D.L. 701: Subsidy, Public Policy, or the Chilean State's Best Business Deal?

By Simón Berti, President of the College of Forestry Engineers

For years, Decree Law 701 has been the subject of a debate as persistent as it is polarized. For some, it is an unjustified subsidy to large forestry companies; for others, it is one of the most successful public policies in Chile's economic and environmental history. The reality, as is often the case, is more complex.

This column draws on extensively documented background information by sector professionals, including forestry engineers Jaime Salas and Eduardo Morales, whose publications have contributed to a deeper understanding of the origin, operation, and effects of D.L. 701.

D.L. 701, enacted in 1974 in a context of economic crisis, aimed to incentivize afforestation on degraded soils. It did not start from scratch. Previous efforts already existed, such as the 1931 Forest Law, which established incentives and technical instruments for afforestation, although these became obsolete due to a lack of updates in the face of inflation. The new decree came to correct, expand, and operationalize that policy.

From a social point of view, the impact was significant. The forestry sector came to generate direct and indirect employment for hundreds of thousands of people, particularly in rural areas where alternatives were scarce. Furthermore, it contributed to the development of human capital, with the creation of multiple forestry engineering schools and the professionalization of the activity.

Economically, the debate becomes more interesting. It is often stated that D.L. 701 provided "subsidies" to the forestry sector. However, the very design of the instrument suggests something different: the bonuses had to be recorded as deferred income, incorporated into the tax base at the time of harvest. In practice, this implies that the State recovers a relevant part of that incentive via taxes, which allows the argument that it was not a simple transfer, but a development mechanism with a fiscal return.

Added to this is the sector's export role. With billions of dollars in annual shipments and a relevant contribution to GDP, forestry activity consolidated as one of the country's productive pillars. That development would hardly have occurred at the same pace without a sustained incentive policy.

Parallel to its implementation, D.L. 701 not only promoted afforestation but also allowed a sustained process of learning and technical improvement throughout the productive chain. Over decades, genetic improvement programs were developed, systems for nursery production, planting, pruning, thinning, and harvesting were perfected, and significant advances in sawmilling, wood drying, and product manufacturing were incorporated.

This process transformed an incipient activity into a sophisticated industry, capable of competing in demanding international markets and positioning Chile as a relevant actor in forestry exports. Behind that development lies accumulated knowledge, investment, and continuous adaptation to different soil and climate conditions.

For this reason, any future policy should recognize that experience. In particular, it is fundamental to safeguard the freedom of owners to choose the species to plant, based on their specific conditions and the productive objectives they pursue.

The environmental component is perhaps the most controversial. A significant part of the discussion has compared forest plantations with native forests. However, that comparison is incorrect: plantations should be evaluated against the eroded soil they replace.

Through that lens, the change is evident. Plantations generate greater biodiversity than degraded soil, contribute to improving water infiltration into groundwater, capture carbon dioxide, and, over time, form soil through the accumulation of organic matter. Furthermore, they stop erosive processes that would otherwise continue degrading the land.

Half a century after its creation, D.L. 701 leaves an evident lesson: long-term public policies can indeed transform a country's productive structure.

But there is a point rarely mentioned with sufficient clarity. From approximately 2019 onward, the annual tax revenue from the forestry sector is enough to cover, in a single year, everything the State invested over more than three decades in bonuses. In practice, what many have labeled a "subsidy" ended up being an extraordinarily profitable business deal for the Chilean State.

Today, when vast areas of the country continue to degrade, Chile needs a new forestry development instrument—similar in spirit to D.L. 701—that allows addressing at least 1.5 million hectares undergoing erosion. An instrument focused on small and medium-sized owners, which incentivizes afforestation with modern criteria and promotes longer rotations, aimed at producing higher-value sawlog timber.

More than an ideological discussion, the challenge is practical: to replicate a model that, with adjustments and learnings, demonstrated it is possible to recover soils, generate employment, and build a solid productive base.

Source:BiobioChile