Spotlight: Reforms, effective social security, development of small businesses help Chile avoid "middle-income trap"

Chile has no special geological advantages or enormous natural resources, but it is the first Latin American country to escape the "middle-income trap."

Gradual market-oriented reforms under proper government supervision, a transparent and efficient administration and judicial system, effective social security system and robust development of Small and Medium Enterprises (SMEs) and foreign trade help Chile achieve the goal.

Chile is the first South American country to join the Organization for Economic Cooperation and Development, with many of its indexes, like the per capita income, life expectancy and infant mortality, close to the corresponding levels of developed countries.

GRADUAL REFORMS

The "middle-income trap" happens when a country's economic growth slowly stabilizes and eventually becomes stagnant. According to the World Bank standard, a nation registers a per capita GDP higher than 12,000 U.S. dollars and maintains sustainable development to escape the so-called "middle-income trap."

According to the World Bank, Chile's per capita GDP grew from 1,415 U.S. dollars in 1978 to 14,000 U.S. dollars in 2014, and Chile was on the list of high-income countries in 2013.

Wu Feng, an associate research fellow on world economy and macro-economy at China's State Information Center, has said the key to Chile's success lies in the balance of reforms and the government's macroeconomic control.

Chile adhered to market-oriented reforms to stimulate market potential, and insisted on opening-up policies to upgrade the development model at the proper time. Meanwhile, the government controlled the pace of pushing forward reforms, ensuring continuity and consistency of macroeconomic policies and continuing to follow prudent fiscal and monetary policies, Wu said.

Since the 1980s, Chile has been pushing forward financial reforms step by step. The country successfully transformed itself from a controlled economy to a market economy, from a financial repression phase to a financial deepening phase, while gradually changing its fixed exchange rate to a floating one.

Chile has become one of the most marketized economies in the Latin American region, with the most open financial system. State economic intervention in Chile has been prudent, which helped build a robust national economy.

EFFICIENT ANTI-GRAFT AND SOCIAL SECURITY SYSTEMS

In state and social governance, Chile has built an effective system to fight corruption and established an efficient social security system, which served as a buffer of society.

Learning from previous lessons of corrupted governance, Chile has developed an anti-graft system with a powerful and independent audit department.

Chile's government also provides an attractive salary for civil servants and policemen, with good retirement payment. If found guilty of corruption, they will be deprived of the attractive salaries and other benefits.

Chile started to privatize the retirement fund in the 1980s and introduced a new system of privately managed individual accounts, which later became known as the "Chilean model".

According to a report titled "Chile's Next Generation Pension Reform", published on the U.S. Social Security Administration's website, Chilean workers must contribute at least 10 percent of their monthly earnings to their individual accounts, and the nation's funded and regulated private pension funds, called AFPs, are responsible for the management of these accounts. Workers are free to choose any AFP and may switch from one to another. AFPs invest these sums of money according to regulations set by the government, and contract with insurance companies to provide survival and disability insurance for their members.

A series of effective state and social governance policies have brought positive results, including growth in the number of middle-income groups and decline in the rate of people under poverty. In particular, Chile's poverty rate dropped from 40 percent in the 1980s to 14.4 percent in 2013.

PROMOTION OF FREE TRADE AND SMES

Chile has chosen to promote free trade and signed free trade agreements with most major economies in the world, with a view to encouraging Chilean companies to compete on a global scale.

Reducing taxes to ease the burden on companies, cutting the number of big corporations and promoting the development of SMEs with favorable policies are prominent in Chile's path to nourishing a robust business sector.

In 2010, the Chilean government put into force a series of programs with a market value of 2.5 billion U.S. dollars, including perfecting the state purchasing system and improving the financing environment for SMEs.

However, with all those achievements and valuable experiences, the future development road for Chile is still bumpy.

Juan Carlos Moreno-Brid, professor at the School of Economics at the National Autonomous University of Mexico, pointed out that, although Chile has already avoided the middle-income trap, problems like inequality and wealth gaps still exist and need to be addressed.

The per capita income has indeed increased a lot, but low-income groups are still in lack of educational and medical services. Moreover, Chile needs to invest more to promote industrial transformation so as to build a new engine for economic development. Endi