The Chilean economy since the return to democracy in 1990. On how to get an emerging economy growing, and then sink slowly into the quicksand of a “middle-income trap”

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October 2019
Paper author(s): 
José Gabriel Palma
Topic: 
Macroeconomics - Economic growth - Monetary Policy
Year: 
2019

The main hypothesis of this paper is that the Chilean economy's poor performance over the last two decades (e.g., average productivity growth collapsed by three quarters vis-à-vis the previous cycle) results from its development strategy having run its course ─being now in desperate need of a full “upgrade” (one capable of generating new engines of productivity growth; e.g., the industrialisation of commodities, a “green new deal”, or the spread of the new technological paradigm to the four corners of the economy). The same can be said of the neo-liberal ideology at its foundations, as most of its “absolute certainties” are being shaken to the core. However, neither the (not so) invisible hand of distorted markets, nor centreleft or centre-right governments have had much of a clue as to how to bring this change about. There is also (unlike, say, in some Asian economies) a generalised lack of nerve to do anything about it. Consequently, the Chilean economy is now jammed in a rather transparent ─and self-made─ “middleincome trap”. In fact, change has come in the opposite direction: in order to reinforce the growingly fragile status quo, a new policy-straightjacket has been added in the form of the Transpacific Treaty, or TPP-11, which gives large corporations (foreign and domestic) a de facto veto against any change in policy. In turn, the advanced countries’ “reverse catching-up” isn’t helping either, as this also helps reinforce the convictions of those in Chile defending the status quo. We are all now indeed converging in the West, north and south, but towards Latin American features such as mobile élites creaming off the rewards of economic growth, and ‘magic realist’ politics that lack self-respect if not originality. In fact, it is now even tempting to say to those in the high-income OECD “Welcome to the Third World”.

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