Inexorable traps for the development of Chile?

Eduardo Bitran Academic Faculty of Engineering Universidad Adolfo Ibáñez, Director of Public Space

Eduardo Bitran

The 2019 OECD “Latin American Economic Outlook” report, published before the pandemic, warned that the region found itself in a “New Development Trap” that involved four simultaneous traps: productivity, social, institutional and environmental vulnerability. It is interesting to note how what was proposed then by the OECD applies especially to Chile.

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The report pointed out that the “persistence of low productivity seems to be associated with an export structure concentrated in primary sectors with low levels of sophistication and production linkages”, undermining participation in “global value chains”. This limits the ability of economies to generate quality employment for a young population that significantly increases their enrollment in tertiary education.

This is linked to the second trap, that of “social vulnerability”. The growth of an “aspirational” middle class, vulnerable, with low-quality jobs and risks of falling into poverty is pointed out. It is worth mentioning here that the generation of a virtuous circle between productive sophistication and quality jobs was the main motivation for the establishment of a mining royalty in 2005 that would be invested in innovation to sophisticate our economy and thus improve, through job creation quality, the functional distribution of income in Chile.

However, less than 40% of the mining royalty has been invested in innovation. It was proposed that to converge in per capita income, investment in research and development should rise from 0.4% of GDP, with a third of private participation, to 1.2% of GDP by 2020 with 50% of participation private. However, in these 17 years, investment in R&D fell to 0.3% of GDP, private investment to only 0.1% of GDP, exports decreased from 12% annually in the 1990s to only 1% starting in 2005 and Total Factor Productivity declined, even if we exclude the mining sector.

Part of these figures is explained by the temporal inconsistency of pro-productivity public policies, that is, we did not overcome the institutional trap. The political cycle, with institutional weakness, prevents prioritizing public policies that mature in the long term, a situation that has been exacerbated in the pandemic, with pension fund withdrawals being the most eloquent case.

Finally, regarding the environmental trap, the OECD notes that “concentrating on a high-carbon growth path is difficult and costly to abandon.” In addition, “the natural resources on which their economies are based are being depleted, making it unsustainable.”

Is it inexorable to fall into these development traps, as described by the OECD, or do we have a chance to escape them? In my opinion, the fundamental trap we must get out of is the institutional one. Only in this way will we be able to face the challenges of the environment, social inclusion, and productivity and growth, which require an institutional political system that encourages the temporal coherence of public policies.

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