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Digital banking 14 Jul 2016

A new growth strategy for Chile

After a period of steady decline, the prices of copper -Chile’s main export product- now stand at levels close the average cost of production of the mining companies that operate in the country. This has prompted a drop, not only in the industry’s investment and employment rates, but also in Chile’s economic activity level as a whole.

After averaging Gross Domestic Product growth rates of 4.7% during the 2004-2013 period (5.4% excluding 2009), the country’s economic growth rates have dropped to averages of about 2%.  This scenario has driven authorities and experts to correct their economic growth estimates from rates close to 5% to a range between 3% and 3.5%.

The question everybody is asking in this context is: What is Chile’s growth driver going to be from now on?

Going back to the answers that worked in the past and investing fully in some sort of industrialization may seem like a mistake. As mentioned in the article ‘The Challenges Facing Chile’s Economy’ – available also at info.bbva.com and written by BBVA Research Chile’s Chief Economist Hermann González– the economic model on which the country has run for the past decades has proven successful at a number of levels, including growth, living standards and poverty reduction. We are an open economy, with solid institutions, which has managed to capitalize on foreign trade tailwinds and which has increasingly promoted the delivery of non-tradable services. However, there are still significant challenges to overcome; taking care not to take a step back in everything that has been achieved.

Building consensus around a new growth strategy for Chile will take time. In the past few decades, our competitive advantage came from the extraction of copper bars, but we are undergoing an adjustment stage, during which resources will need to be funneled toward new sectors. The key question is: Which sectors?

Services

Chile is a small country, home to just 17 million people and with limited population growth rates. But at the same time, the country offers more than enough appeal to attract migration. Is there room for services, which have driven almost 40% of growth in the past six years, to play a more leading role? New technologies are opening the door for an improvement in the quality of financial, business and personal services. Going back to the “Challenges Facing Chile’s Economy” article, the middle class’ growing demand for an improvement of the quality of the services can be covered in a better manner. Some specific examples, as the room for improvement in financial education, evidence that services’ contribution can be much higher.

Service exports deserve a special comment. Although it is not exclusively about tourist services, even these have huge potential for development. Our country boasts a broad range of stellar tourist attractions. The number of tourists grows and diversifies every year, in a context where most of the population only speaks one language and whose potential is still not fully understood. But, again, it is not only about tourism. For example, regarding business services, there are many areas in which we can become a beacon for other the region or for other developing economies, such as in the management and use of natural resources, the proper design of a concessions system, and the development of financial markets.

Tradable sectors 

Under macroeconomic conditions capable of generating the correct incentives to transfer productive resources to these sectors (depreciated exchange rate), the investment in non-mining export sectors could benefit from a level of dynamism that has not been realized yet. Even in mining, there is room for improvement in the processing of the metals extracted in our territory.

Innovation

Chile is one of the biggest R&D spenders in the OECD and the region, where the contribution of the public sector is the highest. But, despite being so small in size, the scientific community is quite productive. According to Scopus figures, while growth in scientific production in the world stood at 4.4% in 2008-2012, in Chile it was 10.1%. And year after year, Corfo, the state-owned company, devotes significant amounts to innovative projects. In other words, it seems that, with the appropriate incentive, the innovative process should come naturally.

The government’s assessment to improve in innovation related matters point at number of factors, including: 1) Increasing incentive to boost R&D expenditure by private companies and 2) laying bridges between knowledge centers and the industry. There is currently a national innovation plan to improve in these and other areas. There are also public authorities that work to boost entrepreneurship, such as the seed capitals that Corfo and Sercotec hand out, or Conicyt’s support to scientific studies. All in all, these state-run services have not managed to completely bridge the gap that separates Chile from top-level innovative countries.

Digitization

Chile is the leading Latin American country by technology usage, with a digital status similar to that of countries such as Spain or Luxembourg, as explained in the presentation of Chilean digital context that BBVA Research prepared. The use of smartphones is widespread across the country and therefore we are not unfamiliar with the use of new applications. Digitization has a unique growth potential in Chile, and once it manages to permeate areas hindered by the vestiges of 20th century bureaucracy, it can become a source of growth that we still cannot gauge today.

Although the current economic climate has led us to wonder where we should be looking after the commodity boom, there is enough room for Chile to go back to high-growth rates. For this new growth strategy, more focused on services, non-mining tradable sectors, innovation and digitization, it is necessary not only to keep an orderly economy at a macro level, a feat we achieved in previous years and which we should not neglect, but also re-focus the discussion and the agenda to promote the areas that will support future growth.

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