The Political Economy of Peripheral Growth: Chile in the Global Economy

By José Miguel Ahumada

This book provides a political economy perspective on Chile’s contemporary economic development, explaining the different stages of Chile’s neoliberal pattern of economic integration into the global economy from 1973 to 2015. Three key explanatory variables are considered: the evolution of business-state relations, US geopolitical interest in the region through the waves of trade agreements, and the political impact of the dynamics of inflows and outflows of financial capital. Although Chile is typically considered to be a successful case of a free market economy, this book presents an alternative narrative of Chile’s growth through using a Latin American Structuralist political economy perspective. While it recognises the positive results in terms of growth, it also emphasises the lack of dynamic sources for long-term development, which embeds the economy into short-term booms followed by periods of stagnation.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Mar 23, 2019
• ISBN: 9783030107437

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© The Author(s) 2019

José Miguel AhumadaThe Political Economy of Peripheral Growthhttps://doi.org/10.1007/978-3-030-10743-7_1

1. Introduction

José Miguel Ahumada¹, ²  

(1)

Department of Politics and Government, Alberto Hurtado University, Santiago, Chile

(2)

Institute of International Studies, University of Chile, Santiago, Chile

José Miguel Ahumada

Until just a few years ago, Chile was a case of economic success. The neoliberal reforms of the seventies and eighties, as it has been argued by many academics and international organizations, built a pattern of insertion into the world market which made the country flourish from the nineties onward: Chile at the beginning of the new century became the country with the highest income per capita and the most dynamic economy in the region.

Those results were considered to be clear evidence in favor of the neoliberal strategy in Latin America . Despite the meager aggregate economic results of the region after the reforms of the Washington Consensus (that led to many countries turn to the left during the noughties), Chile was pointed out as a successful case that should be considered when analyzing the causes of the regional stagnation. As Kuczynski and Williamson (2003) indicated, the critics of neoliberalism in the region should also explain the successful case of Chile .¹

In the Chilean debate, the economic success was characterized in different ways. During the nineties, for example, Chile was defined by the main newspaper in the country, El Mercurio , as an economic Jaguar, in direct reference to the Asian tigers. The main idea behind this was to show that Chile was an exception to the region that signaled the path that the rest of the countries should follow.

Both the old advocates of the military dictatorship and the new intellectuals of the democratic government agreed that, since the neoliberal policies during the dictatorship and the reforms during the nineties, Chile built a pattern of insertion into the world economy where the market and its signals determined the economic specialization and provided the incentives to invest and innovate. This pattern permitted the country to exploit its comparative advantages, dynamize and diversify its exports, attract foreign capital and build an environment for competition which paved the way for a new entrepreneurial class (see Montero 1997; Toloza and Lahera 1998). This process of economic growth and export diversification was defined as a capitalist modernization and was considered to be the material base for the stable democracy of the country (Muñoz 2007).

Twenty years later the scenario has changed. A new wave of social conflict emerged since the first decade of the 2000s that challenged the political stability that characterized the country so far. Student, worker, and environmental protests have defied the previous consensus around the economic model. That wave of conflict came in parallel with a period of economic stagnation: since 2011, the export-led growth gave way to a new period of stagnation, export reprimarization and an intensification of the premature deindustrialization ² of its productive structure.

What happened with the Jaguar of Latin America ? During the Chilean presidential elections in 2017 the debate around this question quickly emerged. Many liberal economists argued that Chile was entering into a new populist cycle (this in reference to the first term of the center-left government under President Michelle Bachelet and its proposal for a new Constitutional, tax, labor , and educational reforms) that undermined the main institutional pillars of the so-called capitalist modernization, preventing the country to continue its path of growth and threatening to turn it into the middle-income trap . The economic stagnation, then, was not an internal product of the economic model but the result of Bachelet government’s populist turn.

The center-left, on its part, argued that contemporary social riots and economic stagnation had different causes. In relation to the first one, it was argued that, as every process of economic modernization improved the standards of living of the population, it permitted the emergence of new necessities and demands among the people (for redistribution, recognition, democratization, ecological sustainability, etc.) and, thus, opened the door for a new period of agitation. Therefore, the only way to keep a consensus around the process of modernization was through the implementation of reforms that could address those demands. The economic stagnation was considered to be not the result of populist measures but of two different causes: the end of the exogenous super cycle of the commodities and the necessity of the country to, having successfully modernized the economy, jump into new areas such as services, energy and deepen the export diversification in order to build a new economic boom (Foxley 2017).

Evidently, completely different political strategies could be derived from those hypotheses. While the first one argued for a State whose function would be to secure free market and put a stop to the demands for social and political reforms, the second one, on the contrary, wanted to gave answers to those demands. However, even though the political implications of these hypotheses were widely different, both of them shared a key diagnostic: Chile did experience a process of economic modernization that, despite the current stagnation and social malaise, distinguished it from the rest of the region as an example of success.

Put in these terms, the debate about Chile’s economic performance has been implicitly based on a typically Rostownian approach: a moment of economic take-off during the eighties that lineally advanced on the road of economic modernization during the nineties and where the social sectors not yet modernized are considered to be lagging behind and requiring the state to help them jump into the wagon of progress.

Nevertheless, this approach has a series of limitations that makes it problematic to understand development in general, and Chile’s case in particular. After forty years of the implementation of this pattern of integration into the world economy, Chile is still an extractive economy, dependent on copper exports and lacking an endogenous industrial core, with high inequalities and a fragile economic growth. While Chile is the strongest economy in the region, those characteristics have prevented it to replicate a sustainable economic dynamism, as the ones experienced by late-developers like Finland and South Korea during the twentieth century, that could close the productive and income gap with developed countries.

Thus, everything seems to suggest that these characteristics of Chile’s economic regime are not transitory situations within a general process of modernization but, on the contrary, permanent economic outcomes of the type of insertion that Chile opted in the seventies and that nowadays is showing its limits in terms of ensuring a sustainable economic dynamism. That perspective opens up a question: if what is been observed in Chile is not a process of economic modernization, what is it?

By looking at the current characteristics of Chile’s productive structure and pattern of specialization one can see that they are not substantially different from the ones of its regional peers. Indeed, the increasing internal deindustrialization and the export specialization on extractive sectors are regional tendencies of which Chile is just another example. Those dynamics are typical of a common peripheral condition, that is, of a growth anchored on sectors with low levels of technological complexity (from natural resources extraction to labor -intensive assembly) and lacking an internal industrial core. Thus, understanding the case of Chile can shed some light on these general tendencies of the region.

This is particularly relevant since this kind of regional peripheral growth has traditionally been associated not only with unstable economic fluctuations (periods of growth followed by stagnations), but also with high levels of wealth and income inequalities, affecting the whole social fabric, particularly the stability of the democratic political system (Cimoli et al. 2015). In fact, the erosion of this kind of growth after the end of the commodity cycle has led the way to strong political crises in the region, from which there is no clear signals of recovery until today.

This book is an attempt to contribute to the understanding of the political and economic variables, both national and international that, in their interactions, shaped Chile’s pattern of integration and growth from 1975 to 2015. The chosen method is political economy rather than formal economics. And the reason for this is that economic regimes, such as the pattern of insertion that is analyzed here, are the outcome of a broader social process that exceeds the mere interactions between prices, quantities, and utilities, as is the focus of contemporary conventional economics, and refers to the dialectical interaction between internal political forces, geopolitical contexts, and international economic dynamics.

To comprehend these interactions it is necessary to have an approach less economistic and more pluralist in its concepts. Economics as a discipline has not always been so blind on these more complex perspectives. In fact, different schools of economic thought since the nineteenth century have developed analytical categories that permit to comprehend the economy as embedded in deeper historical and political processes that shape it. The German Historical School , American Institutionalism , and Marxism , have been among the paradigms that have extensively tried to link history, institutions , and political interaction among classes as key variables that explain the economic dynamics, allowing the expansion of the horizons of analysis beyond the limits of conventional neoclassical economics . During the mid-twentieth century, Latin American Structuralism has achieved a creative synthesis of those traditions in order to understand the phenomenon of (under)development in the periphery (see Di Filippo 2013).

Latin American Structuralism has the important characteristic of focusing precisely in the processes of economic development and productive transformation from a perspective that includes the political and economic processes, stressing the constant interaction between the national and the international spheres. This multidisciplinary way of looking at economic processes was labeled by structuralists as the historical-structural method and became an alternative to the formalist neoclassical school.

This research takes that tradition and methodology to explain the process through which Chile entered into the international economy since the seventies. The book has two main ideas. First, the peripheral growth that Chile witnesses today is the outcome of its passive insertion in the international economy since the seventies. As it will be explained in the next chapters, this pattern of insertion implied trade, financial, and investment liberalization together with a role of the state focusing exclusively on protecting the property rights of both investors and patent holders. This type of insertion, the book argues, permitted the country to exploit sectors with static comparative advantages, but locked it into those areas, restricting the options to deploy new productive capacities that could help to spur a sustained economic growth.

Second, that pattern of Chile’s insertion is not a result of nature, but the outcome of an underlying political economy . The books considered three variables that, in their interactions, shaped that pattern and determined its different moments. These are the geopolitical interests of the United States in the region, the internal alliances between business sectors and the state and the impact of international economic dynamics (capital flows and prices booms and busts) on the stability of the pattern of insertion.

The geopolitical interests of the United States determined the context and rules of the game in which Chile integrated into the world economy. As it will be shown, with the WTO and the FTA , the United States widely restricted the policy space of Chile to implement a series of industrial policies and, at the same time, put an end to its regionalist strategy . The alliances between business sectors and the state shaped the pattern of the country’s integration in different periods. Finally, the international economic dynamics refer to the inflow and outflows of capital to and from the region (and Chile ) and, specifically during the mid-2000s, the super cycle of commodity prices. Those dynamics during the boom (massive inflows of capital or rise in commodity prices) fortified the given pattern of integration , while, during the periods of bust (massive outflows or fall in prices) created conjunctures that opened the door for changes in that pattern.

The political economy of Chile’s integration into the world economy is a particularly interesting study case, both because of its implications for understanding the region and for comprehending contemporary Chile in a deeper way. Firstly, Chile is the country with the best economic performance within the regional performance, so focusing on understanding Chile’s dynamics permit us to shed some light on the economic possibilities and limits of the region. Secondly, the country is also considered the most liberal in Latin America and among the first ten more liberal countries of the world.³ Thus seen, deeply understanding the Chilean case helps us to understand the political economy of one of the pristine cases of neoliberalism . Finally, nowadays there are a series of analyses about the Chilean economic model.⁴ However, this book adds new topics to the study case, such as the impact of the series of multilateral and bilateral trade agreements on Chile’s policy space , the period of the commodity boom (both absent in the previous researches) and an analysis of the contemporary structural characteristics of Chile’s peripheral development , adding another layer to the analysis: from political economy dynamics to structural orders.

The empirical research has been mainly qualitative, including in-depth interviews with key policymakers and business representatives, archive research (with an emphasis on the public interviews and statements of businesses and policymakers), analyses of official documents (public statements of the government, the transcriptions of the debates in the Parliament and analyses of national laws concerning FTA and related economic policies) and the academic literature related to the various topics of the research. The quantitative data included is mainly descriptive, and in most of the cases has been taken from UNCTADstat, ECLACstat, World Bank indicators, and the Chilean government’s own data (Central Bank and Foreign Investment Committee).

The book consists of eight chapters. Chapter 2 presents the theoretical debate between the liberal and developmentalist approaches. The Latin American Structuralist approach is emphasized as its focus on the productive structure and political economy of peripheries are the main areas of analysis of this book. In Chapter 3 an overview of the state of Latin America is presented, emphasizing the peripheral type of growth of the region and its passive integration into the world economy since the eighties. From Chapters 4–6 the political economy analysis of the Chilean case is presented, from the military dictatorship , the golden period of the nineties, the stagnation after the Asian crisis and the commodity boom during the 2000s. Chapter 7 is a turn from the previous chapters and passes from the political economy analysis to the contemporary economic structure of Chile , emphasizing its self-reinforcing characteristics and outcomes. Finally, Chapter 8 summarizes the main arguments of the book.

References

Cimoli, M., Martins, A., Porcile, G., & Sossdorf, F. (2015). Productivity, social expenditure and income distribution in Latin America (Series Production Development, LC/L.4105). Chile: ECLAC.

Di Filippo, A. (2013). Poder, capitalismo y democracia. Chile: Ril Editors.

Ffrench-Davis, R. (2010). Economic reforms in Chile. Basingstoke, UK: Palgrave Macmillan.

Foxley, A. (2017). La segunda transición: conversaciones con Alejandro Foxley. Chile: Uqbar.

Kingstone, P. (2011). The political economy of Latin America: Some reflections on neoliberalism and development. London, UK: Routledge.Crossref

Kuczynski, P., & Williamson, J. (2003). After the Washington Consensus. Washington, DC: Peterson Institute for International Economics.

Montero, C. (1997). La revolución empresarial chilena. Santiago, Chile: Dolmen.

Muñoz, O. (2007). El Modelo Económico de la Concertación: 1990–2005, ¿Reformas o Cambios? Chile: Catalonia Publisher.

Palma, G. (2005). Four sources of ‘deindustrialization’ and a new concept of ‘Dutch Disease’. In J. A. Ocampo (Ed.), Beyond Reforms: structural dynamics and macroeconomic vulnerability. New York: Stanford University Press and World Bank.

Phillips, N. (2004). The Southern Cone model: The political economy of regional capitalist development in Latin America. London, UK: Routledge.Crossref

Silva, E. (1996). State and capital in Chile. Boulder, CO: Westview Press.

Solimano, A. (2012). Chile and the neoliberal trap: The post-Pinochet era. Cambridge, UK: Cambridge University Press.

Taylor, M. (2006). From Pinochet to the ‘Third Way’: Neoliberalism and social transformation in Chile. London: Pluto Press.

Teichman, J. (2001). The politics of freeing markets in Latin America: Chile, Argentina and Mexico. Chapel Hill: University of North Carolina Press.

Toloza, C., & Lahera, E. (1998). Chile en los noventa. Santiago, Chile: Dolmen & Presidencia de la República.

Footnotes

1

In Kingstone (2011: 86).

2

This terms refers to the situation where countries experience a fall in the share of manufacture in GDP, value added and total employment in the economy before they reach the level of income per capita in which industrial countries experienced that phenomena (see Palma 2005).

3

In 2016, the Heritage Foundation considered Chile as the 7th most liberal country in the world.

4

See, for example, Silva (1996), Phillips (2004), Teichman (2001), Taylor (2006), Ffrench-Davis (2010), and Solimano (2012).

© The Author(s) 2019

José Miguel AhumadaThe Political Economy of Peripheral Growthhttps://doi.org/10.1007/978-3-030-10743-7_2

2. The Political Economy of Development and Integration: A Structuralist Perspective

José Miguel Ahumada¹, ²  

(1)

Department of Politics and Government, Alberto Hurtado University, Santiago, Chile

(2)

Institute of International Studies, University of Chile, Santiago, Chile

José Miguel Ahumada

1 Introduction

The power to create wealth is infinitely

more important than wealth itself

—Friedrich List¹

Every branch of social science emerges in order to provide complex answers to straightforward questions. In the case of economic development , the key question has always been: what are the causes of the wealth and poverty of nations? Talking about the causes of wealth means not only considering individuals’ consumption possibilities, but the way a nation creates that wealth and makes it sustainable in the long run. Development , then, is not about wealth as such, but about the specific physical and human assets that can sustain a nation’s material welfare permanently. As Alice Amsden famously suggested, Economic development is a process of moving from a set of assets based on primary products, exploited by unskilled labour, to a set of assets based on knowledge, exploited by skilled labour (2001: 2). This implies that development is less a quantitative process of commodity expansion than a qualitative change of the productive order, a structural movement toward a more complex and knowledge-driven economic system (Amsden 2001).

Given that capitalism has evolved in the context of ever-deepening global integration , albeit with ups and downs, parallel with the consolidation of nation-states and the international system, the relationship between global capitalism and national economic development has naturally been at the core of the debate on economic development.

Capitalism is a social system based on private control of the means of production, where investment decisions are determined by profit maximization of capitalists under the compulsion of competition through market exchange and the existence of a financial system that provides new capital for entrepreneurs (Schumpeter 2008 [1943]). In order for the compulsion of competition to be the force in determining where to invest, the main factors of production and means of exchange must become (fictitious) commodities, including labor , land, knowledge, and money (Polanyi 2002 [1944]; Wood 2002). This compulsion also implies an endogenous tendency for capital to self-expand into new territories (building a whole world market) and into non-commodified areas (social services, state firms, etc.), thereby radically modifying the economic institutions of nations. This process of self-expansion toward a world market generates a strong pressure for firms and nations to adapt themselves to global competition, reshaping their pattern of economic specialization (Furtado 1978). If capitalist market forces are left alone, countries (and the firms within them) will specialize in the areas where they are more competitive in the short run, following their given comparative advantages (see next section).

At the same time, the building of a global market implies the international flow not only of goods, but also of financial and productive capital throughout the world, making some key pillars of national economies (e.g. exchange rate , interest rate) dependent on these flows. In this sense, the building of the global capitalist market means, in principle, the dependence of a nation’s productive structure on the international flows of goods and capital (both financial and productive).

However, nations are not passive agents in these global dynamics. On the contrary, nation-states, through the legitimate control of the means of violence and the establishment of a bureaucratic organizational structure (Weber 1978 [1922]; Furtado 1978; Skocpol 1985), can shape the norms and rules of market relations and impose constraints on capital accumulation (based on principles such as national autonomy , cultural maintenance, increasing power vis-à-vis other states, etc.). Thus, despite global market compulsion, there is a certain amount of policy space for countries to shape their patterns of integration (see next chapter).

Notwithstanding the policy space for countries, the world system has the capacity to develop new productive capabilities and increase the availability of goods and services in some economies, while leaving others in fragile condition, with low productivity and a focus on extractivist production regimes. How can we understand this result? Is market expansion the source of growth and prosperity, and the incapacity of some regions to integrate into this innovative machine the cause of their problems? Or does this world market tend endogenously to concentrate wealth into some regions, while leaving the rest anchored in precariousness? This chapter will provide a brief summary of the structuralist perspective on the matter. The next section will present a structuralist critique of free-market capitalism , focusing on the tendency of the global market to keep peripheral countries underdeveloped. Finally, Sect. 3 will describe the historical-structural method of Latin American structuralists, arguing that this method enables an understanding of the interactions between peripheral countries and the world economy from a political economy perspective, and thus allows analysts to avoid the conventional static and economistic interpretations.

2 Economic Development and Integration

2.1 Economic Liberalism and Free Trade: A Summary

The history of economic thought is,

To an important extent, a history of the

Fortunes of economic liberalism

—Christopher Colclough²

Economic liberalism ³ has been the center around which most theories of economic development have been formed. Such theories can be categorized, at least to some extent, according to their treatments of free trade (Colclough and Manor 1993). The traditional case in favor of free trade has been articulated by classical economists, and specifically the Smith-Ricardo-Mill triad. John Stuart Mill systematized the case in his Principles of Political Economy (2006 [1848]), where he suggested that free trade produced, among other benefits, two kinds of major advantages: direct economic advantages (increases in consumption possibilities through specialization) and indirect economic advantages⁴ (the expansion of technological capabilities through innovation).⁵

The direct advantages of free trade are captured in Smith’s theory of specialization and Ricardo’s theory of comparative advantage . As the market extends its scope, economic agents will specialize in the production of goods they are the most skilled at creating (absolute advantage), initiating a complex division of labor (both in the market and in production), and scale economies that will increase productivity. In this way, they will begin the process of modern economic growth (Smith 1999 [1776]). Ricardo (2004 [1817]) famously suggested that as this dynamic expands across nations, countries will specialize (provided there are no barriers to entry) in the production of commodities for which their opportunity costs, determined by the differences in the productivity of labor across sectors, are lower than for the rest of the world.

However, Ricardo’s idea of comparative advantage just tells us that free trade will maximize countries’ welfare under a given set of productive capabilities (Chang 2008). His point is about how trade increases consumption possibilities, not about how productive capabilities can expand through trade. Ricardo’s posits a one-time gain in welfare: after a country enters into the world economy and adopts a new pattern of resource allocation based on its comparative advantages, it does not make any further gains in