Policy Changes and Growth Slowdown: Assessing the Lost Decade of the Latin American Miracle

50 Pages Posted: 1 Dec 2023 Last revised: 14 Apr 2024

See all articles by Emiliano Toni

Emiliano Toni

University of St. Gallen - Department of Economics

Pablo Paniagua

King’s College London

Patricio Ordenes

Universidad del Desarrollo; Universidad del Desarrollo

Date Written: November 21, 2023

Abstract

The Latin American region has suffered an economic slowdown since the end of the commodities boom. This has affected the capacity of the region to tackle inequality and pending social ills. Within this context, Chile was the poster child of economic growth and development up until 2014. Since then, Chile has also been trapped in a decade of slow economic growth. Chile's sudden slowdown and recent growth path divergence have posed a puzzle for economists interested in economic growth and development. This paper examines this slowdown considering Chile’s recent changes in public policy. We argue that Chile experienced a divergence from its recent economic trend mainly due to an internal policy regime change. We use a synthetic control approach to assess the timing and quantify this slowdown, thus estimating the economic consequences of Chile's recent policies. Our results suggest that, unlike what is believed, Chile’s recent slowdown has been primarily driven by internal factors, such as its policy regime change. Based on the synthetic counterfactuals, Chile should have been almost 10% richer (in real GDP per capita terms) at the end of the treatment period. Our results are consistent with the development literature that establishes that external shocks can explain only a small fraction of the poor economic performance of developing countries, suggesting that internal factors are the primary source of subpar performance. This research sheds light on the potential effects of policy regime shifts in economic growth, thus providing valuable insights for development economics.

Keywords: Synthetic control; Economic growth; Policy regime changes; Economic development; Middle-income trap

JEL Classification: C32, C54, O47, O15

Suggested Citation

Toni, Emiliano and Paniagua, Pablo and Ordenes, Patricio, Policy Changes and Growth Slowdown: Assessing the Lost Decade of the Latin American Miracle (November 21, 2023). Available at SSRN: https://ssrn.com/abstract=4640416 or http://dx.doi.org/10.2139/ssrn.4640416

Emiliano Toni

University of St. Gallen - Department of Economics ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

Pablo Paniagua (Contact Author)

King’s College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

Patricio Ordenes

Universidad del Desarrollo ( email )

School of Business
Ainavillo 456
Concepcion
Chile

Universidad del Desarrollo ( email )

School of Business
Ainavillo 456
Concepcion
Chile

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