Vittorio Corbo

Overview and summary

This symposium analyzes the recent liberalization and stabilization attempts in Chile, Argentina. and Uruguay attempts remarkable for their speed and coverage. To bring these analyses together in one volume seems natural because the three experiences were so similar. All three countries started with highly protected economies. inflation, balance-of-payments crises. widespread government intervention, and production systems in considerable disarray. All three countries launched liberalization policies that spanned commodity and factor markets. And all three followed the same path toward stabilization: the battle against inflation was first based on control of the money supply; then the exchange rate was used to reduce inflationary expectations. The initial results were as remarkable as the reforms. Inflation was reduced. fiscal deficits were controlled, and growth was restored. But, in the early 1980s. all three countries were .again in crisis. The objective of the reforms was to realize the gains from better allocations of resources and investment. This objective was to be achieved by moving to market regulated economies. One intention was to eliminate the traditional bias against exports and thus to spur the growth of exports, which required an increase in the effective exchange rate for exportables and a decrease in that for import-competing sectors. A second intention was to deregulate interest rates and foreign capital inflows and thus to provide more credit to activities with the highest returns. The motive here is to draw the lessons for other developing countries confronting liberalization and stabilization problems. Why did these unusual experiments fail? To what extent did various parts of the packages succeed or fail? Was the failure due to external events or to bad policies? Were the institutional arrangements for deregulation appropriate? The introduction to Part I presents some analytical issues that arise from the experiences of the three countries. It addresses the general issue of opening an economy to trade and to flows of foreign capital and the related issues of sequencing and policy coordination. It also explores differences in the speed of adjustment in labor and commodity markets and the implications of these differences for the design of macroeconomic policy. The other papers in Part I explain and evaluate the macroeconomic performance of the liberalization and stabilization policies in each country. First. each paper describes the reforms and in an appendix provides a chronology of the many reforms. perhaps the place to start for the uninitiated reader. The descriptions are accompanied by summaries of the authorities’ intentions when the reforms were launched. The approach to implementation is also addressed when it gave rise to policy reversals and conflicting signals. Second, the papers construct stylized analytical frameworks to help interpret the macroeconomic outcome of the liberalization and stabilization policies in each country. These frameworks help to draw the stylized outcomes of the reforms. The papers in Part II rely on financial statements to analyze the adjustments by firms. The data span the period covered by the reforms in each country and provide the basis for simple statistical models. Groups of firms (exporters vs.

What went wrong with the recent reforms in the Southern Cone

This paper describes and interprets the outcome of the reform packages in Chile, Argentina, and Uruguay during 1974-83. It is shown that all three countries experienced initial success with the rescue operation from the severe macroeconomic disequilibrium at the inception of the reforms. The paper then discusses the areas in which the reforms were successful and why the countries experienced boom bust cycles resulting in large increases in external indebtedness and internal financial crises. The paper attributes the failure of the reforms to a combination of policy inconsistencies, implementation difficulties, and market frictions. Jointly, these factors generated a sustained appreciation of the real exchange rate and a large spread between the cost of dollar-denominated and peso-denominated loans. In turn, the appreciation and interest rate difference created protracted opportunities for arbitrage that distracted firms from the business of production.

Reforms and macroeconomic adjustments in Chile during 1974-1984

Abstract This paper provides a background on the main macroeconomic developments of the reform period. After a review of the macroeconomic disequilibrium before the reforms, the paper interprets the macroadjustments. The interpretation covers two distinct periods: 1973–1976, when policy was based on a closed-economy view, and 1977–1982, when macropolicy was increasingly guided by an open-economy model. The paper argues that the setback that Chile suffered during 1982–1983 and the large external debt that was accumulated were the result of two major errors. The first was the use of the exchange rate to stabilize prices without due regard for the incentives for large capital inflows that arose from this policy at a time when international capital markets were very liquid. The second major error was in the second half of 1981. After a large drop in capital inflows, the authorities relied on an automatic adjustment mechanism, by which the monetary squeeze from the reduction in capital inflows would improve the real exchange rate. Because wages were indexed to prior inflation, the adjustment mechanism was bound to create substantial unemployment, as indeed was the case. The paper concludes with the assessment that most of the micro reforms were in the right direction and had the expected result — and the errors were mostly in the design of macroeconomic policies.

The translog production function: Some evidence from establishment data

Abstract This paper uses cross-section data from individual establishments to estimate directly, i.e., without using side conditions, translog functions for 44 four-digit ISIC Chilean manufacturing industries. Main results are: (1) The null hypothesis that the production function is Cobb-Douglas cannot be rejected for 39 out of 44 four-digit ISIC industries. (2) The null hypothesis of constant returns to scale cannot be rejected for 35 out of 44 industries; the remaining 9 sectors show evidence of increasing returns to scale.

Productivity Growth, External Shocks, and Capital Inflows in Chile: A General Equilibrium Analysis

This paper uses a computable general equilibrium model to analyze the growth path of the Chilean economy during 1977–81. During that period a comprehensive package of reforms liberalized international trade and removed restrictive labor legislation. As a result of the reforms, there were large changes in relative prices and in the structure of production and demand, and the economy enjoyed unprecedented growth with declining inflation. But large macroeconomic imbalances become evident toward the end of the period and in 1982 Chile experienced an abrupt and severe recession. Taking the real exchange rate as an exogenous policy variable, and using the observed levels of employment growth and foreign capital inflows, this paper compares model-generated growth paths with those of the economy. First, the benchmark simulation path is used to estimate the magnitude and pattern of growth and productivity change during the 1971–81 period. Next, counterfactual simulations are used to assess how Chiles economic performance would have differed if (a) external events had been different; and (b) foreign capital inflows had been different. The analysis suggests that the macroeconomic imbalances that led to the crisis in 1982 were exacerbated by the large capital inflows and real exchange rate appreciation that resulted from the use of the exchange rate as a stabilization device.

Earnings determination and labour markets: Gran Santiago, Chile—1978 ☆

Abstract The purpose of this study is twofold: first, to ascertain whether or not there are statistical differences in the structure of earnings functions among workers in various sectors of economic activity; second, to provide a test of the human capital approach in the explanation of earning differentials among wage earners. Using individual characteristics of full-time wage earners in Santiago, the results show that the structures of earnings functions are not statistically different across sectors of economic activity. Also, the application of a human capital model shows that about 50 percent of the relative dispersion of earnings may be attributed to differences in schooling and experience.

The International Crisis and Latin America: Growth Effects and Development Strategies

Latin America has been strongly affected by the international crisis and recession since late 2008. In comparison to historical experience, how has Latin America coped with the global crisis, which has been the role of different transmission mechanisms, and how have the region’s structural and policy conditions affected its sensitivity to foreign shocks? Moreover, what policies can protect the region better from world crises and shocks, and to which extent should it rely on a strategy of close trade and financial integration into a world economy punctuated by shocks and crises? This paper addresses the latter questions in three steps. First, by assessing empirically the sensitivity of growth in the region’s seven major economies during 1990-2009 to large number of structural and cyclical factors, based on high-frequency panel-data estimations. Second, by using the latter results to decompose the amplitude of GDP reductions in both recessions according to the individual and combined contribution of the different growth factors. Third, to derive the main implications of the results for the choice of macroeconomic regimes and development strategies.

Exchange rate based disinflation, wage rigidity, and capital inflows: tradeoffs for Chile, 1977-81

Real exchange rate appreciation usually accompanies stabilization programs based on the exchange rate. One thing that causes the real exchange rate to appreciate is the capital inflows that follow liberalization of the capital account and the financial market. Capital inflows cause the exchange rate to appreciate in part because of the resulting increase in expenditures. This appreciation is exacerbated if there is some price rigidity, and if control of the money supply is only partial. All these conditions existed during Chiles experiment with exchange rate-based disinflation between 1978 and 1981. Simulating what might have been, the authors study how exchange rate based disinflation affects expenditures switching and reduction when wages are partially indexed in some segments of the labor market. The paper also shows the extent to which a more flexible rule on wage indexing would have offset the adverse impact of lower capital flows on protected sector employment.

Measuring technical efficiency : a comparison of alternative methodologies with census data.

This paper reviews and contrasts the results from different approaches to the measurement of technical efficiency. The measurement of efficiency is based on the estimation of production function frontiers. The alternatives considered include full frontiers and stochastic frontiers under different assumptions about the error structure. The comparison is carried out on the 1967 Chilean manufacturing census. The few previous attempts that have compared alternative approaches were based on extremely narrow data sets. The results for 43 4-digit International Standard Industrial Classification (ISIC) sectors indicate that the measurement of sector efficiency is sensitive to the selection between statistical and stochastic frontiers but not to the choice of error structure. Measures for establishment-level efficiency estimates within a sector correlate highly, and about half of the sectors considered could not support the estimation of a stochastic frontier. It appears that error structures in the literature are not appropriate or the purged data might still include observations with measurement errors.

Korea's macroeconomic prospects and policy issues for the next decade

The purpose of this paper is to evaluate Koreas macroeconomic prospects and major policy issues for the next decade. After reviewing the intial conditions, the report examines growth strategies, and prospects for growth. Then it discusses external borrowing options and the role of monetary and fiscal policy in the next decade. From the review of Koreas macroeconomic prospects for the next decade the report concludes that although the external environment will not be as favorable as in the 1983-86 period, still the Korean economy will be resilient enough to achieve a 6-7 percent annual growth rate for the next decade. Areas where new policy actions will be required are in the management of monetary policy and the provision of social welfare. Although there is an indication of some increase in the protectionist threat against Koreas exports, the report maintains that the pressures for higher consumption and investment and the less favorable external environment will result in smaller trade surpluses in the years ahead.