Market Reforms and Efficiency Gains in Chile

Starting in the mid 1970s, Chile implemented a deep and comprehensive set of structural market reforms. In spite of the wide agreement there is with respect to the expected benefits these reforms should have on growth, little evidence has been provided to empirically establish and to quantify this connection. Using plant-level data on Chilean manufacturing firms for the 1980-2001 period, we provide such evidence. In particular, we estimate disaggregate total factor productivity (TFP) and decompose its dynamics into production reallocation and within plant efficiency changes to study aggregate efficiency, a fundamental source of aggregate growth. We find that during the 1990s, when most reforms had already been fully implemented, both the level and dispersion of TFP grew steadily. These efficiency gains were explained in equal proportions by within plant changes and by the net entry of new and more productive economic units. The reallocation among incumbent plants did not contribute significantly to the enhancement of efficiency, however. Finally, we also show that within-plant efficiency gains were the largest among firms producing traded goods, and among firms that were more likely to face binding liquidity constraints. Thus, in Chile, the adoption of better technologies and production processes, fostered by broader foreign exposure and a superior access to external finance, seem to have accounted for the observed improvement in manufacturing performance.