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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 - PowerPoint PPT Presentation
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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
ET
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
H
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
CE
RE
AL
LA
B M
AN
CA
P M
AN
MA
CH
HI T
EC
H
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