Economic Growth in Chile: A Long Term Perspective

1
Economic Growth in Chile A Long Term
Perspective

• by
• SEBASTIAN EDWARDS
• University of California, Los Angeles
• and
• National Bureau of Economic Research
• Agosto 23, 2002
• CEP

2
Outline

• Facts, Questions and the Sources of Growth in
  Chile
• The Determinants of Long Run Growth
  International Evidence
• Geography, Natural Resources and Infrastructure
• Culture and Institutions
• International Comparisons Successful and a Not
  So Successful Countries
• Conclusions and Policy Recommendations Relating
  the Long and Short Runs

3
Facts, Questions and the Sources of Growth in
Chile
4
Sources of Growth in Chile
5
Sources of Growth in Chile
Fast TFP growth, due to modernization reforms,
competition, openness, and exports growth
6
Sources of Growth in Chile
What happened? What to do about it?
7
Sources of Growth in Chile
The decline in labors contribution is worrisome
8
Sources of Growth in Chile
What is the sustainable long run rate of growth
in Chile
9
The Determinants of Long Run Growth
International Evidence
10

• Economic Policies
• Macro Stability
• Openness
• Competition
• Innovation
• Adaptability
• Rules Predictability
• Geography
• Resources
• Distance
• Culture
• Trust
• Institutions
• Values, beliefs, attitudes

11
Geography, Natural Resources and Infrastructure
12
Geography Resources and Distance

• Factor endowments determine what countries export
  and earn.
• Is there a natural resources curse?
• Location matters it pays to be close to markets
• Role of infrastructure
• Distance is more than how far you are

13
Chile Exports Materials and Commodities
14
This Needs not be the Case Sweden Exports
Commodities and High Tech Goods
15
Distance Chile is Very Far

• Distance between Valparaiso and
• Lisbon 6,357 miles
• Monterrey 4,875 miles
• Seoul 11,345 miles
• Distance is more than miles or kilometers.
• Each 1,000 miles of distance is equivalent to a
  7 -17 import tariff.
• Our costs have to be lower by 26 to 65 !
• Infrastructure and Networks are key to reduce
  distance

16
Culture and Institutions
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Culture makes almost all the difference

• Role of institutions second generation
  reforms
• Trust and social capital
• Values
• Beliefs
• Attitudes
• Legal system and culture of conflict

18
Institutions, productivity and growth

• Robert Putnam Social capital reduces frictions
  and provides the incentives for innovating
• Francis Fukuyama Trust plays a key role in
  achieving cooperative outcomes
• Douglass North Strong institutions help reduce
  transaction costs, encouraging productivity
  improvements
• Andrei Schleifer Origin of legal system affects
  conflict resolution mechanisms

19
Chile Low Degree of Trust
20
The Culture of Work

• Culture makes almost all of the differencehard
  work, honesty, seriousness (Landes, 2001)
• Cultural attributes that are desirable include
  hard work, initiative, belief in the value of
  education
  (Porter, 2001)
• Todo era trabajo y más trabajoNi pensar en
  armar un asadito...
  
  (Ingeniero chileno
  de regreso de Silicon Valley, La Tercera
  7/8/02)

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The Culture of Innovation

• But a culture of work is not enough.
• Creativity and innovation are required to move
  towards higher value added exports
• University research
• Venture capital
• Cultural diversity
• Encouraging the arts

22
International Comparisons Successful and Not So
Successful Countries
23
Germany vs Ireland

• GDP Growth

• Unemployment

24
Conclusions and Policy Recommendations
Relating the Long and Short Runs
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Have a long run, productivity-enhancing strategy

• 1. ECONOMIC POLICY
• Macroeconomic Stability
• Implement a tax moratorium no more tax changes
  until 2006
• Create an efficient state
• Reduce ministries to 12
• Reduce state-employees by 10,000 (Retirement
  Program)
• Reform management practices.

• Increase RD budget by 4-5 times competitive
  grants
• Privatize, judiciously
• Encourage competition beware of lobbies
• Democratize labor market be pro-young and women
• Dont be afraid of currency depreciation be
  afraid of appreciation

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• 2. Culture
• Increased trust in institutions of the state
• Accountable bureaucracy
• The public as customer
• Reduce ministries to 12 cut bureaucracy by
  10,000
• End political quotas (including in Central Bank)
• A change in culture begins at school
• Entrepreneurs as heroes
• Encourage risk-taking
• Accept failure

• Encourage diversity, innovation and dissent
• Accelerate the cultural legislative agenda
• Avoid cultural hegemony
• Increase funding for the arts in 8 - 10 times
• Changing culture of work requires proper
  incentives structure
• Seek a permanent agreement with ethnic minorities
  (compensation)
• Major reform of legal system

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• 3. GEOGRAPHY
• Be global reach out for new markets (8 thousand
  kilometers radius)
• Infrastructure program
• Best ports and airports in the world
• US 5 to 6 billion fund
• Distance-reducing networks
• Language learning
• English and Spanish!

• Attract global talent
• The return of Chilean talent
• Exports value added upgrade
• Increase capital-labor ratio (increase
  investment)
• Avoid picking winners
• Distance-reducing services
• Customs
• Post Office
• Internet

28
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29
Have a long run, productivity-enhancing strategy

• 1. ECONOMIC POLICY
• Macroeconomic Stability
• Implement a tax moratorium no more tax changes
  until 2006
• Create an efficient state
• Reduce ministries to 12
• Reduce state-employees by 10,000 (Retirement
  Program)
• Reform management Practices.

• Increase RD budget by 4-5 times competitive
  grants
• Privatize, judiciously
• Encourage competition beware of lobbies
• Democratize labor market be pro-young and women
• Dont be afraid of currency depreciation be
  afraid of appreciation

30

• 2. Culture
• Increased trust in institutions of the state
• Accountable bureaucracy
• The public as customer
• Reduce ministries to 12 cut bureaucracy by
  10,000
• End political quotas (including in Central Bank)
• A change in culture begins at school
• Entrepreneurs as heroes
• Encourage risk-taking
• Accept failure

• Encourage diversity, innovation and dissent
• Accelerate the cultural legislative agenda
• Avoid cultural hegemony
• Increase funding for the arts in 8 - 10 times
• Changing culture of work requires proper
  incentives structure
• Seek a permanent agreement with ethnic minorities
  (compensation)
• Major reform of legal system

31

• 3. GEOGRAPHY
• Be global reach out for new markets (8 thousand
  kilometers radius)
• Infrastructure program
• Best ports and airports in the world
• US 5 to 6 billion fund
• Distance-reducing networks
• Language learning
• English and Spanish!

• Attract global talent
• The return of Chilean talent
• Exports value added upgrade
• Increase capital-labor ratio (increase
  investment)
• Avoid picking winners
• Distance-reducing services
• Customs
• Post Office
• Internet