Fighting Against the Market Forces: Insights Form Economic History of Chile

Fighting Against the Market Forces: Insights from

Economic History of Chile

Roberto ÁlvarezGonzalo Islas

University of Chile and Central Bank of ChileAdolfoIbañezUniversity

The historical discontent with specialization patterns oriented to the exploitation of natural resources has profound roots in developing countries. Most of these countries, in different historical periods, have implemented specific policies to change their comparative advantage. The evaluation of interventionist polices have been mostly negative when looking at overall economic performance (Edwards, 1993, Taylor, 1997)[1]. However, little is known about how these policies were able to achieve some of their expected objective and the specific distortions that were created.[2]

The case of Chile is highly motivating. Since the second half of the XIX century the country had incipient developments of industrial activities (Ortega 2005), but they only matured when the economy was exposed to profound structural changes, among them the opening of the economy to international trade. For example, the wine industry has registers since the first years of the Colony, but it had to wait till the middle of the 80´s to become a competitive industry for international standards. The same can be argued for other industries based in natural resources.

This work has two main objectives. Firstly, to trace the historical records of how the ChileanState introduced several policies to change the specialization patterns. The most direct interventions were high and differentiated import tariffs. While some authors claim that it is possible to trace the origins of these protectionism to the early years of independence (Sagredo, 1989) the evidence shows an increase in both the level and dispersion of tariffs since the second decade of the twentieth century. While there is an extensive literature that analyze the evolution of tariffs over time in Chile and its aggregate effects (see for example Butelmann et al, 1981 and, more recently, Lederman 2005) there is much less done in terms to study the impact of tariff differentiation on the pattern of sectoral development in Chile. We address this question using detailed information about the import-export pattern available on the “Dirección Nacional de Estadísticas” annual reports and the evolution of tariff and trade restrictions from 1920 to 1970 obtained from Customs regulations.

Not only tariffs were important in this process, as there were others policies in place such as industry-specific investments, credit allocations and creation of enterprises carried out by the Chilean Development Corporation (CORFO) established in 1939 by the Government of Pedro Aguirre Cerda. By the mid-sixties, CORFO and other public and semi-public institutions accounted for a large part of the credit in the economy, and given the high inflation rates, for most of the long run credit. CORFO entrepreneurial role and the impact of the large state-owned enterprises in the economy has been studied before in the literature, but the influence of the Chilean State credit policies on resource allocation hasn´t received the attention that it deserves yet (one exception being Mamalakis, 1969).

It has been largely argued in the literature that the discretional interventions such as the ones described on previous paragraphs may be captured by special interests groups trying to take advantage of the economics rents generated by trade protection and special policies (Krueger, 1974). We are interested in two important different questions. Our first objective is to illustrate who were most benefited groups by these special policies. We see this exercise as a first step in answering the relevant question of how politicians were permeable to pressures coming from different groups (unions, trade associations, agricultural societies, etc). Then, we use the available trade and production data to illustrate how these distortions affected the way in which resources were allocated and the potential negative effects on industrial dynamics and productivity.

In sum, this project aims to establish new microeconomic evidence on discretionary industrial and trade policies and their effects on industries performance.

REFERENCES

Butelmann, Andres; Cortes, Hernán and Videla, Pedro (1981): “Proteccionismo en Chile: Una Visión Retrospectiva”, Cuadernos de Economía, Vol. 18, N° 54, pp. 141-194

Edwards, Sebastian. (1993): "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, 31(3): 1358-93.

Esquivel, Gerardo and Graciela Márquez (2007), “Some Economic effects of Closing the Economy: The Mexican Experience in the Mid-Twentieth Century”, pp. 333-360 in, Edwards, Esquivel and Márquez, “The Decline of Latin American Economies”, The University of Chicago Press.

Katz, Jorge (2000) "The Dynamics of Technological Learning during the Import-Substitution Period and Recent Structural Changes in the Industrial Sector of Argentina, Brazil, and Mexico," pp. 307-334 in Linsu Kim and Richard R. Nelson, eds., Technology, Learning and Innovation: Experiences of Newly Industrializing Economies. NY: Cambridge U. Press.

Krueger, Anne O. (1974): “The Political Economy of the Rent-Seeking Society,” American Economic Review, 64(3): 291-303.

Lall, Sanjaya (1984): "Exports of Technology by Newly-Industrializing Countries: An Overview," World Development, 12(5-6): 471-480.

Lederman, Daniel (2005): “The Political Economy of Protection, Theory and the Chilean Experience”, Stanford University Press.

Mamalakis, Markos (1969), An Analysis of the Financial and Investment Activities of the Chilean Development Corporation :1939-1964, The Journal of Development Studies ; vol. 5, no. 2.

Ortega, Luis, “Chile en Ruta al Capitalismo: Cambio, Euforia y Depresión”, LOM-Ediciones, Dibam, 2005.

Sagredo, Rafael (1989), “Pragmatismo Proteccionista en los Orígenes de la Republica”Revista Historia, N°24, pp. 267-286.

Taylor, Alan M. (1998) “On the Costs of Inward Looking Development: Price Distortions, Growth and Divergence in Latin America,” Journal of Economic History, 57: 147-184.

[1] Other researchers have emphasized some positive effects of import substitution industrialization on technological progress. See, for example, Lall (1984) and Katz (2001).

[2] One recent exception is the work of Gerardo Esquivel and Graciela Marquez (2007) for the Mexican case.