##economic constraints to grow beyond the current rates. on the one hand, financial conditions are highly favorable and corporations and financial institutions face no liquidity constraints. on the other, with a current account deficit of 1. 6 % of gdp, chile has little pressure from external savings. finally, public net debt is only slightly positive and there is very little risk of crowding out private investment. figure 9 public sector balance ( percent of gdp ) latin america : 1995 - 2015 average ( * ) 1. 1 - 2 - 4 - 1. 5 - 0. 9 chile - 2 0 - 4 - 3 - 3 - 0. 5 - 3. 4 - 3. 1 - 6 - 6 chile peru argentina mexico brazil colombia - 6 - 6 effective 14 18 ( f ) structural ( * ) general government financial balance. ( f ) for 2017 to 2019, forecasts obtained from the 2016 public finances report. sources : moody ’ s and national budget department, ministry of finance of chile. 22. this is one of the factors that explain the cb estimates of growth at 2. 25 % - 3. 25 % in 2018. other factors include improving external conditions, the expansionary monetary policy and the gradual disappearance of idiosyncratic factors that have dragged down economic activity in recent years. according to the cb growth should resume gradually from the second quarter of 2017 to gain speed and start reducing the output gap, currently at 1 ½ per cent, in the second half of the year ( figure 10 ). 23. the above compares to a potential growth between 2. 5 % and 3 %, according to the latest central bank estimates. this is indeed significantly lower than trend growth rates close to 5 % in the mid - 2000s. however, the same central bank analysis indicates that reallocating resources beyond the shorter term, recovering the historical investment / gdp ratios and resuming the increase of participation rates of women in the labor force could allow the country to attain trend growth of about 3. 5 % per year. this suggests that the chilean economy still has considerably headroom to grow. the challenges 24. speeding up growth with price stability in chile still faces some important challenges. first and foremost, closing the current output gap would require recovering productive investment that has remained particularly weak over the last four years. part of this is due to a substantial drop in investment in the mining sector, but gross capital formation in sectors other than mining has also faltered. while recent data points towards an increase in machinery imports, a more

substantial change would require an improvement in business expectations that have remained in negative territory for some time. 25. the possibility of raising potential growth beyond the figures quoted above relies mainly on : ( 1 ) increasing human capital accumulation through increased labor participation, raising working skills above the already projected levels or the migration of workers with the competences required by the chilean system ; and ( 2 ) making productivity improvements via enhancing companies ’ efficiency, lowering production and trading costs, and changing output composition toward more competitive and productive sectors, while advancing in terms of innovation and technological development. 26. as chile ’ s concern for growth has intensified, many ideas about public policies have emerged that could help enhance productivity, with proposals coming from the government, private agents and the national productivity commission. in particular, policies have been developed that have permitted to diversify the energy matrix, increase supply reliability and reduce costs. there have been other factors, however, that pose a risk to productivity, including initiatives that may overburden corporate costs, generate new trading costs or reduce savings. last, but not least, any discussion about productivity must necessarily cover technological development and innovation, which in chile is limited by low private and public investment in r & d and by discontinuity in long - term policies aiming at economic diversification. 27. a third key challenge for the chilean economy is to strengthen its institutions and making them more trustworthy. even though chile enjoys a substantial advantage in this respect over other emerging countries, trust in public and private institutions has suffered from a series of scandals in recent times and rebuilding such trust would require consistent action over a number of years. such effort, however, would be well justified since a low - trust economy is likely to suffer from high transaction costs, free - riding behavior and low policy effectiveness. 28. the former three elements — investor expectations, potential growth and institutional trust — are certainly not part of the conventional agenda of central banks. however, even a narrow focus on stable and low inflation requires monitoring the key developments affecting the future path of the economy. while the central bank can contribute indirectly to these goals by reducing economic instability and uncertainty, it would greatly benefit from the additional flexibility, effectiveness and welfare that they would be able to build.