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  • Editors' Summary
  • Eduardo Engel, Francisco H. G. Ferreira, and Roberto Rigobon

Chile's economic performance over the last two decades is one of the few success stories in Latin America during this period. The country's per capita gross domestic product (GDP) grew at an average rate of 4.3 percent a year, and the fraction of the population living under the poverty line decreased from 45.1 to 13.7 percent. The contrast with other countries in the region is stark. For example, Brazil's per capita income, corrected for purchasing power parity (PPP), was 45 percent higher than Chile's in 1985, but it lagged by 30 percent two decades later. These trends have motivated the search for the determinants of the Chilean success story. Early and deep reforms following the prescriptions that eventually became known as the Washington Consensus are one line of explanation. The way in which Chile deviated from this blueprint is another factor.

In "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," Chang-Tai Hsieh and Jonathan Parker put forward a provocative thesis that goes beyond the standard explanations for Chile's performance. They argue that a reduction of the tax rate on retained profits from 50 to 10 percent in 1984 explains the investment boom underlying the so-called Chilean growth miracle. A central argument of their thesis is that taxation of retained profits is particularly distortionary in an economy with good growth prospects and poorly developed financial markets—as Chile arguably was after liberalizing the economy in the late 1970s and suffering the banking crisis of 1982—because it primarily reduces the investment of financially constrained firms. Consistent with this theory, they find a large increase in aggregate investment after the reform, which was entirely funded by an increase in retained profits.

Hsieh and Parker's thesis has its caveats, and both discussants do a good job of pointing them out. Yet sometime in the future, when the dust has settled and a synthesis emerges, their thesis is likely to represent a significant part of the explanation for Chile's success story. [End Page vii]

Inequality is often cited as a possible explanation for Latin America's lackluster economic performance. Some of the mechanisms through which inequality may hinder growth relate to unequal opportunities and lack of economic mobility. In "Social Mobility and Preferences for Redistribution in Latin America," Alejandro Gaviria uses Latinobarómetro data to explore the relationship between intergenerational mobility and political attitudes in seventeen countries in Latin America. While it has long been known that inequality (say, in educational attainment) is higher in Latin America than in the United States, this paper presents the first multi-country study of differences in educational mobility. The news is not good: in addition to being considerably more unequal, Latin American countries tend to display lower levels of mobility across generations than do developed countries.

Does this matter for the outcome of the political process in Latin America? Using Latinobarómetro data on political attitudes, Gaviria finds that demands for redistribution are relatively high in Latin America. Preferences for redistribution are (negatively) correlated with socioeconomic status, more strongly than in other regions, suggesting that the Meltzer-Richards paradigm (that the poorer the median voter, the more redistribution he or she will demand) seems to apply to the region. But one's present position in the distribution is not all that matters: those who are most optimistic about mobility seem to demand less redistribution, as predicted by the hypothesis on prospects for upward mobility. Finally, people's own views of the causes of inequality also matter. Those who feel that poverty is caused by external circumstances, rather than lack of effort, or that hard work does not guarantee success, are more likely to favor an active redistribution policy than those who hold the opposite views. Sadly, a majority of Latin Americans believe that opportunities are not equal for all, that poverty is due to external circumstances, and that hard work is no guarantee of success. This probably reflects their own experiences of limited mobility, and it probably also helps shape their political demands for the role of the...


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