Chile has been experiencing a sustained loss of competitiveness and economic freedom reflected in a gradual but constant fall in the world rankings of freedom. Last week the World Competitiveness Ranking 2022 was published and shows that Chile falls, for the second consecutive year, in its levels of competitiveness. With this result, the country today reaches its worst record and lowest level of economic competitiveness in history. The ranking also shows that Chile was today ranked number 45 out of 63 countries surveyed in the ranking, the lowest level in the history of measurement (see here). To put things in perspective, economically backward countries such as Greece and Indonesia hold 47th and 44th places respectively.
This ranking analyzes and classifies countries according to how they manage their competencies to achieve value creation in the long term. The Each country’s competitiveness is measured from four areas: 1) economic performance, 2) state efficiency, 3) business efficiency, and 4) infrastructure. All this is based on 333 selected competitiveness criteria (see methodology here).
The recent history of Chile in this ranking is worrying, as it shows a marked boom and fall in our economic competitiveness.: in 2005 the country rose and reached the number 19 position, being its best historical record at the level of competitiveness (today the 19th place is held by Australia). Subsequently, and from 2012 onwards, the country observes a more or less constant and sustained deterioration, always losing steps of competitiveness over time.. The final collapse came both in 2021, an instance in which Chile lost six steps of competitiveness, and today, in 2022, where the loss accumulated in the last decade leads us to our worst historical position, reflecting a very low economic competitiveness and a lack of capacity to generate value. All this can be seen graphically in the figure below.
World Competitiveness Ranking, Chile (2001-2022)
Source: LyD, 2022
This bad news in the productivity ranking comes in addition to the very bad recent news regarding Chile’s collapse in the rankings of economic freedom.. Well, in 2022, the ranking of economic freedom made by the Heritage Foundation shows that Chile has also fallen there for the second consecutive year, falling to position 20 in the ranking (see here); Likewise, in 2021 in the Fraser Institute’s “Economic Freedom of the World” index, Chile experienced a debacle never seen before, falling 15 places in just one year in that ranking of economic freedom (see here).
It is interesting to note that Chile’s fall in the competitiveness ranking seen is analogous to the country’s fall in terms of economic freedom, since both have experienced a boom in the periods (1990s-2000s) and then experienced a slow fall and a constant retreat in the period (2010-2020). In fact, in our most recent academic study in this regard (Paniagua and Ordenes, 2022), we have reviewed the historical evolution of economic freedom in the country for the entire 1970-2018 cycle, which reflects a history similar to that of the aforementioned competitiveness ranking.
Economic Freedom of the Heritage Foundation, Chile (1995-2021)
Source: Paniagua y Órdenes, 2022
Our study notes that Chile has experienced three periods of differences in its economic freedom: 1) the “great expansion of economic freedoms” (1980-1995), 2) the “consolidation of economic freedoms” (1995-2009) and, finally, 3) the “stagnation and decline of economic freedoms” (2010-2018). Our research also points out that the speed of expansion and subsequent stagnation of economic freedoms in Chile is related to its once successful growth process and its current economic atrophy that has been dragging on since 2011 (Paniagua and Ordenes, 2022). Our study uses the Chilean case as an illustration to make a key point in development theory, noting that the relationship between institutions and growth occurs through how economic freedoms expand over time.. This relationship between institutions and economic growth, via an expansion of economic freedoms, has not beenhas been recognized by the literature, no less appreciated by politicians and academics who speak pestilence of the pro-market and modernizing process that Chile promoted in the period 1985-2000.
However seeing both the sustained fall of Chile in the ranking of competitiveness since 2012 and in that of economic freedom since 2013, it seems no coincidence then that the country has experienced the most marked economic slowdown of the last forty years in the period 2011-2021 (see table below) —period we have called “atrophy of our modernization” in my most recent book Atrophy: Our Crossroads and the Challenge of Modernization (Paniagua, 2021)—.
Source: Paniagua, 2021
All this evidence for Chile, regarding its rise and fall of competitiveness and economic freedoms, suggests that the presence of institutions that promote high degrees of economic freedom is a condition sine qua non in order to achieve high and sustainable growth rates in the long term, because there is a strong and negative relationship between loss of economic freedom and competitiveness at a relative level and a loss in our ability to generate value and economic growth over time.
This is precisely what the empirical evidence reveals to us: a recent study Quantitative points out that for every point of decline in economic freedom, between 0.3 and 1.6 points of economic growth are lost. Economists Rafael Acevedo and María Lorca-Susino (2022) have investigated the short-term consequences of the erosion of economic freedom on the rate of economic growth and institutions in nineteen Latin American countries. The results lead the authors to conclude that:
“Between 2000 and 2019 Latin American governments have increased and decreased economic freedom in a continuous cycle. Combining differences in the erosion of economic freedom with differences in economic growth and a set of institutional variables, for a sample of 19 Latin American countries, the results suggest that for every percentage point that a country erodes economic freedom, the following year, its economic growth rate is between 0.3 to 1.6 percentage points lower, and suffers from a worsening of institutions such as democracy, corruption, transparent laws, media censorship efforts and judicial restrictions.”
In conclusion, the fall in the rankings of economic freedom and competitiveness is one thing that should concern us, since they help, in part, to understand how our institutions have been withering, eroding our economic freedoms and how all this has been destroying our ability to generate value and prosperity for the middle classes. Today, as we are on the verge of a referendum seeking to pass a New Constitution that follows the risky path of eroding our economic freedoms, it is to be hoped that all this evidence will be taken into consideration.
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