PIONEERS IN DEVELOPMENT

1. PIONEERS IN DEVELOPMENT PUBLIC POLICIES FOR INVESTMENT IN HUMAN CAPITAL: THE CASE OF CHILE 1990-2000 Comments by Roberto Junguito November 4, 2003-11-03

2. I. Introduction: The Lecturer, the Country and the Topic I would like to congratulate the World Bank for having chosen Eduardo Aninat to give this year’s The Pioneers in Development Lecture. Mr. Aninat has distinguished himself as an economist and academic researcher in Latin America. He has also had a prominent role as a policymaker, as his achievements as Minister of Finance of Chile at the mid-nineties clearly showed. Eduardo also made a significant contribution as Deputy Managing Director of the IMF in the past four years. For his lecture, Mr. Aninat chose one of the central topics in development theory: Public Policies for Investment in Human Capital. And, he applied it to his country, Chile, in the period 1990-2000 Summing it all up, The World Bank chose the right Lecturer from the right country to discuss the right economic development subject.

3. II. CHILE AS AN OUT PERFORMER IN LATIN AMERICA • It is well known that Chile out performed all other Latin American countries in the 1990’s. • This out performance was especially significant in terms of GDP growth as Figure1 clearly illustrates. • Chile, in fact, was the fourth country with largest GDP growth in the world during the decade. • Growth performance was accompanied with a gradual lowering of inflation (Figure 2). • Using a successful inflation targeting framework. • Without major costs in terms of exchange rate appreciation as observed in Latin American countries that had exchange rate objectives.

4. Figure 1. Selected Latin American Countries: Growth Performance (Annual percent change in per capita real GDP) 12 12 Argentina Latin America 8 8 4 4 0 0 -4 -4 -8 -8 -12 -12 -16 -16 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 12 12 Brazil Bolivia 8 8 4 4 0 0 -4 -4 -8 -8 -12 -12 -16 -16 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 12 12 Chile Colombia 8 8 4 4 0 0 -4 -4 -8 -8 -12 -12 -16 -16 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 12 12 Mexico Peru 8 8 4 4 0 0 -4 -4 -8 -8 -12 -12 -16 -16 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 Source: IMF, World Economic Outlook.

5. figure 2. Selected Latin American Countries: Inflation Performance (Annual percent change in consumer price index) 600 3500 Argentina Latin America 3000 3,080 percent 500 485 percent 2500 400 2000 300 1500 200 1000 100 500 0 0 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 14000 3500 Bolivia Brazil 12000 3000 2,948 11,750 percent 10000 2500 8000 2000 6000 1500 4000 1000 2000 500 0 0 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 50 50 Chile Colombia 45 45 40 40 32 percent 35 35 31 percent 30 30 25 25 20 20 15 15 10 10 5 5 0 0 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 140 8000 Mexico Peru 7,486 132 percent 7000 120 6000 100 5000 80 4000 60 3000 40 2000 20 1000 0 0 1981 1984 1987 1990 1993 1996 1999 2002 1981 1984 1987 1990 1993 1996 1999 2002 Source: IMF, World Economic Outlook.

6. Figure 3. Selected Latin American Countries: 1 Poverty Rates Latin America 1999 1990 Ecuador Colombia Bolivia Peru Brazil Mexico Venezuela Chile Argentina 0 10 20 30 40 50 60 70 Source: ECLAC (2002). 1/ In percent of households. POVERTY RATES • Chile also obtained the largest decline in poverty rates • Showing that countries that grow strongly for a sustained period of time are able to reduce their poverty rates significantly.

7. PERFORMANCE INDICATORS • Its governance index is above expected levels, given it GDP per capita. • Corruption is below the average for Latin America and also other emerging countries. • Chile was able to lower its public debt during the decade to 34% by the end of the nineties. • Chile achieved high tax revenues and the highest VAT productivity index in the region. • Financial deepening was significant with the highest index of stock market capitalization. • Bank performance indicators show low operating costs, low NPL/ total loans and high profitability margins • Chile is also the country with the highest savings rate • Has a low index of dollarization, and • Is one of the most open economies of the region.

8. CHILE’S SUCCESS STORY • Many distinguished International and Chilean economists are working on the reasons behind Chile’s success story. • Hypothesis go beyond factor shares and Total Factor Productivity explanations. • Aninat’s paper brings to the forefront two major motives: trade openness and strong institutions. • The Lecture provides a third major reason from the new growth theory: Investment in human capital

9. III. INVESTING IN HUMAN CAPITAL IN CHILE • Aninat’s Lecture illustrates a case of successful policy-making in Chile. • An elementary but important lesson for Latin-America is that no new expenditures, no matter how important they are, should be approved without additional public revenue support. • Another institutional lesson which emerges from his Chilean experience is that the Ministry of Finance has to involve itself in the sectoral allocation of resources. • The paper highlights the fact that significant growth in social expenditures may be achieved as a result of high and sustained growth. • Under such conditions, there is a revenue dividend that may be allocated to serve the social debt.

10. The paper also shows that increasing the tax burden is easier to achieve when the increased tax load, is linked to a specific public expenditure with high internal rate of return, such as education. • Other lessons that emerge from the Lecture include the importance of investing in human capital as one of the priorities in public choice in the developing world • And that keeping serious macroeconomic policies is a key to economic and social success as the case of Chile so clearly shows