Last friday I was at Central University of Washington (Ellenburg,Washington State)where I gave a lecture concerning the wealth creation process.Some key ideas about that were :
The role of institutions,policies and rules.The basic premise was that bthe State do not create wealth,instead it redistribute it .So, the fisrt question was who has the responsability of wealth creation if the State by nature does not.The answer was, that the private sector(business firms,people motivation and self interest among others )and markets forces,are the key factor to start out the process of wealth creation.
But private sector and market forces, do not works well when there is no institutions, policies are wrongly designed, or there is no stable rules.Most of the empirical available evidence indicates that there is also a kind of right combination to get the best results.
The lecture was related to the Chilean economy experience about the process of wealth creation ,so I emphasized how the local authorities at that time (1975-2000),made the proper decisions.
It is widely known that there is no economic growth without investment,but it is also widely known that there is no investement without economic growth.Therefore both are connected to one another,mainly because they are affected by the same variables.Chile started out in the mid senventies a process of modernizing its economy focused on those three variables.
Let take a look at them more closely.
a.-Institutional variables:it meant to change the emphasizes away from the states and more focused on markets and private firms.To become an entrepreneur was not a negative option, like it was common to believe in the sixties .A privatization process was implemented to get back all of those business in State hands ,to their owners. At the same time , new laws were approved to support market forces to do their job.Markets start to set prices,and this meant that busines decisions were made on the basis of markets signals.Therefore new productive sectors started out its productive process headed toward exports.Consumers were also important so there was a new institutional framework to support their rights.
b.-Policies variables. The so called macroeconomic fundamentals ,started out to be applied.Responsible fiscal policy, keep inflation under control ,a strong private financial system were the new polices framework,such as it created the necessary conditions to support economic growth.
c.-Rules variables. The new rules set energies in favor of markets forces.Every new project had to have financial resources available to be implemented ,so there was no printed money available to finance any kind of project.Prices were all set by markets,so there was a clear signaling process for business decisions.The rule of law was widely applied in economics activities .
All of these allowed the chilean economy to overcome the economic mess of the seventies.Because to finance investment it is also nedded some saving,in the eighties there was a second wave of reforms, to support saving throughout the privatization of pension funds.This resources were aimed at providing fresh resources for new investement opportunities, otherwise it would have been very difficult to implement them.At the beginning (1980), they were unsignificant,but at the middle of the years 200o they represent near 70 % of chilean economy Gdp. Moreover, these funds has made the chilean economy less dependent on foreign capital and more reliable for long terms investment project which requires a lot of new and fresh resources.
In the beginning of the year 2000,there was a key second step in favor of private sector.The State no longer had the monopoly for public investment.The same principle applied before to health,education and pension systems,was applied this time to public investment.Those traditional projects like high ways, port and airport facilities,were assigned to private firms throughout a bidding process.This mechanism allowed the chilean economy unfrastructure to improve its efficiency supporting the exporting sector to get competitive edge.
It is clear that all of these reforms process, were related to have more private sector in the economy and less state intervention.The income percapital grew form about U$$4000 in the beginning of the nineties to roughly U$$ 9000 in the year 2006.(Some measures indicates such income level to be U$$12000).Of course each economy has their own experiences,realities, and framework setting but there is something in common.All of those economy which followed this path ,are among the first on the list of economic development.Markets forces creates energy which under the proper institutional framework, improves wealth levels.This idea was not clear until the mid nineties,when the all project got to a higher level of maturity,such it was all needed to make new reforms.
But reforms have a short life span without new and complementary reforms.The big challenge at this moment is to move deeper into modernize the state.The current public management model is not longer able to support private requirements.-