The Golden Period for Growth In Chile: Explanations And Forecasts

Economic growth in Chile since the mid 1980s has been remarkable for its high level and persistence. This paper explores the factors behind the high growth rates of the past 15 years and analyzes the extent to which they can be sustained in the future. The first part of the paper presents some stylized facts about growth in Chile. Taken together, they suggest that the jump in growth was driven by policies and macroeconomic conditions that affected the economy’s overall productivity. The second part of the paper considers the large body of recent empirical growth literature to examine the extent to which a cross-country approach can explain Chile’s growth performance. It formulates a basic regression model that contains the most popular variables in the growth literature and estimates it using techniques suited for dynamic models of panel data. The basic model allows us to explain about 45% of the change in the growth rate between 1970-1985 and 1986-1998, which was 4.74 percentage points. When we expand the basic model to include the quality of the political system and governance, the comprehensiveness and complementarity of policy reforms, and the availability of public services and infrastructure, we can explain 73% of the growth improvement. The last part of the paper starts the assessment of possible new growth sources for Chile by, first, projecting the country’s growth rate for the next 10 years under various assumptions and, second, proposing some areas with potentially large returns.