Lessons from Chile: How To Solve The European Economic Crisis

This is a guest post by Raj Uttamchandani
who runs Incubatrix, a company that develops cloud application software and digital films. He also advises the Government of India on international trade matters.

A year ago, I arrived in Chile at the invitation of the Chilean government, or rather, as one of the first 23 participants of the Start Up Chile pilot programme. In the last 12 months I have:

• found our initial customers who have worked with us to develop our application;
• met the president of Chile;
• become a trade advisor to the government of India;
• met Vivek Wadhwa;
• debated with a Stanford professor;
• made some great friends;
• networked with interesting people;
• gave a talk at one of Chile’s top Universities
• experienced some of Chile and South America
• been exploring other business opportunities in the region; and
• met some potential investors

For anyone who does not know by now, Start Up Chile gives you $40,000 to spend on your start-up with no equity requirement. The programme has grown from our initial group of 23 a year ago to over 300 teams, currently. About 30% of the teams from our group have decided to establish a presence in Chile after the initial 6 months as we have either, established customers, raised finance, or are developing other business ideas here and for the rest of Latin America. It will be interesting to see how many teams finally end up staying indefinitely.

The main point of this post is not to explain or evaluate the Start Up Chile programme, but to actually determine what lessons if any, can be applied to Europe, where the problems compound on a daily basis and growth has been stagnant for a while.

Chile is blessed with mineral resources-it supplies 36% of the world’s copper. Corporation tax is low at 17% and corruption is almost non-existent. The money raised by the government is spent on stimulating private enterprise, with mixed results.

The main problem it seems, is the perception that entrepreneurship is risky. Failure has a life-long stigma attached to it. One of the objectives of Start Up Chile has been to try and change this through an influx of foreign entrepreneurs who are “gung ho” and who see failure as part of the journey. It is hoped some of this attitude rubs off locally. It is starting to happen but it is too early to judge the result yet.

In Europe, the situation is almost the polar opposite. We have a culture of would-be entrepreneurs who, having being fed a diet of “Dragon’s Den” and “The Apprentice” have seen first hand the victory of a capitalist system over the former socialist republics. There is no need to convince most people in Europe about the benefits of being in business; people would take risks if the environment was conducive to them doing so. Right now it is not.

However, imagine if, instead of quantitative easing (government spending/printing more money), European banks/governments gave young people the opportunity to learn how to become entrepreneurs. This would be done through:

• Giving them $40,000 (GBP 25,000/Euro 30,000) to start their own businesses;
• Providing a tax holiday on the first x years of profit;
• Simplifying employment contracts/regulations/paperwork;
• Scrapping national insurance payments for the first y years;
• Providing networking opportunities with similar start ups in other countries (there could be some business to business/synergy opportunities within the group);
• Mentoring; and
• Arranging access to angel/VC financing

Government spending on unemployment benefits would immediately fall, as the funded entrepreneurs themselves and whoever they employ would not be claiming such benefits. In addition, any money spent by the start-ups would also provide fiscal stimulation of the economy, which would be compounded through the multiplier effect. For example, if start-ups congregated around a certain area, a local cafe might see more demand and they in turn need to get more supplies and hire more staff to cope. So the money gets handed down the chain. This is something that is currently not happening in Europe as banks refuse to lend to small businesses, thereby cutting off the supply to a whole range of businesses /individuals further down the line.

Now imagine if 1,000 or 5,000 start-ups were funded this way in every European country. You would have failures and you might have some companies that would survive quite nicely. But you would also have a few companies that become truly spectacular. They would be paying taxes, hiring people, growing. The psychological benefits would be multifold and intangible; as people would see their peers achieving and becoming successful, this would more than likely allow them overcome any underlying fear of failure. The risks to each person inherent in trying in the first instance are also further mitigated as the government provides the seed capital. In short, there’s nothing to lose.

In this way, not only would one reduce unemployment, increase spending and productivity but would, by default, create an eco system, a European hub to (potentially) rival silicon valley as regards founders, mentors, customers and access to finance. As companies become successful, more private money will flow in to fuel this explosion.

Now add in the ability to write off student loans against your start up’s tax plus apprenticeships/internships offered to students and one can really start to create something special, ground breaking and self sustaining.

But how much would it cost? To fund 1,000 start-ups would cost the UK GBP 25 million. Not a lot of money really, given the potential benefits. Incidentally, a pot of GBP 250 million has already been created in the UK for businesses to create training programmes. However, that is wrong; the money needs to go directly to start-ups and if it did, it would fund 1,000 start-ups a year for 10 years.

The government needs to instigate the push: an environment in which people feel enabled. The private sector then needs to provide the pull by determining the direction. This is exactly what happened in Israel, which since the 1990’s has been the most vibrant high technology cluster outside the US. Several complementary factors have contributed to this: a highly adaptive innovative entrepreneurial culture’ government spending on educational establishments, the highly skilled immigration wave from the former Soviet Union, and pro-active government policy for the promotion of civilian R&D spending. From a standing start it now ranks second to the US in terms of invested private equity financing to GDP and is number one in terms of research and development as a percentage of GDP.

Chile is trying to emulate this by attracting entrepreneurs from Europe, Asia, Africa, USA and Latin America to stimulate local entrepreneurship. If Chile can seize the moment with a population of 16 million, then the UK and the rest of Europe have to recognise that it’s time to think radically if they want to remain competitive.

We are no longer in a cycle of boom and bust. Events in other countries can, and do, have an effect on how we all live.

With capital and labour flowing easily across borders, Europe needs to be careful of losing the very people who could stimulate economic growth and recovery.

At risk is the ability to compete not for now or the next few years, but for this century and beyond.

The Chinese equate danger with opportunity. Never has this been truer than now.