Searching for Global Economies That Foster Private Company Prosperity: An Exploration of Chile
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.
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.)
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 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.
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).
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.
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:
Figure 7 - Intentional Homicides
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:
|Figure 8 - LAVCA Score Card|
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?
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 at Start-Up Chile and Chile Business.
We've already begun a couple of projects in Chile and look forward to working there more.