Barriers to Foreign Investment, R&D Shortage and the Lack of Qualified Labor Threaten Chile's Economic Future

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Nov 27, 2019, 10:57 ET

MADRID, Nov. 27, 2019 /PRNewswire/ -- Excessive dependence on exports from the mining sector and especially on copper, coupled with an explosion of populist policies with violent social protests threaten Chile's economic stability and the country's governability. This is one of the main aspects that need to be redirected so that it can face the economic challenges of the future. This is the conclusion of the second analysis that the Instituto Coordenadas de Gobernanza y Economía Aplicada (Coordinates Institute of Governance and Applied Economics) has carried out on the economic and social situation of Chile, and which also points to other key aspects to improve such as the commitment to R&D or the formation of qualified labor to keep the country's economy afloat.

Chile has traditionally been considered an economic reference, a model that has cemented a strong and stable macroeconomics that has enabled to progressively reduce social inequalities, with a solid basis of strong and stable institutions, in the middle of a poor regional context. This model is in danger, social conflicts have marked the political agenda of the lasts Chilean governments leading the country into a growth slowdown. The violent imposition of demagogic ideas that, far from being able to resolve the legitimate social demands, has continued to burn the streets with riots that are encouraged by radical extremist left wing groups. These small groups find their breeding ground in a current political scenario in which new parties that converge are far from the center and have an irrefutable growth potential and certain populism doses. The populist trend it translates into protectionist measures, generating a slowdown in the evolution of finances and has caused Chile to have lost competitiveness within the international market, triggered by the concern and suspicion of the business class and markets in general.

REFORM NEEDS

To cope with this uncertain future, the Instituto Coordenadas believes that Chile must face its internal weaknesses and address them with important reforms.

Firstly, the Chilean economy is especially dependent on copper exports, which causes the Andean country to be cyclically affected by recessions typical of the evolution of international markets. The consequences of the commercial war between the United States and China also seriously affect Chile since 35% of Chilean copper exports are directed to the Asian country. Therefore, economic development requires a boost to industries not linked to raw materials, which boosts other productive and commercial sectors of the country.

Secondly, the need to encourage foreign capital investment. The advantages that foreign investments in Chile have contributed to the country's growth are undeniable, contributing to a substantial increase in tax revenues, a stimulus of human capital and greater business development.

The international financial system values foreign investment very positively, so it is essential to strengthen it by simplifying the excessive bureaucratization and inefficient control mechanisms to which the activity of concessionary companies in Chile is often subjected. The government sets especially dysfunctional conditions for compliance, and sometimes, they collide with a productive activity and a quality of service that can hardly be achieved.

The change in economic policies of the last decade has caused the drop in foreign investments, with the consequent reductions in credit ratings and lower international credibility. A distrust that if is not resolved promptly will begin to make a dent among both domestic and foreign entrepreneurs.

Without greater private investment it will be difficult to achieve the diversification of the industry necessary to part with copper dependence, it will also be difficult to create a quality workforce that keeps unemployment at bay and reduces social inequalities.

"Chile is still, for foreign entrepreneurs, one of the countries with the best prospects for investment because it complies with the basic precepts for business: transparency and legal certainty; social stability and economic strength", says Jesús Sánchez Lambás, Executive Vice President of the Coordinates Institute. "However, in order for Chile to remain a leader in the region, it must improve the technique of regulatory models, excessive bureaucracy, and continue betting on foreign investment and public-private collaboration projects", adds.

This analysis also highlights that Chile accuses a poor commitment to R&D, a low-skilled and specialized workforce, a network of vulnerable energies, limited infrastructure and a remarkable weakness in network industries. Thus, it is a priority to invest in innovation and improve collaboration formulas between the State, private sector and universities. Strengthen the link between education and the labor market and promote inclusion, conciliation and the female labor role, one of the social justice challenges that constitutes in itself an emergency. All this, to qualify business and achieve an empowered and better trained workforce.

It is also necessary to promote labor mobility, reduce bureaucracy, improve the pension system and strengthen the financial system. Fiscal consolidation through a planned tax system in the medium term will also be essential to stabilize debt, strengthen confidence and help boost private investment.

The challenges on the social front stand out, which goes through improving the quality of health and education services and promoting inclusive policies, all of them key to reducing social inequality and eradicating poverty, recovering the value of middle classes that have collapsed and fight against the deterioration of the environment in one of the best countries in terms of diversity and environmental wealth. A more relevant long-term resource than copper.

The recent history of Chile, marked by almost 30 years of democracy and an opening economic policy, is the Latin American prototype of economic and social growth. A scenario that has receded significantly in the last decade by implementing populist measures against social pressure. In fact, the highlights in the analysis carried out by the Coordinates Institute, coinciding with the diagnosis of large economic institutions worldwide, explain the decline that Chile's economic attractiveness has suffered. Even sometimes even surpassed by other markets such as Mexico that influences potential international investments, with everything that it means for the country.

SOURCE Instituto Coordenadas