The middle-income trap, state capacity, and institutional business power: understanding the failed upgrading of the lithium industry in Chile

Since the 1980s, state capacity has been a major explanation for countries leaving the middle-income trap. However, this literature is unable to explain the failed experiences of countries with relatively high state capacity. This was the case of Chile after the unsuccessful enaction of a series of policies in the mid-2010s to upgrade the country’s position in the lithium value chain. To understand this failure, we combine the literature on developmental states and the literature on business power. We use the concept of institutional business power to understand how business actions erode state capacities leading to countries’ persistent inability to leave the middle-income trap. In the case of Chile, despite the relatively high levels of state capacity, previous processes of deregulation and privatization in the country configured a situation favorable to business’ monopolization of information and technical knowledge about lithium production and innovation processes that directly affected the capacity of the state to regulate the sector, let alone implement policies designed to upgrade the industry. The article highlights the need to investigate further the role of not just the state, but of the private sector in either facilitating or blocking value chain upgrading in countries caught in the middle-income trap.