chilean economy reforms:1975-2000

ERICO WULF BERICO WULF B 11

CHILEAN ECONOMIC CHILEAN ECONOMIC TRANSFORMATION AND ECONMIC TRANSFORMATION AND ECONMIC

GROWTH :1975-2000GROWTH :1975-2000

SOME LESSONSSOME LESSONS


Chile and latin AmericaChile and latin AmericaPattern Growth

Red line : Latin America


PREVIOUS ECONOMIC DATAPREVIOUS ECONOMIC DATA

Previous data

-10

0

10

20

30

40

1958-1964 1964-1970 1970-1973

1958-1973

Bd df

Inv Rt

Gdp

un rt

exp gw

Bd: Budget deficit

Inv Rt : Investment rate

GDP:Gross domestic Product.

Un Rt:Unemployment rate

Exp Gw:Export growth


Social background Chile v/s Social background Chile v/s Latin American countriesLatin American countries

At the beginning of the 70s, Chile was a At the beginning of the 70s, Chile was a socially advanced country .The educational socially advanced country .The educational level, national health system,popular houses level, national health system,popular houses construction program were among the more construction program were among the more advanced of the region.advanced of the region.

There also was an increasing organization of There also was an increasing organization of social intermediate groups .-social intermediate groups .-


Social indicators 1974Social indicators 1974((dr: Death Rate , le:Life expectancy, im:Infant mortality ,dr: Death Rate , le:Life expectancy, im:Infant mortality ,

ee :education expenses, lt: Literacy )ee :education expenses, lt: Literacy )

dr le im ee lt

p/th p/thChile 7 63 56 32 88Brazil 8 61 109 33 66Mexico 8 65 66 28 74Peru 11 56 80 31 72Uruguay 10 69 49 45 90Argentina 9 68 59 37 93Latin Amer 8 63 83 32 73


Factors behind Economic growthFactors behind Economic growth


Social backgroundSocial background19741974

0

20

40

60

80

100

dr le im ee lt

Social indicators

Chile

Latin Amer


GDP Growth rates 1960-1975GDP Growth rates 1960-1975

Gdp Growth RateChile 2.3Colombia 5.6Brazil 7.2Peru 5.7Mexico 6.8Argentina 4Venezuela 5.8Lat amer 5.3Source : M Todaro Ec Dev 1981


SOCIAL and ECONOMIC SOCIAL and ECONOMIC IntegrationIntegration

There was a gap between social integration There was a gap between social integration purposes, and economic growth requirements.purposes, and economic growth requirements.

The social comprehension of how society The social comprehension of how society works, did not match with the way economic works, did not match with the way economic growth works.-growth works.-


Hirschman argumentHirschman argument

Economic and political progress, does not go Economic and political progress, does not go apart from each other.-apart from each other.-

Economic Progress is at cost of the Political Economic Progress is at cost of the Political Progress,or viceversa.-Progress,or viceversa.-

Economic progress at the begining goes alone, Economic progress at the begining goes alone, to be catched up later by political progress to be catched up later by political progress which must be based on solid macroeconomic which must be based on solid macroeconomic foundations.-foundations.-


1974-1982: Assumptions for the 1974-1982: Assumptions for the initial reforminitial reform

The decreasing of state intervention would The decreasing of state intervention would lead to more efficient, flexibles and well lead to more efficient, flexibles and well integrated markets capable of inducing integrated markets capable of inducing economic growth.-economic growth.-

Because of its quickness, the adjustment Because of its quickness, the adjustment process itself has a stabilization purpose.-process itself has a stabilization purpose.-

Competition get higher increase in welfare for Competition get higher increase in welfare for the majority of the comunity.-the majority of the comunity.-


Sequencing of economic reforms: Sequencing of economic reforms: Some proposalsSome proposals

((DPL.Domestic price liberalization,F/Mest.FiscallDPL.Domestic price liberalization,F/Mest.Fiscall ,Monetary stabilization,Tr,Trade libveralization,DFs;Domestic financial system ,Monetary stabilization,Tr,Trade libveralization,DFs;Domestic financial system

reforms, C/Flib, capital and financial liberalization,Priv,privatization)reforms, C/Flib, capital and financial liberalization,Priv,privatization)

DPL F/mEstDfs Tr C/f lib PrivFiel(90) 1 1 2 3Frenkel(82) 1 2Krueger(81/84) 1 1 1//2 2//3McKinnon(82) 1 2 3 4LaL(87) 1 1 3 2Schweickert(93) 1 2 1 3Source :w p/02/132 S Nsouli August 2002


Speed of the reformSpeed of the reform

When product and factor prices are flexible enough When product and factor prices are flexible enough they adjust inmediately, and resources can be they adjust inmediately, and resources can be allocated without cost, the optimal policy is clear: allocated without cost, the optimal policy is clear: Simultaneously remove all distortions. Adjustment Simultaneously remove all distortions. Adjustment costs are expected to be lower when labor market are costs are expected to be lower when labor market are less rigid, capital and labor are less specific, and less rigid, capital and labor are less specific, and entrepreneurs are both more flexible and adaptable.-entrepreneurs are both more flexible and adaptable.-

Because it is hard to find those conditions, the Because it is hard to find those conditions, the alternative arising are a gradual against the Shock alternative arising are a gradual against the Shock approach to reform.-approach to reform.-


Sequence of the reformSequence of the reform

Fiscal and Monetary stabilization,and institutional Fiscal and Monetary stabilization,and institutional reform ,should be implemented early in the reform reform ,should be implemented early in the reform process.-process.-

Trade reforms, requires previously to keep Trade reforms, requires previously to keep unemployment, inflation and external deficit under unemployment, inflation and external deficit under control, to avoid distortions in relative prices and control, to avoid distortions in relative prices and misalignment in exchange rate.It also requires to misalignment in exchange rate.It also requires to restructure the tax system to compensate for tax restructure the tax system to compensate for tax losses. It is key to liberalize first the factor prices, losses. It is key to liberalize first the factor prices, before the commodity prices, because of its role in before the commodity prices, because of its role in the production process.the production process.


Capital account liberalizationCapital account liberalization

Capital Account liberalization can improve welfare, Capital Account liberalization can improve welfare, as long as financial markets are efficient ,and foreign as long as financial markets are efficient ,and foreign resources are used to support the development resources are used to support the development process instead of consumption. Foreign capital may process instead of consumption. Foreign capital may reduce the cost of capital, and be helpful to make reduce the cost of capital, and be helpful to make respurce intermediation more efficient. The respurce intermediation more efficient. The liberalization of long term investment flow, before liberalization of long term investment flow, before short term flows, specially foreign direct investment , short term flows, specially foreign direct investment , is recomended as a first step. Empirical studies is recomended as a first step. Empirical studies confirm that it can promote overall investment.confirm that it can promote overall investment.

Trade reform should precede capital account reform.Trade reform should precede capital account reform.


Financial marketsFinancial markets

The financial markets reforms includes:The financial markets reforms includes:

Developing of the banking sectors.Developing of the banking sectors. Reform of the interest rate and monetary Reform of the interest rate and monetary

operations.operations. Fostering competition in financial marketsFostering competition in financial markets Development of long term financial Development of long term financial

markets,and foreing exchange markets.-markets,and foreing exchange markets.-


What Chile did:1974-1982What Chile did:1974-1982 Chile started its reform with domestic price Chile started its reform with domestic price

liberalization(74),Privatization(74),and Trade reform liberalization(74),Privatization(74),and Trade reform (74) almost simultaneosly. It followed a shock (74) almost simultaneosly. It followed a shock approach,dismissing the gradual view, because of the approach,dismissing the gradual view, because of the critical initial conditions,which demanded to restore critical initial conditions,which demanded to restore confidence and break inflationary expectations.-confidence and break inflationary expectations.-

Later in the process,it followed Domestic Financial Later in the process,it followed Domestic Financial reform(75),and Capital Liberalization(78),following a reform(75),and Capital Liberalization(78),following a gradual approach. First ,it opened the current gradual approach. First ,it opened the current account,later the capital account.Argentina did the account,later the capital account.Argentina did the oposite,inducing capital inflows,before strenghtening oposite,inducing capital inflows,before strenghtening the trade sector.the trade sector.


Restrictions to reformsRestrictions to reforms

The high inflation rate constrained the The high inflation rate constrained the implementation of monetary policy, fiscal policy and implementation of monetary policy, fiscal policy and trade reform policy as well. There was an “inflation trade reform policy as well. There was an “inflation trap” which created distortions ,because it was no trap” which created distortions ,because it was no possible to get control of inflation quickly,so it possible to get control of inflation quickly,so it affected the path of trade reform and the strengh of affected the path of trade reform and the strengh of export sectors.-export sectors.-

Higly indexed economy sent a wrong markets signalsHigly indexed economy sent a wrong markets signals The wrong assumptions affected the path of the The wrong assumptions affected the path of the

reforms, specially the policy mix to favor export reforms, specially the policy mix to favor export sectors.-sectors.-


What were the results?What were the results?Chilean economy 1974-1982

-40

-20

0

20

40

1 3 5 7 9

Years

GDP

DEG(%)

UnR(%)

Inv Rt

GDP growth and Trade Index

00.5

11.5

1 3 5 7 9

Year

GDP

ITI

GDP growth and real exchange rate

0

1

2

1 2 3 4 5 6 7 8 9

year

GDPGrow th(1)

Real excRate (7)


The microeconomic sideThe microeconomic side

In the period 1982-1989,Chile implemented In the period 1982-1989,Chile implemented the second stage of reform : the tax system , the second stage of reform : the tax system , strenghthening the saving capacity, and the strenghthening the saving capacity, and the banking sector.banking sector.

Entrepreneurs had a more important and active Entrepreneurs had a more important and active role on the microeconomic efficiency, role on the microeconomic efficiency, deepening the modernization of production deepening the modernization of production and management process ,and human and management process ,and human resources training .-resources training .-


1990-20001990-2000

This periods count for the fully liberalization of This periods count for the fully liberalization of capital account, which creates some dificulties with capital account, which creates some dificulties with the exchange rate trend to be overvalued because of the exchange rate trend to be overvalued because of the incoming capital flows. It was necessary some the incoming capital flows. It was necessary some control of the capital account flows, diferentiating control of the capital account flows, diferentiating productive from speculative ones.-productive from speculative ones.-

The average growth was 7.1 % in the whole period, The average growth was 7.1 % in the whole period, the highest in LatinAmerica .Argentina grew by 4.9 the highest in LatinAmerica .Argentina grew by 4.9 %,Brazil 3%,Peru 5%,Mexico 2.7%,Colombia 3.3%.-%,Brazil 3%,Peru 5%,Mexico 2.7%,Colombia 3.3%.-

2222ERICO WULF BERICO WULF B

TFP Períod 1990-97.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1961-74 1990-97

TFPGrowth (0.9)

Residual(0.7)

Macro stability (2.9)

TFP Growth (4.9)

BetterPolícies (2.9)

WorseExchangeterms(-1.6)


Concluding commentsConcluding comments Economic growth in the whole period was favored Economic growth in the whole period was favored

by micro and macroeconomic variables ,supporting by micro and macroeconomic variables ,supporting an increase in productivity .an increase in productivity .

Exchange rate policy is not a good instrument to push Exchange rate policy is not a good instrument to push inflation down,and while it is fixed cannot support inflation down,and while it is fixed cannot support export sectors , while there are rigidities in labor export sectors , while there are rigidities in labor markets and indexation.-markets and indexation.-

The speed and sequence of reform followed in some The speed and sequence of reform followed in some cases, a different pattern to what it has been cases, a different pattern to what it has been suggested by economic literature.-suggested by economic literature.-

Social progress can not go apart from economic Social progress can not go apart from economic progress, somehow both reinforce to each other.progress, somehow both reinforce to each other.

chilean economy reforms:1975-2000

Business

reform process

capital account reform

trade reform policy

reform fiscal

path of trade reform

initial reform

institutional reform

stage of reform