In the first part of this paper a historic analysis of the Chilean’s sources of economic growth is performed. A total factor productivity index shows strong procyclical behaviour. The analysis reveals the importance of external shocks as principal determinants of productivity cycles and output in the short run. It also shows the importance of openness on output in the medium and long run, which goes beyond the typical efficiency gains that could be associated to the reallocation of resources. During 1979-82 and 1990-97, the Chilean economy experienced the largest long term productividty gains. In the second part of the paper a simple growth prediction model is built. The simulations show that, in order to reach output growth rates of 8%, very optimistic assumptions for productivity and labour force growth are required. Average growth rates of about 6.4% seem more plausible in the medium run. In this case, and according to estimated investment and wage equations, the investment rate would converge to about 30%, and the unemployment rate to 6.3%. This seems realistic for the Chilean economy in the medium run and consistent with a sustainable current account deficit, once terms of trade return to more normal levels.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.
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