ECONOMIC GOVERNANCE AND GROWTH IN CHILE , 1984 - 2004 by

Chile has undergone profound economic, social and political changes over the past two decades, marked by high growth and poverty alleviation. Strong economic governance is the main factor behind this performance. Policy quality, institutional capacity and reasonable consensus have created a propitious environment for growth. This paper analyzes the interplay between the governance factors and growth in Chile during five periods from 1984 to 2004. Considering that this transformation has not been a smooth process, changes in the pace of reforms are analyzed to better understand the positive, as well as the negative, interactions between governance factors. This analysis shows that when policies, institutions, and consensus operate in a consistent environment, sustained progress follows. This view demands a balanced agenda that simultaneously strengthens these three spheres. An important part of governing structural reforms is maintaining the virtuous circle of reasonable consensus, good policies and strong institutions. These interrelated factors lie behind the results achieved by the Chilean economy during two decades of transformation. Namely, these results are highlighted by an average growth rate of 6% (1985-2003) and a poverty reduction from 47% to 20% of population (1987-2000). The purpose of this paper is to explore the interplay between governance, structural reforms, and growth in five periods of the last two decades in Chile. Two of these periods belong to the military regime that ended in March 1990 and the other three characterize democratic governments. Section 2 analyzes the interactions between policies, institutions, and consensus in the growth process. The third section applies this framework to the last two decades in Chile. Finally, the fourth section draws conclusions and offers some recommendations. The effectiveness of structural reforms requires consistency between policies, reasonable consensus, and institutions. Workable consensus allows the decision-making framework to respond efficiently to economic developments. Institutions have an important role in keeping policy implementation in line with the established objectives. Policies are actions that should withstand rigorous empirical assessment. These three factors reinforce each other and create a virtuous circle of reforms and progress. Governance is the capacity with which a government coordinates these factors to manage policies and reforms to foster growth. For instance, building reasonable consensus can significantly improve decision-making. In the same way, strengthening institutions is frequently a necessary step to push for better policies, especially in times of pressure, when political support wanes. In contrast, an environment of weak institutions, fragmented authority, or polarized politics …