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El Mercurio 12-16-2016

El Mercurio 12-16-2016

Some key challenges facing Chile for growth, development and social mobility

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.

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[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.

[2] Much higher than the average growth observed in the period 1990-2003.

[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