Chile: A stronger private sector for a more inclusive and productive society

By David Tinel, IFC’s Regional Manager for the Southern Cone

Long considered an economic success story in Latin America and the Caribbean, Chile is experiencing unique times. From the October 2019 protests — which evinced the issue of inequality — to today, the Andean country faced a pandemic, voted in favor of a new Constitution, and elected a president with a transformative agenda. Currently, a constitutional convention is drafting the Magna Carta, to be endorsed or rejected by the Chilean people in a vote scheduled for September 4th.

This context is full of expectations and invites us to analyze the role and responsibilities of the private sector. In recent decades, the solid performance of large, medium, and small companies, enabled by a favorable investment environment, has been critical in expanding the economy and reducing poverty in Chile. However, recent progress has been slower, segmentation continues in education and health care, and labor markets remain segregated. In an environment constrained by lower growth and productivity, Chileans are demanding access to better opportunities and improved services.

The World Bank and the International Finance Corporation, both part of the World Bank Group, hope to contribute to this debate by presenting the first Country Private Sector Diagnostic (CPSD) for Chile. The work, with contributions from experts from the two organizations and external associates, assesses challenges and opportunities to strengthen the private sector, a key step towards building a more productive, inclusive, and sustainable society. In particular, the CPSD analyzes three areas in which all actors, public, private and civil society, can work together to promote the country’s development: digital economy, green hydrogen, and climate-smart agriculture.

The digital economy presents huge opportunities to stimulate productivity and entrepreneurship and jump-start a greener economy. Technological change can also help to overcome structural weaknesses such as low firm productivity, disparities in service delivery, and high territorial concentration of economic opportunities. However, inadequate skills and financing, and shortcomings of public support programs are some of the challenges hindering the development of a stronger digital entrepreneurship ecosystem. In this order, regulatory reforms and private investments in infrastructure development, local venture capital, and ecosystem networking will foster digitalization, which encompasses greater access as well as more sophisticated use of technology.

As a bridge between the public and private sector agendas, green hydrogen (GH) appears on the horizon as a source of sustainable growth. Voices inside and outside Chile agree that the country could become a global leader in the industry of the so-called “fuel of the future”, produced from renewable energies, with the capability to produce GH at costs of 1.6 USD/kGH or lower in the long term. Specifically, investments in green hydrogen could green the economy, create high-quality jobs across the country, boost inclusion, and generate a new source of exports. There remain significant challenges, however, to reach economies of scale in GH production. These include financing and technological hurdles and difficulties in gauging market size for GH, as well as competition from other GH producers. To support the development of GH production, the government can introduce measures to incentivize investors, establish financial mechanisms to reduce risks for early adopters, and help bridge the gap between supply and demand.

Finally, Climate-Smart Agriculture (CSA) offers a pathway to improve resilience and competitiveness. Against the threat of climate change, the adoption of CSA practices could reduce GHG emissions and production costs, lead to more resilient crops, and new export opportunities. There is progress in this direction, but Chile needs a faster and broader uptake of CSA technologies, for which it will be essential to foster innovative financing instruments, higher R&D efforts, and more coordination among existing initiatives.

In each of these sectors, as in the economy as a whole, an enabling business environment where the state fosters entry and competition and promotes strong skills formation and a more inclusive labor market in partnership with the private sector are essential. Chile is going through exceptional times with the constitutional process and the series of transformations proposed by the government of Gabriel Boric. The scenario calls us to discuss the role of the private sector in the development of a more productive and inclusive society and the generation of a more innovative and sustainable economy. The CPSD of the World Bank Group hopes to provide a starting point.

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IFC

IFC, a member of the World Bank Group, is the largest global development institution focused on the private sector in emerging markets.