Chile's thrust towards financial fragility

Abstract

This paper argues that the Chilean economic model is characterized by three stylized facts that undermine its view as a free market/neo-liberal success: A lower trend in the rate of growth of gdp, increased inequality, and rising indebtedness. Since the mid-1990s gdp growth has trended downwards. This has been accompanied by an increase in the profit relative to the wage share. Chile has also one of the highest levels of personal income inequality across the oecd countries. The combined effects of the decline in trend growth and high levels of inequality have given rise to increased indebtedness of the household sector, especially of lower income households, and the corporate sector. Lower trend growth, high inequality and increasing debt are the perfect mix that can lead to a context of financial fragility, which puts in doubt the sustainability of the Chilean economic model.