Commodity Prices Shocks and Poverty Reduction in Chile

This paper examines the local economic impact of large increases in metal-mining product prices on poverty in Chile. Using household data from 1998 to 2013 and exploiting differences in municipalities’ exposure to price changes, we provide evidence of a reduction in poverty rates following the positive terms of trade shock of 2003. According to our estimations, the increase in mineral prices experienced between 2003 and 2009 reduced poverty by more than 2 percentage points in municipalities relatively exposed to the commodity boom – with at least 7% of employment in the metal-mining sector – in comparison to municipalities with no exposure to the boom. In addition, we explore some of the mechanisms explaining the reduction in poverty. We find significant effect of higher products prices on wages and employment, especially for unskilled workers and for workers employed in metal-mining industries.