Chile can avoid the middle-income trap by modernizing its economic model – new report

11 January 2018

A new report says Chile has the potential to move beyond mining and consolidate development gains.

Chile needs to update its economic model to reap the benefits of a changing world, a report co-authored by UNCTAD has said.

The report, which was produced by the Organisation for Economic Co-operation and Development (OECD) in collaboration with the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and UNCTAD, says Chile should modernize its economic model by renewing the relationship between g​overnment, business and society.

“Finding such an approach tailored to local economic circumstances and institutional conditions will be key to forging an industrial strategy that can help Chile avoid the dangers of a middle-income trap,” director of UNCTAD’s division on globalization Richard Kozul-Wright said.

The report says Chile has, at an annual average of 4%, enjoyed higher and more stable growth than most others in the region since 2000, thanks to sound macroeconomic management, openness to global markets and sustained Chinese demand for raw materials.

Santiago de Chile - Flickr/Orlando Contreras López

Flickr/Orlando Contreras López


Living standards have improved with access to better services and infrastructure, and the average income of a Chilean now equals 40% of that of a citizen of the United States, up from 26% in 1990.

But the report warns that low productivity is holding back Chile’s growth potential.

Hampered progress

Total factor productivity (TFP), which measures the efficiency of all inputs into a production process and is a good indicator of an economy’s long-term technological dynamism, has remained stagnant since the beginning of the 1990s.

This is mostly due to mining, a sector where TFP has been declining at a yearly average of 4.7% in the last 25 years. The number of workers per unit of output in mining is three times higher in Chile than in Sweden. In addition, most workers in Chile are employed in low-productivity activities.

Mining accounts for more than 55% of Chilean exports, while 40% of Chileans live in the Santiago metropolitan region and generate 48% of national GDP. Such imbalances hamper progress and limit innovation, according to the report.

Large firms play a dominant role in Chile’s economy, but they innovate less than others in OECD countries, the report says. Such firms account for 73% of the domestic business turnover and 57% of total business research and development (R&D) expenditures, while in Germany, for example, large firms account for half of business turnover and for 85% of business R&D.

The private sector’s contribution of total R&D expenditure – at only 33% – is significantly below the OECD average of around 68% and at 0.39% of GDP one of the lowest rates of R&D in all OECD countries.

“Chile has potential to be part of the next production revolution,” OECD Development Centre Director Mario Pezzini said.

“But being a stable and open economy will not be sufficient to sustain business development and respond to the Chileans’ evolving demands for a more inclusive, green and prosperous society,” he said.

“A pro-innovation mindset from the business community and targeted policies to facilitate business development and foster learning and innovation will be critical to seize the unique window of opportunity of Chile’s current momentum.”

Skills needed

Seizing these opportunities requires making the economy more knowledge-based and less reliant on natural resources, the report says.

This includes filling skills, infrastructure, standards and supply-chain gaps to make mining and other traditional activities more productive and environmentally sustainable. Chile could also open competitive future areas, including solar energy, in which Chile has major potential.

“Active public policies are required to sustain the expansive cycle opened with the rebound of Latin American growth,” ECLAC acting Deputy Executive Secretary Mario Cimoli said.

The report highlights the need for Chile to ensure a resilient, reliable and safe Internet connection and to modernise training at all levels – from vocational to post-graduate – to give the next generation of workers and managers the skills they need for the future.

Chile can reap increasing benefits from its trade openness by improving its participation in global value chains and seeking opportunities beyond mining, including in services.

Game changers

The report identifies many game changing moves for the long-term, including:

  • Modernizing public institutions and governance to cope with the more complex roles that the government will have to play in the future.
  • Strengthening inter-ministerial coordination in innovation and economic transformation and enabling long-term financing for strategic investment.
  • Consolidating progress made in articulating agendas for production, foreign direct investment, trade, energy and education.
  • Extending the government’s successful consultation with firms to civil society, entrepreneurs, SMEs and start-ups.
  • Strengthening the anticipation capacity at the highest strategic level.
  • Shifting to a place-based approach to policy making by advancing its regional agenda to identify new sources of growth and make it more inclusive.

The report was launched at Chile’s Ministries of Economy, of Foreign Affairs and the Production Promotion Corporation in Santiago on 9 January.

The Production Transformation Policy Review of Chile is based on good practices from the OECD Initiative for Policy Dialogue on Global Value Chains, Production Transformation and Development and peer advice from Emilia Romagna (Italy), Germany and Sweden.