Economics Essays | Economic Growth In Chile

The main question this work aims at answering is whether the Chilean recent economic growth is sustainable?

Then the first question that arises is whether this growth can be sustained in the future or tends to fade out. Two main theories try to predict what can possibly happen.

If the diminishing marginal product of capital (MPK) assumption holds, then it is expected that the capital poor economies will eventually catch up the rich ones. Besides, the economies are expected to grow up to their steady-states.

Beyond this point, capital accumulation no longer means growth and they only can keep growing by investing in TFP. In this case, in some point in the future, Chile’s growth would be expected to decelerate forcing the country to invest more in technological progress rather than in capital accumulation.

As soon as the steady-state were reached, the difference between the Chile’s economy growth pace and the wealthy nation’s would no longer be significant.

Alternatively we can test the endogenous growth models, which assume that MPK is constant rather than diminishing. Then, the steady-state proposed by the diminishing MPK no longer exists. In this case, Chile can keep its fast-track growth only by investing in capital accumulation and taking advantage of the spill-over effects.

Empirically, however, data compel us to believe that a conditional convergence seems to be more accurate than the pure convergence model. By that, in samples with countries with similar steady states, the poorer ones tend to grow faster than the richer ones.

This work aims at assessing all of those issues by comparing Chile with similar countries and eventually reaching a verdict about its future growth odds.

The main objective of this paper is to anticipate the Chilean’s future growth potential by analysing TFP and human capital impacts in the output. In order to do so, I start analysing Chilean GDP and current fiscal policy highlighting the slowdown in the country’s GDP in the last years compared to the extraordinary growth in early 90’s.

Then an investigation of the possible causes of that slowdown and the tools the country has to recover that pace are offered.

From that broad picture, I begin to explore the possible impact the TFP investments and the human capital can possibly bring to the Chilean prospective growth.

Conclusion

As addressed in section 3- TFP, Chile is clearly relying not only on capital accumulation but also on Technological progress, be it on R&D or ICT investment, to sustain its growth rates. Attracting foreign investment has not only financed its current account deficit but also imported foreign technology which is eventually an essential condition for TFP improvements.

On top of that, Chile is currently investing in the Labour Market Education as a means of achieving both a more skilled labour force and lower unemployment rates.

However, an appropriate economic environment is also essential to achieve sustainable growth. In this field, the Chilean economic policy has focused mainly in keeping its inflation rate within the target range by changing the interest rates as much as needed.

In addition, the government is working to reduce the country’s dependency on copper which currently accounts for 40% of GDP. This dependency has made the Chile’s current account too much vulnerable to external conditions.

Despite the last years disappointing declining in the country’s growth rates, the external environment together with a reasonable internal supportive economic policy seem to guarantee increasing growth rates at levels of 4-5%. A more stable regional scenario and an external environment with sound improvements in the relations with US, EU and South Korea, its main trade partners will greatly contribute to its uprising.

Finally, if the conditional convergence holds, then Chile is working hard to not only rely on the catch-up advantage of the poorer nations but also investing to shift its steady-state forward, in order to keep growing.

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