MAURICIO VILLENA Dean of the Faculty of Economics and Business, Diego Portales University
Unfortunately, short-term issues have taken over the country’s economic agenda, both due to the urgencies caused by the pandemic and the political cycle, with important consecutive elections held and others ad ported. A key issue has been absent from the presidential debates: economic growth. One wonders, does it make a difference for the population that one program is pro-growth and another is not?
Economic growth is the only means for countries to improve people’s quality of life in a sustainable way over time. It provides States with the necessary resources to deliver goods and services that their citizens need, such as health, education, social protection and basic public services. It also creates wealth, some of which goes directly to workers and some to employers. As people earn higher income from their work, they can lift themselves out of poverty and improve their quality of life.
Seemingly slight differences in annual growth rates can have a strong impact on per capita income in the long run. With a per capita growth of 1% per year, it takes 70 years to double the average income of the people; but if it is 3% per year, a country will have to wait only 23 years to double its per capita income; and with 7% per year, it doubles it in less than a decade.
While economic growth should be seen as a means rather than an end, presidential candidates should have proposals for further potential growth of the economy.
For example, a great concern in Chile is low investment and low productivity growth, which, although they are certainly affected by the pandemic, also have to do with structural issues that affect the medium term. In particular, the definitions that we are taking in the institutional, economic and social order – which may have consequences in respect of private property, national and international contracts and free trade agreements, for example – create uncertainty that naturally affects investment, especially long-term projects.
Since Robert Solow (1956), physical capital, labor and total factor productivity have been recognized as the main factors of economic growth for a country; the long-term per capita growth rate is determined solely by exogenous changes in technology. Although for long periods of time Chile has grown more due to perspiration (accumulation of factors) than inspiration (increases in productivity), improving productivity is key.
As Paul Krugman (1994) points out in “The Age of Diminished Expectations”: “Productivity is not everything, but in the long run it is almost everything. Whether a country can improve its standard of living over time depends almost entirely of its ability to raise output per worker. ” It is inexplicable that this future issue is absent from the presidential debate.
Leading a country requires looking to the long term, beyond the electoral offers of the moment.