Productivity falls between 1.8% and 2.4% in 2023, confirming the slowdown trend of the last 15 years

Productivity falls between 1.8% and 2.4% in 2023, confirming the slowdown trend of the last 15 years

The Total Factor Productivity (TFP) continues its stagnation trend of the last 15 years, falling for the second consecutive year after the atypical increase during the pandemic years.

This situation occurs in a year when an economic activity variation of 0% is expected, accompanied by capital growth and worked hours of 3.0% and 1.9%, respectively. Thus, in 2023, approximately the same was produced as in 2022, using more productive factors.

In the years 20-23, productivity has fallen annually, on average -0.2% for the aggregate economy and increased 0.5% for the non-mining economy.

In this report, along with presenting the total factor productivity (TFP) figures, labor productivity is analyzed for the first time. The statistics show annual growths of over 2% between 2001 and 2010, half of the 4% observed between 1990 and 2000, and just 1% average annual growth since 2011. However, since 2000, labor productivity growth in Chile’s main driver has been a higher level of capital used, namely more investment in machinery and equipment, and not efficiency in the use of capital and labor (measured by TFP), a key variable behind labor productivity growth in OECD countries. Labor productivity, while influenced by factors other than productive efficiency, allows for international comparisons and is a determining factor in the growth of real wages.

The 2023 version includes an exploratory study of the impact of incorporating the STEM approach (integration in learning Science, Technology, Engineering, and Mathematics subjects) into the national educational framework. The document confirms its global impact on productivity, growth, and wages. It warns that STEM initiatives are not part of the local formal education system, making it difficult to move forward in artificial intelligence to complement work instead of replacing it.

The institutional report addresses the diagnosis regarding the system of permits for investing in Chile, characterized by high degrees of inefficiency, uncertainty, and instability, and notes that the agenda driven by the authority in the matter is moving in the right direction. It also analyzes the normative conflicts in the telecommunications sector, the digital gap, and the need to change the spectrum concession model used by Chile.

Finally, it also highlights the work in the field of public policy evaluation. Each year, the CNEP will prepare an “Annual Evaluation Report,” the first version to be published in mid-2024.

Wednesday, January 10, 2024. Through the eighth edition of the Annual Productivity Report, the National Commission for Evaluation and Productivity (CNEP) disclosed figures and analyses explaining what happened with productivity last year in Chile.

Before delving into this, the president of the CNEP, Raphael Bergoeing, addressed the institutional report, focusing on the studies completed during 2023, those currently in process, along with the detail of some milestones and findings that marked part of the public discussion in various sectors of the economy.

CNEP Report

In the study “Analysis of Priority Sectoral Permits for Investment in Chile,” which includes a set of recommendations to improve the permit processing system, the CNEP concluded that the permit system for investing in Chile is highly complex and outdated, implemented in silos and without internal coherence, which generates inefficiency, uncertainty, and instability. The president of the CNEP, Raphael Bergoeing, highlighted that “this is a consideration transversally shared in Chile. Therefore, the agenda driven by the authority to eliminate the system’s flaws is a step in the right direction.”

On the other hand, he delved into the study “Productivity in the telecommunications sector,” which focused on identifying the barriers that, after the increase in the provision of telecommunications services (digital divide), could limit the growth of productivity in different sectors, as well as those that hinder the deployment of high-speed networks.

He emphasized that, through an institutional effort, the research considered creating a georeferential map, which allowed visualizing the coverage of fixed internet in Chile. This publicly available tool identified 21,600 km of fiber optic cable needed to provide high-speed connectivity to all households in the country.

This work identified that the digital divide in Chile is through:

  1. The type of use given to the internet, since most do not use it for productive purposes but for entertainment or communication, where the lack of digital skills has a significant impact.
  2. Unequal quality throughout the territory.
  3. Lack of access in low-income sectors.
  4. Absence of fiber optic coverage for 5.6 million people.

Regarding issues related to the sector’s functioning, the study highlighted problems in the authorization processes of projects, identifying that the times to process telecommunications concessions exceed the legal norm by about 120% and confirming that the institutional framework presents various normative conflicts.

Another topic addressed was the management of the radioelectric spectrum. In this regard, the executive secretary of the CNEP, Rodrigo Krell, explained that “the evidence shows that the model Chile uses to grant this resource is an exception compared to most developed countries; and that Chile, in addition to having the longest duration of concessions (30 years), compared with OECD member countries, still retains some of the indefinite character, which among other effects, can distort competition. Therefore, some of the recommendations proposed by the CNEP are to change the model under which the spectrum is auctioned, modify the duration of concessions, an explicit pronouncement from SUBTEL on the indefinite character, and compensation mechanisms,” he stated.

In addition, the CNEP reviewed the impact of recommendations proposed between 2015 and 2020. In this regard, Rodrigo Krell detailed that during the analyzed period, 13 studies were conducted with 452 recommendations, of which 32% have been accepted to some extent. 11% are fully complied with, 9% are with high compliance, and 11% are partially low. At the same time, 26% are currently under study, and 42% still need to be complied with.

The CNEP report highlighted the work in public policy evaluation, a new function since 2022. In this regard, the CNEP will prepare an “Annual Evaluation Report,” scheduled for mid-2024, which will review and analyze the systems and instruments used to evaluate initiatives, programs, and public policies at the central and sectoral levels. It will also include a specific chapter on evaluating planning and territorial ordering in Chile.

The rest of the ongoing studies are: “Efficiency in procurement management and inventory handling in hospitals,” “Medium-term evaluation agenda,” “Evaluation, planning, and territorial ordering in Chile,” and “Measurement of times to process investment permits in mining.”

The national education system does not have an incorporated STEM approach

Like every year, the Annual Productivity Report includes an “exploratory study” related to the country’s economic and productive development, which analyzes the level of incorporation of STEM (integration in the learning of Science, Technology, Engineering, and Mathematics subjects) in the national educational framework. 

The evidence indicates that this approach not only has the potential to improve the skills and competencies of students but is also seen as a source of increased productivity and innovation, contributing to research and development and the efficient adoption of new technologies.

According to international literature, a one percentage point increase in the participation of workers with higher education in STEM fields generates about a 2% increase in productivity. It also notes that the facilitated granting of visas to STEM professionals in the U.S. has increased productivity in the cities where they settled.

On the other hand, it discusses literature reviews on some projections on the impact of Artificial Intelligence (AI) on global growth and productivity. Estimates indicate that generative AI, capable of generating new content (like ChatGPT), could increase global productivity rates by 1.5% annually over the next ten years. However, exploiting its productive potential must be enabled and accompanied by specialized human capital such as STEM, specifically ICT (Information and Communication Technologies) professionals. Indeed, employee competencies are one of the main barriers to business use of this technology.

The CNEP diagnosis of the Chilean case reveals that, although there are multiple public and private initiatives in the field, the programs that encourage STEM education operate outside the formal education system, leading to fragmented actions, limited scope, coordination problems, and a lack of consolidated knowledge about effective practices.

Regarding admission to academic programs, there is a low representation of women in STEM fields, with only 20% of the total admissions, significantly below the OECD average of 35.5%.

Furthermore, the document points out that individuals with STEM degrees in Chile earn an hourly wage 7% higher than those who studied in other areas, even though they are similar workers (in terms of sociodemographics, education, and experience) and work in the same industry. This difference is even higher for young adults (25 to 44 years old), who earn a salary 9% higher.

The research presents the opportunity and need for Chile to adopt policies and projects to create a more integrated STEM ecosystem, which includes a coordinated policy in the field that promotes both the supply and demand of STEM skills. This approach follows some notable cases, such as South Korea and the United Kingdom, which encourage investment in R&D&I (Research, Development, and Innovation), create job opportunities for STEM graduates, and align STEM training with crucial economic sectors.

Last 15 years: virtually no growth in productivity

Additionally, the president, executive secretary, and economist of the CNEP, Raphael Bergoeing, Rodrigo Krell, and Maximiliano Alarcón, respectively, referred to the productivity figures for 2023. The CNEP’s estimate indicates a fall in Total Factor Productivity (TFP) between -1.8% and -2.4% for the aggregate economy (which includes the mining sector) and between -1.8% and -2.6% for the non-mining economy (excluding the mining sector).

The executive secretary of the CNEP, Rodrigo Krell, explained that “this situation occurs in a year where a variation in economic activity of 0% is expected, accompanied by moderate growth of capital and worked hours of 3.0% and 1.9%, respectively. This scenario shows a deterioration of productivity in 2023 compared to 2022. In other words, last year’s production did not vary significantly compared to 2022, but more productive factors (capital 3.0% and employment 1.9%) were used.

He emphasized that the figures observed in recent decades are concerning, “productivity is the most important driver of sustained economic growth, which allows, among other things, to increase the well-being of the population. It is determined by elements such as those associated with regulatory quality, the level of competition in different markets, technology use, training, and innovation, among others. These are variables that are not always observable, and because of this, productivity is a measure that must be estimated,” he warned.

Productivity is the relationship between the quantity of goods produced and the resources used for that purpose; it constitutes a measure of how much can be generated with a certain level of inputs.

He stressed that in Chile, “the influence of TFP on economic growth has declined over time. While between 1991 and 2000, it explained more than 1/3 of the average annual growth, from 2006 onwards, its influence has been virtually nil,” he asserted.

He explained that, with the contraction of TFP in 2023, the moving average of its growth fluctuates at around 0%, in line with the trend since the end of the 2000s. Although in 2020 and 2021, TFP experienced a growth of 1.8% and 3.2%, respectively (due to exceptional conditions in which the economy operated during the COVID-19 pandemic), the contractions of 2022 (4.0%) and 2023 (between -1.8% and -2.4%) absorb this rise, reaching a level practically identical to that recorded before the pandemic.

When comparing these figures with the growth rates of over 3% recorded at the beginning of the 90s, it is possible to observe that the last 15 years (2008-2023) constitute a declining trend. This situation highlights the need to generate measures to boost it and review the evidence (technological changes, massification of telework). These design policies take advantage of these developments and improve labor efficiency.

For this reason, there has been progress in the review of sectorial reforms to improve investment, growth, and productivity. For example, and as a result of several specific studies, the CNEP has analyzed the system of permits for investment. The CNEP’s diagnosis, which identified the system as unstable, inefficient, and legally uncertain, and over which there is transversal consensus, is present within the measures included in the Pact for Economic Growth, Social Progress, and Fiscal Responsibility promoted by the authority.

It is essential to specify that, in line with the drop in aggregate productivity in 2022, the CNEP report also noted that six out of eight productive sectors reduced their Total Factor Productivity (TFP). The primary contractions were in commerce, hotels and restaurants (-11.8%), mining (-9.4%), and industry (-8.4%). At the same time, electricity, gas, and water, as well as transport and communications, experienced an expansion of their productivity by 6.7% and 2.5%, respectively.

Maximiliano Alarcón emphasized that this version of the Annual Productivity Report included an analysis of Labor Productivity for the first time. “Similar to the behavior of the TFP, labor productivity showed great dynamism between 1990 and 2000 with annual growth rates above 4%; however, since 2011, the average annual growth has been around 1%,” he pointed out.

Labor productivity, defined as the output generated by a worker per hour worked, partially reflects changes in the workers’ abilities or the intensity of their efforts, as its variation depends not only on the worker’s efficiency alone but also on the presence of more or less capital. Simply put, a worker may improve the level of inputs they produce in a year, but this (labor productivity) may not be due to greater efficiency and/or skills but because they have more tools and equipment to achieve it.

Regarding Chile, “Since 2000, the main driver of growth has been the increased intensity in the use of capital, namely more investment in machinery and equipment, and not the efficiency in the use of capital and labor as given by the TFP. This contrasts with other OECD countries, where the TFP drives labor productivity growth,” he specified.

He pointed out that labor productivity growth “is due to changes in the volume of product per total hours worked in an economy. For labor productivity levels to increase, some of the following scenarios must be present: more capital for production, better quality of work, or greater efficiency in the joint use of labor and capital, that is, when a higher TFP is achieved,” he affirmed.

Raphael Bergoeing mentioned that “the slowdown in productivity is a long-term phenomenon, which has been exacerbated by the fall in mining productivity, but is transversal in the national economy. Its deceleration before the COVID-19 pandemic is a global phenomenon, behavior that has even been the focus of multiple studies and, given that it occurred in a period with significant technological changes in the digital area, is usually referred to as the productivity paradox,” he stated.

Before concluding, he expressed concern about what various studies of the entity have shown regarding the knowledge, skills, and training of the population in Chile, particularly in digital topics. “An example of this is some of the data we collected in the telecommunications study, where he highlights that, at the present rate, it will take decades to improve the skills that the population declares they need.” To conclude, he warned that “policies aimed at eliminating bottlenecks to restrict productivity growth, integrated training programs with a focus on ICTs, are key to driving sustained economic growth and improvements in the well-being of the population.”