Economic Growth in Chile: Economic Growth in Chile: A Long Term Perspective A Long Term Perspective

byby

SEBASTIAN EDWARDSSEBASTIAN EDWARDSUniversity of California, Los AngelesUniversity of California, Los Angeles

andand

National Bureau of Economic ResearchNational Bureau of Economic Research

Agosto 23, 2002Agosto 23, 2002

CEPCEP

OutlineOutline Facts, Questions and the Sources of Growth in Facts, Questions and the Sources of Growth in

Chile Chile The Determinants of Long Run Growth: The Determinants of Long Run Growth:

International EvidenceInternational Evidence Geography, Natural Resources and Geography, Natural Resources and

InfrastructureInfrastructure Culture and InstitutionsCulture and Institutions International Comparisons: Successful and a Not International Comparisons: Successful and a Not

So Successful CountriesSo Successful Countries Conclusions and Policy Recommendations: Conclusions and Policy Recommendations:

Relating the Long and Short RunsRelating the Long and Short Runs

Facts, Questions and the Facts, Questions and the Sources of Growth in ChileSources of Growth in Chile

Sources of Growth in ChileSources of Growth in Chile GDP

GROWTH

TFP GROWTH

CAPITAL LABOR

1976-1980

6.8 3.7 0.8 2.3

1981-1985

-0.1 -2.2 0.9 1.2

1986-1990

6.8 2.3 1.9 2.5

1991-1995

8.7 3.7 3.5 1.5

1996-2000

4.1 0.1 3.6 0.5

1998-2001

2.4 -0.6 2.8 0.1

Sources of Growth in ChileSources of Growth in Chile GDP

GROWTH

TFP GROWTH

CAPITAL LABOR

1976-1980

6.8 3.7 0.8 2.3

1981-1985

-0.1 -2.2 0.9 1.2

1986-1990

6.8 2.3 1.9 2.5

1991-1995

8.7 3.7 3.5 1.5

1996-2000

4.1 0.1 3.6 0.5

1998-2001

2.4 -0.6 2.8 0.1

Fast TFP growth, due to modernization reforms, competition, openness, and exports growth

Sources of Growth in ChileSources of Growth in Chile GDP

GROWTH

TFP GROWTH

CAPITAL LABOR

1976-1980

6.8 3.7 0.8 2.3

1981-1985

-0.1 -2.2 0.9 1.2

1986-1990

6.8 2.3 1.9 2.5

1991-1995

8.7 3.7 3.5 1.5

1996-2000

4.1 0.1 3.6 0.5

1998-2001

2.4 -0.6 2.8 0.1

What happened?What to do about it?

Sources of Growth in ChileSources of Growth in Chile GDP

GROWTH

TFP GROWTH

CAPITAL LABOR

1976-1980

6.8 3.7 0.8 2.3

1981-1985

-0.1 -2.2 0.9 1.2

1986-1990

6.8 2.3 1.9 2.5

1991-1995

8.7 3.7 3.5 1.5

1996-2000

4.1 0.1 3.6 0.5

1998-2001

2.4 -0.6 2.8 0.1

The decline in labor’scontribution is worrisome

Sources of Growth in ChileSources of Growth in Chile GDP

GROWTH

TFP GROWTH

CAPITAL LABOR

1976-1980

6.8 3.7 0.8 2.3

1981-1985

-0.1 -2.2 0.9 1.2

1986-1990

6.8 2.3 1.9 2.5

1991-1995

8.7 3.7 3.5 1.5

1996-2000

4.1 0.1 3.6 0.5

1998-2001

2.4 -0.6 2.8 0.1

What is the sustainable long run rate of growth in Chile

The Determinants of Long Run The Determinants of Long Run Growth: International Growth: International

EvidenceEvidence

Economic PoliciesEconomic Policies– Macro StabilityMacro Stability

– OpennessOpenness

– CompetitionCompetition

– InnovationInnovation

– AdaptabilityAdaptability

– Rules’ PredictabilityRules’ Predictability

GeographyGeography– ResourcesResources

– DistanceDistance

CultureCulture – Trust Trust

– Institutions Institutions

– Values, beliefs, attitudesValues, beliefs, attitudes

Geography, Natural Resources Geography, Natural Resources and Infrastructureand Infrastructure

Geography: Resources and DistanceGeography: Resources and Distance Factor endowments Factor endowments

determine what countries determine what countries export and earn.export and earn.

Is there a natural Is there a natural resources curse?resources curse?

Location matters: it pays Location matters: it pays to be close to marketsto be close to markets

Role of infrastructureRole of infrastructure Distance is more than Distance is more than

how far you arehow far you are

Chile Exports Materials and Chile Exports Materials and CommoditiesCommodities

-1000

-500

0

500

1000P

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RO

MIN

ING

FO

RE

ST

AG

RIC

UL

AN

AG

CE

RE

AL

LA

B M

AN

CA

P M

AN

MA

CH

HI T

EC

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1986 1996 2001

This Needs not be the Case: Sweden Exports This Needs not be the Case: Sweden Exports Commodities and High Tech Goods Commodities and High Tech Goods

-1800

-800

200

1200

2200

3200P

ET

RO

MIN

ING

FO

RE

ST

AG

RIC

UL

AN

AG

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LA

B M

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P M

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CH

HI T

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1958 1974 1998

Distance : Chile is Very “Far”Distance : Chile is Very “Far” Distance between Distance between ValparaisoValparaiso and and

– Lisbon: 6,357 milesLisbon: 6,357 miles– Monterrey: 4,875 milesMonterrey: 4,875 miles– Seoul: 11,345 milesSeoul: 11,345 miles

Distance is more than miles or kilometers.Distance is more than miles or kilometers. Each 1,000 miles of distance is equivalent to a Each 1,000 miles of distance is equivalent to a

7% -17% import tariff.7% -17% import tariff. Our costs have to be lower byOur costs have to be lower by 26% to 65%26% to 65% ! ! Infrastructure and Networks are key to reduce Infrastructure and Networks are key to reduce

“distance”“distance”

Culture and InstitutionsCulture and Institutions

““Culture makes almost all the Culture makes almost all the difference”difference”

Role of institutions: Role of institutions: “second generation” “second generation” reformsreforms

Trust and social capitalTrust and social capital ValuesValues Beliefs Beliefs AttitudesAttitudes Legal system and culture Legal system and culture

of conflictof conflict

Institutions, productivity and Institutions, productivity and growthgrowth

Robert Putnam: Robert Putnam: Social capitalSocial capital reduces frictions reduces frictions and provides the incentives for innovatingand provides the incentives for innovating

Francis Fukuyama: Francis Fukuyama: TrustTrust plays a key role in plays a key role in achieving cooperative outcomesachieving cooperative outcomes

Douglass North: Douglass North: Strong institutionsStrong institutions help reduce help reduce transaction costs, encouraging productivity transaction costs, encouraging productivity improvementsimprovements

Andrei Schleifer: Origin of Andrei Schleifer: Origin of legal systemlegal system affects affects conflict resolution mechanismsconflict resolution mechanisms

Chile: Low Degree of TrustChile: Low Degree of Trust

The Culture of WorkThe Culture of Work

““Culture makes almost all of the difference…hard Culture makes almost all of the difference…hard work, honesty, seriousness…”work, honesty, seriousness…”

(Landes, 2001)(Landes, 2001)

““Cultural attributes that are desirable [include] Cultural attributes that are desirable [include] hard work, initiative, belief in the value of hard work, initiative, belief in the value of education…”education…” (Porter, 2001)(Porter, 2001)

““Todo era trabajo y más trabajo…Ni pensar en Todo era trabajo y más trabajo…Ni pensar en armar un asadito...” armar un asadito...”

(Ingeniero chileno de regreso de (Ingeniero chileno de regreso de Silicon Valley, Silicon Valley, La TerceraLa Tercera 7/8/02) 7/8/02)

The Culture of InnovationThe Culture of Innovation But a culture of work is But a culture of work is

not enough.not enough. Creativity and Creativity and

innovation are required innovation are required to move towards higher to move towards higher value added exportsvalue added exports

University researchUniversity research Venture capitalVenture capital Cultural diversityCultural diversity Encouraging the artsEncouraging the arts

International Comparisons: International Comparisons: Successful and Not So Successful Successful and Not So Successful

CountriesCountries

Germany vs IrelandGermany vs Ireland

GDP GrowthGDP Growth UnemploymentUnemployment

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

199019911992199319941995199619971998199920002001

Ireland

Germany

0

2

4

6

8

10

12

14

16

18

Ireland

Germany

Conclusions and Conclusions and Policy Recommendations: Policy Recommendations:

Relating the Long and Short RunsRelating the Long and Short Runs

Have a long run, productivity-Have a long run, productivity-enhancing strategyenhancing strategy

1. ECONOMIC POLICY1. ECONOMIC POLICY Macroeconomic StabilityMacroeconomic Stability Implement a tax Implement a tax

moratorium: no more tax moratorium: no more tax changes until 2006changes until 2006

Create an efficient state:Create an efficient state:– Reduce ministries to 12 Reduce ministries to 12

– Reduce state-employees Reduce state-employees by 10,000 (Retirement by 10,000 (Retirement Program)Program)

– Reform management Reform management practices.practices.

Increase R&D budget by 4-5 Increase R&D budget by 4-5 times; competitive grantstimes; competitive grants

Privatize, judiciouslyPrivatize, judiciously Encourage competition; Encourage competition;

beware of “lobbies”beware of “lobbies” Democratize labor market: Democratize labor market:

be pro-young and womenbe pro-young and women Don’t be afraid of currency Don’t be afraid of currency

depreciation; be afraid of depreciation; be afraid of appreciationappreciation

2. Culture2. Culture Increased “trust” in Increased “trust” in

institutions of the stateinstitutions of the state– Accountable bureaucracyAccountable bureaucracy

– The public as “customer”The public as “customer”

– Reduce ministries to 12; cut Reduce ministries to 12; cut bureaucracy by 10,000bureaucracy by 10,000

End political quotas End political quotas (including in Central Bank)(including in Central Bank)

A change in culture begins A change in culture begins at schoolat school– Entrepreneurs as “heroes”Entrepreneurs as “heroes”

– Encourage risk-takingEncourage risk-taking

– Accept failureAccept failure

Encourage diversity, Encourage diversity, innovation and dissentinnovation and dissent– Accelerate the Accelerate the “cultural”“cultural”

legislative agendalegislative agenda– Avoid cultural hegemonyAvoid cultural hegemony– Increase funding for the Increase funding for the

arts in 8 - 10 timesarts in 8 - 10 times Changing Changing “culture of “culture of

work”work” requires proper requires proper incentives’ structureincentives’ structure

Seek a permanent Seek a permanent agreement with ethnic agreement with ethnic minorities (compensation)minorities (compensation)

Major reform of legal Major reform of legal systemsystem

3. GEOGRAPHY3. GEOGRAPHY Be global; reach out for Be global; reach out for

new markets (8 thousand new markets (8 thousand kilometers radius)kilometers radius)

Infrastructure programInfrastructure program– Best ports and airports in Best ports and airports in

the worldthe world

– US$ 5 to 6 billion fundUS$ 5 to 6 billion fund

Distance-reducing Distance-reducing networksnetworks– Language learningLanguage learning

– English and Spanish!English and Spanish!

Attract global talentAttract global talent The return of Chilean The return of Chilean

talenttalent Exports’ value added Exports’ value added

upgradeupgrade– Increase capital-labor ratio Increase capital-labor ratio

(increase investment)(increase investment)

– Avoid picking winnersAvoid picking winners

Distance-reducing Distance-reducing servicesservices– CustomsCustoms

– Post OfficePost Office

– InternetInternet

Have a long run, productivity-Have a long run, productivity-enhancing strategyenhancing strategy

1. ECONOMIC POLICY1. ECONOMIC POLICY Macroeconomic StabilityMacroeconomic Stability Implement a tax Implement a tax

moratorium: no more tax moratorium: no more tax changes until 2006changes until 2006

Create an efficient state:Create an efficient state:– Reduce ministries to 12 Reduce ministries to 12

– Reduce state-employees Reduce state-employees by 10,000 (Retirement by 10,000 (Retirement Program)Program)

– Reform management Reform management Practices.Practices.

Increase R&D budget by 4-5 Increase R&D budget by 4-5 times; competitive grants times; competitive grants

Privatize, judiciouslyPrivatize, judiciously Encourage competition; Encourage competition;

beware of “lobbies”beware of “lobbies” Democratize labor market: Democratize labor market:

be pro-young and womenbe pro-young and women Don’t be afraid of currency Don’t be afraid of currency

depreciation; be afraid of depreciation; be afraid of appreciationappreciation

2. Culture2. Culture Increased “trust” in Increased “trust” in

institutions of the stateinstitutions of the state– Accountable bureaucracyAccountable bureaucracy

– The public as “customer”The public as “customer”

– Reduce ministries to 12; cut Reduce ministries to 12; cut bureaucracy by 10,000bureaucracy by 10,000

End political quotas End political quotas (including in Central Bank)(including in Central Bank)

A change in culture begins A change in culture begins at schoolat school– Entrepreneurs as “heroes”Entrepreneurs as “heroes”

– Encourage risk-takingEncourage risk-taking

– Accept failureAccept failure

Encourage diversity, Encourage diversity, innovation and dissentinnovation and dissent– Accelerate the Accelerate the “cultural”“cultural”

legislative agendalegislative agenda– Avoid cultural hegemonyAvoid cultural hegemony– Increase funding for the Increase funding for the

arts in 8 - 10 timesarts in 8 - 10 times Changing Changing “culture of “culture of

work”work” requires proper requires proper incentives’ structureincentives’ structure

Seek a permanent Seek a permanent agreement with ethnic agreement with ethnic minorities (compensation)minorities (compensation)

Major reform of legal Major reform of legal systemsystem

3. GEOGRAPHY3. GEOGRAPHY Be global; reach out for Be global; reach out for

new markets (8 thousand new markets (8 thousand kilometers radius)kilometers radius)

Infrastructure programInfrastructure program– Best ports and airports in Best ports and airports in

the worldthe world

– US$ 5 to 6 billion fundUS$ 5 to 6 billion fund

Distance-reducing Distance-reducing networksnetworks– Language learningLanguage learning

– English and Spanish!English and Spanish!

Attract global talentAttract global talent The return of Chilean The return of Chilean

talenttalent Exports’ value added Exports’ value added

upgradeupgrade– Increase capital-labor ratio Increase capital-labor ratio

(increase investment)(increase investment)

– Avoid picking winnersAvoid picking winners

Distance-reducing Distance-reducing servicesservices– CustomsCustoms

– Post OfficePost Office

– InternetInternet