Can correcting for real exchange rate misalignment help countries escape the middle-income-trap? An analysis of a natural resource-based economy: Chile

Chile is classified as a high-income country but suffers from the sameweaknesses affecting middle-income countries. The same policies that have encouraged thedependency on natural resources and restricted the expansion of the productive and exportbase, have prevented the use of exchange rate policy as an instrument of economic andsocial development. The performance of the economy is greatly determined by the evolutionof the terms-of-trade which is negatively correlated with the real exchange rate. Also, thenominal exchange rate has been used mainly as an instrument for price stability purposesrather than for economic development. Building on the exchange rate misalignment conceptsdeveloped by the New Developmentalism, the analysis shows that, at the macroeconomiclevel, the real exchange rate has appreciated over time. However, the evidence also showsthat the industrial/manufacturing sector has an external price competitive advantage inrelation to the rest of the economy. This raises the broader question as to what extent isprice competitiveness a powerful enough incentive for a broad-based structural changetowards innovation and more knowledge intensive production which is needed to escapethe middle-income trap. JEL Classification: E32; F41; O11; O24; O54.