This paper addresses the following questions on the political economy of distribution and growth in Chile. How does Chile compare to the world in government size, income distribution, and per capita GDP? Which is the relation between income distribution, government size and structure, and growth in a political-economy model of endogenous growth? How do changes in income distribution affect growth through changes in the size of government, in a model calibrated for Chile? Which are the dynamics of distribution and growth, when they are shaped by political leadership, the policy-making process, and the quality of institutions and policies? Under which conditions of such dynamics does a non-monotonic relation between income distribution and growth emerge, akin to the Kuznets curve? How do Chile’s leadership, policy-making process, and reforms affect equity and growth? Which are the political economy requirements for successful adoption of ten key reforms to support growth and equity in Chile?

Resource-rich economies in general, and Arab oil exporters in particular, are at a critical juncture, facing the challenge of revamping their fiscal policy institutions and conduct to strengthen macroeconomic and financial stability, raise growth, and improve intra/inter-generational equity. This paper starts by reviewing the international evidence on fiscal policies and outcomes in resource-rich economies at large and Arab oil-exporting countries in particular, which suggests that strong fiscal (and political) institutions can turn the resource curse into a blessing. Then the paper provides comparative reviews of Chile’s and Norway’s decade-long experience in setting up new fiscal institutions and rules to manage their resource rents, aiming at and, in fact, attaining more macroeconomic and financial stability, higher growth, and improved equity. Specific reform lessons to strengthen fiscal institutions and policies are drawn for resource-rich economies and Arab oil exporters.

Fiscal policy regimes based on a developed fiscal institutions and fiscal rules are increasingly adopted by governments that aim at stronger fiscal policy sustainability, more output stability, and more resilience of public finances to political pressure. This paper describes and evaluates fiscal policy institutions and particularly the fiscal rule in Chile. This commodity-exporting country is unique by having in place since 2001 a cyclically-adjusted government balance rule that takes account of both GDP shocks and mineral export price shocks. The paper starts by assessing the overall institutional set-up for fiscal policy in Chile in international comparison. Then it focuses on the fiscal rule, its changes over time, and its budgetary consequences and macroeconomic effects. By and large, the rule is found to have contributed to fiscal sustainability and credibility, and to macroeconomic stability. Yet the rule also presents shortcomings in its institutional set-up and application to the budget. Therefore the paper presents proposals for reform, following the recommendations made by the Advisory Council for the Design of Fiscal Policy in early 2011. The final section of the paper draws policy lessons from international experience and the Chilean case on institutional reform of fiscal policy and adoption of fiscal rules in commodity-exporting countries.

The behavior of inflation in Chile over the last 30 years has striking similarities to the experience of many industrialized and developing economies. The successful reduction of inflation, in a context of health GDP growth, reflects a combination of factors, ranging from better policies (both in terms of objectives and actual policy management) to a global supply shock that reduced inflation everywhere. Thus, the reduction of inflation in Chile was not solely luck or solely inspiration from the monetary authorities, but rather a (successful) combination of both. The paper performs two empirical exercises to analyze the behavior of inflation in the last 3 decades. Using the structural break methodology developed by Bai and Perron, we find that inflation process has changed twice since 1977, both changes roughly coinciding with relevant changes in both the monetary policy framework and international conditions. The second exercises uses the UC-SV model developed by Stock and Watson (2007). Comparing our results for Chile with a similar exercise for the G7, we confirm the strong similarities between the timing and characteristics of the inflation process in Chile and the industrialized world. This paper can be seen as the first part of wider agenda that tries to understand the features of inflation in Chile, with an emphasis on placing them on an international context. Future research will try to empirically analyze those mechanisms, shedding some light on the competing hypotheses and their relative weight.

This paper contributes to the empirical literature on oil and other point-source resource curse. We find that the curse does exist but conditional on bad political governance. Unlike previous studies we estimate a flexible econometric growth model that accounts for long-term country heterogeneity and cross-dependency and retains the virtues of the recent literature, including short-run flexibility, cointegration and error-correction mechanisms. We unpack political institutions into those reflecting the degree of inclusiveness (Polity) and credibility of intertemporal commitments (Political Check and Balances) and find that resource-rich countries with low levels on both scores are likely to experience the curse, while those with high enough levels may turn resource rents into a driver of growth. Countries with high scores on only one dimension may avoid the curse but are not likely to effectively use resource rents to promote growth. This suggests that for the oil-rich Arab world to achieve sustained growth, the Arab spring should not only bring democracy, as badly needed as it is, but should also lay the foundations for strong systems of political checks and balances.

The UAE is blessed with vast deposits of oil and gas. Contrary to other oil-rich economies, the UAE seems to have escaped from the so-called “oil curse”. We study how the UAE used resource rents to achieve economic development and provide higher welfare for the local population. We identify, nevertheless, symptoms of the resource curse in three areas: very low growth in labor productivity, government policies unable to counteract economic cycles induced by oil-price volatility, and massive overemployment and declining productivity in the public sector. Therefore, we conclude that while the UAE has not been immune to the oil curse, but it has managed to make the benefits outweigh the negative outcomes of oil exporting. We finally study the case of Dubai as an example of how to overcome the dependency on oil exports and diversify the economy by using a combination of market deregulation, support for foreign trade, and efficient provision of infrastructure and institutions for private sector participation.

President Carlos Ibáñez del Campo came into power in 1952 to restore price stability and to end corruption. Soon, however, inflation was running at about 80 per cent per year and government invited Klein-Saks, the prestigious U.S. based consulting firm, to design and implement an anti-inflationary program. The Klein-Saks mission, after some initial studies, concluded that major economic structural reforms were necessary to bring inflation under control and to increase the rate of economic growth. Government accepted the proposed package and reforms were initiated. However, about a year and a half later, broad political opposition to these reforms induced government to cancel the contract with Klein-Saks, in spite of the fact that inflation had been drastically reduced. Soon the reform process was also abandoned and in some areas, even reversed. Decades after the Klein-Saks attempt and starting in late 1973, when inflation run at about 500 per cent and GDP was falling, were the military able to implement –this time under the guidance of the Chicago Boys- a coherent market system in Chile, not too different from that envisioned by Klein-Saks in the mid 1950´s. Good luck, political liberalization, and the economic institutions created under the military are today credited with the relatively high economic growth rates and price stability of Chile. This paper (a) compares the economic reform packages of the Ibáñez (Klein-Saks) and Pinochet (Chicago Boys) administrations, to identify main similarities and differences between those two programs; (b) carries-out a counterfactual exercise to quantify welfare cost of not having implemented the Klein-Saks program in the mid fifties; and (c) attempts to explain the political economy of the reforms in one and the other case.

Este artículo hará un breve recuento histórico del tema de la protección a la libre competencia a nivel internacional y de la lógica de la acción pública para asegurar la libre competencia, para luego centrarse en la experiencia histórica de Chile, que en estricto rigor data en el mejor de todos los casos sólo desde 1959. La tesis es que en un país pequeño como el nuestro la apertura comercial es la política más efectiva para asegurar la libre competencia, sin perjuicio que acciones legales específicas como aquellas que prevé la actual institucionalidad a favor del libre comercio son un complemento indispensable de la política comercial.

Within the context of the Permanent Income Hypothesis (PIH), the predictions for consumption depend crucially upon the process for income. In this paper, we consider an unobserved components model that allows for both asymmetric transitory movements and correlation between permanent and transitory innovations. Using aggregate U.S. data, we show that this model fits labor income data significantly better than common alternatives. However, we find that consumption is excessively smooth relative to the predictions of our model. To reconcile these predictions with the data, we explore the possibility of imperfect information. A delayed information version of the model fits the data better but consumption is excessively sensitive compared to the predictions of this model. We are able to match the data when we consider an economy in which 60 – 65% of consumers behave according to the PIH with full information and the remaining consumers have delayed information.

The issues of air pollution and traffic congestion in Latin America have been growing increasingly important since the end of the 20th century. The latter may help explain why several cities around the continent have tried different combination of public policies with vary-ing degrees of success. We describe the policies that outline the Latin American experience in this matter and hope to be a useful reference to subsequent research in the area.

In an effort to reduce air pollution and congestion, Latin American cities have experimented with different policies to persuade drivers to give up their cars in favor of public transport. Two notable examples are the driving restriction program introduced in Mexico-City in November of 1989 –Hoy-No-Circula (HNC)– and the public transport reform carried out in Santiago in February of 2007 –Transantiago (TS). We develop a simple model of car use and ownership, and show that policies that may appear effective in the short run can be highly detrimental in the long run, i.e., after households have adjusted their stock of vehicles. Based on hourly concentration records of carbon monoxide, which comes primarily from vehicles exhaust, we find that household’s responses to both HNC and TS have been remarkably similar and consistent with the above: an expected short-run response followed by a rapid (before 11 months) increase in the stock of vehicles.

This paper shows that oil price changes, measured as short-term futures returns, are a strong predictor of excess stock returns at short horizons. Ours is a leading variable for the business cycle and exhibits low persistence which avoids the ctitious long-horizon predictability associated to other predictors used in the literature. We compare our variable with the most popular predictors in a sample period that includes the recent nancial crisis. Our results suggest that oil price changes are the only variable with forecasting power for stock returns. This signi cant predictive ability is robust against the inclusion of other variables and out-of-sample tests. We also study the cross-section of expected stock returns in a conditional CAPM framework based on oil price shocks. Our model displays high statistical signi cance and a better t than all the conditional and unconditional models considered including the Fama French three-factor model. From a practical perspective, ours is a high-frequency, observable variable that has the advantage of being readily available to market-timing investors.

Hacia fines del 2012 debe entrar en vigencia una nueva ley de pesca en reemplazo de la actual Ley No. 19.713. Varios analistas han argumentado que la nueva ley se debe hacer cargo, entre otras cosas, de la baja competencia en el sector y de la falta de entrada de nuevos actores. En este trabajo se estudia la validez de estos argumentos a la luz de la teoría económica y de los datos provenientes de las pesquerías de la zona Centro-Sur que son las principales del país. El principal resultado del estudio es que no se observan problemas de libre competencia ni en los mercados de productos finales (v.gr., harina, aceite, conservas, congelados) ni en el mercado de transacción de cuotas individuales. A pesar de esto último, la autoridad debiera igualmente facilitar en la nueva ley una mayor transferibilidad de las cuotas, tal como ya ocurre en otras pesquerías en Chile. Se explica además que desde una perspectiva de libre competencia no hace diferencia si la asignación inicial de las cuotas individuales se realiza en base a capturas históricas o vía subasta, que es lo que proponen estos analistas. Por lo mismo, el uso de subastas responde a motivos de recaudación y distribución y esa es una discusión de economía política que se debiera mantener separada de los temas de libre competencia.

This paper finds that the long-term co-movement of commodity prices is driven by economic relationships, such as production, substitution, and complementary relationships. Such relationships imply that the convenience yield of a given commodity depends on its relative scarcity with respect to associated commodities. The economic linkage between two commodities creates a new source of positive correlation between the futures returns of both commodities. We build an empirical, multi-commodity maximal affine model that allows the convenience yield of a commodity to depend on its relative scarcity. We estimate the model using three commodity pairs: heating oil-crude oil, WTI-Brent crude oil and heating oil-gasoline. Our model allows for a flexible correlation term structure of futures returns that matches the upward-sloping patterns observed in the data. The high long-term correlation implied by an economic relationship reduces the volatility of the spread between commodities, which implies lower spread option prices. An out-of-sample test using short-maturity crack spread options data shows that our model considerably reduces the negative bias generated by traditional models.

I study gender differences in major choice and college entrance probabilities in University of Campinas, a Brazilian public university dependent on the State of Sao Paulo. As with most Brazilian public universities, students select a major, and then compete for a place in that major by taking a major-specific entrance exam. This singular characteristic of the Brazilian case allows me to differentiate the effect of gender on major-specific entrance probabilities and preferences. I propose a model and econometric strategy which can account for two important issues, selectivity bias and the fact that expected utility depends on the probability of entering the different majors. I find evidence of gender differences in preferences and entrance probabilities. For most majors, gender differences in major choice are mostly explained by differences in preferences. However, for the most demanding majors (those that require higher grades from students), differences in major choice are explained in a large proportion by differences in entrance probabilities. Finally, I find that gender has important interactions with other variables. In particular, gender effects depend on education, socioeconomic characteristics and family background.

This paper considers the estimation of a dynamic ordered probit of self-assessed health status with two fixed effects: one in the linear index equation and one in the cut points. The two fixed effects allow us to robustly control for heterogeneity in unobserved health status and in reporting behaviour, even though we can not separate both sources of heterogeneity. The contributions of this paper are twofold. First it contributes to the literature that studies the determinants and dynamics of Self-Assessed Health measures. Second, this paper contributes to the recent literature on bias correction in nonlinear panel data models with fixed effects by applying and studying the finite sample properties of two of the existing proposals to our model. The most direct and easily applicable correction to our model is not the best one, and has important biases in our sample sizes.

We estimate the evolution of intergenerational mobility of education in Chile for synthetic cohorts born between 1930 and 1978. The correlation coefficient between children and parent education falls from 0.67 for the cohort born in 1930 to 0.41 for that born in 1956, a process of improvement that suddenly stops, followed by stagnation. We find that the stagnation is explained by the effect on tertiary education coverage of low incomes when the children were born (long-run credit constraints) and the restrictions to the supply side of tertiary education (that had a particularly strong effect on children from less educated parents) during the late seventies and early eighties.

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.

The 1990s ushered the world not only into a democracy wave, following the collapse of the former Soviet Union, but also a wave of fiscal rules, where the number of countries adopting this fiscal regime steadily rose from only 10 in 1990 to reach 97 in 2009. Countries that depend on hydrocarbons tend to suffer from fiscal policies that are highly susceptible to energy price shocks. This provides incentives for implementing fiscal stabilization instruments in the form of “fiscal rules”. However, the resource-rich but largely democracy-deficit MENA region has been a fiscal rules-free region. Against this backdrop, this paper asks two fundamental questions: why has MENA chose not to adopt fiscal rules? And what role, if any, resources dependence and political institutions might have played in this outcome? We find that lack of democracy and weak systems of political checks and balances that characterize MENA countries appear to have outweighed the positive impacts of oil resources so that fiscal instability persists despite ample oil revenues. The nascent Arab 'democracy spring' might tip the scale in favor of the adoption of fiscal rules by emerging democratic governments in the region. However, stronger systems of political checks and balances are also needed and, unfortunately, not necessarily a certain outcome. A move toward inflation targeting regimes, as proposed for Tunisia and Egypt, might also provide additional impetus for adoption of fiscal rules as the evidence of Chile and other inflation targeters suggests.