THE POLITICAL ECONOMY OF TRADE POLICY REFORM: CHILE, 1974-2005

The document details Chile's shift from an inward-oriented import-substitution model to a highly liberalized trade regime. It covers the radical 'big bang' reforms of the military regime (1973-1989), the subsequent 'pragmatic orthodoxy' of the second trade reform, and the 'multi-track' approach adopted under democratic rule (1990-2005). The author argues that while the military regime implemented the structural shift, democratic governments provided the social legitimacy and macroeconomic stability necessary to sustain the open-economy model, leading to significant export diversification and poverty reduction.

• Prior to 1973, Chile followed an import-substitution model characterized by high protectionism, including import tariffs averaging 105% and eight different official exchange rates, which resulted in modest growth and an uncompetitive industrial sector.
• The first trade reform under the military government (1974-1979), led by the 'Chicago Boys', radically opened the economy by eliminating quantitative restrictions and implementing a uniform nominal tariff of 10% for almost all imports by 1979.
• A severe economic collapse in 1982, marked by a 14.1% drop in GDP and 26% unemployment, led to a brief 'populist interlude' where tariffs were temporarily raised back to 35% to generate revenue and respond to social pressure.
• The second trade reform (1985-1988) was more successful in promoting export-led growth by combining tariff reductions (down to 15% by 1988) with a depreciated real exchange rate and pragmatic export incentives like the simplified drawback program.
• Under democratic rule (1990-2005), Chile adopted a 'multi-track' approach that maintained unilateral opening while aggressively pursuing bilateral and regional free trade agreements (FTAs) with partners including the EU, USA, China, and Korea.
• Chile's trade liberalization contributed to significant export diversification; the share of copper in exports fell from 80% in 1970 to less than 45% by 1990, though it rebounded to nearly 55% by 2006 due to high international prices and Chinese demand.
• The Foreign Investment Statute of 1974 was critical in attracting FDI by guaranteeing non-discriminatory treatment and the right to repatriate capital and profits, leading to an FDI stock of 64.6% of GDP by 2005.
• Democratic administrations achieved a massive reduction in poverty, from 38.6% in 1990 to 13.7% in 2006, by combining the open-economy model with increased social spending in health and education.
• Despite economic success, Chile faces ongoing challenges including high income inequality, low research and development intensity (0.7% of GDP), and a need to upgrade labor force skills to transition into a 'knowledge economy'.

APA

Herreros, S. (n.d.). THE POLITICAL ECONOMY OF TRADE POLICY REFORM: CHILE, 1974-2005. South African Institute of International Affairs. https://saiia.org.za/wp-content/uploads/2008/04/dttp_pap_herreros_chile_20071007.pdf

Chicago

Herreros, Sebastián. THE POLITICAL ECONOMY OF TRADE POLICY REFORM: CHILE, 1974-2005. South African Institute of International Affairs, n.d. https://saiia.org.za/wp-content/uploads/2008/04/dttp_pap_herreros_chile_20071007.pdf.

Wikipedia

{{cite report |last1=Herreros |first1=Sebastián |title=THE POLITICAL ECONOMY OF TRADE POLICY REFORM: CHILE, 1974-2005 |publisher=South African Institute of International Affairs |url=https://saiia.org.za/wp-content/uploads/2008/04/dttp_pap_herreros_chile_20071007.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{herrerosndpolitical, author = {Herreros, Sebastián}, title = {{THE POLITICAL ECONOMY OF TRADE POLICY REFORM: CHILE, 1974-2005}}, institution = {South African Institute of International Affairs}, url = {https://saiia.org.za/wp-content/uploads/2008/04/dttp_pap_herreros_chile_20071007.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }