Market Reforms and Efficiency Gains in Chile

Abstract

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 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 suggestive evidence of the role of structural reforms on plant efficiency. The paper first analyzes the behavior of aggregate total factor productivity constructed from data at the plant-level. We find that, once major reforms had been fully implemented, aggregate efficiency gains were explained in equal proportions by within plant improvements 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. The paper also finds 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 at least partially accounted for the observed improvement in manufacturing performance.