OCTOBER 5th 1988 was a good day for Chile. In a plebiscite voters rejected a proposal by Augusto Pinochet, who had taken power 15 years before, to extend his dictatorial rule. That led to free elections a year later and to more than two decades of strong economic growth, underpinned by pro-market policies, social reforms and, from the early 2000s, a commodity boom (see chart). The economy trebled in size and the poverty rate dropped from nearly 40% to less than 10%. Economists dubbed Chile “the tiger of Latin America”.

Recent years have been less tigerish. The price of copper, the biggest export, began falling sharply in 2014. Michelle Bachelet, the president from 2014 to 2018, rewrote the tax code, strengthened labour unions and proposed a new constitution. Her aim was to reduce inequality, but she also unnerved business. Investment contracted for four consecutive years. Economic growth dropped from an average of 5% in the post-Pinochet years to 1.7% in 2013-17.

Under Sebastián Piñera, who took over from Ms Bachelet in March, the economy has begun to purr again. GDP in the second quarter of this year was 5.3% higher than in the same quarter last year, the fastest rate of growth since his first term as president in 2010-14. Investment grew at 7.1%. The central bank has raised its forecast for growth this year to 4-4.5%.

But this is not yet a return to glory days. Growth has recovered partly because copper prices have. Potential growth—the economy’s capacity to grow without inflationary pressure—is only around 3%. In the past 15 months the three big credit-rating agencies have downgraded Chile’s sovereign debt. This has grown from 4.9% of GDP in 2008 to 23.5% in March this year. Although that is not high, the agencies fear growth will not be fast enough to justify Chile’s strong credit ratings.

The workforce will shrink as the population ages unless more women, young people and immigrants join it. Productivity is “low and stagnant”, according to the OECD, a club of mostly rich countries. This holds back potential growth. Chile’s dream of becoming a fully developed economy thus looks elusive. Its biggest challenge “is to avoid falling into the middle-income trap”, says Rodrigo Aravena, the chief economist of Banco de Chile, a commercial bank. Voters elected Mr Piñera, a billionaire businessman, to guide Chile away from that trap. His critics say he has been slow to seize the steering wheel. He unveiled his first big reform proposal, a shake-up of corporate tax, in August. It faces resistance in congress, where his centre-right coalition lacks a majority. The economy’s growth spurt has so far not produced many more jobs. Consumer confidence fell into negative territory in August; business confidence is also down. The pace of reforms and economic recovery have lagged behind expectations, says Jorge Desormeaux, a former vice-president of the central bank. “Our job is to defeat this pessimism with action,” says José Ramón Valente, the economy minister. He is in charge of three new units—for investment, productivity and “the economy of the future”—which have the task of encouraging entrepreneurs and reducing the economy’s dependence on copper. The government wants to keep growth in investment at 6-7% a year. The goal for productivity is growth of 1% a year. If all goes well, the potential growth rate will rise from 3% to 4%. Achieving that ambition will require advances on several fronts. Some will meet resistance; others will take years to produce results. The plans include a five-year concession programme, under which investors will spend nearly $15bn, about 6% of this year’s GDP, to build roads, airports and hospitals. The government itself will invest $8bn in the Araucanía region, Chile’s poorest. It wants to provide free nursery school for every child, which should bring more women into the labour force and raise productivity in the long run. Employers will pay into a fund for that. The government also plans to reduce regulation of business, which is more complex than in any other member of the OECD. More controversial is a scheme to make rules for employing students more flexible than for other workers.

The government has picked as its first big battle an assault on the confidence-killing tax system introduced by Ms Bachelet. It will be one of the hardest to win. Ms Bachelet’s tax reform raised corporate taxes to provide more money for education. It brought in two corporate-tax regimes, which confused both business folk and tax inspectors. It also limits business-owners’ scope for deducting from their personal tax bills the tax their company has paid on its profits. Among the angry entrepreneurs are 80,000 owners of small businesses, who previously paid no tax at all.

Mr Piñera’s proposed reform would re-establish an “integrated model”, restoring shareholders’ ability to deduct taxes paid by the company. It would also exempt from tax the low-income company owners who were caught in Ms Bachelet’s tax net. To spur investment, the new scheme would let companies speed up depreciation. With more money in their pockets, owners of businesses, both prosperous and poor, will spend more, the government predicts.

The reform proposal has had mixed reviews. Business-owners cheer the return of the integrated model, but are disappointed that Mr Piñera has not kept a promise to reduce corporate-tax rates (27% for big firms). Large companies will get accelerated depreciation for just two years, which will diminish the boost to investment in the long run, says Claudio Agostini, a tax expert at Adolfo Ibáñez University. The business-friendly intent of the tax reform has stirred suspicions in congress, where the opposition, split among centrist and left-wing parties, has united to fight it. They claim it will increase inequality.

It may also increase debt. The government, which promises to cut the fiscal deficit from 1.8% of GDP this year to 1% by 2022, when Mr Piñera’s term ends, claims the tax plan will raise a bit of revenue. It says the scheme will compensate for any shortfall by making electronic sales-tax invoices mandatory. Many observers doubt that. Chile has no independent agency like Britain’s Office of Budget Responsibility to estimate revenues and spending, points out Eduardo Engel, a director of Espacio Público, a think-tank. The government missed an opportunity to set the tax on diesel at the same rate as that on petrol and has left open widely used loopholes.

If the tax reform does not pay for itself, the government will have less money to spend on more popular policies, like the investment in Araucanía. Mr Engel worries that the battle over tax reform will use up political capital needed to address the grievances of Chile’s middle class, especially crime, poor-quality health care and pension benefits they deem to be too low. Neither Mr Piñera nor his ministers have been astute political managers. The education minister suggested in July that schools should host bingo games to pay for repairs, a gaffe that led to his sacking.

The window for enacting bold policies will not stay open for long. Rising global interest rates and the trade war between the United States and China have not yet hurt the economy, thanks to Chile’s relatively solid finances and a floating exchange rate, which has allowed the peso to depreciate. But the economic environment is becoming unfriendlier just as Mr Piñera’s honeymoon is coming to an end. If he wants to swerve away from the middle-income trap, he will have to act fast.