To Modernize the “Chilean Miracle”

John Ahn and Chase Wonderlic

Acclaimed as the economic model for Neoliberal reform in Latin America, Chile’s economy has experienced remarkable growth in the past few decades (Hojman, 73). Despite a complex international commodities market and the frequency of external shocks, the country’s long held tradition of democratic political system sets the country apart relative to the region. However, a recent report last month (January 2018) by the OECD and ECLAC argue that Chile’s stable and open economy will no longer be enough to sustain business development. Despite the country’s increased participation in global value chains and diversification of exports, a limited knowledge base and stagnating productivity concentrates economic opportunity to only a few firms and activities (UNCTAD). The organizations urge the country to leverage today’s global production revolution by transitioning beyond its mining-focused economy to renew its relationship between government, business, and society (UNCTAD).

While acknowledging Chile’s relatively high annual average growth rate and sound macroeconomic management, the organizations observe stagnating total factor productivity (TFP) since the 1990s. The unchanging productivity is primarily due to the country’s concentration in the mining sector, which has had declining TFP every year for the past 25 years and composes 55% of Chilean exports (UNCTAD). Compared to the rest of the countries in the OECD, large firms in Chile innovate considerably less and account for merely 57% of total business research and development compared to Germany, where large firms account for over 85% of business R&D (UNCTAD). Chile has one of the overall lowest rates of R&D of the OECD with the private sector’s contribution being 33%, significantly below the OECD average of 68% (UNCTAD).

Chile is by far, the most unequal economy in the OECD (Bloomberg and OECD)

Chile’s impressive economic performance is manifested in several measures but perhaps most striking is its position as the sole South American country to be a member of the Organization for Economic Co-operation and Development (OECD)–an intergovernmental organization composed of the world’s most powerful economic powers. Yet, beneath the country’s many distinctions, Chile has sustained severe inequality through extremely high income gaps between the haves and the have-nots (Atria). According to the World Bank, Chile is the 18th most unequal country globally and is by far, the most unequal economy in the OECD. The social inequities have also been persistent throughout time with a Gini coefficient of approximately 0.52 for the last 25 years. (Atal). There has been increasing literature in the past decade that attempts to disseminate the vast disparities in Chile’s income distribution, however, a consensus on how to target the country’s bottom quintile is far from being reached.

Among the measures proposed by the OECD and ECLAC for Chile is to modernize its public institutions, enable long-term financing for strategic investment, and consolidate progress made in articulating agendas for production while highlighting the need for reliable Internet connection (UNCTAD). These targeted policies will certainly enhance business development while promoting a pro-innovation mindset for Chile’s private sector—particularly during the supposed unique window of opportunity of the country’s current momentum. However, in the context of developing countries achieving economic development that reaches beyond growth, what are the possible trade-offs Chile has when considering the OECD’s report? Is Chile’s case an example of the constraints countries may have in improving human welfare in a world consumed by attaining economic growth?

Sources:

  • “Journal Of Interamerican Studies And World Affairs “Poverty and Inequality in Chile: Are Democratic Politics and Neoliberal Economics Good for You?””. Accessed 15 Feb. 2018.

  • “Chile can avoid the middle-income trap by modernizing its economic model – new report”. Accessed 15 Feb. 2018.

  • “Elites, the Tax System and Inequality in Chile”. Accessed 19 Feb. 2018.

  • “Income Inequality and the Tax System in Chile”. Accessed 19 Feb. 2018.

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    6 Responses to To Modernize the “Chilean Miracle”

    1. the prof says:

      I emailed a set of links, the IMF has a lot of studies on Chile, perhaps because so many are interested in a presumed success story.

      But I was a bit surprised by the view of Chile as a long-standing democracy; my memory is of the military taking over in 1973, aided and abetted by the US, which worked in a heavy-handed way to topple President Salvador Allende. General Pinochet stepped down only in 1990.

      Is 30 years long enough to rate “tradition”? An argument in favor is that a previous military dictatorship ended with elections in 1932, and that period lasted until the 1973 coup. So 67 of the last 85 years were under elected governments.

    2. herndono20 says:

      At first glance the economic growth and success does seem promising in Chile. But like many other developing countries with a market focused on one industry, such as mining in chile, many internal issues become apparent. The first thing to notice is the low TFP. Because of their low educational foundation, much of the population will be excluded from the more skilled jobs within their successful mining industry. This makes sense with their extremely high wealth distribution. It is common in these countries for the economic opportunties that come with reform to exclude the poor from job attainment. The poor are often given the unskilled jobs leaving the management and more lucrative positions to the already wealthy and educated. Their lack of technology and R&D seems that it will hold back higher positions from modern information and business management strategies become an influential economic power. For future success Chile needs to expand their market to build a larger consumer base, which would allow for expansion and success among industries.

    3. reamest18 says:

      I could be way off here, but Chile’s main export is copper. The largest copper company in the world is state-owned CODELCO. In the UAE, local emirati citizens receive $18,000 and a house when they marry. This state-sponsored program is funded by the UAE’s vast oil reserves. Though Chile might not have the same amount in monetary terms in Copper reserves, might the government consider (if they aren’t already) using a similar type program to help its citizens? After all, the local citizens should theoretically have claim to the copper that is native to their country.

    4. John Gaugin-Rosenthal says:

      Chile is well on its way to becoming a developed nation. Its growth struggles are largely due to a system that doesn’t yet give enough freedom to its producers (private business sector), something that the United States has seen drive its economy over the last several decades. One thing that concerns me about the Chilean economy is its budget; it is spread far too thin and doesn’t have much backing – a disaster of the likes of 2010 could prove to be a catastrophic financial setback. Chile is one of the few Latin American nations that is no longer plagued by political corruption and drug trade, and its population is culturally rich and educated. It is on its way to becoming quite the powerhouse as it has shown potential, particularly in its increasing transparency and propagation of people’s rights.

    5. Chris DuPont says:

      Chile is an interesting country to observe in a development economics context. These struggles regarding growth are something not often seen in more developed nations such as the US, probably because these nations have far more development from large firms. If Chile wants to continue their impressive growth statistics, they need to improve their R&D. The country as a whole would also greatly benefit from an improvement in equality, something that could help the country for generations to come, improving economic growth.

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