Chile: In Search of a Second Wind

Published 16 May 2002
Reference 5022
Region South America
Summary

The case considers the problem of diversifying Chile's economy, in particular its export industries, away from primary products and toward manufacturing. Starting with a recent debate around Chile's failure to attract a major investment by Intel to build a factory for the Pentium III, the case reviews Chile's economic performance in the last quarter-century, devoting particular attention to the following issues: (a) Whether the Chilean economy's heavy reliance on copper and other primary or first-transformation products ought to be a source of concern to policymakers (b) To what extent FDI could contribute to the economy's diversification, and (c) How recent policy debates around the need (or absence thereof) for a government-led "development strategy" tie in with traditional political debates in Latin America.

Teaching objectives

The questions on which students will have to reflect are: (a) Is export diversification into manufacturing a prerequisite for long-run economic development? (b) If yes, should the State adopt proactive policies or should markets be relied on to engineer the necessary transformation? (c) If the former, what are the appropriate policy measures? In particular, what is the best policy to attract Foreign Direct Investment (FDI): invest in the country's "fundamentals" (education, infrastructure) or grant generous tax breaks? The case provides a fascinating real-world setting to discuss, inter alia, the effect of FDI on host countries and the determinants of FDI flows, in particular the issue of competition between emerging countries and the "race to the bottom".

Keywords
  • Chile
  • Latin America
  • Economic development
  • Emerging markets
  • Public policy
  • Industrial policy
  • Business and government
  • Foreign investment. AR2002
  • RD0302