Time for Chile’s Next Step in Economic Development

Print Send to friend Building on its past success, how can Chile now move forward into the ranks of the high-income countries? In this guest article, Professor Jeffrey D. Sachs looks at the challenges and at some of the policy shifts that may be required. During the last few decades, the Latin American region as a whole has achieved little economic growth, attaining an average real income per capita growth rate of only 0.3% per year during 1980-2002. Despite the implementation of many pro-market policies, such as trade liberalization, privatization of inefficient state enterprises, and budgetary reforms, the region has been plagued by repeated crises, and the reforms have not resulted in sustained economic growth. Poverty rates are, quite surprisingly, on the rise. Something is holding Latin America back. Despite the economic difficulties of its neighbors since the early 1980s, Chile has been a strong performer, reaching an average growth of 3.3% per capita during 1980-2002. The country undertook ambitious market reforms, resulting in Chile’s rank as 13th in the world in the 2004 Index of Economic Freedom of the Heritage Foundation and Wall Street Journal. Chile certainly holds a big advantage over its regional neighbors in stability, rule of law, and institutional quality. At the same time, Chile’s successful private sector found a niche not only in the traditional mineral exports, but also in agribusiness, especially as an off-season supplier of fruit to northern hemisphere markets. Between 1965 and 1990, the total planted area for agribusiness increased 325%, with annual growth rates of roughly 10%, including the introduction of new products such as kiwis. Chile now dominates large parts of the fruit market in the southern hemisphere, thanks in large part to the use of modern technology. The total volume of fruit and vegetable exports increased by more than 500% between 1980 and the 1990s. This exemplary performance has carried Chile to the ranks of the upper middle-income countries of the world. By 2002, income had reached US$9,820 in purchasing-power adjusted dollars, 37th in the world among large economies (1), more than US$2,000 above the Latin American average, and second only to Argentina in the region. Chile now faces the challenge of joining the ranks of the high-income countries. The major policy question, therefore, is whether Chile’s current engines of growth exports of primary commodities in the mining and agribusiness sectors can successfully double the country’s current income per capita once again. Chile’s economy differs structurally from almost all of the high-income countries that enjoy sustained economic growth. Except for Saudi Arabia and Oman, both oil-exporting nations, all countries wealthier than Chile have a significantly higher ratio of manufactured exports to total exports. As of 2001 (the most recent available data), only 18% of Chile’s exports were manufactures, while Latin America averaged 48%, East Asia 80%, and the high-income countries 81%. These are worrisome numbers, because Chile remains heavily dependent on natural-resource exports. As the main copper producer in the world, it accounted for around 35% of world production and over one-third of proven reserves in 2003. Although the economy has partly shifted from copper to agriculture and forestry during the last 25 years, Chile still relies largely on natural resource exports, and copper alone was still 36% of merchandise exports in 2003. Export Diversification Economies dependent on natural resources tend to face profound long-term limitations, especially a vulnerability to internatio18/11/2011 21:17