The International Crisis and Development Strategies: The Case of Chile
stimulus without jeopardizing the policies or the authorities’ credibility. In short, the most recent world trade contraction hit Chilean external demand, but, thanks to countercyclical monetary and fiscal policies in 2009, internal demand turned out to be quite resilient, although not enough to lift global demand. This macroeconomic framework was not in place during the two prior crises, which required strong domestic adjustment through major fiscal contractions and increases in interest rates, together with abrupt and significant devaluations, all of which amplified the effects of those two previous world crises on the Chilean economy. In contrast, from a cross-section perspective, the performance of the Chilean economy in 2008–09 was not better than that of several other Latin American countries, despite the magnitude of Chile’s expansionary policies. In fact, the fall in Chile’s GDP in 2009 was surpassed only by Mexico— a country with a high dependence on the U.S. economy— and the Républica Bolivariana de Venezuela. Other countries, such as Argentina, Brazil, Colombia, Ecuador, and Peru saw their economies growing marginally in 2009 or experiencing a smaller drop in GDP than the Chilean one. It is possible that, in this comparison, the Chilean economy was more affected because of its very high degree of trade and financial openness to the international economy. However, when the crisis became acute, the conditions faced by Chile were quite different from the other countries considered. In 2008 and 2009, Chilean industrial activity suffered two major shocks not related to the crisis (methanol production and exports fell significantly because of lack of gas in the south of Chile); and salmon output and exports also fell drastically because of inadequate sanitary conditions and lack of appropriate sector regulation. Before the crisis erupted, Chile’s GDP growth rate had been trending downward from 2004 (6 percent) to 2007 (3.7 percent), and the 2009 figure of 1.5 percent implies that, with the single exception of Colombia, Chile had, among the countries considered, the smallest drop in GDP growth rate between 2009 and 2008. In the same vein, Chile’s average rate of inflation in 2008 (8.7 percent) was the highest, with the exception of the Républica Bolivariana de Venezuela, of all Latin American countries considered, requiring a stronger price stabilization policy (that is, higher interest rates), which inevitably had a negative effect on Chile’s GDP growth rate in 2009. In fact, in 2009 Chile’s average rate of inflation fell eight percentage points from 2008, by far the largest drop in the sample considered. Furthermore, Chile’s current account improved by 3.7 percent of GDP in 2009 over 2008, the second-highest improvement in the sample considered and very similar to the 3.9 percent registered by Peru.
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Although the medium-term macroeconomic policy framework has worked well and the Chilean economy benefited from its implementation by successive governments, there is room for further improvement. Chile could consider complementing its fiscal rule with a ceiling on growth in government spending. During booms, such ceilings help accumulate additional funds, which can then be used countercyclically in sharp downturns. The financial system is generally well regulated, but a consolidated approach to financial conglomerates and stronger supervision of nonbank financial institutions would be useful. Additional strengthening of the insurance element of the unemployment benefit system, in combination with lowering severance pay, would provide more effective protection for the unemployed and would contribute to greater flexibility in the labor market. Although the valued-added content of exports and product diversification are still lagging, this lag may be explained by Chile’s development stage, in that it can still benefit from comparative advantages based on natural resource abundance and their “light” industrialization, while the country deals with—and perhaps solves— its major challenge: increasing the growth of total factor productivity. Although Chile’s per capita income on the basis of purchasing power parity has increased markedly over the past two decades, TFP has stagnated in the past decade. In addition, although poverty has been reduced quite significantly, income distribution remains extremely skewed, and many sectors of the population do not feel integrated into the country’s development and modernization process. Income inequality, as measured by the Gini coefficient, has not declined much over the past 20 years and remains very high by standards of the Organisation for Economic Cooperation and Development (OECD). Sustained growth will need to be accompanied by the right social policies to reduce poverty further and improve income distribution. The OECD, Chilean think tanks, and academics generally agree that TFP growth should be dealt with by microeconomic policies and additional reforms, aimed at fostering competition, entrepreneurship, and innovation; improving the quality of education; and modernizing labor market practices and regulation. Facilitating entrepreneurship could have beneficial effects on productivity and economic dynamism. For this purpose, the regulatory red tape that burdens start-ups should be reduced, and bankruptcy procedures could be further simplified. Until recently, the innovation policy framework focused on basic research in public institutes and universities. As a consequence, the private business sector’s propensity to engage in technological (product or process) and nontechnological (marketing or organizational) innovation