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Chilean economy reforms:1975-2000


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It show the sequence followed by economic reforms, done in Chilean economy.

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Chilean economy reforms:1975-2000

  2. 2. Chile and latin America Pattern Growth Red line : Latin America
  3. 3. PREVIOUS ECONOMIC DATA Bd: Budget deficit Inv Rt : Investment rate GDP:Gross domestic Product. Un Rt:Unemployment rate Exp Gw:Export growth
  4. 4. Social background Chile v/s Latin American countries <ul><li>At the beginning of the 70s, Chile was a socially advanced country .The educational level, national health system,popular houses construction program were among the more advanced of the region. </li></ul><ul><li>There also was an increasing organization of social intermediate groups .- </li></ul>
  5. 5. Social indicators 1974 ( dr: Death Rate , le:Life expectancy, im:Infant mortality , ee :education expenses, lt: Literacy )
  6. 6. Factors behind Economic growth
  7. 7. Social background 1974
  8. 8. GDP Growth rates 1960-1975
  9. 9. SOCIAL and ECONOMIC Integration <ul><li>There was a gap between social integration purposes, and economic growth requirements. </li></ul><ul><li>The social comprehension of how society works, did not match with the way economic growth works.- </li></ul>
  10. 10. Hirschman argument <ul><li>Economic and political progress, does not go apart from each other.- </li></ul><ul><li>Economic Progress is at cost of the Political Progress,or viceversa.- </li></ul><ul><li>Economic progress at the begining goes alone, to be catched up later by political progress which must be based on solid macroeconomic foundations.- </li></ul>
  11. 11. 1974-1982: Assumptions for the initial reform <ul><li>The decreasing of state intervention would lead to more efficient, flexibles and well integrated markets capable of inducing economic growth.- </li></ul><ul><li>Because of its quickness, the adjustment process itself has a stabilization purpose.- </li></ul><ul><li>Competition get higher increase in welfare for the majority of the comunity.- </li></ul>
  12. 12. Sequencing of economic reforms: Some proposals ( DPL.Domestic price liberalization,F/Mest.Fiscall ,Monetary stabilization,Tr,Trade libveralization,DFs;Domestic financial system reforms, C/Flib, capital and financial liberalization,Priv,privatization)
  13. 13. Speed of the reform <ul><li>When product and factor prices are flexible enough they adjust inmediately, and resources can be allocated without cost, the optimal policy is clear: Simultaneously remove all distortions. Adjustment costs are expected to be lower when labor market are less rigid, capital and labor are less specific, and entrepreneurs are both more flexible and adaptable.- </li></ul><ul><li>Because it is hard to find those conditions, the alternative arising are a gradual against the Shock approach to reform.- </li></ul>
  14. 14. Sequence of the reform <ul><li>Fiscal and Monetary stabilization,and institutional reform ,should be implemented early in the reform process.- </li></ul><ul><li>Trade reforms, requires previously to keep unemployment, inflation and external deficit under control, to avoid distortions in relative prices and misalignment in exchange rate.It also requires to restructure the tax system to compensate for tax losses. It is key to liberalize first the factor prices, before the commodity prices, because of its role in the production process. </li></ul>
  15. 15. Capital account liberalization <ul><li>Capital Account liberalization can improve welfare, as long as financial markets are efficient ,and foreign resources are used to support the development process instead of consumption. Foreign capital may reduce the cost of capital, and be helpful to make respurce intermediation more efficient. The liberalization of long term investment flow, before short term flows, specially foreign direct investment , is recomended as a first step. Empirical studies confirm that it can promote overall investment. </li></ul><ul><li>Trade reform should precede capital account reform. </li></ul>
  16. 16. Financial markets <ul><li>The financial markets reforms includes: </li></ul><ul><li>Developing of the banking sectors. </li></ul><ul><li>Reform of the interest rate and monetary operations. </li></ul><ul><li>Fostering competition in financial markets </li></ul><ul><li>Development of long term financial markets,and foreing exchange markets.- </li></ul>
  17. 17. What Chile did:1974-1982 <ul><li>Chile started its reform with domestic price liberalization(74),Privatization(74),and Trade reform (74) almost simultaneosly. It followed a shock approach,dismissing the gradual view, because of the critical initial conditions,which demanded to restore confidence and break inflationary expectations.- </li></ul><ul><li>Later in the process,it followed Domestic Financial reform(75),and Capital Liberalization(78),following a gradual approach. First ,it opened the current account,later the capital account.Argentina did the oposite,inducing capital inflows,before strenghtening the trade sector. </li></ul>
  18. 18. Restrictions to reforms <ul><li>The high inflation rate constrained the implementation of monetary policy, fiscal policy and trade reform policy as well. There was an “inflation trap” which created distortions ,because it was no possible to get control of inflation quickly,so it affected the path of trade reform and the strengh of export sectors.- </li></ul><ul><li>Higly indexed economy sent a wrong markets signals </li></ul><ul><li>The wrong assumptions affected the path of the reforms, specially the policy mix to favor export sectors.- </li></ul>
  19. 19. What were the results?
  20. 20. The microeconomic side <ul><li>In the period 1982-1989,Chile implemented the second stage of reform : the tax system , strenghthening the saving capacity, and the banking sector. </li></ul><ul><li>Entrepreneurs had a more important and active role on the microeconomic efficiency, deepening the modernization of production and management process ,and human resources training .- </li></ul>
  21. 21. 1990-2000 <ul><li>This periods count for the fully liberalization of capital account, which creates some dificulties with the exchange rate trend to be overvalued because of the incoming capital flows. It was necessary some control of the capital account flows, diferentiating productive from speculative ones.- </li></ul><ul><li>The average growth was 7.1 % in the whole period, the highest in LatinAmerica .Argentina grew by 4.9 %,Brazil 3%,Peru 5%,Mexico 2.7%,Colombia 3.3%.- </li></ul>
  22. 22. TFP Períod 1990-97 . TFPGrowth (0.9) Macro stability (2.9) TFP Growth (4.9) Better Polícies (2.9) Worse Exchange terms (-1.6) -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 1961-74 1990-97 Residual (0.7)
  23. 23. Concluding comments <ul><li>Economic growth in the whole period was favored by micro and macroeconomic variables ,supporting an increase in productivity . </li></ul><ul><li>Exchange rate policy is not a good instrument to push inflation down,and while it is fixed cannot support export sectors , while there are rigidities in labor markets and indexation.- </li></ul><ul><li>The speed and sequence of reform followed in some cases, a different pattern to what it has been suggested by economic literature.- </li></ul><ul><li>Social progress can not go apart from economic progress, somehow both reinforce to each other. </li></ul>