Policy changes and growth slowdown: assessing Chile’s lost decade

Abstract

Latin America has been snared in an economic slowdown since the end of the commodities boom. Within the region, Chile used to stand alone as the poster child of economic growth and political stability from 1990 to 2010. However, a stark contrast is perceived since around 2014, as Chile has also been trapped in a decade of slow economic growth, marking a shift in its economic trend. This paper examines this Chilean slowdown from an empirical perspective and determines how much can be attributed to internal and external causes. Using the Synthetic Control Method (SCM), our empirical analysis suggests that at least two-thirds of Chile’s recent slowdown can be attributed to internal causes (i.e., policy regime change) and only one-third to external ones. Our results are consistent with the literature, confirming that external volatility can explain only a small fraction of poor economic performance, suggesting that internal factors are the primary source. This research sheds light on the effects of policy regime shifts and their economic impact.