Is education reform the ticket for Chile?

Chile’s president Sebastian Piñera has made no secret of his goal for Chile to obtain developed-country status by 2018. According to Piñera, “Our per capita income today is of $14,400, and by 2018 we want to reach $24,000, which is the threshold that separates the developed world from the developing world. If we are able to grow by 6 percent a year, which is our target, we will be able to be a developed country by 2018.”

Of course, Chile will have to deal with the major road bump that was the 2010 earthquake, whose total damage is estimated to exceed 18% of GDP.

However, the goal is still a reasonable one. Compared to many other emerging markets, Chile has significant advantages. It has a stable political system. The leading parties on the left and right have demonstrated a preference for practical solutions over ideologies. Corruption is very low (Chile is the 21st least corrupt country in the world, beating out the United States, which is ranked 22nd in the Corruption Perceptions Index).

There is more: the Index of Economic Freedom ranks Chile as the 11th most free economy in the world. The country has done an excellent job capitalizing on its abundant natural resources, including copper, forests, and some of the world’s best farmland: Chile is among the world’s leading exporters of copper, timber, fruits, wine, and salmon.

This has translated into steady economic growth (Chile’s only year of negative economic growth since 1985 was due to spillover from the Asian financial crisis of 1997-98). A rainy-day fund from copper exports let the country avoid the 2008-09 global recession.

This is great, but Chile won’t become a developed country simply by selling copper and wine. Reaching Piñera’s goal implies the emergence of a well-educated society and a large middle class. However, Chile has neither. Chile’s Gini Index (a measure of income inequality, and thus middle class strength) is among the highest (most unequal) in the world. No developed country has a Gini Index nearly as high as that of Chile.

Chile also lags in education. The OECD (an organization of mostly developed countries) has a sub-group called PISA that evaluates countries by students’ performance in reading, math, and sciences. PISA’s 2009 results show Chile lagging far behind the OECD average (set at 500) and performing only slightly better than other Latin American countries.

Piñera seems to recognize this and has made education reform one of the top priorities of his presidency. On February 16th, the president announced his reform program.

In essence, Piñera’s reform proposals seek to accomplish two major changes. The first is to increase the peso value of vouchers for poorer families. (Chile’s system is based on vouchers. Currently, families receive $100 a month to pay for tuition at the school of their choice. The problem is that tuition at better schools is often much higher).

The second, and bolder, aspect of the reform is to introduce a shred of accountability to the system. Under Mr Piñera’s plan, head teachers (school principals) would now to be chosen by independent boards, and would be able to sack up to 5% of teachers.

I wish Piñera the best of luck with these initiatives. While I don’t believe it is possible to produce an overnight transformation in Chile’s educational levels, these are strong reforms that could have a significant impact over the course of a generation.

However, these reforms should be supported with other initiatives, such as recruitment of educated teachers and community college-type education for adults. If this happens, I will bet Chile achieves Piñera’s goal of developed nation status in the next 10-15 years.

After all, it’s not unprecedented: Spain became a developed country after the government enacted dramatic reforms of the educational system in the 1970s and 1980s.

Today Spain has a highly educated population but is in the doldrums because incredibly rigid labor laws make it impossible for many young Spaniards to get jobs. I’ve already pointed out Chile has the 11th freest economy in the world. So, I’d bet that with improvements to education, Chile’s income levels may one day exceed those of Spain.

Written by David Gates for Emerging Markets Blog

This entry was posted in Latin America, Market Analysis and tagged , , , , . Bookmark the permalink.

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