By Si Guo and Andrea Schaechter
- Faster investment approvals, greater labor force participation, public-private R&D collaboration and steps to harness critical minerals and renewable energy can support higher growth
USA / CHILE – Many of Chile’s current socioeconomic debates—such as those related to fiscal sustainability, pension adequacy and college loans—can be attributed to the country’s growth slowdown over the past two decades. Back in the 1990s, Chile grew 6.2 percent per year on average and was Latin America’s poster-child success story. Over time, this robust growth trend steadily waned, and by the 2020s, growth barely went above 2 percent. The IMF’s recent annual economic health check of the country (Article IV consultation) addresses how Chile can reverse this trend.
Comparing Chile to its peers, there is scope to grow faster. Higher-income countries that were once at a comparable income level to Chile grew at a rate of around 2.9 percent per year. However, Chile faces challenges that most of those economies did not encounter at the same stage of development: such as an aging population and a global slowdown, both of which will make it more difficult for Chile to reach this pace.
Historical patterns
As countries get richer, sustaining rapid growth simply becomes harder because of diminishing gains from investment and less scope for technology catch-up. To evaluate Chile’s growth potential, we compared its trajectory with other countries when they reached similar income levels, such as Australia in the late 1980s and Korea in the 2000s. According to the Penn World Table and our calculations, Chile’s GDP per person tripled from US$8,200 in 1990 to around US$26,000 in 2025, in constant 2017 U.S. dollars after purchasing power parity (PPP) adjustment.
Among 28 economies that crossed the US$26,000 real GDP per capita threshold between 1950 and 2010, median annual GDP growth over the subsequent decade was 2.9 percent. This benchmark is well below Chile’s 1990s boom, but still above its current trend.
Demographic and external drags
While the comparison is useful and offers some optimism, Chile faces an aging population and a less favorable global growth environment – impediments that many of these other higher-income economies did not face during their development stage.
Though still relatively young, Chile’s population is aging. According to the UN’s median population projection, Chile’s working-age population (15-64) will grow by just 0.15 percent per year during 2025-35. With modest gains in labor participation, employment will likely grow by 0.2-0.3 percent annually – below the 0.8 percent seen in the comparison group. This demographic drag alone saps ¼ percentage point from Chile’s potential growth.
Global technological trends could also weigh on Chile’s outlook. In the 1990s, information technology boosted productivity across countries. Our comparison group of countries benefitted from a US GDP growth rate – taken as a proxy for global technological trends – of 3.1 percent per year on average. In contrast, economists now expect more modest US growth of 2.1 percent for the next decade. We estimate that a one-percentage point reduction in 10-year US annual growth translates to a further 0.8 percentage point restraint on Chile’s potential growth.
Transformational reforms
While these are rough estimates, and outcomes could vary widely, the exercise suggests a long-term growth trend of around 1.9 percent, if Chile were to perform in line with the median country and the demographic and external headwinds persisted.
So, how can Chile increase its potential and defy these drags on growth? Short-run macroeconomic stimulus is not the answer, and Chile’s economy is already balanced. The solution lies in deepening supply-side structural measures, consistent with the policy messages in our latest annual review of Chile’s economy (the Article IV consultation).
First, it is critical to make regulatory requirements more efficient. As an extreme example, it can take up to 10 years to sort out permits and navigate bureaucracy to get a large mining project off the ground. Streamlining this lengthy process would help reduce barriers to investment and support technology adoption. Similarly, modernizing regulations related to maritime transport could lower trade costs and improve Chile’s competitiveness.
To address demographic challenges, Chile could stimulate labor participation, for example by improving the access to quality childcare that would enable more women to enter the labor force.
Chile’s R&D spending is also substantially below the OECD average. Greater public-private collaboration here is essential, given limited budgetary resources. The proposed technology transfer bill, enabling university researchers to create tech companies and commercialize their work, could help narrow this gap.
Finally, as the world’s largest copper producer, second largest lithium producer, and as a nation richly endowed with solar and wind resources, Chile can benefit from the high global demand for these critical minerals and through use of low-cost renewable energy.
While there is no silver bullet for growth, together these reforms improve the chances of a better outcome. Lifting Chile’s growth potential is critical for improving living standards and addressing social and fiscal pressures. Chile has an established track record of prudent macroeconomic management. Building on this solid foundation, the country can achieve stronger growth in a challenging global environment.
Si Guo is a senior economist and Andrea Schaechter is an assistant director in the Western Hemisphere Department.
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