Some key challenges facing Chile for growth, development and social
mobility*
From the middle of the last decade
until the year 2014, the Latin American countries abundant in natural resources
experienced an economic boom, fueled by higher demand from China and the sharp
rise in the prices of these goods. In some cases, the price more than doubled,
and led to unexpected increases in revenues and profits for companies, but also
in revenues for many of the region's governments.[1] For example, for Chile,
copper prices increased from US $ 1.3bn in the period 2003-2005 to US $ 3.0bn
in the period 2006-2009 and US $ 3.5bn in the period 2010-2014, and where in the
last two years its average price has not exceeded US $ 2.5lb.
The higher commodities prices and
economic growth in the region, which averaged 3.8% in the period 2004-2014,[2] slightly below the 4% of
the global economy, and well below the 8.4% average of the Asia emerging
economies, allowed in Latin America a significant reduction in unemployment
rates, from a rate of more than 10% in 2002, to a rate of 6.3% in 2013. The
natural resource boom also provided governments with significant additional
resources that enabled them to implement large programs of social assistance.
Some of them with questionable impact on social welfare, such as the widespread
practice in the region of granting indiscriminate assistance to the population,
often for electoral purposes, which have taken the form of bonuses and
subsidies for basic services and energy.
This higher growth resulted in a
sharp drop in poverty levels and an increase in the middle class. Poverty in
the region declined from 43% in 2000 to 23% in 2014; and the middle class
increased from 21% in 2000 to 35% in 2014. In 2010, for the first time in Latin
America, the percentage of the population belonging to the middle class exceeds
the percentage of the population that is in poverty. In Chile, the poverty rate
declined from 23.7% in 2000 to 11.6% in 2009, and 6.8% in 2013; and the middle
class increased from 31.8% in 2000 to 42.5% in 2009, and notably to 50.9% in
2013, where for the first time one in every two citizens belongs to the middle
class.
According to the World Bank's
report " economic mobility and the rise of the middle class in Latin America
", the strong increase in the population entering the middle class is
explained by more than 75% due to higher economic growth in the region, and social
assistance policies only account for less than 25%. This antecedent, accounts
for the importance of growth for social mobility, development and increase in
the economic well-being of people. It is therefore of paramount importance to
be concerned with economic growth. If the economy does not grow, the new jobs
demanded by the population and the labor force will not be obtained, and the
resources necessary to promote innovation and entrepreneurship will be meager,
or to renew and increase the stock of capital. In Chile, the private sector is
responsible for more than 80% of employment at the national level, making it
the main driver of economic growth, development and social mobility.[3] With an estimated GDP growth
rate of 2% for the period 2014-2017, Chile is far from being able to generate
more and better jobs that respond to the aspirations of a population which is
growing at a rate of more than 1% a year.
With the end of the commodity price
boom, the stern wind that for a decade was an additional boost for the
economies of the region, today vanished. In this new reality, the economies of
the region face the challenge of how to achieve and sustain high growth rates.
And this underscores once again the importance of promoting reforms that create
a business environment that is attractive to investment and to increase
competitiveness.
The Business Environment
Global economic growth and relevant
markets are an indicator of the growth potential of a business, but many times
beyond the growth potential of the economy or market, other factors are crucial
to success. Not only the impetus of enterprising, entrepreneurs and workers
depends on the success of a business, they are a fundamental pillar, but their
chances of success are also very conditioned by the business environment. The
business environment is defined by a combination of internal and external
factors that influence the operational situation of a company, and where
external factors are usually more remote from company control.
Chile is not alone, and is a small
economy open to the world, accounting for 0.33% of the world's Gross Product
and 0.24% of the global population. And in this context, it has no room for bad
reforms or reforms that do not contribute to improve competitiveness and the
business environment, as for example happened with the negative assessment that
the World Bank in its Doing Business report in 2015 did about the tax reform
approved in 2014. This is due to the detrimental impact that the increase in
corporate tax has on companies, and on small and medium-sized enterprises that
generate about 65% of employment in the country. Never before the 2014 tax
reform, the World Bank's Doing Business report has negatively assessed a reform
in Chile. If Chile, only a few years ago, led in this ranking at regional
level, today is in the fourth position behind Mexico, Colombia and Peru. The
strong increase in corporate tax creates a heavy burden on companies that want
to develop in Chile, this today is even more complex as the trend in more
developed economies goes in the direction of a sharp reduction in corporate tax
rates, as it is already glimpsed that it will happen in the USA and in the
United Kingdom, with rates expected well below the corporate tax rate would
apply in Chile.
Resources are scarce, and the
competition for attracting resources is fierce, where countries that are
unsuccessful in promoting a business climate that is conducive to investment,
that increase productivity, and that give it a competitive advantage over other
economies, will have greater difficulties in generating the desired economic
growth, with more and better jobs, which are by far the main tool to reduce
poverty and promote social mobility.
In addition to considering the
macro and microeconomic variables traditionally used to evaluate the evolution
of the business environment, such as those considered in the Doing Business
ranking, in the last decade there are other major changes in the society and the
economy that we should not ignore. On this, in the year 2013 Moises Naím gives
us insights on some great transformations that are having a profound impact on
the future of civil society, the economy, the international community and
access to technology.[4]
The change in civil society
We are more, we live longer, we
lead healthier lives and we are more educated. By 2015, the world's population
reached 7.34 billion people, and is expected to reach 9 billion people by 2040.
To this, there are major changes in the age profile of the population, where
China, Japan, North America, Europe, Russia, the Southern Cone of South America
and Brazil, are steadily struggling to have a relatively older population,
where at least one in four people will be over the age of 60.
Also, we are more connected, ICT
and social networks have created a global communications forum where we no
longer feel isolated in our reality. And, citizens see that they can take their
voice to the media, and through social networks feel that their voice counts.
With this, it has become an empowerment of the civil society, which today is
less tolerant of injustice and abuse, and is more critical, suspicious and
vigilant. But, too, it is exposed to be directed by social actors external to
the formal system, of which we do not always have the backgrounds about their
links, ideas and objectives. Where, thanks to the ICT, the ability to influence
with the word is a power that today is easier to acquire. Civil society also
demands more and better services, is less patient and demands immediate
solutions to its problems; and calls upon those in power to stand and not to
serve themselves.
The growth of the global population
plus the greater connectivity, has been accompanied by a strong migration of
people, on a scale never seen before. People are displaced by conflicts or because
it seeks better economic opportunities, but beyond what triggering their
displacement, the clear majority pursue the same goal that is to seek a better
life for them and their family, and the pursuit of happiness. It is estimated
that in 2013 there were 230 million migrants globally, where it has been that the
most advanced regions or economies are the most wanted by the migrants. This
strong displacement of people, together with the change in the global
productive centers, the transfer of jobs from one region to another, and,
unfortunately, the emergence of extremely violent ideological groups or the movement
of criminals, has raised mixed feeling towards the immigrants, and this has
unfortunately happened beyond the great contribution that immigrants generally
make to the local economy.
The Arab Spring, the vote in the UK
to leave the European Union -Brexit-, the rejection of the peace agreement in
Colombia, and the recent election of Donald J. Trump in the USA, respond to
motivations that, if may well be different, have had in common the surprise
factor that accounts for a disconnect between the governing oligarchies, the
media and the governed.
The development of large emerging economies
The development of
large emerging economies such as the BRICS countries (Brazil, Russia, India,
China and South Africa) has brought about a change in global geopolitical
balance, where the geopolitical and economic weight has moved from the west to
the East and from the north to the south. Where, for example, if 25 years ago,
the US economy represented more than 25% of the global economy and China less
than 5%, today the US represents less than 20% and China more than 15%. Along
with the shift in the relative sizes of the economies of the larger countries,
new centers of global financial power have also emerged, such as Shanghai and
Dubai, and China has become a major source of financing for infrastructure in
general, in many cases granting the financing in exchange of goods and
services, and the allocation of equipment and construction contracts. It is
estimated that in a decade, China has invested more than US $ 250 billion in
Latin America, thus exceeding the total invested in the region by all
multilateral development agencies.
The greater weight
of the major emerging economies has made them question Western structures of
global governance, such as the United Nations, the World Bank, and the
International Monetary Fund, where developing economies have pushed for greater
voice and decision, being aware of the great geopolitical and economic
influence of these institutions. And, in response to a weak acceptance of its
demands, China has led initiatives that have resulted in the founding of two
alternative financing institutions to the World Bank and the Asian Development
Bank, such as the recently created New BRICS Development Bank, and The Asian Infrastructure
Investment Bank (AIIB).
The weakening of
global governance bodies is also seen in the more active role, over
multilateralism, of micro-multilateralism that has led to the building of
coalitions such as the Pacific Alliance, UNASUR, BRICS, etc ... , with varying
degrees of success.
Access and democratization of technology
Since the industrial revolution
technological change has not stopped and seems to accelerate more and more.
Today, change is a constant in our life, and we have had to learn to adapt
continuously. The new disruptive technologies or "game changers" that
create new products, services and markets, destroy those of less value. Process
automation, artificial intelligence and robotics, and the integration and
connectivity of the systems are gaining greater scope for application. Today,
smartphones already seem like a further extension of us, and they allow us to
do multiple things that until recently were only part of the science fiction
novels. This technological advance, while making economies more productive,
also puts the routine work in jeopardy, and this can incubate future social
conflicts on which we must be alert and anticipate with good formulas of
solution, if those who lose their jobs, do not find other satisfactory work
alternatives.
The last decades have been marked
by a greater democratization of knowledge, which, together with the fall in the
costs of the technologies, has led to the end of the supremacy of knowledge and
technology by the most advanced economies. For example, if by the end of the
1960s, only the Soviet Union, the United States, and France could place a satellite
in orbit, today there are already ten countries that have that competition; or
if by the end of the 1960s only five countries had electric power generation,
and today there are more than 30; and so, has occurred with many other
technologies and advanced knowledge sciences. The greater democratization of
knowledge has also been reflected in how universities in developing countries
begin to climb within the rankings of the best universities in the world. For
example, if BRICS countries in 2009 had 47 universities among the best 800 (QS
World University Rankings), in 2016 this number has increased to 88. Thus,
today thanks to greater access to knowledge, competition in industries with more
specialized knowledge and greater technological content is greater, where, and
through globalization, is possible to observe how the cost advantages that are
associated with mass production, lead to the displacement of jobs.
Moore's law that predicts that the
number of transistors in a dense integrated circuit doubles approximately every
18 months is not unique to circuit technology, and today it seems to have
equivalents in many other areas of scientific and technological development.
Internet and the shared economy
Internet technology has reduced
transaction costs, making it easier for people to connect in a more trusted
environment between those who can sell a good or offer a service to those who
need it. The first signs of electronic commerce, although they date back to the
early 1970s with ARPANET, are Amazon and Ebay, in the mid-1990s, that introduce
electronic commerce in a massive way. Amazon starts with the sale of books, and
Ebay is developed as an auction site. Online e-commerce systems have
transformed commerce, and increasingly the volume of transactions in physical
stores is shifting transactions online. And while retail e-commerce has existed
for about 2 decades, and today accounts for only 5% of worldwide sales, its
growth rate is exceptional. While growth in traditional retail is estimated at
just over 3% a year, e-commerce growth exceeds 17%.[5]
An even more recent phenomenon is
shared economy, where, with the massification of access to internet, access to
smart computers and mobile phones, and the development of applications (apps),
people can share the use of assets, sports boats, tools, etc. The big change
that facilitates the emergence of this shared economy is the lower transaction
costs, where the greater availability of data about people and things, in an
inexpensive, easy and large-scale way, allow the physical assets to be
disaggregated and to be consumed as services. Before the internet, renting a
room, car, or parking space from another person was feasible, but usually
problematic and risky. Today, applications like Uber, Airbnb, RelayRides or
Parkme allow to bring the owners of the goods with the lessors. In addition,
online payment systems handle billing, and GPS smartphones allow people to see
where the nearest parking lot is, or the nearest car is leased for rental. The
social networks allow to obtain information from the lessor and the lessee,
which provides a form of control over the people and allows to create trust
between the users.
We are and are going to be more in
a more stressed world, where we will see a greater rivalry to gain control of
natural resources, the management of global networks and for adjudicating major
projects. And, where small economies like Chile must be very effective in
promoting a business environment that improves productivity and gives it a
global competitive advantage. Chile, with almost 18 million inhabitants, has no
room for bad reforms that do not increase productivity and competitiveness
globally; and membership in alliances that allow the country access to
international markets is essential for its development.
* Note prepared for the course Business
Economics of the Pontifical Catholic University of Chile.
[1] This
occurred despite the financial crisis of 2008 that affected the global economy,
but from which Latin America recovered quickly thanks to the fact that in 2010
the prices of natural resources had recovered much of what was lost.
[3] In
fact, the percentage of public employment over total salaried employment rose
to 16% in 2015, according to BBVA Research calculations, with information from
the National Statistics Institute (INE). This is since salaried public
employment averaged almost 900 thousand people last year while the total
salaried workers in the country was 5.6 million.
Source:
Emol.com -
http://www.emol.com/noticias/Economia/2016/02/15/788320/Empleo-publico-llego-a-record-de-16-del-total-de-trabajadores-asalariados-en-2015.html
[4] In
his book “The End of Power: From Boardrooms to Battlefields and Churches to
States, Why Being In Charge Isn't What It Used to Be”, Moises Naim proposes the
thesis that, in the 21st century, power is easier to obtain, more difficult to
use and easier to lose.
[5] http://www.mbaskool.com/business-articles/marketing/12259-e-commerce-threat-to-traditional-retail.html
