In the Economics courses I teach each semester, before we dive into the mechanics of supply and demand and after we establish what the science of economics is, we discuss the various types of economic systems around the world. We spend at least a couple of classes discussing the economies of the world on a spectrum between those that are command and those that are market economies.
One source we use to feed our discussions is the Index of Economic Freedom, which ranks the economies of the world. #economicfreedom About five years ago many of my students assumed that the United States was at or near the very top of the list. They were wrong (as I had also been before diving deeper into the facts). The United States left the index's highest “Free” category in 2010 and has been in the lower “Mostly Free” category ever since. (Interestingly, as an anecdote of how public perception has changed, today most of my students come to class expecting that the United States is not at the top of the economic freedom list, even before seeing the rankings.) Today you can find countries in parts of the world that have been notorious for their lack of economic freedom ranked higher than the United States. Come on U.S.! You can find a country in each of Africa, Eastern Europe, and South America which have more economic freedom than the United States.
During several semesters of discussing this list with my students, it was the one country in South America that caught my eye. Currently ranked 7th in the world in terms of economic freedom (the United States is ranked 12th, much of Chile's economic progress #chile has occurred in the last 20-30 years. While its growth in prosperity wasn't at the media-getting pace of the Asian Tigers during a similar time frame, this 17-million person country has certainly taken a saliently different course than its Latin American neighbors. It is currently the only Latin American member of OECD (although discussions are currently being held with Colombia and Cost Rica) and has slashed its poverty rates.
Over the last few years I became increasingly curious to learn more, and I just a few days ago returned from an almost three-week long trip to Chile with my family to have a look around.
In this post I present a few of the publicly available data sets that led me to want to have a first-hand look around. I'm not making any statements about the political system or investment climate in Chile, although I'd love to hear your thoughts. This is admittedly not a scientific discussion and doesn't contain any original research or data. I'm simply describing some of the factors that made me, someone who advises and invests in lower-middle market private companies want to buy an airplane ticket and learn more. In future posts I will present a few stories of our personal experiences in this country of amazing natural beauty, warm and welcoming people, and a unique economic prosperity that has eluded much of the rest of Latin America. While the country isn't Disney Land and still has many issues to grapple with, many key indicators look promising.
Here is what I observed during several semesters of discussions with my students: GDP per Capita: While Chile's GDP per Capita is still lower than many of those in the developed world ($15,700 USD as compared to, say Portugal at $21,700 USD in 2013), the country seems to have taken a trajectory recently on which it is emerging from its peers. (The chart below shows GDP per capita, PPP in current international $ and thus reflects different value than USD.)
Poverty Perhaps most impressive is Chile's large drop in poverty in only a few decades. The figure below shows that while most of the region has reduced its poverty levels (defined below by those living on less than $2 a day), Chile leads its peer group.
Furthermore, the World bank (which below is using a threshold of $2.50 per day) reports:
"Chile has successfully reduced poverty rates and increased shared prosperity in recent years. The percentage of the population living in extreme poverty (on US$ 2.5 per day) declined from 20.8% in 1990 to 2.0% in 2013 whereas the percentage living in moderate poverty (US$ 4 per day) decreased from 40.8% to 6.8% during the same period. Additionally, between 2003 and 2011, the average income of the poorest 40% of the population rose 4.3%, considerably above the average growth for the total population (2.5%)." http://www.worldbank.org/en/country/chile/overview
It doesn’t take more than a few internet searches on Chile’s economy to find that many commentators completely overlook the poverty data listed above and focus on criticisms of the country's uneven income distribution and high GINI index. It is true that Chile's middle class is smaller as a percentage of its population than its more popular-with-the-media peers, Argentina and Brazil. However, an encouraging sign can be found in 2009 data from the IMF, which shows that Chile leads Latin America in the percentage of its middle-class population that is climbing in prosperity, rather than stagnant or declining.
I’m puzzled by the GINI index complaints as the World Bank reports that while Chile's GINI index isn't the lowest in South America, it is lower than that of both Colombia and Brazil and certainly isn't out of line with its peer group. The data below ends in 2011. Perhaps there have been some changes since then:
And if we look at income distribution, the lowest 20% of Chile's population in terms of income make up a smaller percent of its population than of the same group in the United States (at least as of 2010 when Google's public data for this data set ends).
While current guidance given to the governments of much of the developing world is that running large deficits and accruing debt are what need to happen in order to "stimulate" an economy out of recession, Chile seems to have slashed poverty and grown it's GDP per capita without the mammoth amounts of debt that have swamped most developed nation governments. The Economist Intelligence Unit reports in its Global Debt Clock that while the United States currently owes a public debt as a percent of GDP at 90.6% with an annual increase of 10.4%, Chile’s debt is a uniquely low number in the developed world of 5.6%. And while its debt has increased lately, it has done so at a much more modest 3.8%. More recent data from ieconomics.com show that the debt levels in terms of % of GDP between the two nations are drastically different.
Safety While crime has been increasing in Chile and Chilean citizens we spoke with seemed VERY concerned about this, homicide rates are lower there than in any of its peers and even lower than those of the United States. As an example, intentional homicide rates across the region and the United States are shown below:
Investment Climate Each year the Latin American Private Equity & Venture Capital Association (LAVCA) publishes its Score Card, which ranks the business environments for such investments on a scale of 1 to 100.
Chile regularly tops the list:
Correlation or Causation? So what does this all mean? Has Chile's restructuring into an economy with high economic freedom caused its prosperity? What do you think? I'm not equipped to make a pronouncement on the current or future state of Chile's political or investment climate, but several indicators look interesting and make me want to learn more. Why is a high ranking on the Index of Economic Freedom so important? In their report "Economic Freedom of the World: 1975-1995" Economists James Gwartney, Robert Lawson and Robert Block reported some very strong correlations: "No country with a persistently high economic freedom rating during the two decades failed to achieve a high level of income. In contrast, no country with a persistently low rating was able to achieve even middle income status." While correlation isn't always causation, the correlations are strong and makes me scratch my head. Perhaps there is something to this?
Summary I'd love to hear your thoughts. As of now, in our team's strategic initiative to globalize our business, we've decided that the key macroeconomic indicators in Chile make it worth exploring further. We'll have at least one other post coming soon on personal experiences there, particularly about my visit with the folks atStart-Up Chile and Chile Business. We've already begun a couple of projects in Chile and look forward to working there more.