At its annual ex-US meeting, the Harris School’s Dean’s International Council heard from a range of officials about how Chile is developing and implementing public policies to reach its development goals. Christopher O’Dea reports

With historic links to Chile through the work of economists and officials who studied under Milton Friedman and returned to Santiago to apply his ideas, the University of Chicago has strong ties to Chile’s business, academic and government circles. At its annual ex-US meeting in Santiago, the Harris School’s Dean’s International Council heard about the country’s progress towards reaching its development goals.

The conference took place against a looming 2012 budget debate that brought Chilean students into the streets to demand better financing for higher education. Since the Pinochet regime collapsed in 1989, Chile has made big strides in development but had become too complacent. Locals coined the term ‘the Chilean nap’ to describe the dip in productivity and growth that the current administration is working hard to rouse it from. Current President Miguel Juan Sebastián Piñera Echenique, who took office in March 2010 and revived Chile after the devastating 2010 earthquake, is working to jumpstart Chile through seven priorities: growth, employment, crime, health, democracy, education, and poverty. Among these, the education reform needed if Chile is to maintain its competitive edge stands out - President Piñera has referred to the issue as “the mother of every battle”.

Education, education, education
Why is education so important at this stage of Chile’s development? Chile is without doubt one of the most successful countries in Latin America on most standard economic benchmarks. Since 1985 the Chilean economy has grown steadily at a rate of approximately 5% per annum, slowed only by two relatively mild recessions in 1999 and 2009. Today Chile boasts Latin America’s highest per capita GDP on a purchasing power parity basis, at about $16,000 (€12,000). But the economy is still heavily dependent on raw materials - particularly copper, which with only a 3% share of employment generates 60% of export earnings and 25% of GDP. But if Chile is to have a fair shake at meeting its national goal of reaching developed-market status by 2020, the country needs to diversify its economy toward more human-capital intensive sectors while also raising productivity.

And that is where education comes into play. The World Economic Forum ranks Chile 31st in the world on overall competitiveness, but just 71st in terms of primary health and education conditions. How did such a gap appear? Manuel Agosin, dean of the School of Economics and Business at the Universidad de Chile, provided an overview.

Primary and secondary education deteriorated steadily under Pinochet and Chile emerged from that period in 1990 with low levels of schooling - barely eight years in the adult population - and a primary-secondary school system with three distinct segments: private, private-subsidised, and municipal. The process of deterioration was broad-based, ranging from the dismantling of the public school system, through tight control of teachers’ salaries, to the curtailment of freedom of research at universities controlled by presidents drawn from the military. Since 1990, the ‘Concertation’ governments have steadily improved education, requiring compulsory schooling through 12th grade, more than doubling enrolment at primary and higher levels, raising teachers’ salaries and establishing new schools. While progress has lagged - partly because a strengthened teachers’ union has refused to allow teacher evaluation and partly because of the persistence of a three-tier system - current reforms concentrated in the preschools, primary, and secondary schools, have the dual goal of better supervision of private subsidised schools and improvement in municipal schools, perhaps moving them to another level of government supervision.

All this will require better teachers and better-defined programmes, and include the ability to evaluate and replace teachers, if necessary. The Piñera administration has taken a strong initial step with a programme to provide a free university education for young people who choose teaching as first option and score above a minimum in country-wide university admission tests. These costs are placing a strain on the national budget, but the country is also working to improve technical and university results, by making more financing available for students who can place into top schools, for example.

Right now - despite the ‘nap’ - Chile maintains an enviable edge over its neighbours in many dimensions of economic growth, pension provision, and capital market development. In an address titled “Chile’s Development Strategy and Regional Implications”, former Chilean Minister of the Economy, Juan Andrés Fontaine, now a consultant at the public policy think tank Libertad y Desarrollo, painted the picture as Latin America moves into the second decade of the new century. Chile is one of the ‘New Tigers’ or ‘Pumas’, along with Peru and Colombia.

The larger countries, Mexico and Brazil, face a variety of challenges to development - but have improved recently in terms of stability and growth potential. The laggards in the region are Argentina and Venezuela - “still trapped in old populism, inward-looking strategies and short-termism, they have done well thanks to good export prices,” says Fontaine, but they remain “very vulnerable to a world economic downturn.”

And Chile is unlikely to enjoy a completely smooth ride, Fontaine noted. President Piñera was elected with a clear mandate - to speed up Chile’s stride towards development - and a climate of optimism and confidence in the new government prevailed, peaking about 12 months ago with Piñera’s approval rating reaching 62%. “[But] expectations probably rode far ahead of what was achievable in the short run,” said Fontaine. Approval ratings dropped to 27% two months ago.

Nevertheless, Fontaine argues that Chile is leading the development race in Latin America: citing World bank data, he notes that in 1980 Chile’s per capita income was 37% below the Latin American average, and in 2010 it was 26% above, while today Chilean per capita income is 32% of the US level, up from 21% in 1980. As result, Chile’s GINI coefficient, which measures the inequality of wealth distribution, has begun to decline, illustrating the reduction in poverty.

Fontaine attributes the record to fundamental economic, policy and financial factors that make Chile the ‘model’ for Latin America:

• Prudent macro institutions (see accompanying story on Chile’s pension system and capital markets development);
• A friendly environment for inbound investment, including limited government spending;
• An ‘outward oriented’ economy, hallmarked by a reduction of import tariffs from 90% in the 1970s to a uniform 6% today, coupled with free trade agreements with nearly 60 nations that give effective tariffs of 0% on 90 of trade;
• A strong financial system underpinned by pension funds holding assets equal to about 70% of GDP according to the Chilean pension regulator;
• A high ranking (6) on the Fraser Institute Ranking of Economic Freedom.

But challenges lie ahead. Chile’s target is to reach per capita GDP levels similar to the Czech Republic, the Slovak republic or Portugal by 2020, and to do that per capita income needs to increase by an accumulated 50% from 2011 to 2020 - with GDP growth averaging 6% per annum over that period. Fontaine notes that the main obstacle will be the degree of productivity improvement than can be attained. The government’s target is for a 1.0-1.5% annual improvement; that will be a tall order, considering that productivity growth averaged -0.6% between 1998 and 2009, and 0.2% during the past two years. Notable slowdowns from the 2.3% annual rate between 1986 and 1997, and while education reforms will help increase the number of highly skilled and professional members of the Chilean workforce, education takes time - and the future is approaching fast.

Recognising the challenges, Fontaine believes Chile retains the “competitive impulse” that has propelled it to the front rank. “Chile’s free market model has made possible sustained economic growth over the last 25 years and a substantial reduction in poverty,” he says. “Present difficulties are going to be overcome.”