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Within the framework of a seminar organized in Casapiedra by banks, the global economy is on the verge of a nervous breakdown. American economist Nel Rubini proposed formulas for Chile to recover economic growth with inclusion. Below we will see an excerpt from his presentation. I remember it was this year, at the end of January, at the World Economic Forum.
There was a panic that reached its peak regarding the global economy. People were asking me a lot if we were going to return to the situation we were in in 2007 or 2008, if we were going to have another global financial crisis, another global recession, and my easy answer was no. And they were a little surprised because I am...
They call me Dr. Disaster. So I always kind of predict what is going to happen in terms of financial disasters. But what I was saying is that there was a global risk, but that things were not so bad as to cause another global recession. And in terms of the market, we saw an increase in the value of the dollar.
The value of the dollar began to strengthen and That was negative for many reasons. First, a stronger dollar meant that the probability of China devaluing its currency was higher. A higher dollar value meant lower oil and commodity prices, which was bad for commodity producers in both advanced and emerging markets.
A stronger dollar also meant that exports were going to be worse, that global equities were also going to fall. So the strengthening dollar was still a concern; it was a mini-storm. Then people started to worry about whether we were going to have a crisis like 2008, a recession. My view now is that all these risks are things we have to worry about, but the extreme possibility of everything going wrong and all these risks materializing is limited.
A limited risk. And that's the good news. While there are several risks in the global economy, things are not at a point where the risk factors are severe enough to cause other global recessions. So, a mediocre economy in terms of growth is what some call the new mediocre, others say the new normal, I say the new abnormal, but it continues to be A global economy that has some growth and where certain opportunities remain, the super commodity cycle is over, and it's over not only because China has declined, but also because in the best years, when commodity prices were quite high, there was massive investment in many productive capacities for oil, energy, copper, and many industrial metals, and that supplied this side of the market when demand was decreasing due to this decline in China.
Therefore, commodity prices decreased and fell sharply. Many emerging markets, many economies, in the good years, not only did market-oriented structural reforms not occur, but many of these emerging markets moved away from market-oriented strategies towards moderate growth where there were variations of what we talk about with respect to state capitalism: a large role of the state with companies in the economy, too much role associated with the allocation of credit and investment savings with respect to the state's national resources, certain substitutions that industrialization, and so on.
An example, of course, was Russia; an example is also China; an example is also India before the change of government with Mori, and in In recent years, Brazil has seen some more populist and radical policies, and Argentina, for example, also before the recent change of government. But there are many countries in the world that have found this model based on the state to be effective, but now it has reached its limit.
This kind of bottom-up micro-reform, which is the second-generation structural reform, didn't happen to grow quickly when you're poor. When you 're poor, it's easy; there are no better institutions, there's a good macro framework, you can grow very quickly for a while, but once you reach the middle-income level, to move from middle to high income, you have to do things that increase productivity: innovation, technology, investment in human capital, physical capital, infrastructure, better institutions.
This second-generation reform did n't happen; it happens very slowly in many emerging markets. Again, there are exceptions, for example, in Asia, in India, which has started to do it, and in Latin America, Mexico has done it, so it's not a general picture. However, in many emerging markets, it's difficult.
With strong growth, steel policies have become somewhat lax in terms of making these structural reforms more difficult, which doesn't increase productivity. There's an additional point about Latin America: Latin America has, of course, been hit hard. Like many emerging markets, due to these global problems— decreased growth in China, the fact that most South American countries are net commodity exporters and commodity prices have fallen, and the fact that they have imported capital, many of them have had certain deficits—and when there was a policy downturn, money began to flow out of emerging markets in Latin America.
So these are some rather short impressions, but something important about Latin America is that most Latin American countries have stable democracies. Yes, sometimes there are inappropriate governments, some left-wing, others right-wing, but compared to the past, 20, 30, 40 years ago, when we had these big policy shifts, radical populist parties of the extreme left in power followed by authoritarian regimes of the extreme right, from left to right, there were many changes from the left to the right, there were economic crises, there were price crises, there were debt crises.
You know the history of Latin America over the last 30 years. It was a period of economic reforms, institutional building, democracy, better democratic policies, reforms. Structurally, some countries are doing better than others; however, this is a region of the world that is currently more politically stable, with a balanced alternation of democratic governments.
Yes, there have been certain political changes in Argentina, Brazil, and Peru. We hope that there will be certain political and economic changes in Venezuela as well. Now, let's finally talk about your country, Chile, a country I greatly respect. First, I would like to suggest that there are several aspects of the country that are structurally very positive and very powerful.
Something important about Chile is the relationship between growth, as I was saying, and the last few years. A few years ago, growth was close to 5%, but in the last three years, it has been between 1.5% and 2%. And of course, there is some debate in this country regarding the different views that different people have about the sources of growth.
Some people say it has to do with international shocks, like China and the fall in the price of copper, while others say it has to do with some of the economic policies that the current government has pursued, which haven't generated much confidence in the private sector. And that has caused investment to fall.
These are negative policies that have led to... This result, now, if you're in the opposition, on the right, you might say that a third of the relationship has to do with the domestic sector. If you're on the government side, you might say that two-thirds or more has to do with global factors, and the rest might have to do with excessive politics.
I'm not going to get into that debate, but I will make a point: things are more complex. In my view, more than whether it's just a global or domestic impact, there are several things to consider. Even in the United States, one of the most advanced economies, we can see that there's concern regarding inclusive economic growth for this region of the world, for this country.
It's natural that after several years of maximizing growth and employment, there's a growing concern about inclusive growth, and that it's becoming more important in the political discussion. Therefore, the idea of investing more in education, because that's undoubtedly one of the drivers of growth, and financing it will produce higher taxes in the business sector, has been the political discourse.
So we have to see if these reforms were done well or poorly—the educational reforms, other reforms. Like tax reform, we have to see how to do these reforms in a good way. We know as economists that there's a trade-off between growth and income and equity. We can maximize growth and not care about equity, or we can only worry about inequality and distribution, and then growth will fall.
So we're not helping those we want to help. And of course, sometimes we have this pendulum that swings, where the government wants more inclusive growth, and now the government is emphasizing equity, and the cost of having significantly lower growth is a factor. So we have to find the middle ground.
We have to find how to create incentives for entrepreneurship, how to create jobs, how to make growth inclusive. Because there's also something... There's an issue that has to do with the political world. It seems that another important point here for Chile is that the current system won't work like it did in the past.
The previous system isn't going to work like it did in the past; it's broken. Before, there was a lot of reliance on primary production, on commodities, on... Copper, the super cycle of commodities, has ended, so the economic gains and growth derived from mining will not be the same as in the past. This also has to do with an economic model where a small country doesn't have enough competition; there are oligopolies.
And these oligopolies have quite high margins, which can be explicit or implicit. The world is becoming more globalized, so this model doesn't work—a model in which we have a very large margin for commodity retail, financial intermediation, etc. Therefore, there is no investment in new innovation. This is the world we have to change in the economic sector.
We need to diversify the economy, produce more goods and services, not just the traditional ones. We need innovation; we need technological innovation; more competition; we need more entrepreneurs; we need many more small and medium-sized enterprises; more startups that become large companies. And for that, we need to have a positive attitude.
We have to see that many entrepreneurs can succeed. So, there is an economy that has been growing below its potential for several years, and the gap is widening. So, some of this mediocre growth potential could be related to a lack of investment and a lack of... Confidence. The question is whether we have a good macroeconomic mix, whether policies need to be conservative and cautious because eventually the credit rating will be reduced, so there's a question.
Regarding monetary policies, should they be a little looser, more flexible? Final observation is that we have two sides, one for Chile, which is more positive, one more negative. The positive side is that this is a country that has performed very well for the last few decades, and there's something I must mention: there's a strong political debate and some sensitive policies that need to be addressed, policies that I would call centrist, not far-right or far-left.
However, there's another risk. Compared to a few years ago, I would say that in Chile I see a risk of social and political polarization. There are some forces on the far left that are in favor of radical populist policies and have some influence in the current government. However, there are also forces on the far right—not the moderate right—that aren't interested in social equity, they don't care about economic opportunities, they're simply in favor of fair trade.
And I'm optimistic about this country because this country It's stable, it has a good democracy, there's a vibrant debate, there's a growing middle class, and there's a growing number of people who believe that the right thing to do must be done, and the right thing is the balance between the private and public sectors and policies that foster growth but also provide opportunities for everyone.
So yes, I see certain concerns, but I have great hope that this region of the world can remain stable in the future despite certain difficulties, and that it will have opportunities and social benefits for all. So thank you very much to everyone for your attention
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