Friday, December 17, 2010

Chile: Catching up with the top performers

The best innovation capacity in Latin America
With a rank of 29 among the 131 countries included in the ICI, Chile is by far the best performing country in Latin America. Indeed, it has a rank a full 20 places ahead of Uruguay (49), the next best performer. Chile is firmly positioned among 12 members of the European Union, with some slightly ahead (e.g., Belgium, Austria, France, and Spain), and others slightly behind (Italy, Slovenia, the Czech Republic, and Portugal). Chile has the highest rank among countries with a broadly similar level of income per capita, with only Malaysia (34) exhibiting a similar performance. Chile has a rank of 1 in Latin America in several important indicators including government effectiveness, rule of law, absence of corruption, the fiscal balance (as a proxy indicator for the strength of macroeconomic policies), the number of schools connected to the Internet, the ease of paying taxes, broadband penetration rates, reliability of electricity generation, and a top 5 rank in a much larger set of indicators.

Chile’s strong performance in the Innovation Capacity Index is the result of a combination of several factors two of which have played a central role and are, therefore, desirable to highlight: first, the gradual build up of an institutional environment that has been broadly supportive of private sector development; and second, the introduction of a range of policies that have explicitly sought to enhance the role of high technologies in promoting gains in factor productivity. It will be useful to present here a brief overview of both.

Chile ranks 23rd among 180 countries in Transparency International’s Corruption Perceptions Index 2008, tied with France (23) and ahead of Spain (28), Portugal (32), and far ahead of Korea (40), Italy (55), Mexico (72), Brazil (80), and Argentina (109). In fact, the 22 countries with a better score than Chile are all high-income countries, as defined by the World Bank. In the ICI’s own Good Governance subindex—which also includes measures of voice and accountability, political stability, government effectiveness, rule of law, the property rights framework, and transparency and judicial independence—and in the Country Policy Assessment subindex, which captures various measures of the quality of public sector policies, Chile ranks 25 and 14 respectively, out of 131 countries in 2009.

Legitimizing market reforms
Market reforms in Chile have been legitimized in the eyes of the public because they have benefited the population in tangible ways, for instance, by increases in per capita income or, as noted earlier, sustained reductions in poverty levels. This contrasts sharply with other countries in the region, where the motivations for public policy have more often been a mixture of dubious ideology or some confusion about public ends and private benefits among the ruling elites. In addition, on those occasions when flaws in the public administration in Chile have emerged, the authorities’ response has been swift and effective. For example, Chile today has a demanding campaign contributions law that is tougher than those found in the statutes of many high-income democracies. Furthermore, the authorities have generally been very good about generating a broad consensus for their policies, which ensures sustainability in the policy environment. Successive governments over the past 19 years, following the country’s return to democracy, have been fairly successful in setting in motion processes of consultation, to elicit the views of various sectors in society, such as opposition political parties, trade unions, and various organizations of civil society. This has resulted in greater understanding on the part of the population, and elicited their commitment to the often painful measures that accompany the implementation of various economic adjustment measures. This approach has also led to a more equitable distribution of the costs of adjustment and contributed to political stability.

A solid macro environment
Together with the Nordics, Chile is part of a small group of countries in which the political process has resulted in broad-based support for fiscal discipline, where safeguards have been introduced, which effectively insulate the budget from the short-term horizon of politicians, and from the diverse demands placed upon it by economic agents in a pluralistic democracy. The net effect has been a virtuous fiscal policy, which has contributed to a sustained reduction in the levels of public debt, from close to 90 percent of GDP in the mid-1980s, to less than 7 percent of GDP in 2008. We find no example, either among industrialized countries or in the developing world, with as sustained a downward adjustment in debt levels as in Chile. In fact, quite the opposite is the case: the vast majority of OECD members have higher levels of public debt today than 10 years ago. Indeed, according to the IMF, against the background of the global financial crisis and the fiscal stimulus measures that have been taken to address the effects of the crisis, public debt in the advanced economies will rise from 75 percent of GDP in 2008 to 110 percent of GDP in 2014.

Chile’s policies have, in contrast, greatly reduced the debt-servicing burden of the public debt in Chile, contributed to sharply lower interest rates, and to the highest credit ratings in Latin America. Indeed, in 2009 Chile was the only country to have actually seen a rise in its credit ratings, at a time of massive ratings downgrades worldwide, affecting corporations and sovereign debt issuers alike. A lower debt burden has, of course, allowed spending to rise in other areas, including education and public health, and is very much behind the progress made in reducing the incidence of poverty, which fell from 38.6 percent in 1990 to 13 percent in 2006.[1]

Moreover, as noted above, not only has Chile done much to establish a clear, transparent framework for public policies, also involving a solid legal and regulatory framework—it has a ranking of 23 in the third pillar of the ICI, which captures several indicators measuring various obstacles to private sector activity—but the government has also played a leading role in promoting other innovation-friendly policies which have nicely complemented those aimed at improving the institutional climate.

Good innovation policies
The government has shown remarkable commitment to e-government, to increasing efficiency in public management, to diminishing the transaction and coordination costs between public entities, to facilitating innovation and creativity in management, to increasing the public value of services, improving government transparency and, more generally, to enhancing the quality of the services provided by the government to civil society.[2] Three areas in which this has been done in a particularly effective way, providing best practice, are those reforms introduced at the Internal Revenue Service and through the electronic platforms ChileCompra and Trámite Fácil. At the IRS, e-government has boosted direct interactions with tax payers and greatly facilitated tax compliance. Close to 100 percent of Chilean tax-payers now pay income taxes through the Internet and the Chilean IRS is acknowledged to be one of the most modern, efficient, high quality taxation administrations in the world, setting high international standards for tax compliance.

ChileCompra was launched in 2000 and is a public electronic system for purchasing and hiring, based on an Internet platform. It has earned a worldwide reputation for excellence, transparency and efficiency. It serves companies, public organizations, and citizens, and is by far the largest business-to-business site in Chile, involving over 1000 purchasing organizations which invoiced well in excess of US$2 billion in transactions by 2005. It has also been a catalyst for the use of the Internet throughout the country. Trámite Fácil is a government site coordinating the work of over 240 government agencies and bodies, and taking care of a broad range of processes online, including birth certificates, identity documents, pension fund payments, trademarks/patents, housing subsidies, university credits, and so on. The government’s efforts to integrate the Chilean school system with the Internet have been no less successful, and have involved heavy infrastructure investments, the training of over 90,000 teachers in the basics of ICTs, digital literacy campaigns, encouraging the study of English and several novel public-private partnerships aimed at bringing to the classroom the latest technologies and know-how.

Some challenges ahead to boost innovation capacity
The authorities in Chile have shown remarkable leadership, as well, in identifying the key challenges ahead to strengthening the role of ICTs in improving productivity and in boosting the innovation capacities of the public and private sectors and civil society. In this respect, they feel that it is necessary to expand and intensify the integration of digital technologies in the educational curriculum and to improve the education and training of highly qualified workers. It is also necessary, in their view, to enhance connectivity, especially among the lowest four-fifths of the income distribution, by overcoming unequal income distribution, restrictions facing micro- and small companies, and connectivity problems in rural and remote regions. They would also like to encourage the development by the private sector of computer packages for low-income households and micro-companies so that they can access the Internet more cheaply and effectively, and to continue government subsidies for rural and remote areas and low-income communities and microcompanies. Priority is also being given to increasing R&D in the use of ICTs to stimulate competitiveness of the main export sectors, to rectify limitations in the legal system, to provide an appropriate institutional framework to stimulate/encourage e-trade, e-government, and use of ICTs, and to assure public trust in electronic operations and platforms. Finally, priority is also being given to facilitating the takeoff of the ICT industry by improving virtuous cycles of cooperation between institutions of higher education and the business community. This is seen as essential for narrowing the skills gap that exists today between Chile and the average in the OECD, made evident by the results of the PISA tests.
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1. For a discussion of the institutional framework in place for the implementation of fiscal policy in Chile, including the targeting of a surplus in the government balance since 2000, as well as other progress made in the implementation of a sound institutional framework, see: López-Claros, A. 2004. “Chile: The Next Stage of Development”, Global Competitiveness Report 2004-2005. Hampshire: Palgrave Macmillan. pp. 111–24.
2. For a comprehensive discussion of these issues, see: Alvarez Voullième, Carlos, Constanza Capdevila de la Cerda, Fernando Flores Labra, Alejandro Foxley Rioseco, and Andrés Navarro Haeussler. 2006. “Information and Communication Technologies in Chile: Past Efforts, Future Challenges.” Global Information Technology Report 2006, Hampshire: Palgrave Macmillan. pp. 71–87.

Friday, December 10, 2010

Korea: Impressive innovation capacity

Korea is ranked 11 in the 2010 edition of the Innovation Capacity Index, because it does extremely well in many of the areas captured by the Index.

Let us begin by highlighting a few facts about Korea’s innovation capacity. First, the information and communications technology industry is a powerful engine of economic growth, contributing over 40 percent to the total expansion of GDP growth in recent years. Second, expenditure on research and development in relation to GDP has risen from under 1 percent in the 1980s to close to 3.5 percent in 2009, well above the OECD average. Third, the share of R&D expenditure carried out by the private sector had risen from 29 percent in 1970 to over 70 percent by 2000. Fourth, the average number of patents granted in the United States to Korean firms rose from about 10 per year during the period 1963–1986 to an average of about 4,800 per year during the period 2002–2007, a close to 500-fold increase. Fifth, the share of ICT in total manufacturing in Korea is 20.2 percent, higher than in any other country in the OECD other than Finland, where it is slightly higher. Indeed, the share of ICT goods in total merchandise exports (close to 35 percent) is higher in Korea than in any other member of the OECD, except for Israel. Finally, Samsung, the company that perhaps best exemplifies Korea’s transformation over the past five decades from an agricultural society into a technology powerhouse now has research centers in Europe, the United States, Japan, Russia, India, and China, 27 manufacturing facilities in 12 countries, and an extensive network of sales organizations in 50 countries across the world.[1]

The role of government policy
What are some of the factors that have contributed to this impressive performance, perhaps matched only by Taiwan over the same period? Without doubt, a primary engine of change has been government policy, which at various times has provided critical support to the development of the ICT sector through a variety of policy instruments and incentives. The Korean economy has opened rapidly over the past 30 years and this has facilitated technology transfer, boosted international competition in the domestic market, and allowed economies of scale. A first step was taken in 1984 when the law regulating FDI was amended to broaden the sectors into which investment was permitted, with restrictions changed from a positive to a negative list, and restrictions on majority ownership relaxed. A second wave of liberalization for FDI came ahead of OECD entry in 1996. This was boosted further after the 1997–98 financial crisis, which had the effect of persuading the Korean authorities of the clear advantages of non-debt capital inflows to finance economic development. The New Foreign Investment Promotion Act (1998) brought about several incentives to promote inward FDI, including corporate income tax concessions, exemptions from customs duties on imported capital goods and various subsidies for firms setting up in specially designated economic zones. In parallel to the creation of an increasingly friendly environment for foreign investment—and thus a strong reliance on foreign technology—the capacity of Korean firms to enter into strategic alliances with companies abroad was significantly enhanced. For instance, over the past decade or so Samsung has signed a number of partnerships: with Nokia (2007) to co-develop technology for handsets; with IBM (2006) to co-develop and market technologies for industrial printers; with Sun Microsystems (2005) to cooperate on next-generation computing systems; with Sony (2004) for collaboration on development of 7th generation LCDs; with Hewlett-Packard (2003) to share technology for ink-jet printers; and with Microsoft (2001), to co-develop digital household electronics, to name just a few.[2] All of these companies, and many others, have established research centers in Korea.

The virtues of an open trade regime
A second dimension of increasing openness has been a fairly ambitious program of trade liberalization. For instance, average most-favored nation (MFN) tariffs for manufactures of electrical industrial machinery were reduced from 19.6 percent in 1988 to 4.6 percent by 2006. Tariffs on manufactures of radio, television, and communications equipment were reduced from 13.1 percent in 1988 to 1.1 percent by 2006. Similar tariff reductions applied to other ICT-related products. A particularly important instrument in this regard has been the WTO’s Information Technology Agreement, a comprehensive framework that came into force in 1997, when 40 nations, including Korea, accounting for over 90 percent of world trade in ICT products, agreed to the elimination of tariffs on a range of ICT products. As a result, the growth of imports of ICT products accelerated sharply, but that of exports grew even faster. Indeed, the trade figures for ICT products are nothing short of spectacular. Imports in 1999 were US$30.3 billion and had risen to US$54 billion by 2005. Exports in 1999 were US$48.5 billion and rose to US$102.3 billion by 2005. As a result, the trade surplus on ICT products rose from US$18.2 billion in 1999 to US$48.4 billion in 2005. The penetration of the Chinese market was particularly swift, with Korean exports rising from US$5.5 billion in 1999 to US$35.6 by 2005.[3] To take a specific example, total exports of mobile handsets rose from under US$600 million in 1995 to well over US$17 billion in 2006, a close to 30-fold increase—impressive by any standards. Indeed, as noted by Onadera and Kim (2008, p. 114), Korea’s “industrialization drive has been strongly led by exports,” with the export-to-GDP ratio rising from some 5 percent in 1962, to 43.6 percent by 2009, notwithstanding a vertiginous rise in GDP, among the highest in the world.

The latest technologies and human capital
Equally impressive has been the extent to which use of the latest technologies has penetrated Korea, both within the business community, government, and civil society. Broadband Internet subscribers per 100 inhabitants rose from 13 in 2000 to 32 in 2008. Internet usage per 100 inhabitants was 45 in 2000 and had risen to 77 by 2008. There were 57 mobile phone users per 100 inhabitants in 2000 and 95 by 2008. Similar increases can be noted in personal computer use, e-commerce, and Internet banking subscribership. These penetration rates often exceed those of other OECD members having much higher levels of income per capita. The UN e-Government Readiness Index ranks Korea as number 1 among 180 countries in its latest edition, reflecting the extent to which the growth of the ICT sector in Korea has affected every dimension of economic life, including the delivery of services by the government.

But trade and investment policies have only been one dimension of Korea’s approach to the rapid development of the ICT sector and the creation of an impressive innovation capacity. The government has also been aggressive in the way it has gone about developing a modern infrastructure for higher education and training. Korea has the highest tertiary enrolment rate in the world: 96.1 percent. The Electronics and Telecommunications Research Institute was established in 1976, part of ten government-sponsored research institutes created with a mandate to boost Korea’s science and technology capabilities, develop its skilled technological manpower, and promote private sector participation in research and development. The number of fully qualified researchers engaged in R&D in Korea rose from under 6,000 in 1970, to about 224,000 in 2007, a 37-fold increase.

Korea’s rise from a relatively simple agricultural society in the early 1960s to a leading industrial and technological power by the beginning of the new century is worthy of admiration, particularly when set against the background of the relatively pessimistic expectations after the Korean war; a country with such a difficult political geography and modest natural resource endowments might well have raised questions about its long-term viability. That a country could transform itself in so short a period into a high-income industrial giant with a huge footprint on the global economy highlights two important facts: a) the powerful role of sensible economic policies in enabling a country to embark on a path of self-sustaining economic growth, and b) the extent to which governments can, in fact, contribute to rising prosperity for their populations, notwithstanding the many limitations of the free market economy, so painfully evident during the latest global financial crisis.

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1. Onodera, Osamu and Earl Kim Hann. 2008. Case Study 2: Trade and Innovation in the Korean Information and Communications Technology Sector. OECD, Paris.
2. Organisation for Economic Co-operation and Development (OECD). 2008. Handbook on Constructing Composite Indicators: Methodology and User Guide. Paris: OECD.
3. In 1999, the United States was Korea’s most important trade partner. By 2005, by a significant margin, the most important markets for Korean ICT exports were China and the EU, accounting for roughly half of the total.