Policy Changes and Growth Slowdown: Assessing the Lost Decade of the Latin American Miracle

TL;DR

This paper analyzes Chile's decade-long economic slowdown post-2014, attributing most of the decline to internal policy regime changes using empirical methods, highlighting internal factors as key to growth performance.

Contribution

It provides empirical evidence linking internal policy shifts to growth slowdown, emphasizing the importance of internal reforms over external shocks in economic performance.

Findings

At least two-thirds of the slowdown is due to internal causes.

Internal reforms led to nearly 10% GDP per capita reduction over five years.

External shocks account for a minor part of the economic slowdown.

Abstract

The Latin American region has suffered an economic slowdown since the end of the commodities boom. Within this context, Chile was the poster child of economic growth and development up until 2014. Since then, Chile has also been trapped in a decade of slow economic growth. Chile's sudden slowdown and recent growth path divergence have posed a puzzle for economic growth and development economics. This paper examines this slowdown from an empirical perspective and determines how much can be attributed to internal and external causes. Using a synthetic control approach and a structural time series Bayesian estimation, our findings suggest that at least two-thirds of the Chilean slowdown is attributable to internal causes driven by a policy regime change in 2014, with external factors playing a secondary role. The net effect of this set of internal reforms resulted in a nearly 10% reduction in real GDP per capita over five years and led to a 1.8% decline in average GDP growth rates from 2015 to 2019. Our results are consistent with the literature that establishes that external shocks can explain only a small fraction of the poor economic performance of developing countries, suggesting that internal factors are the primary source of subpar performance. This research sheds light on the potential effects of policy regime shifts in economic growth, thus providing valuable insights for development economics and, more specifically, emerging economies.