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Cablegate: A/S Valenzuela Discusses Chile's Economic Strengths and Role

VZCZCXYZ0000
RR RUEHWEB

DE RUEHSG #0046/01 0151156
ZNR UUUUU ZZH
R 151154Z JAN 10
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC 0528
INFO MERCOSUR COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHQT/AMEMBASSY QUITO

UNCLAS SANTIAGO 000046

SENSITIVE
SIPDIS
STATE PLEASE PASS TO USTR KATE DUCKWORTH
STATE FOR WHA/BSC, EEB/TPP/BTA, WHA/EPSC
TREASURY FOR BLINDQUIST
COMMERCE FOR KMANN

E.O. 12958: N/A
TAGS: ECON ETRD EINV ELAB PGOV SOCI CI
SUBJECT: A/S VALENZUELA DISCUSSES CHILE'S ECONOMIC STRENGTHS AND ROLE
IN THE REGION WITH MINISTER OF FINANCE

1. (SBU) SUMMARY: A/S Valenzuela met with the Minister of Finance
on January 12 to discuss Chile's accession to the Organization for
Economic Cooperation and Development (OECD), the state of Chile's
economy, and plans for the next Chilean administration. The
discussion ranged from innovation to education to economic
instability in Venezuela and Argentina. Two key issues were
Inter-American Development Bank (IDB) capitalization for the
region, which Chile characterized as "miniscule" considering the
region's economy, and a push from Ministry of Finance senior
officials to sign a bilateral tax treaty the first week in
February, in Washington DC. END SUMMARY.

2. (U) On January 12, A/S Valenzuela met with Minister of Finance
Andres Velasco and International Affairs Coordinator Raul Saez.
The Ambassador, Senior Poloff and E/Poloff (notetaker) accompanied
A/S Valenzuela.

OECD Accession: An Opportunity for Expanding Views

--------------------------------------------- ----------------------
---

3. (SBU) In response to A/S Valenzuela's congratulations on Chile's
pending OECD membership (the Accession Agreement was signed the day
before on January 11), Velasco commented that Chile would be an
additional voice in the organization's Asia-Pacific Economic
Cooperation (APEC) group and will provide some balance against the
influence of European countries. He also expressed appreciation
for strong U.S. support in Chile's accession process. Saez noted
that Chile, as well as being willing to learn from other members,
has a fresh perspective to add to the OECD dialogue.

Chilean Economy Will Be Strong in 2010...

--------------------------------------------- ---------

4. (SBU) Expressing concern about the economic policies and high
inflation of both Argentina and Venezuela, Velasco solicited A/S
Valenzuela's views on the economic direction of the region. This
lead to a broader discussion of the boom-bust cycle.
When asked about the state of Chile's economy, Velasco explained
Chile had a "good" year in 2009 for several reasons: it had no
finance/credit problems, economic production in Chile was not
dislocated as it was elsewhere, local consumer demand increased,
and the country continued to have strong exports.

5. (SBU) Velasco stated that the impact of the global financial
crisis was tempered in Chile because the productive sector was not
disrupted. He elaborated that businesses were able to get credit,
consumers continued to spend, and unemployment was not a large
problem. He characterized exports as "strong," specifically citing
copper, fruit and wood and Chile's significant market share in the
U.S., Europe and China.

...and There Will Be an Investment Boom

--------------------------------------------- ------

6. (SBU) Velasco projected that the Chilean economy would fully
recover in 2010, and that it will experience a "boom" in investment
compared to previous years. He said investment is essential for
Chile to maintain growth at 5-5.5 percent and asserted that the
country's development agency, CORFO, was doing an excellent job of
both promoting innovation - an important strategy for growth - and


increasing investment. Velasco strongly emphasized the importance
of education, especially advanced education, to raising economic
growth.

Recommended Priorities for Next Administration: Education, Taking
on Teachers' Union

--------------------------------------------- ----------------------
------------------------------------------

7. (SBU) Responding to Velasco's comment that Chile intended to
send 2,000 PhD students abroad a year, A/S Valenzuela noted that
the split between public and private education, at all levels, is
an "Achilles' heel" for the country. Velasco responded that there
had been "huge strides" in providing education in the past 20
years, citing that 97% of the population completes primary
education, over 90% start secondary education, and nearly 80%
graduate from high school. Velasco said it is "revolutionary" that
four out of 10 Chileans now attend university (an increase from one
in 10) and pointed out that by 2010 this is projected to be six out
of 10.

8. (SBU) Velasco gave credit to both Chilean President Michelle
Bachelet and presidential candidates Eduardo Frei and Sebastian
Pinera for not giving in to demands during the recently-concluded
lengthy teachers' strike, which started out with 80% participation
and dwindled to 8% at the end. Saying that public school
enrollment is "collapsing," he suggested that proactively taking on
the teachers' union and its claim that the government owes it an
"historic debt" (deuda historica), should be a priority for the new
Chilean president, even though it may result in a 1-2 month strike.
He further commented that education is an issue that will make or
break the next administration.

Chile Wants to Sign Bilateral Taxation Treaty in February

--------------------------------------------- ----------------------
---

9. (SBU) Calling resolution of the double taxation issue an
important outcome of Chile's OECD accession process, Velasco said
the GOC would like to find a date during the first week of February
to sign the bilateral tax treaty with the U.S. Mentioning that
this has been an issue for almost two decades, he indicated that
signing taxation treaties with the U.S. (and Australia) is critical
to demonstrate Chile's commitment to high investment standards,
especially in the context of OECD membership. Saez stated that the
text will be ready at the end of January, and Velasco said he could
travel to Washington DC for the signing in first week in February.

Concerns about IDB (Under-) Capitalization for the Region

--------------------------------------------- ----------------------
------

10. (SBU) Velasco said he was concerned about the IDB's ability to
support contracyclical adjustment programs, given its liquidity
line of only about $6 billion, an amount he described as
"miniscule" in view of the combined GDP of countries in the region.
Velasco conveyed a sense of urgency because of the level of
unrealized losses due to the financial crises and upcoming
meetings.

11. (U) The Assistant Secretary cleared this cable.
SIMONS

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