Can correcting for real exchange rate misalignment help countries escape the middle-income-trap? An analysis of a natural resource-based economy: Chile

Vol. 42 No. 4 (2022)

Oct-Dez / 2022
Published December 21, 2022
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How to Cite

Caldentey, Esteban Pérez, Lorenzo Nalín, and Leonardo Rojas Rodriguez. 2022. “Can Correcting for Real Exchange Rate Misalignment Help Countries Escape the Middle-Income-Trap? An Analysis of a Natural Resource-Based Economy: Chile”. Brazilian Journal of Political Economy 42 (4):876-901. https://doi.org/10.1590/0101-31572022-3438.

Can correcting for real exchange rate misalignment help countries escape the middle-income-trap? An analysis of a natural resource-based economy: Chile

Esteban Pérez Caldentey
Coordinator of the Financing for Development Unit. Division of Economic Development. Economic Commission for Latin America and the Caribbean, Santiago do Chile, Chile.
Lorenzo Nalín
Universidad Nacional Autónoma de México, México.
Leonardo Rojas Rodriguez
Universidad Nacional de Colombia, Bogotá, Colombia.
Brazilian Journal of Political Economy, Vol. 42 No. 4 (2022), Oct-Dez / 2022, Pages 876-901

Abstract

Chile is classified as a high-income country but suffers from the same
weaknesses affecting middle-income countries. The same policies that have encouraged the
dependency on natural resources and restricted the expansion of the productive and export
base, have prevented the use of exchange rate policy as an instrument of economic and
social development. The performance of the economy is greatly determined by the evolution
of the terms-of-trade which is negatively correlated with the real exchange rate. Also, the
nominal exchange rate has been used mainly as an instrument for price stability purposes
rather than for economic development. Building on the exchange rate misalignment concepts
developed by the New Developmentalism, the analysis shows that, at the macroeconomic
level, the real exchange rate has appreciated over time. However, the evidence also shows
that the industrial/manufacturing sector has an external price competitive advantage in
relation to the rest of the economy. This raises the broader question as to what extent is
price competitiveness a powerful enough incentive for a broad-based structural change
towards innovation and more knowledge intensive production which is needed to escape
the middle-income trap.

JEL Classification: E32; F41; O11; O24; O54.


Keywords: Chile industrial equilibrium real exchange rate real exchange rate misalignment real exchange rate consistent with equilibrium in balance of trade middle-income trap terms of trade