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Microeconomic Policies and Productivity: An Exploration into Chile's Electricity Sector

work, Entrepreneurship, and finance

During the 1970s and 80s Chile was a pioneer in economic liberalization and reforms, but since 1998 the rate of GDP halved and productivity growth grinded to a halt. Policy makers often argue that the slowdown reáects convergence and that further microeconomic reforms are unnecessary and ineffective. This paper evaluates the impact of alternative policies in Chile's Central Interconnected System (CIS), which produces three-quarters of Chile's electricity and 1.3% of total value added, on costs and productivity. We find that some policies, which are currently being discussed in the Chilean Congress, can reduce TFP in electricity by up to 20%. More important, because electricity is an input, the impact of bad policies on the rest of the economy can be large, about 0.3% of GDP, equivalent to about one-fourth of CISís total value added.

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Author(s)
Alex Galetovic
Publication Date
February, 2012