The jump to full development. The hurdles to the leap
Country Risk Chile sheds light on the challenges faced by the newly-elected President, Sebastián Piñera, with a mandate to rule for a second term, in the wake of Bachelet's second-generation reforms. In a post-transition era (2014- present date), "innovation" and "inclusion" (the "i" factor) play a key role in placing Chile on track towards full development. The following analysis focuses on the hurdles Chile needs to overcome in order to take the leap and - at the same time -highlights the opportunities ahead to reach enhanced prosperity.
The "i" Factor:
Chile is facing the "middle-income trap" dilemma. But, what is the MIC trap? That is when countries become prosperous, but once they reach the technological frontier, they face new challenges to seize innovation and jump to full development. On the technological frontier, industrial products and innovative thinking are huge hurdles to overcome. The trap responds to inabilities to escape the country's dependency path on raw materials for revenues. Political coalitions either cling for too long on policy-making that worked so well in the past, to boost growth and progress, but which no longer suffice for enhanced prosperity and well-being of their population and therefore cause the economy to stall. Chile faces the MIC trap so patent in countries with a limited advanced human stock
OECD report on skills available at http://www.oecd.org/education/skills-beyond-school/41473042.pdf (2007) and expert analysis retrieved from http://www.scielo.br/pdf/rbedu/v19n59/11.pdf. Also, the Government initiative to attract foreign talent and academic mobilization available at http://www.conicyt.cl/pci/files/2017/08/Opportunities-final-2016-final_op.pdf
Chile's USD 23,000 GDP per capita puts the country between the major and minor leagues. We cannot compete with labor-intensive economies in the region to lure more investment, and we cannot compete with industrialized countries because we are not still a knowledge-society yet. The trap then can be defined as a:
development stage that characterizes countries that are squeezed between low-wage producers and highly skilled and fast-moving innovators (….) caught between these two groups, many middle-income countries are without a viable high-growth strategy (Mishra, Flaaen, Ghani 2013)
But Chile is striving to jump. The hurdles are multiple and they all come down to efficient public policy deriving from efficient institutions. They revolve around the letter "i". Innovation and Inclusion. In several past analysis, Country Risk Chile has emphasized the "i" factor as a fundamental driver to overcome the middle-income trap.
Country Risk Chile reviews the following hurdles:
Hurdle nr 1: Chile leads in macroeconomic fundamentals in the region, but Chile is also lagging behind in educational performance, with respect to Asian countries and the OECD. PISA and TIMMS scores point to educational deficits.
For more information visit BID, at http://www.iadb.org/es/temas/educacion/iniciativa-pisa/inicio,20388.html Also a complete review of the PISA examinations 2012-2015 and the performance of Latin American countries at http://www.iadb.org/es/bases-de-datos/cima/inicio,20590.html
Education plays a key role in providing the population with innovative thinking. It starts with elementary and secondary education, especially with public schools and with teacher's reform. It also starts with an emphasis on "culture and arts" to vulnerable students in technical bodies, at tertiary level. It starts with providing teachers with the status they require, socially recognized and well-paid. Chile has embarked on ambitious reforms to tackle equity and fairness aspects in the last administration. More is needed for quality and efficiency. This hurdle hindersproductivity (around a 1.2% drop annually in the last 15 years, and a mining TPF drop of 8.8% per year between 2000 and 2014). According to WEF Country Report, 2017 Chile still leads in the ranking of business climate in the region (#34 worldwide and #1 in the region) but exhibits poor variables in education, such as a lack of innovation in the workforce.
Hurdle Nr 2: Synergies between private and public initiatives are needed to join forces in a national strategy on clusters and labs in the productive chain to successfully put Chile in the GVC. More investment is needed on R&D (a philanthropy law?). On why Asian countries (South Korea, Singapur, and Malaysia, for ex.) could move faster than Latin American countries in the road to development, Barbara Stallings and Alejandro Foxley (2016) point to advanced human capital, education, and state-led initiatives to foster technological pools with MNC's. The market and entrepreneurs can also lead by creating jobs in line with technological innovation.
Hurdle Nr 3: Upgrading coalitions with long-term vision are needed to move away from the copper-related mentality, these should be broad-based and politically aligned to lead the country to hit greater prosperity (the "i" factor), less ideologically-driven and more fast-forward looking in their planning. Chile has conducted major institutional upgradings, on political parties, stringent legislation on financing, and on transparency goals, and accountability goals. Thanks to long-term vision, Chile leads in NCRE such as solar energy in the north placing Chile as a leader in the field in the region. With lithium declared as a strategic resource, a major tender process in the north involves exploitation tied to value-added investment.
Hurdle Nr 4: Informal institutions are difficult to tackle. On a recent visit to Chile, James Robinson, referred to this obstacle by pointing to data showing that back in 1960, under Alessandri's government, 85% of top posts in the private and public arena came from 3 or 4 private schools. Then, in 2010, under Sebastián Piñera's first government, the same 85% posts were filled with graduates coming from the same schools, according to Robinson. This is an issue for inclusion and points to barriers to meritocracy and social mobility.
Hurdle Nr 5: On "Why Nations Fail", Acemoglu and Robinson enhanced the view that "institutions matter" (North, 1990). For institutions to evolve and yield better economic accords, we should be looking into the distribution of political power within a given society. “Solving the problem of development entails understanding what instruments can be used to push a society from a bad to a good political equilibrium” (Acemoglu and Robinson, 2010 p 28). Therefore, Country Risk Chile posits the following questions: what are the main drivers leading to a bad or good equilibrium? Or better still, what are the forces leading to a better political distribution of power? Indeed, with the end of the Binomial law and a new electoral reform in 2016 seeking a more representative Parliament, the 2017 presidential elections (November, 1st round) brought about a new political equilibrium outcome, as of March 2018. With the presence of a third and new political force (radical left and anti-establishment Frente Amplio coalition), there will be an additional strain on the way accords are reached. Broad coalitions across political parties will be needed to align with a national strategy to move the country to high stages of prosperity.
Hurdle Nr 6: Institutions are not value-free. The social liberalization of society plays a role. Once the economy in Chile gains momentum again and revenues pick up once more, society will demand legislation in tune with societal changes (most likely, gay marriage and adoption will surface again, among some of the most sensitive issues against a conservative elite. Chile has only recently adopted a divorce bill and only in 2017, decriminalized abortion under 3 risky factors affecting women's wellbeing).
In 25 years of democracy in Chile, Governance-Standard Institutions (GSI's), fostering property rights and the free market (liberalization of the economy), enabled Chile to overcome extreme poverty: from 47% in 1989 to roughly 7% in 2016. However, the GINI coefficient remained around 0.528 during 1989 - 2009 and then slightly improved to 0.48 in 2016. In a recent WEF report on development, inequality was found to be correlated to poor variables in education and low levels of innovation. Consequently, in order to avoid the curse of raw material dependency, Chile requires an innovative market paired with high levels of R&D and value-added products. But reaching new accords is a challenge to institutions.
Why then - if experts and leaders are aware of the weaknesses of their economies if they can identify the policies required to improve productivity, and if they recognize the need for broad support and engagement - has it been so difficult to move forward? In probing this question, we find that the existing analyses simply do not explain precisely why there is a trap. (Schneider and Doner 2016, p 608).
Institutional challenges (Ross Ben Schneider, 2016) or "bottlenecks" (Acemoglu and Robinson) derive from the fact that even though Governance Standard Institutions brought Chile to hit a per capita GDP of USD 23.000, these GSI's have proved to have limitations to foster inclusion and innovation in a new era where middle classes press the state for increased prosperity. Growth itself has produced agents of change (students' leaders who now act as Members of Parliament) and social demands to upgrade institutions and close the gaps. The jump to full development urgently requires overcoming the heavy lifts and the hurdles to hit sustainable growth and enhanced prosperity.
Soledad Soza, Jan 12, 2018
