Chile Facing the challenge of the New Economy Carlos Alvarez August 2004.

ChileFacing the challenge of the New Economy

Carlos Alvarez

August 2004

Contents

• Economic Performance.• Competitiveness• National System of Innovation.• Innovation Policy.• Future Challenges.

Snapshot of the Chilean Economy

Population: 15.1 million

GDP (2003): US$ 72.1 billion

Income per capita (PPP): US$ 9,992 (IMF)

Exchange rate (July, 2004): 1 US$ = 632 CLP

Interest rate (Monetary Policy): 1.75% (July 2004)

Unemployment rate (July 2004): 9.7%

Source: International Monetary Fund (www.imf.org), 1990 - 2004

Economic PerformanceGDP Average Annual Growth Rate (Selected Countries)

9.0%

6.1%

5.9%

5.5%

4.5%

3.1%

2.6%

2.5%

2.4%

2.0%

1.3%

0.6%Czech Republic

Hungary

Brazil

Argentina

OECD

Poland

Mexico

Indonesia

Chile

Korea

Singapore

China

http://www.imf.org/

Source: Central Bank of Chile (www.bcentral.cl), 1994 - 2004

Economic Performance GDP Growth in Chile (%)

5.7

7.46.6

3.2

4.53.4

2.2

10.2

-0.8

3.3

5.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004(e)

http://www.bcentral.cl/





Economic Performance Fiscal Balance (% of GDP)

-0.8

-0.3

0.1

-1.4

0.4

2.0

2.3

2.6

1.7

-0.8

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003



Economic Performance Evolution of Inflation in Chile (%)

8.98.2

6.66.0

4.7

2.3

4.5

2.6 2.8

1.1

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003


Source: Central Bank of Chile (www.bcentral.cl), 2003

Economic PerrformanceIndustrial Structure

Agriculture-forestry5%

Fishing1%

Mining9%

Manufacture18%

E.G.W3%

Construction8%

Trade, Rest. & Hotels12%

Transport y Communications

8%

Financial Services13%

Household goods8%

Personal Services11%Public administration

4%

Source: Central Bank of Chile (www.bcentral.cl), 2003

Economic PerrformanceExports of Goods (Total: US$ 21.0 billion FOB)

Copper

35,6%

Iron, Saltpeter,

Molybdenum & Others

4,6%

Fresh Fruits

8,0%Food

15,7%

Wine & Spirits

3,4%

Forestry Products

6,0%

Wood pulp

5,9%

Chemicals

8,3%

Others

7,3%Other Industrial Goods

5,2%

Increasingly Diversified Exports…

Selling 3,854 products (200 in 1975), to 165 countries (50 in 1975), by 6,024 exporters (200 in 1975)

… and Markets (2003 figures)

Asia 31.5 %

Europe 25.5 %

United States & Canada 19.7 %

Latin America 18.8 %

Africa 0.5 %

Others 4.0 %

Economoic Performance

Source: World Economic Forum (www.weforum.org), 2003 - 2004

CompetitivenessGlobal Competitiveness Ranking (Selected Economies)

1

102

98

78

72

63

54

47

44

41

39

30

28

18

15

2

Haiti

Bangladesh

Argentina

Indonesia

Colombia

Brazil

Mexico

China

Italy

Czech Republic

Ireland

Chile

South Korea

United Kingdom

United States

Finland

http://www.weforum.org/

Source: World Economic Forum (www.weforum.org), 2003 - 2004

CompetitivenessGlobal Competitiveness index rankings

Chile Mexico Malaysia Poland FinlandNew Zealand

GDP per capita in 2001 (ppp) 36 39 44 34 14 22National business environment 31 60 26 45 2 20Public institutions 19 58 33 61 1 4Macroeconomic Environment 13 21 20 54 14 17Technology 33 47 26 36 3 27Company Operations and Strat. 35 45 27 46 4 25

Source: Knowledge for Development WBI

CompetitivenessEconomic Regime Variables

02468

10Gross Capital Formation

Budget Balance

Trade as % of GDP

Tariff and non TariffBarriers

Intellectual Property is wellprotected

Soundness of banks

Adequate regulation offinancial institutions

Local competition


CompetitivenessGovernance Variables

6,5

7

7,5

8

8,5Regulatory quality

Rule of law

Government Effectiveness

Voice and AccountabilityPolitical Stability

Control of Corruption

Press freedom


CompetitivenessICT Variables

02468

10

Telephones per 1000inhabitants

main telephonbe lines per1.000

Mobile phone per 1.000

Computers per 1.000

TV sets per 1.000

radios per 1.000Daily newspapers per

1.000Investment in telecom as %

of GDP

Internet hosts per 10,000

Internet users per 10.000

Internationaltelecommunications, cost

of call

E-Government

ICT Expenditure as % ofGDP


CompetitivenessEducation Variables

0

2

4

6

8

10Adult literacy rate

Average years of schooling

Secondary enrollment

Tertiary enrollment

Pupils per teacher

Life expectancy at birth

Flexibility of people to adaptto new challenges

Public spending on Eduactionas % of GDP

Prof and tech.workers as % ofthe labor force

8th grade achievements inmathematics

8th grade achievements inscience

National culture is open toforeign influence

Extent of staff training

Availability of managementeducation

well educated people do notemigrate abroad

Univ. Education meets theneeds of a comp. Economy


CompetitivenessInnovation Variables

0

2

4

6

8

10Gross Foreign Direct Investment

Royalty and license feespaymentRoyalty and license fees

payment/mil popRoyalty and license fees

receiptsRoyalty and license fees

receipts/mil. PopScience and Engineering

Enrollment Ratio

Researchers in R&D

Researchers in R&D/ mil.popTotal Expenditure for R&D as %

of GNPManuf. Trade as % of GDPUniversity-company research

collaboration

Entrepreneurship amongmanagers

Scientif ic and technical journalarticles

Scientif ic and technical journalarticles/ mil.pop

Admin. Burden for Start-ups

Availability of Venture Capital

Patent Applications granted bythe USPTO

Patent Applications granted bythe USPTO/ mil.pop

High tech exports as % ofmanuf. Exports

Source: OECD (www.oecd.org), CONICYT (www.conycit.cl)

Natioanal System of Innovation

0,75Spain

3.37Finland

0.54Poland

0.43Mexico

55,30.56Chile

Basic Research(as % of R&D)

R&D Expenditure

(as % of GDP)Country

R&D Indicators

23

37

33

Sources: OECD (www.oecd.org), CONICYT (www.conycit.cl)

National System of Innovation

R&D Expenditure (% financed by)Businesss Government Other

Chile 23,4 64 12,6 Mexico 29,8 59,1 11,1 Poland 31 61,1 7,9 Finland 69,5 26,1 4,4 New Zealand 37,1 46,4 16,5

SourceÑ World Bank (2003)

National System of Innovation

Science and Technology Human ResourcesResearchers in R&D/ million people

Science& Engineering Enrollment Ratio

Chile 418 42Mexico 226 32Malaysia 153 27Poland 1475 28Finland 7094 39New Zealand 2174 20

In 1991 it is launched a first explicit effort to promote innovation in Chile, through the creation of two funds: FONDEF (that provides grants for S&T

projects, performed by universities or technological institutes) and FONTEC (that provides grants for R&D projects performed by

companies). They were followed by the establishment of other funds (FDI, focused in pre-competitive research, FIA for the agricultural sector, etc.).

These funds share the same principles: they are “demand driven” (the pertinence of a project is based on the willingness of private firms to

perform and to co-finance it); they are horizontal (no sector or technology is privileged; they provide grants after a strict process of evaluation.

Innovation Policy1990´s: Market FailureApproach

These initiatives are complemented, on the one hand, by funds that promote basic research (FONDECYT, FONDAP and Millenium Program)

and on the other, programs that facilitates technology difussion (in general “soft technologies” especially focused on the small and medium

sized enterprises).



Institution Programme 1999 2000 2001 2002 2003

TECHNOLOGY FUNDS

CORFO Fondo Nacional de Desarrollo Tecnológico y Productivo (FONTEC) 11.894 10.821 9.823 9.193 8.196CORFO Fondo de Desarrollo e Innovación (FDI) 11.929 11.308 12.711 11.868 11.230CORFO Fondo Innovación Tecnológica Bio Bio 0 0 299 746 1.426SUBPESCA Fondo de Investigación Pesquera (FIP) 3.958 1.962 2.050 1.350 1.838CONICYT Fondo de Fomento Ciencia y Tecnología (FONDEF) 17.983 14.539 13.179 15.475 18.050SUB AGRICULTURA Fundación para la Innovación Agraria (FIA) 6.708 6.334 6.056 6.300 6.025

SUBTOTAL 52.473 44.964 44.118 44.932 46.764

TECHNOLOGY & SCIENTIFICS RESEARCH FUNDS

CONICYT Fondo Nacional de Desarrollo Científico y Tecnológico (FONDECYT) 38.254 32.351 32.852 32.240 30.836CONICYT Programas Regionales de Investigación Científica y Tecnológica. - - - - 1.506MIDEPLAN Programa Iniciativa Científica Millenium 344 4.430 6.877 5.704 5.675

SUBTOTAL 38.598 36.781 39.729 37.944 38.016

TOTAL 91.071 81.745 83.847 82.876 84.780

Source: Undersecretary of Economy, data from DIPRES

TECHNOLOGY FUNDS(thousands of current dollars)

Several evaluations have demonstrated de effectiveness and impact of the funds. However in the late 90´s it became clear that the provision of financing was not enough to unchain a wider innovative effort in Chile. Then, a more comprehensive approach was developed, which includes:

• A focused effort to promote crucial technologies: IT, Biotechnologies, Cleaner Production and Quality. This effort includes not only provision of grants, but the establishment of integrated policies in each area.

• Promotion of entrepreneurship.

• Foreign Investment Promotion.

• Promotion of patenting.

• Promoting the creation of technology consortia.

Innovation Policy2000´s : Towards a more comprehensive approach.

Digital Agenda

A set of 34 initiatives whose objective is “to contribute toChile´s development by using information and communications technologies to increase competitiveness and improve equity, individual liberties, quality of life, and public sector efficiency and transparency”.

Areas of activity:

• Widely available access

• Education and Training.

• Online Government

• Digital development for business

• Takeoff of the ICT Industry

•Legal Framework


Biotechnology Policy.

Broad effort that includes passing a new Law for Bio-safety, strengthen intellectual property rights, personnel training, additional efforts in R&D.

Promotion of Entrepreneurship.

Establishment of business incubators, feasibility studies, seed capital funds, venture capital funds, etc.

Technology Consortia:

Establishment of assotiative proyects, with participation of groups of companies and universities or technological institutes.

High Technology Investment Attraction Program: with a main focus in the software and international services areas.


Innovation Policy2000´s Structure of the Innovation Government Support System

CONICYTFondecyt, Fondef

Universities

Minister of Education

CORFO:Fontec, FDI

Technology Institutes

Minister of Economy Other Ministries

President

Innovation PolicyChallenges

In order to recover high rates of growth, Chile has to increase significantly its innovative effort. A medium-term challenge is to become an economy endowed by a critical mass of companies that have innovation as a crucial component of their strategies.

This means to promote simultaneously:

• Innovation around natural resource-based clusters to encourage the emergence of world class providers of services and equipment.• To promote domestic entrepreneurship.• To strengthen the current investment attraction efforts.

But it also demand to overcome the weaknesses of some components of our National System of Innovation and Policy Framework

Innovation PolicyChallenges

• Build a broad strategic orientation for the innovation policy through an integrative dialog with key actors (business community, researchers, public sector authorities, etc.).• Update the institutional design to overcome the excessive fragmentation of institutions and policy initiatives. Particularly important is the integration of the educational policy (especially in its tertiary education component) in to the innovation policy effort.• Build coherent responses in neglected policy areas such as technological diffusion and sustainability of technologycal infrestructure (technology institutes, metrology labs, etc.).• Increase the total budget allocation for innovation policy.• Strengthen the capacities of key institutions, especially in the area of human resources (quantity and quality).

Chile Facing the challenge of the New Economy Carlos Alvarez August 2004.

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