Economic Growth in Chile: A Long Term Perspective

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Transcript Economic Growth in Chile: A Long Term Perspective

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
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

Facts, Questions and the
Sources of Growth in Chile
Sources 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 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 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 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’s
contribution is worrisome
Sources 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
Growth: International
Evidence

Economic Policies
–
–
–
–
–
–

Macro Stability
Openness
Competition
Innovation
Adaptability
Rules’ Predictability
Geography
– Resources
– Distance

Culture
– Trust
– Institutions
– Values, beliefs, attitudes
Geography, Natural Resources
and Infrastructure
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
Chile Exports Materials and
Commodities
1000
500
0
HI TECH
MACH
2001
CAP MAN
1996
LAB MAN
CEREAL
1986
AN AG
AGRICUL
FOREST
MINING
-1000
PETRO
-500
This Needs not be the Case: Sweden Exports
Commodities and High Tech Goods
3200
2200
1200
200
HI TECH
1998
MACH
CEREAL
1974
CAP MAN
AN AG
1958
LAB MAN
AGRICUL
FOREST
MINING
-1800
PETRO
-800
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”

Culture and Institutions
“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
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

Chile: Low Degree of Trust
The Culture of Work

“Culture makes almost all of the
difference…hard 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 trabajo…Ni pensar en
armar un asadito...”
(Ingeniero chileno de regreso de
Silicon Valley, La Tercera 7/8/02)
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
International Comparisons:
Successful and Not So Successful
Countries
Germany vs Ireland
GDP Growth
Unemployment
14.00
18
12.00
16
14
10.00
12
8.00
6.00
4.00
10
Ireland
8
Germany
6
4
0.00
0
-2.00
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
2
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
2.00
Ireland
Germany
Conclusions and
Policy Recommendations:
Relating the Long and Short Runs
Have a long run, productivityenhancing 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 R&D budget by 4-5
times; competitive grants
Privatize, judiciously
Encourage competition;
beware of “lobbies”
Democratize labor market:
be pro-young and women
Don’t be afraid of currency
depreciation; be afraid of
appreciation

2. Culture
Increased “trust” in
institutions of the state

– Accelerate the “cultural”
legislative agenda
– Avoid cultural hegemony
– Increase funding for the
arts in 8 - 10 times
– 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



Changing “culture of
work” requires proper
incentives’ structure
Seek a permanent
agreement with ethnic
minorities (compensation)
Major reform of legal
system


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
Have a long run, productivityenhancing 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 R&D budget by 4-5
times; competitive grants
Privatize, judiciously
Encourage competition;
beware of “lobbies”
Democratize labor market:
be pro-young and women
Don’t be afraid of currency
depreciation; be afraid of
appreciation

2. Culture
Increased “trust” in
institutions of the state

– Accelerate the “cultural”
legislative agenda
– Avoid cultural hegemony
– Increase funding for the
arts in 8 - 10 times
– 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



Changing “culture of
work” requires proper
incentives’ structure
Seek a permanent
agreement with ethnic
minorities (compensation)
Major reform of legal
system


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