Chile could well have space to increaseits growth potential by 2 percentage points of GrossDomestic Product (GDP) per year. To do this, it would needto pay more attention to new sources of growth in naturalresources, manufacturing, and services. In an increasinglyglobalized world, first-mover advantages have become morenumerous and larger. Chile risks losing out, as a few recenthigh-profile cases suggest. Chile's total factorproductivity growth can be raised by driving within-firmtechnological change closer to the global best-practicefrontier more rapidly, especially in manufacturing. Thiswould encourage the diversification of exports and boostChile's supply response to global demand changes. Chileconfronts obstacles in its processes of innovation, humancapital accumulation, and investment. To overcome them, deepinstitutional changes are needed to develop a nationalinnovation system, stronger and more equitable educationalachievement, more flexible labor markets, and focused publicinvestments that crowd in private business. Such aninclusive growth strategy is likely to yield better socialoutcomes than a strategy that attempts to confront socialinequities head-on through more equitable access to publicservices without paying adequate attention to the demand forlabor and generation of income. Chile could also try a newpolicy towards innovation, but it would need to be bolder interms of the institutional design to maximize the chances of success.
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