End of the line: Railroads in Chile

Between 1860 and 1950, railroads in Chile were synonym of modernization, integration, and economic development. By the 1970s railroads were bankrupt and socially discredited, surviving out of government subsidies. By 2000, passenger services had disappeared but private sector freight operations were revitalized after swift reforms. We review the Chilean reforms and experience, focusing on regulation, public sector involvement and political interference, market entry, vertical integration, and externalities. Perhaps uniquely, two different forms of private sector participation in freight operations emerge after reforms: a vertically integrated, privatized railroad and a state-owned, open-access, concession system.Railways, divestiture, regulation, industrial organization

Unemployment and Real Exchange Rate Dynamics in Latin American Economies

Edwards and Savastano (2000) survey on the equilibrium real exchange rate (RER) literature identify two important limitations: the lack of explicit derivation of flow and stock equilibrium variables as determinants of the equilibrium RER and the failure to allow for unemployment. This paper develops a general equilibrium model that includes both elements, as well as other traditional determinants of the RER such as productivity, terms of trade and government policies. The model is tested against the experience of ten Latin American economies in the 1970-2004 period. From an econometric point of view the model is consistent with the evidence, providing an estimate of the RER misalignment. When evaluating the contribution of labor market distortions to changes in the equilibrium RER, they appear to be less significant than changes in productivity or government policies.Real exchange rate, unemployment, general equilibrium, misalignmen

Open-Access Issues in the Chilean Telecommunications and Electricity Sectors

Este trabajo analiza la crisis eléctrica de 1998-1999. Su principal conclusión es que el diagnóstico habitual que sostiene que ocurrió porque las empresas no invirtieron y el regulador no tenía atribuciones, es equivocado. A pesar de la peor sequía del siglo y de la falla de la central Nehuenco, los cortes de energía y el déficit agregado de 450 GWh se podrían haber evitado si el agua embalsada se hubiese manejado recientemente, o bien los reguladores hubiesen usado sus atribuciones para hacer funcionar el sistema de precios, o si el ejecutivo no hubiese temido afectar su imagen decretando racionamiento apenas las condiciones lo exigieran. Argumentamos que la variabilidad hidrológica a la que está sujeta Chile central hace inevitable las reducciones de consumo en años muy secos. Las crisis ocurren porque el sistema de precios es inflexible e inadecuado para acomodarlas sin cortes de energía; ante una escasez tanto usuarios como empresas enfrentan precios muy por debajo del costo de oportunidad de la energía. Esto, además, introduce un problema de moral hazard que incentiva el uso ineficiente del agua embalsada y hace más probable que ocurra una escasez. Es equivocado pensar que las crisis se evitarían dándole más atribuciones discrecionales al regulador. Varios episodios muestran que no usó las atribuciones que tenía. Al ejecutivo le incomoda zanjar conflictos entre privados porque sus intervenciones tienen consecuencias patrimoniales que lo dejan vulnerable a las críticas de quienes se sienten perjudicados. Por ello se debe liberar al regulador de la obligación de zanjar conflictos entre privados. Esto requiere liberalizar la regulación.

Procyclical productivity : evidence from an emerging economy

Average productivity tends to rise during booms and fall during recessions. This fact is at odds with classical macroeconomic theories which suggest that labor productivity should be countercyclical due to the law of diminishing returns to factors. Theoretical explanations for this puzzle include exogenous changes in production technology, increasing returns to scale, measurement errors due to unobserved input variations, external economies and composition effects at the aggregate level. Surprisingly, aggregate data for the Chilean industry show that productivity is countercyclical. This paper has two objectives. First, we study the cyclical behavior of productivity in 84 sectors of the Chilean industry in the 1979-1997 period. We find that, contrary to the results obtained using aggregate indexes, disaggregated data confirm that on average productivity is unambiguously procyclical. The main reason for this difference is that aggregate data provides a distorted assessment of the cyclical component of productivity due to the marked heterogeneity of behavior between sectors. Second, we examine the determinants of productivity in the Chilean industry using an econometric model that allow us to quantify the relative contribution of the four different explanations of procyclical productivity. The results indicate that technology shocks account for 50% of productivity cycles in the 1979-1997 period, thus supporting the supply shocks hypothesis as the main source of business cycles in Chile. The other 50% of the productivity shocks is explained by important reallocation effects among sectors of different productivity and, more recently, by the presence of increasing returns. Variations in the utilization of capital and labor effort were insignificant.

Toward a Modern State in Chile: Institutions, Governance, and Market Regulation

Chile, as most Latin American countries, inherited the language, religion, and the institutions from 16th century Spanish conquerors. Most institutions have not changed since. This paper examines the institutional and economic structure of the State in Chile. It concludes that in several dimensions the current structure is incompatible with an adequate functioning of market economies, as those intended by the economic reforms implemented during the last three decades of the last century. The country needs to implement reforms in the administration of the State, the working of the Judiciary system, and the incentives and operation of regulatory agencies. Their combined negative effects imply that the benefits of reforms, privatization and market liberalization are partially dissipated in the form of inefficiency and rent seeking behaviour. In turn, this suggest that it is unlikely that the Chilean economy will reach the high growth rates necessary to overcome under development. Our main conclusion is that, in order to implement a framework in which the State acts mainly as regulator and competition supporter, it is necessary to undertake profound changes in the structure of incentives in which it currently operates. Five elements are at the center of this far-reaching evolution away from centralism, stagnation, and inefficiency: (1) the divestiture of state-owned enterprises, (2) the upgrade and update of regulatory agencies and the institutional framework in which they operate, (3) the improve of competition policy institutions, (4) the improvement of consumer rights protection, and (5) a substantial improvement in the working of the Judiciary system

Spatial Inequality, Migration and Economic Growth in Chile

Between 1975 and 2000, annual per-capita GDP in Chile grew at 5%. Yet, regions did not benefit equally: poverty declined significantly in all regions but regional income inequality remained stagnant. We found that convergence in per-capita income and prodMigration, economic growth, convergence, regional analysis

The Efficiency Cost of the Kafala in Dubai: A Stochastic Frontier Analysis

The Kafala (or sponsorship) system is the key instrument behind the economic development of the United Arab Emirates (UAE) and most Middle East economies. The system governs both labor migration and foreign investment by assigning a native-UAE sponsor to each migrant worker and each foreign investor. Sponsors enjoy significant command over these factors and extract sizable economic rents. Firms in free-zones, in contrast, are exempt from the Kafala system. Therefore, they provide an appropriate counterfactual to study the effect of policy regulations on technical efficiency. Using a representative sample of 600 firms of Dubai we estimate stochastic frontier models to identify and compare the degree of technical inefficiency between firms operating under the Kafala system and those in free zones. Our results suggest that on average technical inefficiency resulting from the Kafala amounts to 6.6% of total costs (or 11% of profits). Inefficiency is also greater among firms in Main Dubai in all economic sectors.Labor sponsorship (Kafala), technical inefficiency, economic rents