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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

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Economic Growth in Chile: A Long Term Perspective

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  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 labor’s 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. 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 Geography: Resources and Distance

  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 by26% to 65% ! • Infrastructure and Networks are key to reduce “distance”

  16. Culture and Institutions

  17. Role of institutions: “second generation” reforms Trust and social capital Values Beliefs Attitudes Legal system and culture of conflict “Culture makes almost all the difference”

  18. Institutions, productivity and growth • Robert Putnam: Social capitalreduces frictions and provides the incentives for innovating • Francis Fukuyama: Trust plays a key role in achieving cooperative outcomes • Douglass North: Strong institutionshelp 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 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)

  21. 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 The Culture of Innovation

  22. International Comparisons: Successful and Not So Successful Countries

  23. GDP Growth Unemployment Germany vs Ireland

  24. Conclusions and Policy Recommendations: Relating the Long and Short Runs

  25. 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 Have a long run, productivity-enhancing strategy

  26. 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

  27. 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. 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 Have a long run, productivity-enhancing strategy

  29. 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

  30. 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

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