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Minister Secretary-General of the Presidency, Cristián Larroulet

Downtown Santiago has become a battleground in the last few months. Fed up with what they see as lack of progress in areas ranging from education and the environment to gay rights, thousands of Chileans have marched past the La Moneda presidential palace demanding change. Most of the protests have been peaceful, but a minority has seized the opportunity to fight with police and destroy public property.

This is hardly what President Piñera had in mind when he took office some 16 months ago. Since then his approval ratings have dropped and his government has faced a series of setbacks that have sapped the energy from his ministers.

But at an AmCham breakfast on June 30, the Minister Secretary-General of the Presidency, Cristián Larroulet, reassured AmCham members that even in these difficult times the government has not lost sight of its goal and is continuing to work on a series of economic, social and political reforms.

Some key reforms are in education. Many university students are heavily in debt due to high tuition costs and, on the same day as the breakfast, thousands of them marched in Santiago calling for free education. But in a country with an average wage less than 50 percent of the OECD average, this demand is unrealistic, said Larroulet.

“There is the desire to walk much faster than we really can,” he said.

The problem is that Chile is just waking up after a decade-long “siesta” following the 1998 economic crisis. During this period productivity growth stalled while economic growth shrank to half the average growth rate of 6 percent annually seen during the mid-1990s.

This has led to a politically damaging “zero sum game”, said Larroulet. “When countries stop growing, they start fighting over how to share the pie.”

President Piñera promised in May last year that Chile will become a developed country by the end of this decade. But escaping the “middle-income trap” that impedes countries from making the jump to the big leagues of the world economy, means Chile must promote entrepreneurship while improving income distribution, said Larroulet.

Ever since the 19th century, when Chile was the second most important country in Latin America after Argentina, academics have written about the country’s case of “frustrated development”. A decade ago, former President Ricardo Lagos predicted Chile would be developed by its Bicentennial last year. But Chile’s per capita income of around US$15,000 remains US$7,000 short of its goal.

Now President Piñera has taken up the baton, but he got off to a shaky start. Larroulet reminded members of the devastating impact of the February 27, 2010 earthquake, which struck just days before President Piñera took office. The total losses were estimated at US$30 billion, or 18 percent of GDP, and it had a huge political cost.

The reorganization of resources to help the worst-hit areas meant that poor northern regions, responsible for most of Chile’s copper output, have received less funding than originally envisioned, said Larroulet, referring to recent protests in the city of Calama.

Despite the reconstruction challenges, however, Chile’s economy is expected to grow at the highest rate of OECD countries in 2011, around 6.5 percent versus the world average of 4.2 percent. This is possible thanks to Chile’s solid economic foundation based on high levels of investment, particularly in mining and energy, and an emphasis on innovation.

To promote entrepreneurship, the government passed a law this year that has reduced the time needed to open a new business in Chile from 27 days to 16 days. And Larroulet said the government is planning to reduce this to “between one and two days” like New Zealand, which leads world rankings in the ease of opening a business.

Unemployment has also fallen steadily, partly due to a law that exempts small companies from paying income tax if they re-invest their profits. “There is no silver bullet, but there is a series of systematic small reforms all aimed in the same direction,” said Larroulet.

But improving public education, which directly impacts income inequality, remains the “the mother of all battles”, noted the Minister.

Chile can’t afford free university education for all but funds could be better distributed. For example, subsidies should be increased for Chile’s technical colleges which receive much less funding per student than public universities. “There is huge inequality in access to resources,” said Larroulet.

And it’s not just about money. Despite a massive increase in public investment in education and expanded coverage in the last decade, students’ academic results remain poor compared to international standards, particularly in key areas such as science and math.

The government has made some progress. A reform package approved last year aims to improve teaching quality in the classroom by empowering school principals to fire bad teachers and reward good ones. A second reform will create a new schools regulator and close those that do not achieve minimum standards.

These are not easy times but Chile’s government is facing the challenges of a still developing country, rather than putting them back “under the mattress”, said Larroulet.

“We have done a lot in one year, but there is plenty more to do,” he concluded.

Julian Dowling is editor of bUSiness CHILE