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Can Chile Lead Latin America's Brain Boom?

Jaime Daremblum

We are living in an age of unprecedented optimism about Latin America’s economic future. Countries such as Panama and Peru have experienced China-level growth. Tens of millions of Brazilians have escaped from poverty. A majority of Mexicans now belong to the middle class. Colombia is being hailed as a potential “Latin American tiger.” Chile has the fastest-growing economy in the OECD. According to the United Nations, the regional poverty rate in Latin America and the Caribbean has fallen to a three-decade low. Upward mobility has rapidly increased, and income inequality has rapidly declined.

But despite the growth and poverty reduction of the past decade, Latin America has made relatively little progress in boosting its capacity for scientific and technological innovation.

Indeed, according to the 201213 World Economic Forum (WEF) Global Competitiveness Report, not a single independent Latin American or Caribbean country has an “innovation-driven” economy (Puerto Rico does, but it is a U.S. territory), and only one ranks among the top 45 countries worldwide for PCT patent applications per million population — that would be Barbados (32nd).

Meanwhile, the WEF executive-opinion survey finds that only one Latin American or Caribbean nation (again, not counting Puerto Rico) ranks among the top 40 for the quality of its scientific research institutions (Costa Rica, which is 33rd); only two rank among the top 40 for company spending on R&D (Brazil is 33rd and Panama 34th); and only four rank among the top 80 in overall quality of math and science education (Barbados is seventh, Trinidad and Tobago 35th, Costa Rica 41st and Guyana 70th).

In the 2012 INSEAD Global Innovation Index, Chile outscores every other country in Latin America or the Caribbean, and it ranks fifth among upper-middle-income nations worldwide. Unfortunately, it places 39th overall, trailing most European Union member states (including all the original 15 EU members). The next-highest-ranking Latin American or Caribbean country is Brazil, which comes in at 58th.

Finally, in the 2012 Legatum Prosperity Index, only two Latin American or Caribbean countries rank among the top 40 nations for “entrepreneurship and opportunity,” a category that covers innovation. Those countries are Panama and Chile, which place 39th and 40th, respectively.

How can the region boost its capacity for innovation? Obviously, different countries face different challenges, but all nations should seek to make their tax systems less burdensome for entrepreneurs and small businesses. The World Bank reports that only five Latin American or Caribbean countries rank among the top 70 worldwide for the ease of paying business taxes (Chile is 36th, Saint Lucia 43rd, Belize 45th, Suriname 49th and the Bahamas 51st). High marginal tax rates and complicated tax codes increase the relative costs of entrepreneurship, as do strict labor laws and regulations.

In terms of education reform and R&D spending, Latin American governments should expand successful cash-transfer programs that incentivize parents to keep their children in school (such as Bolsa Família in Brazil and Oportunidades in Mexico); they should experiment with public-private initiatives aimed at improving math and science education; and they should allocate a bigger portion of their budgets to R&D expenditures. The most recent UNESCO Science Report, published in 2010, confirmed that low levels of R&D spending represent the “Achilles’ heel” of Latin America’s approach to scientific and technological innovation. In 2007, R&D expenditures amounted to only 0.67 percent of regional GDP in Latin America and the Caribbean, compared with an OECD average of 2.28 percent.

Tax, regulatory and education reforms are obvious remedies for Latin America’s innovation deficit; a less obvious remedy is bankruptcy reform. Yet as management scholars Mike Peng, Yasuhiro Yamakawa and Seung-Hyun Lee have written: “To facilitate entrepreneurship development, formal institutions not only need to help facilitate more entrepreneurial entries, but also need to reduce the pain associated with bankruptcies in order to facilitate less painful exits.” Consider the evidence from here in the United States: American Enterprise Institute economist Aparna Mathur has calculated that entrepreneurs are 25 percent more likely to start businesses in states with higher bankruptcy exemption levels than their neighbors as compared to states with lower exemption levels than their neighbors.

South of the border, bankruptcy law is a particularly large obstacle to entrepreneurship in Chile: According to the World Bank, Chile ranks 98th worldwide for the ease of resolving insolvency, trailing the likes of Croatia, Togo and Azerbaijan. (That’s why President Sebastian Pinera signed bankruptcy reform legislation back in August.) However, in another area critical to innovation, Chile has become a leader: Through a program known as Start-Up Chile, which offers visas and grants to promising entrepreneurs, the South American country has been luring youthful companies from abroad. As of October, Start-Up Chile had helped about 500 firms and nearly 900 entrepreneurs — mostly of foreign origin, but also many with Chilean roots. Here’s how its architect, Chilean businessman Nicolas Shea, a Stanford graduate, described his inspiration in a recent interview with The Economist: “I saw smart people being kicked out of the United States because they couldn’t get visas to stay. And I thought: Why not bring some of them to Chile?”

The nature of global economic competition is forcing many rich and middle-income countries to pay more attention to skilled immigrants. Chile has found a clever new way to attract them. Other Latin American nations should take notice. For that matter, so should the United States.

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