Public finance, trade, and development : the Chilean experience

This paper analyzes the role of public finance and trade policies in the adjustment experience of Chile over the past 15 years. The purpose is to first review the Chilean public sector and trade reforms, and then to examine their role in the economic development of Chile. The paper is divided into six sections. After the Introduction, Section II presents a brief summary of the conditions in 1973 on the eve of the shift in Chilean policy. Section III focuses on the main policy reforms introduced by the military government over the 1973-82 period. Section IV takes a detailed look at Chile's public finance and trade reforms. The effect of the reforms on aggregate incentives and on the macroeconomic adjustment is the subject of Section V. Lastly, Section VI presents the following main conclusions. First, liberalization and stabilization reforms succeeded until late 1978 in slowing down inflation. Second, the reduction of a large public sector deficit required strong action. Third, the elimination of a large public sector deficit is a necessary but not sufficient condition for the control of inflation. Finally, once the macroeconomic mistakes of the late 1970's and early 1980's were corrected, Chile recovered its growth and reduced inflation.