV CI
SUBJECT: AMBASSADOR REVIEWS ECONOMIC THEMES WITH NOBEL PRIZE WINNER
AND CENTRAL BANK PRESIDENT


1. (SBU) SUMMARY: The Ambassador hosted Dr. Robert Solow -- 1987
Economics Nobel Prize winner -- and Central Bank President Jose De
Gregorio at the residence on January 8 to discuss economic issues in
Chile. The conversation focused largely on the distinctive elements
that make Chile and its economy and labor market so different from
those in the region. Dr. Solow, who visited Chile to participate in
a GOC-hosted seminar on "Labor and Equity," is impressed with the
country's focus on problem areas and the quality and seriousness of
his Chilean interlocutors. Dr. Solow noted that he would be
consulting Harvard and MIT economists on a specific question posed
to him by Finance Minister Andres Velasco the previous day about
collective bargaining. End Summary.

2. (SBU) The Ambassador invited Economics Nobel Prize recipient Dr.
Robert Solow to the residence on January 8, taking advantage of his
presence in Chile for a seminar hosted by the GOC Presidential
Advisory Board on Labor and Equity. Chile's new Central Bank
President Jose De Gregorio (appointed in December 2007) also
participated in the discussion. He is a former student of Dr. Solow
and earned a PhD in economics from MIT.

Need for Labor Flexibility
--------------------------
3. (SBU) Both Dr. Solow and the Central Bank President agreed that
Chile needed a more flexible labor market to advance the country
further. Instead of seeking only to secure existing jobs, labor
unions needed to focus more attention on the creation of new jobs
and industries with higher incomes, noted the retired MIT professor.
Working with the private sector, labor should seek the production
of value added products (e.g., production of furniture with Chilean
wood or cables with Chilean copper) that would generate better
salaries.

4. (SBU) De Gregorio said there is a tendency of some in government
to look toward European labor standards. He warned that the tax
burden is already high in Chile and citizens do not receive benefits
from those taxes, as in Europe. To best help its workers, Chile
needed to generate higher incomes, he said. Dr. Solow indicated
that with changing technologies, workers change jobs more
frequently, unlike in the past, and need to be adaptable and
well-educated. Both the professor and Bank President agreed that
severance payments are a disincentive for businesses in Chile to
hire new workers and foster new industries.

5. (SBU) De Gregorio said that Chilean students are increasingly
more skilled utilizing new technologies. As an example, he noted
students were surprisingly organized during demonstrations against
the Bachelet government in its first month in office. The students
coordinated blockades and warned each other of arriving security
forces by using text messages. De Gregorio contrasted his
experience as a student protesting against the Pinochet regime, when
organizing students with limited means of communication and
information was a problem.

Sub-Contracting Dilemma
-----------------------
6. (SBU) The Ambassador raised the dispute over subcontracting at
CODELCO, the world's largest copper company, noting that the issue
has become a top labor concern for the Bachelet administration. De
Gregorio said much of the problem stems from the differentiated
treatment of the firm's permanent employees and its temporary

contract workers. The Central Bank President indicated that some
contract workers perform the same duties as the permanent ones, but
receive different benefits. The problem is not easily resolved.

Why is Chile different?
-----------------------
7. (SBU) Dr. Solow stated he had been impressed with Chile and the
seriousness and desire of his Chilean interlocutors to solve
problems. Noting that Chile is implementing sound economic
policies, the retired MIT professor wondered what made Chile so
different from other countries in the hemisphere. De Gregorio
explained that Chile has always had strong institutions, even under
the military dictatorship of General Pinochet. The country had
largely refrained from populism, with the exception of the
disastrous Allende administration. He theorized that corruption had
been held in check in Chile, unlike in other Latin American
countries, because of its strong institutions. He noted, for
example, that Argentina has yet to recover from Peron's reign, which
had largely disintegrated the country's institutions.

Consulting Academia
-------------------
8. (SBU) Dr. Solow said he met the previous day with Finance

Minister Andres Velasco, whom he described as exceptional. One
topic raised by Velasco concerned the optimal size for negotiations
between management and workers of a firm. In a Chilean company
there can be as many as 100 separate categories (e.g. cashiers,
shelf stackers, and janitors in a grocery store all negotiate
separately with management). The Finance Minister explained his
team found no academic studies on the optimal size for inter-firm
negotiations in collective bargaining. Dr. Solow said he promised
to consult Harvard and MIT economists on the subject and for any
relevant research. De Gregorio commented that Velasco does an
excellent job linking what is relevant in academia with the
political side of operating a government.

MIT Mafia in Chile
------------------
9. (U) The Central Bank President noted that there are many MIT
graduates working Chile, but they are not as well known as the
University of Chicago "Boys." After 45 years at MIT, the retired
professor said there are several former students in influential
government positions in different countries, including three or four
Chileans who later became Central Bank Board Members. He indicated
he is always pleased to see former students playing important roles
in society.

SIMONS

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