Country Report November 20, 2009, 6:30PM EST

Healing Chile's Malaise

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Tapia: The young data analyst is "living the American Dream" at Evalueserve Eilon Paz

On Bachelet's watch, Chile enjoyed windfall profits from record-high copper prices. But instead of spending that money, as other commodity-rich countries did, the government put $20 billion into sovereign wealth funds and invested it, earning average annual returns of 7.2%. That let Bachelet unleash a $4 billion fiscal stimulus, equal to 2.8% of GDP, after the global financial crisis hit. The money was spent on loans to small businesses, subsidies for companies employing young people, financing for low-income housing, and more. "We were willing to take the heat and make an important savings effort when it was not popular to do so," says Finance Minister Andrés Velasco. While the economy is set to shrink by as much as 2% this year, economists expect growth of 3.5% to 5% in 2010 as the world economy revives and copper prices recover.

A big worry for many Chileans is education. Although 90% of students finish high school, many feel public schools are subpar. Some 40% of high school and university graduates score dismally on reading comprehension tests. And schools are plagued by frequent teacher strikes, including a walkout that kept classes idle for most of November. So low-income and middle-class parents often scrimp or take on debt to send their children to private schools. "Until Chile reforms education, nothing will change," says Manuel José Ossandón, mayor of Puente Alto, a working-class district of 700,000 on the outskirts of Santiago.

He ought to know. Even Puente Alto's top public school suffers from poorly trained teachers and classrooms crammed with as many as 45 students. "The best teachers want to work in private schools, which pay better," says Sandra Urrutia, principal of the sprawling brick complex with 2,400 students from kindergarten to high school.

TAX BREAKS FOR STARTUPS

Last year, 60,000 Chileans joined a new nonprofit group called Education 2020 that is lobbying for better schools. Among the group's goals are higher spending on education, mandatory teacher testing, and tighter accreditation standards. "How do people expect Chile's economy to grow 7% a year if nearly half of its population is functionally illiterate?" asks Mario Waissbluth, an engineering professor at the University of Chile and founder of Education 2020. "Chile has reached a glass ceiling, a limit to its future growth unless it does something quickly to improve its human capital."

A second big worry is a lack of innovation. While Chile ranks well on innovation vs. its Latin American peers, the government knows it must do more to attract higher-end foreign investment. The National Innovation Council for Competitiveness, a public-private partnership, is trying to increase ties between universities and businesses to promote biotech, green energy, and technology startups. And the government has introduced generous tax breaks and subsidies to help build such businesses.

Those incentives helped lure U.S. tech firm Synopsys (SNPS) to Chile. The company, which designs software for chipmakers such as Intel (INTC), opened a research center in Santiago three years ago. Chile's economic development agency, Corfo, pays up to $25,000 for training each new employee, money Synopsys uses to send hires to its Mountain View (Calif.) headquarters for orientation. The newcomers seem to like the culture. Synopsys' 28 engineers, who earn about half what their U.S. counterparts do, come to the office in T-shirts and shorts. "We wanted to create an atmosphere of creativity and innovation," says General Manager Victor Grimblatt. Last year, Synopsys Chile exported $1.2 million in services, and three of its engineers applied for a U.S. patent.

Drive 75 miles west toward the port city of Valparaiso, and you'll find another leg of Chile's efforts to build a knowledge economy. There, Evalueserve, a New Delhi outsourcing firm, employs 160 Chileans who provide business analysis for companies worldwide. "I feel like I'm exposed to the heart of the international financial system," says Santiago Tapia, a 32-year-old who analyzes beverage and food companies for a global investment bank. Tapia says he's "living the American Dream," with a modern apartment two blocks from the ocean, a late-model Hyundai, and his fast-paced job with co-workers from India, Japan, China, and a half-dozen other countries.

Thanks to government-subsidized training and free rent for five years, Evalueserve says its costs in Chile are half what they would be in the U.S. and just 50% more than in India. The company plans to triple its workforce in Chile in four years. Corfo, the economic development agency, says outsourcers in Chile will export some $950 million in services in 2009. Within five years the agency aims to boost that to nearly $3 billion.

If successful, the effort will bring jobs needed to sustain growth as the country moves away from its dependence on copper exports. Until investments in education and innovation pay off, though, many Chileans plan to send their political leaders a message this election: There's no time to waste making sure average citizens enjoy real opportunities. Marta Cecilia Carvacho, a 42-year-old single mother who earns $585 a month as a maid, sells ice cream on weekends at a street market so she can send her 13-year-old son to a private school. "I know we're all better off now than we were 20 years ago," she says. "I can more or less feed and clothe my son and give him shelter. But there is more to life than simply surviving. I want my son to develop as a human being, to participate fully in Chile's promise, and I don't see that happening now."

Smith is BusinessWeek's Mexico bureau chief.

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