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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