This note discusses Chile's macroeconomic policy framework, the role of institutions in Chile, policies over time, export specialization and economic growth, trade policy strategy and recent agreements, an overview of recent developments in capital markets, and corporate financing in Chile. The role of the public sector in establishing debt benchmarks, an assessment of the country’s external position, distress among Chile's foreign-owned firms, balance sheets of public sector finances, and an update on the Chilean banking system have been noted in this paper.


This note discusses Chile's macroeconomic policy framework, the role of institutions in Chile, policies over time, export specialization and economic growth, trade policy strategy and recent agreements, an overview of recent developments in capital markets, and corporate financing in Chile. The role of the public sector in establishing debt benchmarks, an assessment of the country’s external position, distress among Chile's foreign-owned firms, balance sheets of public sector finances, and an update on the Chilean banking system have been noted in this paper.

IV. Export Specialization And Economic Growth In Chile1

1. Claims in the recent economic literature that natural resource-based exports have a negative impact on long-term economic growth have raised some concerns about the prospects of Chile’s exports.2 Exports in Chile have been very dynamic in recent decades but have decelerated somewhat in recent years, while the structure of exports continues to be dominated by natural resources. This chapter (i) asks whether the structure of Chilean exports has worked in favor or against a sustained economic growth, and (ii) looks into how the country could continue to improve its current “export model.” It is argued that:

  • Chile has not been subject of the “curse” of natural resources endowment, because it has avoided the main factors that the economic literature identifies as reasons for a negative impact of natural resource-based exports on economic growth;

  • Chile has developed several export industries based on its natural resources endowments with important spillovers to economic activity, a combination of static comparative advantages with knowledge and innovation;

  • government policies should concentrate on improving education levels to increase overall productivity and the diversification of Chilean exports;

  • the government should continue to deepen its trade liberalization efforts, with the current “open regionalism” strategy being an adequate mechanism to increase the market access of Chilean exports;

  • the recent weak export growth can be traced to the difficult external environment.

2. This chapter is organized as follows: Section A examines the reasons why natural resources in Chile have not been detrimental to growth, the factors behind the recent evolution of exports, and the link between exports and growth in Chile. Section B is more forward-looking, with a discussion on potential trade specialization patterns through the creation of new comparative advantages.

A. Exports of Natural Resources and Growth in Chile

3. Can natural resource-based exports help sustain economic growth in Chile? This question is motivated by: (i) an economic literature claiming a negative impact of natural resources abundance on economic growth rates (due in part to limited spillovers from natural resource-based export products); and, (ii) the recent deceleration of exports growth in Chile. This section presents arguments that largely dispel the concerns associated with each of these critical viewpoints.

The “Curse” of Natural Resources and Chile

4. The idea that natural resources endowment could work against economic development is not a new one, but has received increased attention in recent years in light of cross-country empirical research. In particular, Sachs and Warner (1995) found a negative relation between natural resource exports and growth rates of economic activity, though their findings are not uncontroversial.3

5. The explanations offered by the theoretical literature that postulates a negative impact of natural resources exports on growth can be broadly grouped as follows:

  • Political economy dynamics by which interest groups fight to capture the rents from natural resources. These “voracity effects” (which are particularly acute in the case of government-controlled natural resources) reveal themselves in “rent-seeking” activities, inefficient taxation,4 and distortionary economic policies in general, and lead to a bad allocation of resources and, hence, lower economic growth.

  • Explanations focused on the productive structure of the economy stressing the inability of natural resource exports to generate key linkages among activities generating spillovers on aggregate output. The development literature of the 1940s and 1950s made the case against resource-based growth on (i) the premise of a secular decline in world prices of primary exports relative to manufactures; (ii) poor potential for productivity growth of natural resource sectors; and (iii) small “forward and backward linkages” from primary exports to the rest of the economy.5

  • Dutch Disease. A boom in natural resource exports leads to an appreciation of the real exchange rate that in turn produces a reallocation of factors of production away from other tradables. In the long-run, this process would increase the dependence on natural resource exports and, hence, limit the sources of economic growth.6

6. In fact, Chile has not been subject to the factors related by the literature to a “curse” of natural resources:

  • the exports of natural resources have not displaced other promising sectors;

  • the relative importance of non-processed natural resources exports has consistently fallen;

  • productivity in natural resources-based sectors has increased in the last 25 years;

  • new export products have been developed, partly on the basis of technological spillovers from natural resource exports (as will be shown below).

7. The recent copper mining boom (early and mid–90s) is a case in point. According to some studies, it produced a very limited crowding-out of investments from other sectors and had an overall positive impact on the Chilean economy.7 A key factor behind this outcome was the opening of the copper industry to foreign investment, which has expanded Chile’s mining production avoiding the crowding out of (limited) domestic capital from other sectors. At the same time, the existence of foreign ownership has helped to limit the impact of increased copper exports on the real exchange rate (Dutch Disease) and to share the risks of international price fluctuations. Another positive factor for Chile has been the application of a prudent fiscal policy that has led to increased government savings in times of high copper prices. The latter attests to the strong institutional framework in place in Chile to prevent the capture of economic policy by interest groups.8

8. There has been a steady (though slow) diversification of Chilean exports away from non-processed natural resources. Overall, there is a considerable preponderance of natural resources-based exports, but there has been a steady increase in the share of products with more technological content due to the diversification of the country’s export basket. In fact, an analysis of merchandise exports reveals a steady but slow diversification over time (Table 1).9 The Herfindahl index on export concentration is still higher in Chile than in representative Latin American countries (Table 2), but the gap has been falling. In addition, Chile’s export markets have diversified over time, with an increased share from the U.S. and Asia (Table 3). Furthermore, Chile has displayed some ability to reallocate its exports from less dynamic to more dynamic markets.10

Table 1.

Chile: Evolution of Export Concentration Indicators 1974 - 2002

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Sources: U.N. COMTRADE database and author’s estimates.
Table 2.

Herfindahl Index of Export Concentration 1974 - 2001

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Source: UN COMTRADE database and author’s estimates.
Table 3.

Chile: Evolution of Export Market Shares

(in percent)

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Sources: BCCH and author’s estimates.

Recent Evolution of Chilean Exports

9. One of the concerns about the potential contribution of natural resource-based exports to future growth in Chile refers to the recent slowdown in export growth, and whether it signals structural factors that will also limit export growth in the future.

10. In fact, recent evolution of non-copper exports can be clearly linked to the trends of its standard theoretical determinants and there has not been any anomalous break in exports’ behavior. GDP growth of export partners and export prices started to decelerate in the mid–90s, and the Asian crisis clearly affected Chile’s export growth.11 By contrast, the real exchange rate appreciation in the early 90s was linked to a deceleration in non-copper exports, but the depreciation in the late-90s would have helped the recovery in non-copper export growth rates. Non-copper exports and investment flows also appeared to be closely interrelated. A simple econometric estimation of a non-copper export function (Table 4) suggests that the weaker export growth in recent years can be explained by the more difficult market conditions (more than offsetting gains from a more depreciated real exchange rate).12

Table 4.

Regression on Non-Copper Export Growth13

Dependent Variable: D(X_NC)

Method: Least Squares

Sample (adjusted): 1978 2002

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Residual tests: Breusch-Godfrey=1.31 (0.52); ARCH=0.78 (0.38); Jarque-Bera=2.48 (0.29).

11. That behavior, however, does not imply that Chile should not passively accept changes in external market conditions. International markets are very dynamic, with increasingly tougher demand requirements. This issue is discussed below.

Exports and Growth

12. One of the concerns raised by the literature on natural resource-based exports is based on a perception of limited links with overall economic activity. This section examines this issue both from an aggregate perspective and by looking at sectoral-level evidence in Chile.

13. Economic theory argues that openness should increase the level and growth rates of income,14 however the empirical evidence on the causality link between exports and growth is mixed, hi first place, export expansion to foreign markets, by improving resource allocation and production efficiency, can raise the steady-state level of income. On the other hand, exports can become a transmission channel for externalities due to the increased exposure to foreign markets. The endogenous growth models emphasize concepts like diffusion of technology and learning by doing as mechanisms that would allow countries to achieve higher steady-state growth rates. Thus, exports allow access to imported capital goods with the latest technological improvements and are themselves forced to innovate to keep and expand access to increasingly demanding foreign markets and create so-called dynamic comparative advantages.15 The empirical evidence on a cross-country basis tends to confirm this link,16 but it is less conclusive on a country-by-country basis due in part to endogeneity between exports and GDP.

14. In Chile, exports of goods and services have “contributed” annually about 2 percentage points to GDP growth since 1974, with the contribution climbing to about 2½ percentage points since the 1990s (Table 5). The correlation between exports and GDP growth rates was very high only in the early 90s, when investment growth rates were historically high. By contrast, in part of the 80s there was boost to exports coupled with internal adjustment as a result of the debt crisis, and more recently the deterioration in terms of trade and in access to international financial markets limited overall GDP growth. The contribution of exports to GDP growth in Chile partly explains the positive growth differential against other Latin American countries in recent decades (Figure 1), which in turn is the result of its significantly larger share of exports in GDP. However, while Chile’s integration to the world economy is high by regional standards, the country still lags behind fast-growing economies in South East Asia (Table 6).

Table 5.

Chile: Real GDP and Export Volume Growth

Average per Period (In Percent)

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Source: BCCH
Figure 1.
Figure 1.

Exports Contribution to Growth in Chile and Largest Latin American Economies

Citation: IMF Staff Country Reports 2003, 312; 10.5089/9781451807592.002.A004

Table 6.

Exports and Total Trade Ratios to GDP

(Average 1998-2000. in percent)

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Source: WEO

15. Regarding the export-led growth hypothesis, a basic cointegration analysis for the period 1975–2002 could not confirm its validity for Chile. Looking at the evolution of exports and GDP over time it can be noticed that in certain periods a strong expansion in exports coexisted with weak non-exportable production; more recently, the expansion in export volumes has not produced a significant rise in employment because technological improvements increased average labor productivity and has been accompanied by sharp falls in export prices (which affected national income growth).17 An econometric evaluation detected a cointegrating relationship for a system comprising GDP, gross capital formation and volume of exports, but exports of goods were not found to be weakly exogenous in that estimation (Table 7).18 These results suggest a (long-run) feedback from output (and investment) to exports.19

Table 7.

Chile. A Cointegrating Analysis of GDP and Exports

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The VAR includes Two lags on each variable, an intercept, and dummies for 1982 and 1985. The estimation period is 1974-2002.

denotes rejection of the hypothesis at the 5%(1%) level.

denotes rejection of the hypothesis at the 5%(1%) level.

16. The technological dynamism and the spillovers from certain natural resource-based exports to other levels of their production chain and to the development of new export products offer the strongest evidence of the link between them and economic growth in Chile. A case in point within the agriculture sector is the exports of fruits,20 where Chile was able to transfer, adapt, and extend technologies developed in other countries (with the initial assistance from CORFO). Afterwards, the private sector carried out further innovations at all levels of its production chain (particularly backward linkages) and also disseminated those innovations to other sectors with export potential.

17. After the trade liberalization process, the manufacturing sector undertook an extensive restructuring centered on (mainly) simpler-technology activities linked to Chile’s natural resource endowments.21 Evidence at the firm-level suggests that there had been some technological dynamism, especially in product “engineering” and in adaptation to increasingly rigorous international demand requirements thanks to specialized human capital and the support of specialized institutions (such as the private non-profit organization Fundacion Chile, FC). Specifically, FC’s initiatives for the development and transfer of new commercial technologies have contributed to the dynamism of agro-industry, fishing and forestry sectors, including the salmon industry.22 The latter expanded rapidly in the mid-90s together with its long chains of upstream and downstream activities (e.g., to feed the fish, to distribute medicines and rafts in which salmon are grown, as well as other specialized equipment). A similar process has marked the development of the wine industry, another high technology sector based on foreign investment and technologies that has gained international recognition and has increased its exports from less than US$100 million in the early 1990s to about US$650 million currently.

B. The Development of New Comparative Advantages

18. How to increase the value and diversification in Chilean exports? This section argues that the combination of static comparative advantages with knowledge and innovation should lead to increased value added and diversification, together with the stable macroeconomic framework that provides the right incentives to develop growth-enhancing export sectors. Government supporting policies should be concentrated on improving education levels and on deepening the trade liberalization efforts, particularly by ensuring the access of Chilean products to world markets.

19. Chile’s specialization on natural resource-based exports is in line with the comparative advantage. Chile has plentiful natural resources distributed in remarkable latitudinal and altitudinal ranges, a small domestic market, and high transport costs to major international markets. Those structural characteristics have initially led to a specialization in goods with a relatively low division of labor and a relatively high value-added per unit weight.23 At the same time, and as reviewed in the previous section, there has been a gradual increase in the technological content of exports and this process has led to the inception of more (and new) differentiated products for international markets. Notwithstanding, Chile’s export basket varies markedly depending on the geographic destination:24 there is more natural-resources content in the exports to industrialized countries. The latter might be explained by similar natural resource endowment with non-industrialized countries but also by a positive correlation between tariffs and value-added content in Chile’s export markets.

20. There would seem to be benefits from developing new comparative advantages to further diversify the export base and to better respond to changing world demand patterns. There is a broad agreement in the literature on the negative correlation between export concentration and growth, partly on account of larger volatility in terms of trade and in the real exchange rate. Even though comparative advantages are key determinants in export patterns, they are not necessarily static and can evolve over time based on the relative supplies of production factors and relative productivity levels. De Ferranti (2001) stresses that it not so much what a country produces, but how it is produced that matters, and that production factors such as knowledge and education should help raise productivity growth, even if a country specializes in “traditional” sectors. In the presence of abundant natural resources, high levels of human capital might not only avoid the crowding out of productive factors to other sectors, but even lead to increased rates of growth since a well-educated labor facilitates the movement of workers across economic activities and allows the inception of new industrial activities linked to natural resources (Bravo-Ortega and De Gregorio (2002)).

21. International experience shows the key role of natural resources in the economic success of some natural resource-abundant countries. Many industrialized countries based their development strategies (and to some extent continue to do so) on their abundant natural resources. The U.S. industrial success can be considered as one of the most natural-resource rich nation that made a gradual transition to resource-rich manufacturing industries.25 Exploitation of minerals in the U.S., like in Australia more recently, was the main driving force of growth and industrialization for more than a century.26 The Nordic countries (which share some characteristics with Chile in terms of geography, market size, and export-orientation) also have become highly competitive exporters of manufactures: Sweden and Finland have become leading exporters of telecommunications equipment; Norway has specialized in engineering and shipping services. Two closely interrelated factors stand out behind the success of their development strategies: openness of the economies and high investment in human capital. The latter helped those countries to absorb technological progress to transform resource-based activities into industries with higher productivity levels.

22. By contrast, inward-oriented policies and high tariffs have not helped economic growth. Irwin (2002) shows that inward-oriented policies and high tariffs were not a critical factor behind the late nineteenth century growth experience of high income countries. Noland (2001) suggests that industrial policies made at most a minor contribution to the recent growth experience in East Asia, and that most of its success came from good macro-economic policies, export-orientation, and investment in human capital and in efficient social infrastructure. In Latin America, industrial policies and/or import substitution seemed to work at the beginning but started to crack by the 1960s, partly because of the pressures of interest groups to keep incentives indefinitely; furthermore, several Latin American countries used receipts from natural resource exports to finance industrial policies and protectionism, causing a systematic overvaluation of local currencies and a misallocation of resources that might explain the negative association of natural resources abundance and growth rates.

Accumulation of human capital and technological innovation

23. Chile’s non-interventionist policies, its stable macroeconomic framework, and its open FDI regime should continue to provide adequate incentives to develop growth-enhancing export sectors,27 but the country would be better by developing abilities to innovate and absorb innovation. The general framework of policies allows an efficient allocation of resources. However, the technological content of Chile’s export basket is still not very high. A channel to absorb technology and to innovate is FDI; in this area Chile has been actively signing bilateral treaties with its main investor countries and regions, while the free-trade agreements with large external partners could help Chile become a “hub” for multinational corporations to access larger neighboring Latin American countries.28

24. Another channel of technological innovation and assimilation, the accumulation of human capital, is a key constraint for sustained exports and economic growth.29

Figure 2.
Figure 2.

Educational Attainment and Income

Citation: IMF Staff Country Reports 2003, 312; 10.5089/9781451807592.002.A004

  • There has been significant progress in educational attainment of the labor force, but even though Chile is in the upper range of educational attainment of Latin America’s labor force (7.9 years of schooling in 2000), it still lags compared to natural resource-abundant OECD countries (11.1 years) and "East Asian tigers" (9.7 years).30

  • However, the schooling attainment levels do not reveal the adequacy of education: a study on adult literacy skills31 showed that 50 percent of Chile’s labor force has a low level of basic reading comprehension and only 20 percent achieved the level considered “adequate.”32

  • An analysis of the quality of current education based on the results of the 1999 international study of student achievement in mathematics and science (TIMSS) suggests relatively low quality (even adjusting for income levels, Figure 3): Chile ranked 35th among the 38 countries that participated in the study.33 Part of the poor outcome in international tests can be traced to Chile’s higher income inequality (Figure 4).34

Figure 3.
Figure 3.

TIMSS Math Results and Income

Citation: IMF Staff Country Reports 2003, 312; 10.5089/9781451807592.002.A004

Figure 4.
Figure 4.

TIM SB Math Result and Inequality In Income

Citation: IMF Staff Country Reports 2003, 312; 10.5089/9781451807592.002.A004

25. The government could help improve the quality of education by updating curricula, improving teachers’ skills, track performance, and improve accreditation systems. 35 Total (public and private) spending is high compared to countries with similar income levels. The fact that Chile spends relatively more but achieves lower outcomes than for example Mexico,36 suggests that the emphasis should be placed on increasing efficiency of spending and quality of education. The Chilean government has been undertaking several efforts in this area, including an increased focus on pre-school education, increase in school hours, the review of curricula, and the introduction of standardized admission tests to tertiary education. The World Bank is also assisting in the design of programs to better match labor force skills with the needs of a knowledge-based economy. Increased accountability by public (municipal) and subsidized (through the voucher system for education) private schools should help tackle educational inequalities across income strata; an initiative that might also be considered is to make variable the value of vouchers to broaden students’ choices and increase competition within the educational system

26. Some other microeconomic reforms might also help encourage private sector innovation.37 The government could transfer most of its research execution (often disconnected from the needs of the private sector) to the private sector (through bidding processes), strengthen intellectual property rights, and improve patent approval procedures.


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Prepared by Mauricio Villafuerte.


Lederman and Maloney (2002) argued that their findings are probably due to unaccounted country-specific effects and do not hold when applied to other periods of time or after dealing with endogeneity issues. By contrast, they emphasize the negative correlation between export concentration and growth.


A key policy implication of this view was the “Prebisch hypothesis,” which called for reduced dependency on natural resource exports through a state-led inward-looking industrialization process based on high tariff and quota barriers (import-substitution industrialization).


Of course, a limited endowment of production factors (particularly human capital) would exacerbate the impact of the exploitation of natural resources on other sectors, but this process could self-perpetuate if the abundance of natural resources slows human capital accumulation by making schooling more expensive (Asea and Lahiri (1999).


See the accompanying chapter on Chilean institutions by Espinosa-Vega and Phillips, and in particular the section on the country’s approaches to maintaining fiscal discipline.


The latest numbers reflect partly the recent (sharper) fall in copper prices.


For example, Cabezas (2003) showed that a third of the reduction in exports to Argentina in 2002 were reallocated to other export destinations.


Average of percent changes of data for Chile’s individual trading partners weighted by their share in total exports of goods, as calculated in the WEO database.


A least-squares estimation was made on first differences since the variables involved were found to be non-stationary and no cointegration relation was detected for the period under analysis (1975-2002). A battery of tests were performed to confirm the stability of parameters and to ensure that the residuals were well behaved. This finding was confirmed in an analysis by Baeza (2003).


X_NC stands for non-copper export volume (BCCH data), Y_XB for export partners’ GDP (WEO), REER for real effective exchange rate (IMF’s Information Notice System), PX for export prices (price deflator for exports of goods, WEO). All variable in logs.


See Berg and Krueger (2003) on openness and growth.


See Giles and Williams (2000) for a survey on the empirical literature on the export-led growth hypothesis.


Gallego and Loayza (2002) found a positive impact of openness on output growth in Chile based on a cross-country panel data estimation.


See Banco Central de Chile’s Monetary Policy Report of September, 2002.


Johansen’s procedure for a 2-lag (based on Schwarz and Hannan-Quinn criteria) VAR system. Similar results were obtained for a system including non-copper exports volume.


These results contrast with Agosin (1999) time-series analysis for the period 1960–95.


Fischer (2001). The salmon industry has helped to the establishment of newer fishing industries such as turbot, abalone, and white sturgeon.


Zechner (2002), Ffrench-Davis (2002).


Irwin (2000).


Chile ranked 20th between 80 countries in the Global Competitiveness Report 2002–2003 (GCR), 13th in the specific Macroeconomic Environment Index and 19th in the Public Institutions Index (1st in Latin America). More recently, the government established a special tax treatment (no double taxation) for firms using Chile as a regional investment platform.


See the accompanying note on Chile’s trade policy strategy and the characteristics of recent free-trade agreements.


The critical importance of educational levels in achieving higher growth rates was highlighted in a cross-country panel data regression by Gallego and Loayza (2002): increases in average years of schooling and in the quality of education in Chile to the top 10 percent of the world would lead to a rise in per-capita growth rates of 2 percentage points to 6 percent.


Brunner and Elacqua (2003) provide an assessment of human capital in Chile.


IALS, published by the OECD, as mentioned in Arellano (2001).


To "cope with the demands of everyday life and work in a complex society".


In the Microeconomic Competitiveness Rank of the GCR, Chile ranked about 60th in quality of math and science education and of public schools among 80 countries surveyed.


The differences in performance take place between schools, which in turn are segmented by socio-economic characteristics. Cuadernos de Economia, December 2002.


World Bank (2003a, 2003b).


OECD (2003).

Chile: Selected Issues
Author: International Monetary Fund