Okay, well, welcome everyone. Thanks for coming to the UCL Institute for Innovation and Public Purpose. I'm Mariana Mazzucato, the director, and it's a huge honor to have with us Nicolas Grau, who I will introduce in just a minute. I also want to apologize because some of you who might follow me on social media know my other passion besides the institute is what? Arsenal.
I have to be at the stadium before the match begins, not to make you jealous or anything, and especially if anyone here happens to be a Tottenham supporter, would you please leave now? Okay, the exit is there. Let's show everyone where the exits are.
I was telling Nicolas that as much as I want us to win the Champions League, it's the Premier League that really matters. Anyway, back to business. So it's a huge honor both because of what Nicolas represents. He's an academic who has really thought hard about development policy, the economics behind that, industrial strategy, finance, but then he also had the honor or the misfortune or both to go and put it into place.
And what we do here, as many of you know when you hear me ranting about how important our work is, is this idea of practice-based theorizing. We can all talk about the new economics thinking that's needed, but unless we actually then try to implement and to work with, not at, the global civil service, then we're just ideologues, right? There's different types of ideologues and we become one of them. So that idea of really bringing the lessons from the practice back to the theory and vice versa is what we're about. And we have a research program around this, kind of changing what market fixing, you know, from market fixing to market shaping, new thinking about public value, outcomes orientation, rethinking theories of value. We have a training program. Lots of you are in that program, the one-year Masters in Public Administration, but also the PhD program, and also the applied learning, which we do with governments over a four-week period.
And of course, the third is really that idea of working with policymakers and not just writing papers, but really engaging with policymakers from the start of both the research process, but also when we go rethink whether it's development banks or public sector procurement. Again, working with. So that triangle, the golden triangle of research, teaching, and policy practice is really important for us.
And again, Nicolas is also a friend, but he's also a teacher at university, but also has been the boss of some of the people in the room. Because both our PhD students, but also our master's students ended up working with President Boric's government. So quickly, his biography. And he said something very interesting about this. I'll say it and then I'll comment on it.
He served as Chile's Minister of Economy from 2022 to 2025, and then as Minister of Finance until 2026 under President Boric. And he said, "I love that you also mentioned the fact that I was also Minister of Economy, because in Chile, where the Minister of the Economy is similar to here, say the Ministry of Industry, it's always second to the big job, which is Ministry of Finance." And he, you know, said that he learned so much as a Minister of Economy, really thinking of the real economy, the material economy, and the challenges faced of making it actually align, of course, with the financial economy.
And I mentioned that last week I gave a talk where I mentioned Celso Furtado, a very important Brazilian economist who went from being Minister of Planning to later being Minister of Culture, which in Brazil is actually an upgrade. In the rest of the world, it would be seen as, you know, being downgraded. And again, that really matters in terms of how we put what's to be done, whether it's culture, health, the environment at the center of how we build an economy, of how we build better financial tools. That really requires going beyond financial gaps, right? Thinking a lot of the structure of finance, the quality of finance.
And this lecture today is incredibly — sorry, not lecture, what is it called? A discussion, but also beginning with a 15-minute presentation by Nicolas. This idea that we shouldn't have, you know, these siloed rooms. You either have, think of the G20 process or the G7 process, those thinking of the cost of capital and fiscal space in one room, and in another room far, far away, someone thinking about the critical minerals strategy, green industrialization. So, bringing together how we think about industrial strategy, industrial transformation, structural change and development with thinking about budgets. How do we rethink even the concept of fiscal sustainability? Where fiscal space actually comes from? Is it endogenous or exogenous? And of course, new theories of finance and financial structures. So, it's a huge honor to have you here.
Oh, I haven't even read your bio yet. Sorry. That was just the first line. I got distracted. He's a labor economist by training with a PhD from the University of Pennsylvania and also a fellow professor at the university — why did I write fellow professor? So, he's a professor at the University of Chile. Anyway, a professor at University of Chile before entering government. And hence again, that really important feedback between his learning as an economist at the university and then his period in government. In office, he led some of the most ambitious industrial policy initiatives in Latin America: the national lithium strategy, the sustainable productive development program, and the Biobío industrial fostering plan.
And I must say that having also Javiera Peterson here with us, one of our star PhD students who then worked closely with Nicolas and the Boric government, is also a privilege. And also some of the master's students that we've had here, both next year, this year, and last year, have come from your wonderful government.
And anyway, so what we're going to do is we will have a 15-minute presentation. I will then provoke him a bit on the sides. I even have tools to do that. When I have to unfortunately go watch Arsenal beat Atlético Madrid, I will pass over to Laura Merling who will continue to chair. I will only leave 15 minutes before this ends. There's also a reception upstairs for continuing the conversation. So with that, we will pass over.
So thank you, Mariana, for the introduction and for having me here. It's a great honor to be here after being a minister. I do think that the role of universities is so relevant, but the challenge is how to research the important questions. And I promised to myself now in my new academic life to try to do that, and I think that your job is exactly that.
I should also mention Nicolas will come join us as a fellow of the institute. So this is the beginning of a longer engagement.
So this is the title of the presentation: Fiscal Space for Industrial Strategy. So what I'm going to talk about is three things. First, talking about the question. Then I'm going to give you a little of context for the Chilean economy to understand the discussion. And then trying to go directly to the answers or to this question or some specific proposals, some ways to fix the problems that I'm going to present you. I'm going to talk about four agendas to attenuate, to ease this tension between fiscal policy and productive development policies. So, I would say that this is the core of the presentation.
So, the question: is it possible to have a fiscal space for industrial strategy in a country like Chile? I think it's very important to think about this question in a specific context because the question is not the same depending on what are the institutional capacities of the country and so on. I said I put here low income, but Chile in reality is a medium income country. So, what are the specific characteristics of Chile? A medium per capita country, which means that you have limited fiscal resources. Okay? Then we are in a small economy, which means that the domestic market is not that big, and so we have a problem with the scale.
And we are a democracy, which is good obviously, but it also raises some challenges. For example, the rotation that you have in power, which is so — it's a huge issue for this kind of long-term policies. Okay? So, my answer to that question given this context is a positive answer. I'm optimistic actually after being in government, but I think that we must be creative and build this space. This is a space that is not there. There are some hopes, there are some, let's say, loops, but from that we have to build this space.
So, to give you — I'm going to show you three slides about the Chilean context. First about productivity. We have had a stagnation of productivity in Chile since I don't know, since 2007, 2006, something like that. To have this stagnation in productivity is a problem for two reasons. First, this is an issue for growth, okay? But also it's relevant from the climate change perspective, because we need to produce more with less, and this is the definition of productivity. So this is a very important concern.
It increased a little bit the last two years of our government. So we emphasized that by a lot, but to be honest what you need is increasing for let's say 10 years, okay? So the question is how to reach that, yeah? Then about the size of the government. This is so important because it's the size of the pie that you can distribute to many different goals including the industrial strategy agenda. And here you can see that Chile is not that big. Actually it's a small state or it has a small budget relative to our GDP.
Here you can see the evolution and actually the discussion right now in Chile is about shrinking this. Okay? So this is a huge binding constraint of this debate. And finally, one of the big tensions or one of the big challenges is how to allocate money, investment to these long-term goals when you have to address the challenges that we have in public health, for example, in education, in the pension system. These three ministries actually account for 60% of the budget.
And when you see what is going to happen in the future, what is going to happen with this tension between, let's say, social policies and productive policies, it's going to get worse in the future because you see that our population is aging as in many other places, yeah. And obviously, these needs are so important. Okay, actually I was Ministry of Economy, then I became Ministry of Finance. And when I was Ministry of Finance, I did exactly the same that I was suffering when I was Ministry of Economy. And this is not because I became a bad person, I hope, but because the incentives that you face are so difficult.
When you have to decide between — I mean, you have, for example, a hospital, and the director of the hospital tells you that he or she is going to close the hospital as soon as he's going to stop getting people because you're not giving them the amount of money that they need. How do you deal with that? Yeah, this is a big issue and it's getting worse, as you can see.
So, now, let me move to the four agendas or four ways to attenuate this tension between fiscal space and industrial strategy. The first one is simple, but important. If we argue that investing money on these public policies is going to return in the future, we have to measure that. We have to better measure the way that innovation, technology, improvement, and so on can make a difference in the future. Measuring, at least in the case of Chile, is relevant because once you have that information, you can come up with some ideas about how to incorporate that information into the discussion of the budget law basically in our country.
Actually, there is an example: the way that we treat capital investment, for example, is different than the way that we treat a current expenditure. Yeah. There is an example of this or a direct implication of this way that we treat capital investment. So, for example, if you're in a ministry and you want to change or you want to reallocate money from one public policy to another public policy, from the one that it was specified in the budget law to another one, you cannot. There is a rule for the budget office that you cannot reallocate from capital expenditure to a current expenditure.
And we don't have those kind of rules when you try to protect investment in ICT for — I — no, SAT, sorry. Yeah, exactly.
Obviously, information is not enough. Okay. If these incentives or these social needs are so big, no matter what information you have, you're going to put the money on those short-term challenges. But this is the beginning. We need to account this expenditure, this investment in a different way.
The second agenda, which is related to the previous one, is: okay, this is not just about information, but it's also about designing some specific mechanisms to have an off-budget money, okay? To be allocated to these long-term objectives. And let me give you two examples. What I mean by this is some way to protect this money spent in the long-term objective from the short-term needs that we have.
And I'm going to give you two examples of something that is already happening in Chile. One is that in the CORFO-SQM and CORFO-Albemarle contracts — those are contracts for lithium extraction in Chile — they specify that from the royalty that those firms have to pay to the Chilean state, there is a part of that money that does not enter to the budget, to the treasury, okay? But it goes directly to the final, let's say the final destination, okay? And CORFO, which is our government agency in charge of economic development, okay? CORFO decides how to allocate that money. So the allocation of the money, the decision is coming from the government, okay? But that money never enters the treasury. Okay?
So that is a useful way to protect that investment from other needs. Let me give you an example about this. We found an investment in the Universidad Concepción, which is a university in the south of Chile, to develop a new technology to smelt copper, which is so important in our case, but a technology that was carbon neutral. Okay? We spent on that 10 million of dollars.
Let me — I mean, Javiera announced it. I mean, it's impossible to spend that amount of money through the budget discussion. Okay? It's impossible for something that is going to be in the future. There is no way to get something like that. And it was feasible given this mechanism that was designed by 2018, 2017 during the Bachelet government, actually.
Another example, which is not related to innovation, is what we do in concessions in public works. In that case, the Ministry of Public Works decides the needs of a new infrastructure, okay? And then that infrastructure is paid in the future, okay? Given some fees, right? If there are many different — there are different ways to justify those kind of policy, but another way to justify that policy is that you protect that long-term investment from the budget law discussion.
Okay? The question to me is whether we can create or we can come up with some similar ideas to this, okay? But in the case of innovation, technology transformations, and so on. Obviously, there is a concern here given this paper that you have, Mariana, with — yeah, I just read this paper like three or four days ago. And then I realized that there is a concern whether this off-budget mechanism can limit the learning by doing, but I don't think so because to the extent that the strategic thinking is in the public sector, so you have this learning by doing process, it's going to be fine. So, but maybe there could be a tension between protecting the funding for this long-term perspective and then losing the state capacity to think strategically within the state.
Another — the third agenda is about, you know, this phrase: if you cannot beat them, join them, okay? And this is something that you have developed in your work. I mean, if the most important social needs are public health, well, we need to innovate in public health. Both because it's important and because the money is there. Okay? So, just to give you an idea, just in the last year of the government when I became Ministry of Finance, we spent 2 billion of extra money, so on the top of what was specified in the budget law, in public health. Which is three times the budget of the Ministry of Economy. And that was just what we spent extra. Okay?
So, we need to reorientate our view about how to make innovation and how to take advantage from that. Let me give you one example. We did this emergency route optimization in the case of the hospital of Talcahuano. And in that case, we used public money for some innovation to improve or to optimize the use of specific rooms in that hospital, okay? There are other examples. I'm pretty sure that we can do more here.
One thing that we need, and this is something that we couldn't make during our administration, but we need to change social ministries' objective function. They don't have this in mind. Okay? So I'm pretty sure that the Ministry of Health in Chile, even though they do a very good job — if you see any health statistic in Chile, they are fine, okay? But they don't think about how to make innovation from that huge budget that they have, okay? There is not that much relationship, for example, between the Ministry of Health and CORFO, which is the development agency in Chile. And we need to work with them in that. Maybe we need to put some people thinking about innovation in those ministries, thinking the questions about innovation in those ministries in order that they have this concern in their political view. Yeah.
And finally, I think we need to invest more in people, in creating, building this in-house state capacity. And I'm going to give you two examples. One a positive example, another a negative example to illustrate what happened when CORFO, our development agency, when CORFO had state capacity and when CORFO didn't have state capacity addressing a specific problem. So, I'm going to start with the negative one. And Javiera also worked a lot in this problem, so we suffered together this, okay?
By 2023, there was a big flooding in the south of Chile in general, but in particular in Licantén in the Maule region, okay? There were two, actually. And when the flood hit, okay? The pulp mill firm, okay? They said they were going to close because of this. I mean, they have many other problems, but this was the final hit to them, the final problem. And that was the only firm that they have given good jobs in that place. So, basically, you were killing the good job producers of that place.
I would like to have at that point, okay? An agency, yeah? With people, with expert people in natural disasters. And when a natural disaster creates an economic problem, like a big shock, a big economic shock like the one that I'm describing you, okay? I would like to have people who are experts on this, who have done this 10 times, eight times, okay? Helping me to design a strategy to have another firm like this in, I don't know, in five years. Maybe a strategy together with the private sector, a strategy that has some ideas about how to fund this, the right incentives for this.
But, we didn't have that. We didn't have that expertise. Even though, and this is something not good, we have a lot of natural disasters in Chile. So, the learning by doing process is something that you can get if you have the same people facing those problems again and again. And so, for sure this is something that we need more.
So, let me finish with a positive example about what happened when you have those state capacities. And in this case, also in CORFO, yeah? The national lithium strategy did different things in Chile, eh? The objective was doubling the production, but at the same time reducing the environmental impact, and that was possible changing the technology of lithium extraction, among other things. And there were many things going on in this strategy, but I want to focus on what we did in terms of the involvement of the state in this process.
We had, as I said before, we had some contracts between the two private firms that were extracting lithium in Salar de Atacama, the biggest salt flat in Chile and I think in the world. And those contracts were, I would say in many things, very well-designed contracts, okay? We were getting a lot of rents from that as the state, but there were many, many things in that contract because it's so difficult in a contract to anticipate all the things that could happen in the future. We have this what we call in economics an incomplete contracts problem, huh?
So one example of this is that in the contract there was a royalty, yeah? I would say a very well-designed royalty, but that royalty depends on the price level, yeah? When they designed this contract, the price of lithium was $5,000 per ton, and it reached 80 during 2022. So, when they thought this contract, they specified that the highest price for those different layers in the contract was 10,000. So, we missed some rent from that design because it was so difficult to anticipate.
Also, another problem that we have in those contracts is that there was a design to get a value added from those contracts, but it was so difficult to get that given a contract. So, there was an opportunity window because the contract of SQM was going to end by 2030. So, that was a possibility to renegotiate this situation. Yeah.
One possibility was saying, "Okay, you're going to do the same, but again it's going to be a contract for a private firm, and we're going to try to discipline the behavior of that firm just using the contract." But our approach was different. It was to define we're going to have a public and private joint venture. So, Codelco is going to participate in this. Codelco is the biggest copper firm in the world. They didn't have experience in lithium, but it's a big firm. So, we came up with this idea of Codelco being part of the lithium extraction process.
But then the question was what we're going to do. We're going to have a regular tender to specify who's going to be the partner of Codelco by 2031, or we're going to have the polar cases, or we're going to have a direct negotiation with SQM. Okay. And we decided to have the direct negotiation. Because by doing that it was possible to have Codelco right from now, not from 2031. It was also important to have the investment now because otherwise SQM was not going to invest from now to 2030.
And it was so important the investment not just because of having more production because of this investment, but also because we need to change the technology to have a greener production approach. So, in order to make this decision, and this is the point that I want to make here, in order to make this decision, we talked with the people of CORFO who were experts on lithium extraction because they have the contract with SQM and Albemarle since 2017, 2019. So, they knew a lot about the market structure, about many, many things. So without that information, it would be so difficult, okay, to make this decision that we made.
And then, once we decided to have this approach where Codelco was going to negotiate with SQM, it was important the knowledge, the tacit knowledge and all the expertise that you have in Codelco about this huge negotiation with the private sector. Because this negotiation is the most important public and private agreement maybe in our history, and it was a so difficult negotiation. For example, it depends on future prices. It depends on the technology, it depends to have a proper assessment about the asset value of SQM.
So, there were many things that were difficult, and if we didn't have a stable company like Codelco, it would be impossible to do that. To start from scratch is so difficult. So, to finish, my question then is: imagine that we want to do something similar, not necessarily involving the state in the production, but similar in the sense that having a sound policy design, okay? Where the state has this role of coordination, of thinking about how is going to be the future, designing this market. Imagine that you want to do something like that in the 10 economic sectors that are relevant in Chile. Do you have the experience to do that? Do you have the knowledge in the state to do that? I think no, we don't have that.
So, we need to build that capacity. The same experience, information, knowledge that we had in the case of CORFO and CODELCO, we need to build that capacity in the state. And I do think that CORFO is the right, is the proper place to do that. Because CORFO had done this before. Is doing that in some cases, but we need to rebuild that capacity.
I'm going to finish saying that you know that there is a book about the plan that CORFO made by the end of the '60s in Chile. I think Javiera presented that book, no? No? But you were invited to the — but you read that book. Yeah. And in that book you can see the knowledge that we had at that point about our economy.
I mean, knowing what you produce in different regions, what are all the opportunities that we have, having specific information about all these specific economic sectors is so difficult to make decisions. In some cases to have what we did in the case of lithium where the state has a very important role. In other cases with a different role of the state. But in all cases you need the information and that specific experience to make a sound decision. I'm going to finish this.
So, fascinating presentation and there's so much that I don't know. I mean, so many of these could become case studies. In fact, we often say in the institute that because we haven't valued enough globally precisely these experiences, we haven't built that kind of database of cases that we have instead for the private sector. Think of Harvard Business School with its case study methodology of what works, what doesn't inside companies. It's precisely through this kind of research and this kind of experience that you bring to it that we should start building these cases. So, I have different questions and again, I'm going to then pass it on to the floor. So, start thinking of your own questions.
Maybe I'll divide them into buckets. One is this whole issue of fiscal space and fiscal rules and the kind of whether we want to call it inability or incompetence within so many different governments to differentiate the, you know, current spend from the long-run investment and even how to measure the value, the long-term value of these public investments. This is very much something that our own Ministry of Finance here, called the Treasury, is struggling with right now. The government came in with a very ambitious plan, but then had the wrong fiscal rules and then started to tinker with the fiscal rules instead of kind of really thinking big as you're encouraging us to do.
And we should remember that Dilma Rousseff actually, when she was president, she was impeached not because of corruption and Petrobras and so on, but precisely because she tried to do what you talked about, which was to put off the balance sheet the spend that she was trying to do for education, which she knew would alleviate poverty massively, but with the current fiscal rules, it wasn't allowing her to. So, she did it anyway, which was also happening here actually at the same time, but in Brazil was also then used really to overthrow in some ways the government. So, these are deeply political issues that as you say, sometimes are done quickly with the bat of the wand if it's for defense or IT, somehow we abandon fiscal rules right away, and as soon as you rightly said, it's for the social spend, health, and so on, all of a sudden the fiscal rules get so much more rigid.
So, I want to ask you something very — it's going to sound technical, but I think it's really important. What specifically did you try to do, whether you succeeded or not, in terms of the rewriting of the actual fiscal rules? So, here, for example, they've just changed it from looking at the public debt to the net financial liabilities, like looking a bit more at the value of all the public investments and public assets that the government has. It hasn't been enough, but at least it's been a bit tinkering with the fiscal rules. What did you try to do literally at the formula level that might have not then been accepted because it was too radical to change the way that the investment was being calculated to then be reflected also in terms of the deficit and the debt figures of the government?
Yeah. The thing that is closer to what you're saying, I mean, first let me say something general about that. I think fiscal rules are relevant, but it's true that there is a tension because basically when you have a rule, you're limiting yourself to make decisions in the future. This is the specific definition of a rule. And there are reasons for that, but you're paying a cost. The question is whether first, if you want to have rules, and then whether you can include in those rules a different way to measure, for example, innovation and so on.
But I think the closer thing that we made given your question is the sustainable development program. The BSC actually — Javiera was in charge of that. What was the goal of that? It was to specify that there was going to be a specific amount of money devoted to science, technology, and innovation, but not in any orientation, but target that science and technology innovation on the specific goals that we have in terms of growth and in terms of greener growth, lithium, green hydrogen, and so on.
And I would say that at the beginning it was very successful in the sense that we spent more money on this. The price of lithium was very high at that point, so we had a lot of rent from that, but then the price went down and it was so difficult to sustain that. So the program survived, actually it's still going on, but it was not feasible to increase the amount of money that we allocated to that program. So we increased the money at the beginning of the government, but then it was too difficult to sustain that.
And I would say that there was some innovation in terms of the public policy because we tried to do in the Ministry of Economy something similar to what you have in the Ministry of Social Policies in Chile, trying to work together with the budget office in terms of deciding how to spend this money in an efficient way given the goal that we have. And there were people working there, a former student of this place. I don't know, she leads this group, so for sure we learned a lot from that, but we didn't make a final innovation in the way that we account this in the budget, which was your question, yeah?
Yeah, but do you think now, because of course now you're free. You can do all sorts of things. That — like how would you recommend going about, given your experience, to do what so many people who actually have expertise of the areas, as you rightly said, and all we should be bringing the experts who know a lot about climate and health. If you think of Nick Stern's report that he did on climate change, he said the cost of inaction is greater than the cost of action. So forget whether we even care about climate change. Forget whether we care about the health of young people. The cost of actually preventing so many ills in our young people is lower than funding the prison that they might end up in when they fall through the cracks, right?
So there's so much evidence, whether it's through climate, whether it's through health, that we should act now to prevent the costs from escalating later. Do you feel that especially given that so many people in your team, including Javiera, I don't know, Rodrigo and so on really come from the academic side, have been thinking about the economics, that we can build some case studies now through this experience to really measure the costs of both having done it well, so the lower cost over time, but also where it failed also due to sometimes the congressional, you know, parliamentary kind of process where certain policies were blocked and then the consequences of not having acted properly?
I mean, first as I was saying during the presentation in my first agenda, I think that we're still far, far away from measuring this correctly. And this is important in public policy. For example, in the case of capital investment, you have an institution which is part of the Ministry of Social Development, yeah, where basically they evaluate, they assess the social return of any investment. And when the social return is high enough, then you have the, let's say, the permits to do that investment.
We don't have something like that in the case of industrial policy, innovation, or technology. Maybe in that case it's much more difficult. But at some point we need better information. But then our binding restriction in this concern was not in the parliament. What I mean, it was in the parliament to the extent that we couldn't make the tax reform that we wanted, which was so important to finance this and other things.
But I think it would be not honest from my side saying that the problem was in the parliament. I mean, the problem was in the government. It was with us, not with me in the final year of the government because given the incentives that you have, it's so difficult to invest in these long-term problems. That's why —
Because of the worry also the next election?
No, no, because I mean, if you are in a meeting and they tell you that if you don't spend this money on public health, then you're going to have people dying. So you have to decide between that and investing in a new technology that is going to pay in 15 years. It's impossible that decision. That's why I think that if you see my second proposal, basically is saying that the problem is not who is in the office. The problem is the incentives that that guy has. So we need to change that incentives. Otherwise we're going to have the same results in the future.
Yeah, and I think you went — you said that, but you also said something that we believe deeply here also in the work we've done in Brazil but in other places, which is it's not either the social problem and people dying in the hospital or the technology. It's precisely how you bring together a social problem and use an innovation strategy, an industrial strategy to approach it instead of thinking welfare policy here, industrial policy there. And actually the work that we've been doing with Nicola Alcedo, who's one of our students, around using school meals, you know, healthy, tasty, sustainable lunch for all kids in a country. What does that mean for a new way of government working across ministries, you know, agriculture, health, finance, education, but also using the tools. All tools to govern that.
And that's my next question to you. You talked about CORFO, which by the way, if no one has heard, also the great podcast by Evgeny Morozov, who is also the partner of one of our professors, Francesca Bria, called The Santiago Boys. It's fantastic about the period and Allende's regime where he used cybernetics, cybernetics, sorry, to really think precisely around the capacity, the capability, the data — exactly — what we would even call today AI, to think about how to actually deliver social programs. And it's fascinating again to break down these myths, but you talked about CORFO, which as you say is like an innovation —
development agency, but what was the learning of how the ecosystem of all the different tools, instruments, and institutions have to be kind of aligned? So, you can have CORFO working great, but if you don't then have the tools like on the procurement side, for example, which we've worked on quite a bit in Brazil, which is a demand side instrument, then even when say small companies are financed to do great things, if they don't have a market, they don't scale. So, besides CORFO, did you have, you know, with certain of these cases, was it like CORFO interacting with a public bank, interacting with procurement, with digital strategy that where where the sum was bigger than the parts?
Yeah. Where that kind of planning level that you had in the Boric government has had around these social programs required these institutions to work together in a way they hadn't worked before because there hadn't been, forget the long-term financing, which is a separate issue, and the fiscal rules, but there hadn't been a vision or a plan on top, so they were each doing their own thing before.
Did under your government these things come together because you had a plan?
Mhm. Yeah. Um let me say one thing about the the previous question. Um we did change uh the public procurement uh law in Chile in order to to have uh an an innovation uh public uh procurement uh um policy. Uh and I think this is going to be important in the future because public procurement in Chile is about 20 billion. Mhm. Uh so, it's so important for our um um uh budget uh uh size.
Um about about about your question. Uh the short answer is that um the um Chilean state is not designed for that, Right. I would say. So, let me start by the by the by the end of that uh answer. Um I do think that if we want um an economic transformation in Chile, we we need to transform the state, too. Okay. It's a it's a condition to to get that that result.
Actually, in the last year uh in in office, um every time that I that I talked to uh the different leaders of the of the private sector, leaders of the guilds organizations, and and so on, I want I was trying to convince them that they need to push for a change in the state. I was saying to them, "You know, when when I have a lobby meeting uh with with any firm, they they they ask me for a different state. They they don't say in in in using those words, okay? But then, when I talked to the a guild organization, okay? They don't ask for that. They they they are discussing the size of the state, uh taxes, regulation, but they do not think about what kind of a state they need in order to achieve what what what they want to achieve, Yeah.
And I think that there is a since in all of these policies, you need a long-term view. You need You need a uh You need a common plan, okay? You need a view that it's not going to change depending on who is going to be in the office, okay? It's so important what the private sector thinks uh about that. So, the state, going back to your your question, the state um in the Chilean state, it's so difficult to interact, Yeah.
For example, when we when we were um pushing for this agenda of green hydrogen, one of the things that we did was to uh to to put together uh the private sector with the for example with the public work ministry, with the Ministry of Education, the Ministry of Labor such that they can interact because one of the problem one of the reason why the public health uh ministry the the the the Ministry of Labor, the Ministry of of Housing even. One of the reason why uh they do not have the the productive uh um goal in in their in their objective, okay? is because they don't talk to the to the to the private sector in this in this way. So, the the interaction within the government and the interaction between the private and the public sector is something that we have to think differently in in Chile. And I think that CORFO can eventually can lead that uh that that process, okay?
Um yeah. Interesting. And in fact, I don't want to keep making this like just picking up my students, but we have Kwame here too who did our master's um program and now is helping us um coordinate this public sector capability index which is exactly trying to transform the conversation away from big state or small state towards a capable, dynamic state that's flexible, agile, that works with not at citizens.
The thing about the companies though, my experience is that in the UK for example with our catapult centers which is where science industry are supposed to meet, you know, through a government agency. Um it's more like asking the private sector what they need from government or from science. Whereas the Fraunhofer Institutes in Germany, they're very different. You have public and private thinking together what the challenges of the future are and I think that's that's a lot more promising. It means also the deals that are originated through government financing often come from some sort of public purpose and then they work with the willing in the private sector instead of having kind of a rent seeking lobbying from the private sector asking kind of favors or or different types of needs from the science base or government. So, I think the the design of these partnerships really matters.
But, maybe just a last question before I open it up. Um for the for the kind of economics behind it, right? We we just launched, by the way, 2 weeks ago a new council that I'm chairing with the Minister of the Economy in Spain, a council on new economic thinking for the 21st century. Do you think and and I sort of know the answer cuz you mentioned it upstairs, but I want you to tell the crowd here. What is the relationship in Chile compared to maybe some other countries including Brazil, which is very interesting, right? Cuz Brazil right now in the Lula government has lots of economists coming from academia. What's the relationship you found between the needs of a progressive, even socialist government if you want, um with them the academic base in your local national academic departments? What was the way you either tried to engage or failed to engage or discoveries you found in terms of the degree to which the curriculum that that is being provided is kind of fit for purpose and your ability then to work with students and professors and so on?
Yeah. So, first let me say something about the the previous question. Sorry, I'm very slow. So, sometimes I want to
No, and I'm just like confused. So, I asked 12 questions at once. So, >> [laughter] >> Uh but You unpack it properly. Thank you.
But, but I think that another way to justify this uh uh relationship or this feedback relationship between the private sector and the public sector is that this is another way to protect a long-term investment or the investment in this kind of of policy. Because in Chile the the lead that you have in in the private sector it has a lot of influence. Yeah. So, it's so important their opinion. This I'm not saying something that is good for our democracy, but how is the This is the reality, okay? So, yeah, so to let me put it this way, to the extent that if that that was I was trying to convince them to think in another state. Because if they push for that, we're going to have an a transformation in the in the state.
The The incentive that you have in a government in a government of 4 years of having a huge transformation in the in the state it is is basically zero. Because you spend, I don't know, 3 years, 4 years in that transformation, and then the results you don't see the the results. So, the only way to have that transformation is that the the elite of the country push for that. So, I think that there is another This is another reason why to have that that that feedback.
And going to your to to your question, which is a very important one. I think that the relationship between the the academia and the public policy, at least in in this field, meaning economic development, industrial strategies and and so on, is is not working well in Chile. I think it is not working well in general, but I want to talk about the the Chilean case. And and this is This is I mean, both sides are responsible here.
From the point of view of the of the government, the state, we do not have people in the state who are devoted to come up with these questions. So, we need From From the From the public sphere, what you what you should expect is the right question about the right question for for the for the for the academic people, okay? In order to to make a difference. And and to think questions, you need time, and you need people uh with that time and with that expertise. Uh and this is something that we have to to change in the government.
From the point of view of the of the universities, the universities uh and when I see my my previous research, it's also the case. I mean, the the incentives are all in the direction of just publishing in some in some journals. Uh and those journals, I mean, do not care about uh the important questions in general. And and in particular in the in the in the south or in our countries, I mean, the questions are different, are so specific. I mean, those journals do not care about the specificities that we have in Chile. Maybe for them, this is just a uh uh uh case case study. And they they don't care about about that. But case studies are so important to make a uh sound decisions uh from a policy um perspective.
One one uh to to to to finish with a with an idea about how to solve this, I think one one possibility in the future is that you have people that work, let's say, half of the time in the in the university and half of the time in Corfo, let's say. Okay? So, uh if you have that, be- because in the universities are so important. You you get discipline. You you have time to think deeply in an in an important question. So, that is very valuable uh when you are in the in the government. The problem is that uh they're spending that time in in other questions. Yeah. Okay? So, this is a problem about who is making the question and who is answering that that question. And we're not having any of them basically in the in the in the conversation.
So, so maybe the conversation is too difficult if you have the two people.
Yeah. I mean, the conversation is too difficult if you have one people in the government, one people in the in the in in in the university. So, maybe you need the same person
in both in both places. Okay? Uh so, that that could be an idea about how to how to deal with that.
>> I often use the example of Steve Chu. In the US, he was a Nobel Prize-winning physicist and ended up being the head of the Department of Energy for Obama. And I always wonder, would he have ever accepted to do that job had the task been, "Oh, come in and help us design a carbon tax or incentivize and de-risk, you know, Tesla?" What the remit was, "Help us um direct an 800 billion stimulus program in a green direction." He said, "I'm there tomorrow. I will leave Stanford, come in, very happy to do it." So, it it's both the the the the design of the contracts of secondment, right? Getting university people, for example, or public um or or sorry, private sector people coming into government for a while, but what will incentivize kind of top people to want to do that? It's also the remit. Are you there to help direct and shape and drive something with public purpose or just de-risk, facilitate, fix, administer, regulate? So, it comes back to ultimately what we care about here at the institute, which is public purpose.
So, I will take three questions at a time. Um and as I mentioned, I will then also hand over uh soon to bicycle to the stadium >> [laughter] >> where we will beat Atlético Madrid, just to repeat. Um uh so, three questions at a time. I'll take some from this side, some from that side, mix women and men, young and old. Old. No, just kidding. Young. >> [laughter] >> And uh sorry, just say your name and who you are if you're a student or where you work if you can.
Yeah. Um thank you. Um my name is Faras, uh UCL alumni. And thank you for your uh remark- remarkable presentation. I want to ask about off-budget. Um I I I I think that's interesting about Carfo as a development agencies, right? Because um when you put the money on them on and you are on the middle end democracy country. How can Carrefour Corfo ensure that that that that big money uh from the contract are allocated as directed by government direction? So, yeah, because government has direction and you want to Corfo get that money to that direction, how you ensure that? Because
>> How How uh the mechanism the mechanism to be sure that the money go in that
>> allocate in the direction, yeah. Because yeah, you have moral hazard or even corruption problems in uh middle-income country. So, the money goes directly to them, how do you then manage it if it's not indirectly through the government? And also the second one um
Ooh, just one each, sorry, otherwise we're not going to get around. Is that okay? And tell me your name again? Uh Faraz. Faraz? >> Yeah. Ooh, that's dangerous in this country. >> [laughter] >> Okay. Second question. Yes.
