The Great Divergence - Assessing The Lost Decade of The Latin American Miracle

The great divergence:
assessing the lost decade of the Latin American miracle
Emiliano Toni* Pablo Paniagua†* Patricio Órdenes† **
First version: 14th November 2023/ This version: 21st November 2023
Abstract
The Latin American region has suffered an economic slowdown since the end of the
commodities' boom. This has affected the capacities of the region to tackle inequality and
pending social ills, which has led to protests and the rise of populism. Within this context,
Chile was the poster child of economic growth and development up until 2014. Since then,
Chile has also been trapped in a decade of slow economic growth. Chile's sudden slowdown,
and its recent growth path divergence, have posed a puzzle for economists interested in
economic growth and development. This paper examines this divergence considering Chile’s
recent changes in public policy. We argue that Chile experienced a 'great divergence' from
its recent economic trend largely due to an internal policy regime change. To assess the
timing and quantify this 'great divergence', we use a synthetic control approach, thus
assessing the economic consequences of Chile's recent policies. Our results suggest that,
unlike what is believed, Chile’s recent growth slowdown has been mainly a product of
internal factors, such as its policy regime change, rather than external or regional factors such
as international prices of commodities. This research sheds light on the potential effects of
policy regime changes in affecting long-term economic growth, thus providing valuable
guidelines for development economics and macroeconomic policy.
Keywords: Synthetic control; Economic growth; Policy regime changes; Economic

development; Middle-income trap.
* St. Gallen University (HSG-FGN), St. Gallen, Switzerland.

† King’s College London, London, UK.
Corresponding author: pablo.paniagua_prieto@kcl.ac.uk.
† Universidad del Desarrollo (UDD), Faro UDD, Santiago, Chile.
We would like to thank Pablo García, Veeshan Rayamajhee, and Edwar Escalante for their generous
and useful comments. The usual caveat applies.
Electronic copy available at: https://ssrn.com/abstract=4640416

“El desarrollo es un viaje con más náufragos que navegantes”.
“Development is a voyage with more castaways than navigators”.
Eduardo Galeano, Las venas abiertas de América Latina, 1971.
1. Introduction
From 2012 the Latin American region has suffered for tumultuous political and economic
events, which have hindered its capacity to attain democratic stability, generate economic
growth, and promote widely shared prosperity (Ocampo, 2020). The recent decade has been
categorized as Latin America’s “new lost decade” (Ocampo, 2021). Slowing growth, high
inflation, and global uncertainty due to wars, pandemics, and climate change means that
many people in the region will see their living standards decline and their real wages stagnate.
This has generated increase anxiety about the future, stimulating social conflict, polarization,
and political tensions around the continent. The region has suffered a relevant economic
slowdown since the end of the commodities' boom during 2012-2014, leading to frustration
and social unrest (Alfaro and Jeong, 2019; Ocampo, 2020).
This stagnation has affected the capacities of the region to tackle inequality and many
pending social ills, which has led to protests and new waves of populism across the region
(Edwards, 2019; Justino and Martorano, 2019; Segovia, et al., 2021). The Latin America and
the Caribbean regions (LAC) are highly dependent on commodities and, as such, they
benefited from the ‘commodities’ super-cycle’ since early 2000s up until 2012-2014 (Erten
and Ocampo, 2013; Gruss, 2014). Analogously, LAC also suffered when the commodities’
boom ended, leading to a recent decade of economic stagnation (Ocampo, 2017, 2020). Since
then, countries such as Peru, Chile, Bolivia, Ecuador, Colombia, and others have experienced
protests, political instability, and violence (Segovia, et al., 2021). Analysists have coined the
term “Latin American Spring” to define the recent tumultuous period that followed the end
of the commodities’ boom (Rice, 2020).
Even though the causes of these events and the origins of protests are numerous—
ranging from political polarization, social media networks, and persistent levels of
inequalities (Barrett, et al., 2020; Busso and Messina, 2020; Segovia, et al., 2021)—a key
detonating factor in the “Latin American Spring” has been the sudden economic slowdown
(Cerda and Vergara, 2022; Faiola and Krygier, 2019). In other words, “the protests now
raging across much of Latin America originated from different sparks but are connected by

a single common denominator: economic malaise” (Naim and Winter, 2019). Within this
context, Chile has also experienced weak economic growth, political volatility, and protests
at least since 2012 onwards, and more acutely after 2019, which marked a peaked in political
polarization, street violence, and protests (Somma, 2021). Yet, since early 1990s (Arenas y
Toni, 2023; De Gregorio, 2005), Chile used to be the poster child of economic growth,
political stability, and development, at least up until 2013-2014 (Cortázar, 2019; Bergoeing,
2017). From then onwards, Chile has also been trapped in almost a decade of slow economic
growth and low productivity (Edwards, 2023).
Chile’s economic growth during the 1990s was impressive, growing significantly
above the world average, period which is known as the ‘Chilean miracle’ (Becker, 1997; De
Gregorio, 2005). In fact, after 1990, Chile became one of the most stable and open economies
within emerging markets (Edwards, 2023; Medina, et al., 2023; Toni, 2023), and Chile’s
average per capita GDP growth was 4.1% during 1991-2005—significantly higher than the
world average (Schmidt-Hebbel, 2006). Yet, in less than a decade, Chile’s fortune shifted
rapidly, and since 2014 onwards the country has grown significantly below the world’s
average (Bergoeing, 2017). In between 2014-2018, and right before the 2019 social unrest
and the global pandemic, Chile’s average per capita GDP growth was a meager 0,88%
(Paniagua, 2021). Thus, for Chile, the decade between 2010-2020 has been the worst
performance concerning economic growth since the 1970s (ibid., p. 131).
Chile's sudden slowdown, and its recent divergent path in economic growth, poses a
new puzzle for economists interested in public policy, growth, and development: what
happened to Chile in the recent decade? how come a country that was the poster child of
strong economic growth became an underperformer in less than a decade? This sudden
divergence in Chile’s path of economic growth, and the recent policy changes enacted by the
country since 2014, have drawn some attention in international economic debates
(Bergoeing, 2017; Larraín, et al., 2014; Cortázar, 2019; De Gregorio, 2014). Yet, Chile’s new
economic puzzle remains largely understudied from a quantitative and empirical perspective.
This is paradoxical since Chile’s economic performance during 1990-2010, and its model of
development, have been very prominent fields of inquiry in economics (Arenas y Toni, 2023;
Barro, 1999; Becker, 1997; Edwards, 2019, 2023; López and Miller, 2008). Chile’s past
decades of economic success (1990-2010) have been studied at depth, yet its recent decade

of “growth slowdown” (Eichengreen, et al., 2014) which brought slow growth, stagnant real
wages, and productivity sluggishness has been severely understudied (Paniagua, 2021). This
paper seeks to fill that gap in the literature by analyzing this recent macroeconomic
phenomenon using a synthetic control approach.
This paper contributes to the literature on economic development and economic
growth (Aiyar, et al., 2013; Barrro, 1999; Lucas, 1988; Rodrik, 1999), by examining Chile's
sudden economic slowdown considering its recent public policy changes. Whereas economic
analysis has focused on how international factors—such as commodity prices, terms of
international trade, and the end of the commodities’ boom—have affected Latin-American
underperformance since 2012-2014 (Gruss, 2014; Ocampo, 2017), we propose instead an
alternative approach by using the synthetic control method (SCM) (Abadie, 2021; Abadie, et
al., 2015; Abadie, et al., 2010). SCM allows us to focus on internal and endogenous factors,
such as fiscal and public policy changes that could be framed as ‘treatment events’ (Abadie
and Gardeazabal, 2003), thus helping us to assess their ex-post effect against counterfactuals,
and their role in determining the economic performance of a nation.
This paper also contributes to the “growth slowdowns” literature (Eichengreen, et al.,
2014; Couyoumdjian, et al., 2020), by assessing how policy regime changes affect
development, by providing answers to the ‘Chilean puzzle’. Hence, offering a
methodologically robust and quantitatively grounded response to pressing, yet politicized,
debates such as policy regime changes and fiscal reforms in developing countries. Recently,
synthetic controls have been applied to assess the effects of populist regimes in Latin America
(Absher, et al., 2020; Grier and Maynard, 2016; Spruk, 2019), recent liberalization episodes
in developing countries (Billmeier and Nannicini, 2013), and even to assess the economic
history of Chile (Couyoumdjian, et al., 2020; Escalante, 2022). Yet, as far as we know, this
is one of the first papers using SCM to assess the effects of public policy regime change on
economic growth in Latin America, thus making a significant contribution to the literature.
This paper argues that Chile experienced a 'great divergence' 1 from its recent
economic growth trend mainly due to its internal policy changes enacted during 2014. To
1
The term ‘great divergence’ came into vogue in economics thanks to K. Pomeranz’s (2000) book,
Great Divergence. The term refers to the growing gap in economic performance between Europe and
China –and by extension the rest of Asia and Arabia—since the late eighteenth century.

assess and quantify this 'great divergence', we use a synthetic control approach, thus
providing a novel framework to evaluate Chile's recent change in policy regime. We provide
a methodologically plausible answer for the question: how would have Chile's economic
trajectory unfolded if it had not changed its internal policy framework? Our results suggest
that Chile’s recent growth slowdown has been mainly a product of internal factors, such as
its policy regime change and fiscal reforms, rather than external factors associated with
international prices of commodities. Finally, this research sheds light on the potential effects
of sudden policy regime changes in affecting economic growth, thus providing valuable
insights for development economics and macroeconomic policy (Easterly, 1992; Gemmel, et
al., 2011; Mankiw, et al., 2009; Romer and Romer, 2010).
We find that Chile’s real GDP per capita rose significantly slower (i.e., stagnated)
after the 2014 policy shift, than it would have without such large policy change, as shown by
the performance of the synthetic control. The economic growth and income gaps between the
control and the treated unit is quite large, on the order of thousands of dollars per capita.
Specifically, we find that Chile, at the end of the treatment period, should have been almost
10% richer (in real GDP per capita terms), based on the synthetic counterfactuals. Although
we can find strong causality and identify the crucial role of internal causes in the Chilean
growth slowdown, we cannot pinpoint exactly which policy change, enacted in 2014, affected
Chile’s economy; nevertheless, the results are consistent with an explanation that emphasizes
the relevance of volatile institutional change and political uncertainty in damaging economic
progress (Grier and Maynard, 2016).
The remainder of this paper is structured as follows. Section 2 explores the ‘Chilean
puzzle’ concerning the divergent path in economic growth that such country has experienced
since 2014 onwards. By using descriptive statistics of the Chilean economy, we show its
sudden change of trend in economic growth, and review also the existent state of the debate
concerning its growth slowdown. Section 3 develops the synthetic control approach to assess
the timing and quantify Chile’s 'great divergence'. Section 3 discuses also at depth the data
and method employed. By using SCM we construct a ‘synthetic’ or ‘counterfactual’ for
Chile’s economic performance and its long-term growth pattern. Section 4 provides
robustness tests that support our findings. We find a significant treatment effect, meaning that

Chile’s poor economic performance and its divergence in economic trajectory since 2014
owes a substantial debt to its own policy regime change. Section 5 concludes.
2. The Chilean divergence: some stylized facts
Chile’s economy is today a sort of paradox in economic development, transitioning from a

rapid boom in economic growth during 1985-2013, towards a sudden slowdown in economic
growth from 2014 onwards (Edwards, 2023; Paniagua, 2021). This sudden growth
slowdown can be represented in figure 1 that shows Chile’s per capita GDP growth since
1985 until 2019. As seen in figure 1, Chile’s economic growth during the 1990s was
impressive, growing substantially above the world average (De Gregorio, 2005). As
Schmidt-Hebbel (2006, p. 6) attest: “Chile grew at an average per capita GDP rate of 4.1%
during 1991-2005, breaking with its past mediocre growth performance of barely 1.5%
recorded from its independence (1810) to 1990” (ibid, p. 6; see also Couyoumdjian, et al.,
2020). Moreover, “the country's high growth during the last 15 years also exceeds
significantly the world's average per capita growth during the same period (at 1.4%) and that
of most individual countries and regions” (ibid., p. 11).
In other words, Chile’s historical economic performance has diverged three times:
first, by growing significantly less than most countries and regions of the world between
1940s to mid-1980s (Couyoumdjian, et al., 2020); second, and subsequently, it converged
by growing faster than most countries from mid-1980s (Schmidt-Hebbel, 2006). Third, and
finally, from 2014 onwards, Chile’s fortune shifted again by growing significantly below the
world’s average (Bergoeing, 2017; Edwards, 2023). Similarly, table 1 shows Chile’s average
real GDP growth, since 1970 onwards (first column), and average per capita GDP growth
(second column), based on selected historical periods of the Chilean economy between 1970-
2019: i) the tumultuous political period 1970-1974—marked by deep political and economic
instability, ii) the ‘boom’ period of 1985-2000 and, subsequently, iii) the solid growth of
2001-2013—both periods considered to be part of the large ‘Chilean Miracle’ between 1985-
2013 (De Gregorio, 2005; Escalante 2022; Edwards, 2023); and finally iv) and the recent
period of 2014 onwards marked by a sudden economic slowdown (Bergoeing, 2017).

12,0%
10,0% 9,4%
8,2%
8,0%
Real GDP per capita Growth
7,4%
6,1% 6,0%
6,0% 5,6% 5,4% 5,6%
5,2%
4,9% 5,0% 5,1%
4,8% 4,8% 4,8%
4,1%
3,8% 3,8%
4,0% 3,5% 3,6%
2,9% 2,8%
2,5% 2,3%
2,1%
2,0% 2,1%
2,0% 1,7%
1,1%
0,8% 0,6%
0,0%
-0,2%
-1,0%
-2,0% -1,5%
-2,1%
-4,0%
1985 1990 1995 2000 2005 2010 2015
Fig. 1. Chile’s real GDP per capita (constant 2015 US$) growth (1985-2019). Dotted vertical
line marks 2014. Authors’ elaboration based on World Bank data.
Table 1 shows clearly that the last period between 2014-2019 has been the worst set
of years concerning economic growth since the tumultuous years of Allende’s socialist
project (Edwards, 2023); period also in which Chile’s economic growth per-capita got
reduced by more than a fifth in comparison with the ‘miracle’ period of 1985-2000 (Becker,
1997; Escalante, 2022). The data of table 1 also shows that, in between 2014-2019, Chile’s
average per capita GDP growth was a meager 0,6%, significantly below the world average
(Paniagua, 2021). From these stylized facts of Chile’s recent trajectory of economic growth,
three relevant facts standout: first, the period between 2014-2019 has been the period with
the worst performance concerning economic growth since the tortuous 1970s, when
compared against its own average economic performance (Edwards, 2023; Paniagua, 2021).
Second, since 2014 onwards the Chilean economy, on average, is growing severely less than
it used to grow during the golden years of the ‘Chilean Miracle’. Third, and finally, the
Chilean economy in less than a decade went from growing above the world’s average during
1985-2013, from growing significantly below the world’s average during 2014-2019. We
believe this to be quite a puzzle for macroeconomic and development policy. Hence, a

sudden reversal of fortune which has led Bergoeing (2017, p. 2) to recognize that “neither
the Asian crisis of late 1990s, nor the financial crisis one decade later, have generated an
economic deceleration similar in our country [Chile]”. This raises an important question:
what happened to the Chilean economy from 2014 onwards? Or put differently: why the
‘Latin American miracle’ (Chile) experienced a ‘great divergence’ so quickly? The reminder
of this paper explores these questions at depth.
GDP per capita growth GDP per capita growth

Period Growth gap (Chile-World)
(Chile, annual average) (World, annual average)
1970-1974 -0,1% 2,3% -2,5%

1985-2000 4,6% 1,6% 3,0%
2001-2013 3,5% 1,7% 1,8%
2014-2019 0,6% 1,9% -1,3%
Table 1. Chile’s average per-capita GDP growth v/s World by selected periods.
Authors’ elaboration based on World Bank data.
2.1. Debating the Chilean puzzle: domestic or external factors?
Since the decline in commodity prices during 2012-2014, and the end of the “commodity
super-cycle” (Roch, 2017), a debate amongst economists and other social scientists has
spurred about the causes and consequences of the economic slowdown that the region has
suffered (Aqib, et al., 2016; Didier, et al., 2016; Gruss, 2014; Roch, 2017, 2019; Segovia, et
al., 2021). Didier et al. (2016) argue that the slowdown is synchronous and protracted in
emergent economies, affecting a sizable number of emerging markets, particularly large
ones. The authors suggest that the recent growth slowdown during the last decade has been
driven by both external factors—including weak world trade, low commodity prices, and
tightening financial conditions—and domestic factors, such as slowdown in productivity
growth, policy uncertainty, and an erosion of fiscal buffers (ibid.).
Roch (2019) has argued that shocks through commodity terms of trade are an
important driver of recent business-cycle fluctuations in developing countries. In some cases,
Roch (2019) found that the commodity terms of trade shocks could explain around 30
percent of movements in output. Similarly, Roch (2017) establishes that, in Chile and Peru,
the terms of trade doubled from 2000 to 2011, and in Colombia they increased by 70 percent,

due to the “commodity super-cycle”. Thereafter, the prices of commodities declined after
2011, and by mid-2014, respectively. The ‘commodity shock’, Roch (2017) argues, resulted
in lower national incomes, wider current account deficits, and weaker national currencies for
Chile, Peru, and Colombia (ibid., p. 3).
Within this bleak regional context, and due to the end of the “commodity super-
cycle”, some economists (Roch, 2017; Rivera, 2017) have argued that Chile’s sudden change
in economic growth forms part of this broader regional trend, rather than responding to
internal factors. As Didier et al. (2016) suggest for the Latin American region, there are two
plausible causes behind Chile’s ‘great divergence’: external factors (mostly a weak world
trade and low commodity prices), and internal factors (mostly, productivity slowdown and
policy uncertainty); or a combination thereof. These internal and external factors hypotheses
spurred an intense debate in the region during 2014-2018, before the Chilean social unrest
of late October 2019 and the subsequent pandemic took most of the agenda in Latin America
(Larraín, et al., 2014; Bergoeing, 2017; Cortázar, 2019; Rivera, 2017). For instance,
Bergoeing (2017), after analyzing both the external and internal factors hypotheses
concludes that since 2014 onwards “the main factor [for Chile’s economic slowdown] is
local and endogenous: an uncertain environment that led to generally and persistently
postponing investments” (ibid., p. 1).
To put this ‘internal hypothesis’ in perspective, consider figure 2 that shows Chile's
GDP per capita relative to the World (1990-2022, %). Figure 2 shows the drastic change in
trend that Chilean economy suffered from 2014 onwards relatively to the rest of the world
and selected countries. These descriptive statistics, and the preliminary evidence produced
by Bergoeing (2017) and others (Cortázar, 2019; Edwards, 2023; Fernández, 2022;
Paniagua, 2021), provide prima facie evidence suggesting that Chile’s great divergence in
economic growth since 2014 onwards is driven largely by internal and endogenous factors
such as drastic public policy changes, including the fiscal and tax reform enacted in 2014
(see section 2.2.). Alas, despite of recent attempts to provide plausible explanations to Chile’s
economic puzzle, the literature has remained largely based on anecdotal evidence and
descriptive statistics, thus being unable to provide a statistically rigorous and empirically
robust explanation to what happened to the Chilean economy. This will be the task of
sections 3 and 4 using the synthetic control method (SCM).

84% 170%
Australia
Spain
76% United Kingdom 160%
OECD Members
68% Portugal
Estados Unidos 150%
60%
140%
52%
130%
44%
120%
36%
28% 110%
20% 100%
1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020
Fig. 2. Chile's GDP per capita PPP (constant 2017 international $) relative
to selected countries (left) and the World (right). Dotted vertical line marks
2014. Authors’ elaboration based on World Bank data.
2.2. Establishing Chile’s structural break
The reason why the focus of attention has resided in 2014 as a crucial break in Chile’s trend
of economic performance is not only because it is the period that indicates the beginning of
a significant divergence in Chile’s macroeconomic trend (see previous discussion), but also
due to recent historical and public policy reasons. The fact that a potential structural break
occurred in 2014 is consistent with the historical narrative fact that several important policy
related events took place in the country during that year, which represent a relatively major
policy regime change for the country.
In March 2014 President elected Michelle Bachelet arrived for a second time to the
Chilean presidency after a presidential campaign in 2013, promising “a far-reaching reform
program that vowed to initiate a ‘new historical cycle’ in the South American nation”
(Benedikter, et al., 2016, p. 2). Bachelet’s second presidential campaign was marked with a
strong ‘anti-neoliberal’ and ‘anti-market’ rhetoric, aimed at changing the Chilean economic
model of development that the country adopted since 1980s onwards (Edwards, 2023;
10

Benedikter et al., 2016). 2 During the campaign, Bachelet’s center-left coalition (New
Majority)—which included for the first time since the return to democracy the Communist
Party of Chile (PCCh)—borrowed from the ideas of radical legal scholars and center-left
academics that aimed at establishing “the other model” (el otro modelo); thus seeking to
undo the pro-market reforms established earlier (Edwards, 2023; Paniagua, 2021). During
2013 a critical book was launched titled, ‘The other model: from the neoliberal order to the
public regime’ (Atria, et al., 2013). The book was widely celebrated by the new center-left
coalition because it delineated political and normative guidelines to undermine the pro-
market reforms of the country—Bachelet was a key speaker during the book launch.
When Bachelet arrived at the Presidency in 2014, her coalition arrived also to power
with a strong support in Congress—gaining majority of both houses of legislature in this
election (Kinghorn, 2016)—with the intention of implementing a large battery of economic
reforms and policy changes, that represented a “simultaneous multi-sectoral change and
intertwined reforms” (Benedikter, et al., 2016, p. 3). This set of reforms included: (i) a tax
reform to increase corporate taxes (Kinghorn, 2016); (ii) an educational reform with the
intention to end ‘for-profit’ entities and dismantle the ‘market-based’ policies in education
(Guzmán-Concha, 2017); (iii) a political reform to change the electoral system (Gamboa and
Morales, 2016); (iv) a constitutional process to allegedly ‘end the constitution of Pinochet’
(Contreras and Lovera, 2021); (v) a labour market reform to strengthen the bargaining power
of syndicates (González and Portugal, 2018); and, finally, (vi) a pension reform to increase
the role of the state in social security (Borzutzky, 2019). All of them with the goal to be
implemented in tandem in a time span of four years or shorter (Benedikter, et al., 2016).3
Taken together, these are far from minor reforms to a country’s policy and economic
framework in a single year: increasing corporate taxes and changing the tax structure of the
2
As Bachelet recognized while still in office: “there were some vestiges of the neoliberal model that
we have been putting an end to through the reforms” (La Tercera, 2017).
3
To specify the timing of these reforms during 2014: i) the fiscal and tax reform was announced in
March 2014 and later approved by the Chilean Congress in September 2014; ii) the political reform
that changed the electoral system was announced in April 2014 and later approved by Congress in
November 2014; iii) the educational reform was signed into law by Bachelet during May 2014; 4) the
labour market reform was sent to Congress by President Bachelet in December 2014; v) the pension
reform failed to become a bill during 2014-2018; and, finally, vi) the constitutional reform announced
in October 2014 failed to generate an official document during Bachelet’s presidency, but
spearheaded a long-winded constitutional qualm.
11

country, altering the bargaining balance between corporations and syndicates, seeking to
dismantle the pro-market system in the provision of educational services, altering the
political and electoral system that structures a democracy, and, finally, promoting a
constitutional process with the intention to substitute the existent constitution. All of these
are not only intertwined reforms (ibid.), but also far from simple and economically neutral
policy decisions. Moreover, these set of policy changes are a combination of decisions that
have the potential to cause non-negligible investment uncertainty4 and economic problems
(Absher, et al., 2020; Widmalm, 2001). The fact that most of these reforms were either
announced and/or implemented in a single year (2014), provides strong reasons to establish
that Chile experienced a substantial policy framework shift, or a policy regime change in
that year, when compared with the previous decades (Edwards, 2023; Paniagua, 2021).5
This drastic change in the policy framework, and normative vision concerning how
Chile should move forward in economic policy, was perhaps best encapsulated with the
following anecdote: during the weeks following the installation of Bachelet's second term
(in March 2014), the President of the Senate—and one of the leaders of the center-left
coalition—Senator Jaime Quintana, used the metaphor of a “backhoe” (a sort of bulldozer
excavator) to refer to the overall meaning of the set of economic reforms envisioned by
Bachelet’s second term. In Quintana’s words: “we are not going to use a bulldozer, we are
going to put a backhoe here, because we must destroy the ossified foundations of the
neoliberal model of the [Chilean] dictatorship” (Durán, 2019, p. 18). This metaphor achieved
the status of formal and substantive expression of the entire new political project of the
center-left coalition; until it became a signifier to refer to both the new political project itself,
as well as its radical distance from the previous consensus (ibid.).
Consider, for instance, the Chilean tax reform enacted in 2014. That year a fiscal and
tax reform was implemented in the country, which was the most substantial and significant
4
As pointed out by Claro and Sanhueza (2023), 2014 was the first time in many years in which
Chilean local uncertainty index surpassed international uncertainty index. Additionally, real
investment yearly growth rate went from an average 7.2% during 2000-2013 to -0.6% during 2014-
2018.
5
In the words of Benedikter et al (2016, p. 2): “Bachelet vowed to enact multi-dimensional change
so far-reaching and interdisciplinary in scope and extension that she called it a coordinated array of
‘policies that change cultures’. Overall, Bachelet promised to not only apply sectorial corrections, but
to change the functional, institutional and constitutional basics of the nation to create a ‘new culture’”.
12

tax reform of the last thirty years in Chile, and hence worthy of serious attention for its
potential economic effects (Larraín, et al., 2014; De Gregorio, 2014; Rivera, 2017). The tax
reform was an integral part of Bachelet’s presidential program (Rivera, 2017), since it was
intended to fund a variety of social programs and to expand the role of the state, including
the educational reform (Kinghorn, 2016). The tax reform is relevant for our analysis because
it has been the most significant fiscal change that the country has experienced since 1980s
(De Gregorio, 2014; Rivera, 2017) for two main reasons.
First, because the increase in the tax burden was high for the standard of the Chilean
economy and its history, but also high for countries that make fiscal adjustments without
being forced by having unsustainable fiscal balances (De Gregorio, 2014). Thus, it is
estimated that corporate taxes went up approximately from 20% to 35% (25% plus a 10%
withholding) (Larraín, et al., 2014). This situated Chile with a corporate tax rate higher than
the OECD average (Fuentes and Vergara, 2021). In fact, during these last two decades, while
the corporate tax rate in Chile has gone up, in the other OECD countries, on average, it has
gone down (ibid., p. 71).
Second, the reform was critical since it also changed the way in which taxes were
levied on companies: it altered the way in which taxes were collected, since the reform no
longer have a tax benefit for leaving the profits reinvested in the company (the so called
FUT)6; hence, equalizing the effective rate of retained and distributed profits (De Gregorio,
2014). In sum, the tax reform did change the corporate tax burden significantly and altered
the incentives to reinvest, therefore had potential non-negligible effects on investments and
capital accumulation (Fuentes and Vergara, 2021l; Kinghorn, 2016).
We mentioned the tax reform, not only because it coincides with the timing in which
the Chilean economy started experiencing its ‘great divergence’—suggesting that this fiscal
shock had some non-negligible internal effect—but also because the literature has established
that tax changes could have major macroeconomic effects as well (Arnold, et al., 2011; Barro
and Redlick, 2011; Mertens and Ravn, 2013; Romer and Romer, 2010; van der Wielen, 2020;
6
The tax reform sought to eliminate the Taxable Profits Fund (Fondo de Utilidades Tributables)
known in Chile as FUT; thus, starting to tax accrued income at the partner level instead of withdrawn
income. For a review of Chile’s recent history of tax reforms and the FUT consult: Kinghorn (2016).
13

Widmalm, 2001).7 Identifying the economic impact of fiscal and tax reforms is difficult due
to various confounding factors, most notably the two-way interaction between fiscal policy
and output growth (van der Wielen, 2020), and the potential balancing effects between tax
increases and subsequent government spending that could counterbalance its short-run
effects (Dalgaar and Kreiner, 2003). Nevertheless, there is incipient evidence that suggests
at least some non-negligible impact of tax changes on short-term output and GDP, and that
these effects could be persistent (Gemmell, et al., 2011; Widmalm, 2001).8
Romer and Romer (2010), when studying tax changes in the U.S., found that tax
increases are contractionary, and their “effects are strongly significant, highly robust, and
much larger than those obtained using broader measures of tax changes” (ibid., p. 763).
Similarly, Mertens and Ravn (2013, p. 1212) have found that for, the U.S., the “short run
output effects of tax shocks are large”, and that “changes in taxes have important
consequences for the economy” (ibid., p. 1243). The evidence provided by the authors is
supportive of relatively large and immediate output effects following changes in average tax
rates. Barro and Redlick (2011) also found that, for the U.S., there is evidence that tax
changes could affect GDP. Finally, for the European Union, van der Wielen (2020, p. 303),
have found “suggestive evidence that the anticipated tax hikes implemented slowed
economic activity more strongly than the unanticipated cuts increased growth”. The core
conclusion of the literature seems to be that “a [corporate] tax increase is not innocuous for
growth” (De Gregorio, 2014, p. 36).
Finally, when attempting to establish a recent structural break in the Chilean
economy, Fernández (2022) also confirms the sudden change in the trend of GDP per capita
growth reviewed in this section, which could represent a structural break with respect to both
the previous GDP trend and with respect to the previous policy framework. Following Bai
and Perron (1998), Fernández (2022) carries a statistical analysis for a structural break test
7
For a review of the literature concerning the effects of fiscal policies and taxes on economic growth
consult: Nijkamp and Poot (2004), Larraín, et al. (2014), and Gemmel, et al. (2011).
8
The tax evidence needs to be taken cum grano salis since different countries have different tax
structures, there are different effects also between personal and corporate taxes, and, finally, the
potential negative effects of tax increases on output could net themselves out with better and more
efficient government spending. Not all taxes might generate distortions or negative effects, and not
all government spending is unproductive or wasteful. Nevertheless, the literature suggests that
corporate taxation is, comparative speaking, the most harmful to growth (Arnold, et al., 2011).
14

(i.e., Bai—Perron test) that has the particularity of testing the existence of an unknown
structural break. Fernández (2022) finds two structural breaks in Chile in 1985 (1984-1986
with a confidence interval of 95%), and in 2013 (2012-2014 with a confidence interval of
95%) respectively. According to his analysis: “the specific point estimate of the structural
break occurs between 2013 and 2015, the confidence intervals between both measurements
include 2014 … there is no evidence to support that they correspond to breaks structurally
different but correspond to the same fall in per capita product” (ibid., p. 46).
It is relevant to mention that alongside the fall in GDP per capita since 2014, Chile
also experienced a sharp drop in gross fixed capital formation (GFCF), and therefore in
overall capital accumulation (Bergoeing, 2017; Fernández, 2022). By empirically testing the
GFCF, in search of a structural break that coincides with the drop in GDP, Fernández (2022,
p. 48) also finds that the Chilean investment series suffered a similar structural break in
2014, with a significant fall in the levels of capital accumulation; confirming that is safe to
establish that 2014 does indeed represents a structural break for the Chilean economy.
In sum, the policies enacted (or announced) during 2014 significantly altered Chile’s
political framework and overall public policy regime. Our analysis suggests a sort of
‘institutional shock’ or a sudden, but relevant, change in Chile’s internal policy framework
(i.e., the “treatment” under SCM). Thus, for the following sections, our ‘treatment effect’ for
the SCM is a relevant change in Chile’s policy framework or a policy regime change—when
we compare the “other model” framework that arouse in 2014, and its ‘anti-neoliberal’ set
of economic policies, against the previous pro-market consensus (Edwards, 2023).
3. Creating the synthetic control for Chile
Given the state of the debate concerning Latin America’s and Chile’s sudden economic
slowdowns review in the previous sections, we will now explore the hypothesis that Chile
experienced a ‘great divergence’ mainly due to internal factors rather than external ones. We
seek to provide a methodologically plausible answer for the question: how would have
Chile's economic trajectory unfolded if it had not implemented the set of internal reforms in
2014? Addressing this question presents a significant challenge due to the lack of reasonable
counterfactuals. For example, consider the hypothetical scenario in which a country
implements an industrial policy, and experiences a 5% growth in subsequent periods (ceteris
15

paribus). One might initially perceive this as a ‘successful’ policy. However, there remains
uncertainty about whether the growth could have been the same (or even higher, say 10%)
had that policy not been implemented at all. Hence, “intuition is a poor guide for establishing
causality”, and popular accounts of economic events without objective benchmarks are poor
guides for constructing scientifically trustworthy counterfactuals (Grier and Maynard, 2016,
p. 1). Thus, establishing a credible benchmark in such cases becomes not only a major
challenge, but a necessary one in order to evaluate the effectiveness of any policy. Therefore,
how can we accurately determine the counterfactual scenario to make a reliable assessment?
Recently, an already established body of literature has provided the tools for such
comparisons through the synthetic control method (SCM).
The SCM is a methodological approach suitable for causal inference in case studies
with one treated unit and limited macroeconomic data (Abadie and Gardeazabal 2003;
Abadie, et al., 2015; Abadie 2021; Athey and Imbens, 2017). SCM combines aspects of the
matching and difference-in-difference techniques to facilitate counterfactual comparisons.
Recently, SCM has been fruitfully employed in a variety of fields, such as political science
(Abadie, et al., 2015), political economy (Abadie and Gardeazabal, 2003; Absher, et al.,
2020; Grier and Maynard 2016), economic growth and development (Arenas and Toni, 2023;
Billmeier and Nannicini 2013; Cavallo et al., 2013), and economic history (Escalante, 2022;
Magness and Makovi, 2023), to name the most active fields of inquiry.
The virtue of this methodology is that it’s strengthened the overall robustness of
comparative case studies and its ability to provide accurate quantitative inferences (Abadie
and Gardeazabal 2003; Abadie, et al., 2015; Athey and Imbens, 2017). Moreover, considering
the current limitations concerning access to granular macro data related to economic growth
and development across countries, the feasibility of constructing methodologically sound
counterfactuals is extremely limited. Thus, the selection of this statistical method becomes
justified. SCM creates a ‘synthetic counterfactual’, which is a weighted average of control
donors with similar conditions, using pre-treatment data.
The synthetic control design operates by tracking the pre-treatment outcomes and
matching the treated unit values of several indicator variables to several ‘donors’. In short,
SCM approximates a treated unit’s outcome by using a weighted average of the outcomes of
control units, usually called ‘donors’ in a ‘pool’. These weights are chosen to minimize the
16

RMSPE (root mean squared prediction error) during the pre-treatment period. The weights
are constrained to be non-negative and sum to 1 to avoid extrapolation bias. Additionally, the
SCM also optimizes the weights of the variables that have a higher prediction power over the
independent variable, that is, in this case, real GDP per capita. The synthetic control method’s
capacity to select appropriate comparison units in comparative case studies among countries
and derive precise quantitative inferences, in line with Abadie and Gardeazabal (2003),
renders SCM a highly suitable analytical tool for the investigation of the macroeconomic
effects of crucial public and fiscal policies as this case suggests (Grier and Maynard 2016).
3.1. Assembling the data
As a starting point, no individual country has the capacity to approximate and mimic the main
socio-economic indicators of Chile, since the heterogeneity amongst Latin American
countries is simply too high. Therefore, we need a systematic way of choosing which mix of
countries would represent, the best as possible, the pre-treatment period of the Chilean
economy. Following Abadie and Gardeazabal (2003), Absher, et al. (2020), and most recently
Abadie (2021), we choose a pool of “donor” countries that share, in a smaller or greater
degree, similar conditions to the treatment period for the independent variable. Such
conditions could be culture, history, geography, education, language, structural economic
similarities, and overall institutional framework. (Abadie, 2021; Absher, et al., 2020).
We use annual country-level panel data for the period 1990-20199 with two pools of
donors, named ‘group I’ and ‘group II’ as depicted in table 2. The first pool, group I, consists
of most of Latin American countries, with up to 13 donors, therefore capturing similarities in
cultural background, language, geography, history, and some other local aspects. The second
one, group II, includes all the donors of the first pool, but also introduces countries such as
Spain and Portugal, given their past as colonizers of most Latin American countries, and also
some main trading partners and commodity exporters such as China and Australia (Escalante,
2022). The above is done to match the significant copper exporter nature or ‘commodity
9
We considered unwise to extend the analysis further to 2020 and onwards for two main reasons:
first, Chile experienced a severe social unrest marked with street violence and the destruction of
public infrastructure that negatively affected GDP after the treatment period. Second, and right after
March 2020, the Covid-19 pandemic arrived, and Chile followed a very strict logic of national
lockdowns that severely contracted GDP during 2020-2021.
17

based’ feature of the Chilean economy, similarly also to what Grier and Maynard (2016) have
done to construct a synthetic counterfactual for Venezuela. It is important to note that the
extended pool of donors, group II, is the same as Escalante (2022)10 and it provides a better
pre-treatment fit (reflected in the RMSPE 11 values), which is why it will be used as the
benchmark estimation.12
Group I Group II (Expanded pool)

Argentina 0,000 0,000
Australia ✗ 0,048
Bolivia 0,000 0,000
Brazil 0,000 0,000
Canada ✗ 0,000
China ✗ 0,260
Colombia 0,000 0,000
Costa Rica 0,397 0,514
Dominican Republic 0,000 0,000
Ecuador 0,000 0,000
Guatemala 0,000 0,000
Honduras 0,000 0,000
Mexico ✗ 0,000
Nicaragua 0,000 0,000
Panama 0,268 0,005
Peru 0,000 0,000
Philippines ✗ 0,000
Portugal ✗ 0,000
South Africa ✗ 0,000
Spain ✗ 0,000
United States ✗ 0,000
Uruguay 0,334 0,170
RMSPE (Model fit pre-intervention) 653 448
Note: RMSPE provides information on the root mean square prediction error for assesing the
pre-intervention fit of the model. Countries not included as donors are marked with an ✗.
Table 2. Estimated synthetic control weights.
10
With one country exception, Venezuela due to lack of available information and data reliability.
11
The Root Mean Square Prediction Error measures the fit (or lack of it) between the actual (Y) and
synthetic (Y!"#$% ) country estimation. The RMSPE is defined as:
)
1
RMSPE = ( ,(Y − w ∗ Y!"#$% ) ( ) +/(
T
$*+
12
As an additional form of robustness, results for group I, are also included in the appendix.
18

Therefore, we consider 22 donor countries for a 24-year pre-treatment period,
providing a large window of pre-intervention periods in line with the methodological
recommendations of Abadie et al (2015). Table 2 provides the information on the country
groups and their respective weights in the synthetic control estimation.
To build a robust and credible ‘synthetic Chile’, some assumptions must hold. A
canonical one is the stable unit treatment value assumption (SUTVA). The above states that
SUTVA requires that the response of a particular unit depends only on the treatment to which
it itself its assigned, not the treatments of others around it. In this case, if the donor countries
were somehow affected by the set of internal reforms that affected Chile, the SUTVA would
not hold, and the methodology would be compromised. Chile presents an ideal situation for
this methodology for two main reasons. First, it is a very small and open economy (Vial,
2018) 13 in the South American region, making it comparatively minor (atomless) in the
international trade scenario. Therefore, any slowdown in Chile’s economic performance is
unlikely to affect the donor countries. Second, Chile is known for its unorthodox and
unilateral approach to international politics and trade policies, in which it deliberately chose
to deepen its international relations and trade agreements majorly with non-Latin American
countries (Edwards, 2023), even rejecting being part of the “Mercosur” agreement
(Fermandois and Henríquez, 2005). Hence, due to the small and isolated nature of the Chilean
economy, its major trade relations with non-Latin American partners, and the deliberately
detached political characteristic of Chile in the region, it is safe to assume that SUTVA holds.
Another relevant assumption to consider is that, within the pool of donors, no country
should have had a similar intervention during the period in which the estimation is taking
place. In section 2 we provided arguments and historical facts to show how unique,
significative, and immediate were the set of internal reforms and changes that took place in
Chile. Following this analysis, no other country within the pool of donors has had a similar
‘policy regime shift’ intervention during this period. When we compare the wide-ranging
policy shift of Chile—ranging from fiscal and tax reforms, passing through the political
system, all the way to the constitution—against the recent policy history of our ‘donor pool’
of countries, we can conclude that only Chile, during the period under consideration, had
13
Currently, Chile only represents near a 5,5% of the total GDP of the entire Latin American and the
Caribbean region, thus, being considered a small economy (Vial, 2018).
19

such an extensive and sudden change in the policy framework: both in terms of the relative
size of the changes enacted against the previous policy regime, and in terms of the velocity
of its implementation.
In fact, the previous public policy analysis of section 2 serves as input to validate both
the existence of a relevant economic divergence in Chile’s economic growth starting around
2014, as well as to argue that 2014 could also be a feasible—and highly probable—point in
which Chile suffered a structural break, hence validating our ‘treatment’ for the SCM.
Additionally, to tackle this issue from another (and more robust) angle, we provide a wide
battery of robustness tests, including time and country placebo test and an extensive leave-
one-out (Jackknife) permutation robustness test (see section 4). As shown in section 4, results
remain unchanged with only minor deviations, providing sufficient support for the robustness
of our benchmark result.
Actual Chile Synthetic Chile Sample Mean Source
GDP per capita 9200,43 9245,28 11979,81
Population Growth 1,20 1,30 1,36
Life Expectancy 76,64 76,04 73,03

World Bank
Adolescent Fertility 59,99 56,69 64,44
Crude Birth Rate 16,60 17,45 20,28
Government Consumption 0,15 0,16 0,15
Gross Capital Formation 25,46 25,30 22,78 Penn World Table
Trade Openess 62,59 63,42 59,16 Our World in Data
Mean Years of Schooling 9,30 7,34 8,04 Human Development Index

Note: Table shows the values of indicator variables and the average pre-treatment outcome variable for
actual Chile, synthetic Chile and the total sample average. Real GDP per capita constant 2015 US$.
Table 3. Chile’s Indicator fits, GDP per capita.
Finally, just as important as the donor selection, there is the selection of the variables
that the SCM needs to match to build the synthetic Chile. Indicator variables should be known
to be good predictors of the outcome variable, in this case real GDP per capita14. In line with
14
Throughout the paper we use the measure of real GDP per capita at constant 2015 US$ from the
World Bank Database. As further robustness, we provide several estimations for a variety of GDP
measures such as Real GDP per capita at PPP (constant 2017 international $) and GDP per capita at
current US$, see Appendix.
20

the literature (Abadie, et al., 2015; Absher, et al., 2020; Grier and Maynard, 2016; Spruk,
2019), we choose the variables that best fulfill the above-mentioned requirements. Table 3
display the variable selection, their sources, and the descriptive statistics for the actual Chile,
synthetic Chile, and the pool of donors’ total average. It is relevant to note that the synthetic
Chile provides a much better overall comparison and ‘fit’ for actual Chile than the pool’s
average. The synthetic Chile is very similar to the actual Chile in terms of pre-2014 per capita
GDP, population growth, life expectancy, adolescent fertility, birth rate, gross capital
formation, government consumption, trade openness and mean years of schooling.
3.2. Results and estimations on per-capita income

Now we are ready to perform our synthetic control experiment. Figure 3 displays the real
GDP per capita trajectory of actual and synthetic Chile for the 1990-2019 period. The
synthetic Chile provides a good pre-treatment tracking of actual Chile during the 24-year pre-
treatment period, especially in the years closer to the intervention. The estimation and ‘fit’,
depicted in figure 3, is a noteworthy accomplishment given the explosive and atypical growth
path of Chile when compared to the rest of the region during the ‘boom period’.15 Concerning
the treatment effect, our estimate of the effect of the internal policy reforms on Chile’s real
GDP per capita is given by the difference between the actual Chile (blue line) and the
Synthetic one (red line).
Our estimated model indicates that after five years of the intervention experienced in
2014 (i.e., by 2019), the actual Chile presents a real GDP per capita of $13.761, while the
synthetic version predicts a counterfactual of $15.105. The difference estimated in our model
is substantial, suggesting that in only five years, Chile lost more than $1.345 in GDP per
capita due to the 2014 ‘intervention’. Hence, Chile’s real per capita income should have been
almost 10% higher without the policy regime change. Results indicate that the sudden and
drastic “anti-neoliberal” policy regime shift, enacted during 2014, was in fact harmful for the
overall level of wealth per capita and economic growth for Chile.
15
Our synthetic Chile tracks accurately the actual ‘economic boom’ of Chile during 1990-2014, matching well
also the Asian financial crisis of late 1990s (1997-1999) that affected most of the Latin American region, as
well as the 2007-2008 Great Recession. In the appendix, we provide a similar plot including the samples
average trajectory. The above highlights the importance of this accomplishment.
21

$16.000
$15.000
Real GDP per capita constant 2015 US$
$14.000
$13.000
$12.000
$11.000
$10.000
$9.000
$8.000
$7.000
$6.000
$5.000
1990 1995 2000 2005 2010 2015
Synthetic Chile Real Chile
Fig. 3. Per-capita income. Note: The solid blue line represents real GDP per capita
(constant 2015 US$) in Chile, 1990-2019; the red line represents the synthetic control.
The vertical black dotted line indicates the end of the pre-treatment years (1990-2013).
Perhaps, a result that is even more meaningful for the long-term economic growth of
Chile since 2014 onwards is the abrupt change in long-run GDP trend depicted in figure 4.
Using a Hodrick-Prescott (HP) filter16 we eliminate the cyclical component of the series to
focus on Chile’s long-run economic growth trend (Hodrick and Prescott, 1997). Figure 4
displays the evolution of such economic trends both for the actual and synthetic Chile. From
the figure we can see that our synthetic counterfactual does a good job in matching very
closely the long-run trend of Chile’s GDP per capita for a period of 24 years in the pre-
16
Sensitivity parameter adjusted to yearly frequency, 𝜆 = 100.
22

treatment period. However, since 2014 onwards, the synthetic and actual Chile started to
sharply diverge after the treatment period, providing further evidence concerning the relevant
shift in the country’s long-run economic growth tendency and coinciding also with the timing
of the relevant policy regime shift analyzed in section 2.
$16.000
$15.000
$14.000
$13.000
$12.000
$11.000
$10.000
$9.000
$8.000
$7.000
$6.000
$5.000
1990 1995 2000 2005 2010 2015
Synthetic Chile Trend Real Chile Trend
Fig. 4. GDP per-capita trends with HP filter. Note: The solid blue line represents
the real GDP per capita (constant 2015 US$) trend in Chile, 1990-2019; the red
line represents the trend of the synthetic control.
Finally, even though we can find strong causality and identify the crucial role of
internal causes in the Chilean growth slowdown, we cannot pinpoint exactly which policy
changes affected Chile’s economy for better or worse. However, our results are coherent with
the political economy of tax changes reviewed in the previous section (Arnold, et al., 2011;
Barro and Redlick, 2011; Mertens and Ravn, 2013; Romer and Romer, 2010; van der Wielen,
2020; Widmalm, 2001), as well as with the role that political instability, ideology, and
23

unexpected changes in policy might play in negatively affecting growth (Acemoglu and
Robinson, 2006; Aisen and Veiga, 2011; Bjørnskov, 2005; Easterly, 1992; Edwards, 2019).
Additionally, in between the ‘treatment period’ and the writing of this paper, there hasn’t been
any other significant structural change –besides of the ones already reviewed here– that
could’ve potentially explained this drastic divergence. Based on the above, we conjecture
that the main channels into which the policy regime shift affected Chile’s economic growth
are three: (i) first, the sharp increase in corporate taxes (relatively to both Chile’s recent past
and the OECD), alongside the labor market reform, hindered capital accumulation and re-
investment; (ii) second, the ‘anti-neoliberal’ rhetoric reviewed in section 2 might have
generated higher degrees of commercial distress and market volatility which might also
affected business decisions and investments; (iii) third, the political changes such as the
electoral reform and the attempts at changing the constitution might have added further
political polarization and potential ungovernability, signaling to investors that the ‘rules of
the game’ were about to change in an unpredictable fashion, ultimately encouraging the
postponement of investments and capital flights.
4. Robustness tests
The above findings are provocative, but they require robustness checks to be validated. To
evaluate the credibility of our benchmark results we conduct several robustness checks such
as in-time and country placebo tests, both with additional RMSEP analysis, p-values
significance, multiple leave-one-out (Jackknife) permutation tests and, finally, estimating the
SCM while changing the composition-size of our donor’s pool to an alternative group. In this
section we will explore these robustness tests that support our findings.
The in-time placebo test consists in re-estimating the model with an intervention year
other than 2014. If the pre and post treatment periods do not show any significant tracking
difference –that is the placebo intervention had no perceivable effect– there would be a strong
indication that we are correctly estimating the real impact of the Chilean internal set of
reforms that took place in 2014. Finally, we also provide estimations for different placebo
years. Analogously, the country placebo tests consist in estimating the SCM not only to Chile,
but for every other donor country. If the results produce a large placebo estimate, that could
undermine our confidence that the results are indeed indicative of the internal set of reforms
24

that took place in Chile, and not merely driven by lack of predictive power. Additionally, we
also provide a table with the RMSEP ratios for the most important donor countries.
Based on the previous placebo-country estimations, we also provide the standard p-
values graph, that is, statistically comparing how unusual our observed effect is relative to
the placebo estimations. If the results are in fact unusual, it is possible to reject the null
hypothesis of “no effect”. Finally, we also provide one of the most important robustness tests
consider by the literature: the ‘jackknife test’. The leave-one-out (or Jackknife) permutation
test consists in a resampling statistical technique in which you re-estimate the SCM by
dropping one-by-one different countries with positive (non-trivial) weights in the model. In
the appendix, we also show that our results are robust even when changing the composition-
size of our pool of donors to group I (see list in table 2).
4.1. “In-time” placebo test and RMSPE time ratios
The in-time placebo test follows the methodological recommendations of Abadie

(2021), by estimating the SCM with alternative intervention specifications to check whether
there exists a “in-time placebo effect”. In short, if we estimate the model with an intervention
year other than 2014, we shouldn’t have any major tracking difference in the pre and post
treatment periods. Figure 5 shows the results of such in-time placebo test, where the year
2005 corresponds to the placebo-intervention. 17 The synthetic Chile almost exactly
reproduces the evolution of real per capita GDP of actual Chile for the 1990–2005 period.
Most importantly, the per capita GDP trajectories of actual Chile and its synthetic counterpart
do not diverge considerably during the 2005–2019 period. That is, in contrast to the actual
2014 internal reforms, our 2005 “placebo reforms” test has no perceivable effect in the
Chilean economy afterwards. This suggests that the gap estimated in our benchmark
specification in the previous section does reflect the real impact of the Chilean internal set of
reforms that took place in 2014.
17
We select 9 years before the actual intervention of 2014, which is almost half the period of our
pretreatment window, in line with Abadie et al (2015). The results are also robust to alternative
intervention periods. We have also computed similar in-time placebo studies where we reassign the
‘placebo-intervention’ to the years 2000 and 2008, in which results are similar to the one shown here.
25

$15.000
$14.000
Real GDP per capita constant 2015 US$ $13.000
$12.000
$11.000
$10.000
$9.000
$8.000
$7.000
$6.000
$5.000
1990 1995 2000 2005 2010 2015
Fig. 5. In-Time placebo test. The solid blue line represents the real GDP per capita
(constant 2015 US$) in Chile, 1990-2019; the red line represents the synthetic control.
The vertical black dotted line indicates the new ‘treatment’ (placebo) year set in 2005.
4.2. Country placebo test and RMSPE country ratios

The goal of the country placebo robustness test is to verify if our results are in fact due
to the internal set of reforms that took place in 2014 and not merely driven by lack of
predictive power. Figure 6 shows the results of the country placebo test, where we estimate
the SCM for all the countries in the pool of donors. 18 Figure 6 suggests that, after the
intervention period in 2014, Chile is one of the countries that present the greatest divergence
among the pool. In fact, our synthetic Chile has a very noticeable change or ‘break’ right after
18
Following the methodological recommendations of Abadie et al. (2010), we drop the observations
that had poor pre-treatment fit for this analysis.
26

introducing the treatment, which is significant and persists over the post-treatment period,
unlike most of the other control countries for the post-treatment period. This suggests that
Chile does not have a consistent real per capita GDP growth after the reforms that took place
in 2014, reinforcing the idea that our benchmark results reflect the impact of the Chilean
internal change in the set of reforms that took place in the intervention year.
5000
Deviations = Effective - Synthetic
4000
3000
2000
1000
-1000
-2000
1990 1995 2000 2005 2010 2015
Control Units Chile
Fig. 6. Real GDP per capita (constant 2015 US$) placebo tests, restricted countries. Note: The
bold line represents the difference between the observed income per-capita in Chile, 1990-
2019, and the synthetic control. Analogously, the gray lines represent the same difference but
for different donors, representing different placebo tests.
Additionally, and related with the above, table 4 provides the RMSPE ratios for all
positive weighted country donors in our estimated model (see list in table 2). These results
show that the RMSPE ratios of the main donors in our pool (i.e., China, Costa Rica, Uruguay
and Australia) have an inferior ratio of that of the synthetic Chile, which is another indication
of the robustness and of the correct measurement of the real effect of the 2014 internal
reforms in Chile.
27

Year Weight RMSPE ratio
Chile - 28,67
Costa Rica 0,51 16,39
China 0,26 18,67
Uruguay 0,17 17,22
Australia 0,05 11,69

Note: Root mean squared prediction error (RMSPE) ratio is equal to the post-treatment
RMSPE divided by the pre-treatment RMSPE for a given country estimation. First column
display the placebo country estimated. Second column displays the donors respective weights
in the benchmark estimation (same as table 2). Third column shows the respective RMSPE
ratio values.
Table 4. RMSPE ratios for most relevant placebo countries.
4.3. P-values
Following the country-placebo test, it is standard in the literature to assess if the differences
between the actual and synthetic Chile are in fact statistically significant. To assess the above,
we need to compare how “atypical” is the Chilean synthetic divergence from the rest of the
placebo tests. Figure 7 shows the difference between synthetic Chile and the synthetic
average of all placebos in the pool with its respective p-values.
For the final years of the post-treatment, results are statistically significant under a
90% confidence interval. The above means that we can safely reject the null hypothesis (no
“atypical” divergence), reinforcing the idea that the difference between actual Chile and its
synthetic average are in fact significant and that results are robust in this dimension.
28

200
Difference from placebos' synthetic avg.

.32
0
.25
-200
.18
-400 .08
.04
-600
-800
-1000
-1200
2015 2016 2017 2018 2019
Post-Treatmenmt Years
Fig. 7. Effects of the treatment and p-values on real GDP per-capita. Bars show the
difference between actual Chile and the placebos’ synthetic average, measuring the
treatment effect for each year. Center values represent the statistical significance level.
4.4. Leave-one-out Permutation (Jackknife) test

Finally, as an additional robustness check, we perform a Jackknife robustness test. The test
consists in dropping the donors that have the highest weights in the model to see if the
benchmark result of the previous section still holds. In this case, we go even further than the
standard literature and provide a set of multiple SCM estimations by dropping, one-by-one,
all the countries that had positive weights in the original estimation model.
Figure 8 shows the results of all the SCM estimations by leaving one of the positive
weighted countries out on each time. Results clearly indicate that, independently of the
country that was dropped for any particular estimation performed, the magnitude and pattern
of real GDP per-capita outcomes are similar and close to the benchmark estimation performed
in section 3. This final multiple-robustness test, is clearly in line with the previous ones
performed, thus providing additional evidence for the correct measurement of the negative
impact that Chile suffered during the internal policy regime change.
29

$16.000
$15.000
$14.000
$13.000
$12.000
$11.000
$10.000
$9.000
$8.000
$7.000
$6.000
$5.000
1990 1995 2000 2005 2010 2015
w/o Costa Rica Real Chile w/o China
w/o Uruguay w/o Australia w/o Panama
Fig. 8. Jackknife multiple permutation test (leave-one-out). Solid blue line plots
actual GDP per-capita for Chile. All the other lines represent the different SCM
estimations without that specific country on the sample.
To conclude, and considering the results of the previous sections, and the several different
robustness tests presented here, we have reasons to believe that our hypothesis is correct, and
that it is safe to say that Chile experienced a ‘great divergence’ in economic growth mainly
due to internal ‘policy’ factors. All in all, there is a strong case to be made that both in terms
of long-term trend in economic growth and real income per capita, the 2014 ‘anti-neoliberal’
set of reforms represented not only a drastic normative shift in the policy regime for Chile,
but also these policies seriously harmed the long-term economic performance of Chile
relative to what it would have occurred with a “business as usual” set of policies (as given
by the predictions of the synthetic control).
30

5. Conclusion
In this paper we have studied a crucial problem in developing economics and in the recent
debates on economic growth: why countries that appear to be successful and growing rapidly
could suddenly suffer from growth reversals and experience a prolonged divergence in terms
of economic growth (Aiyar, et al., 2013; Eichengreen, et al., 2014). We have focused our
attention on the recent macroeconomic events of Chile, and our analysis suggests that there
was a significant change in Chile’s economic growth trend in 2014: a negative reversal of
fortune that has affected its long-term path of economic growth. Our analysis shows that this
‘great divergence’ is related to endogenous factors, that are most likely attributed to
significant political (and ideological) changes, that drastically altered both the normative
discourse and the content of the overall public policy framework of that country.
We have provided evidence to support the claim that during 2014 there was a change
in Chile’s policy framework, which—alongside a hostile narrative against businesses and
market-based ideas (Edwards, 2023)—became a pivotal factor in Chile’s great divergence
and its enduring economic slowdown that has brought a decade long of weak economic
growth. Although further work is necessary to establish the precise causal mechanism at play
to indicate how changes in the policy framework specifically affected economic growth, our
analysis is consistent both with the political economy of tax shocks and corporate taxes
(Arnold, et al., 2011; Barro and Redlick, 2011; Mertens and Ravn, 2013; Romer and Romer,
2010; van der Wielen, 2020; Widmalm, 2001), as well as with the role that ideology, political
instability and changes in policy might play in affecting economic development (Acemoglu
and Robinson, 2006; Bjørnskov, 2005; Easterly, 1992; Edwards, 2019; Rodrik, 2014).
Empirically, this ‘anti-neoliberal’ shift costed Chile almost 10% of its real GDP per
capita in only five years. This result is both large and strongly significant. This translated in
the fact that the actual Chile is $1.345 (per capita) poorer than what the synthetic
counterfactual predicts. The most noteworthy result of our analysis is the fact that this ‘great
divergence’ in economic growth seems to be persistent over the long-run as our SCM with a
Hodrick-Prescott (HP) filter suggests. These results could be interpreted as the flipside of
Billmeier and Nannicini (2013), by suggesting that all-encompassing ‘anti-neoliberal’
reforms can create large and persistent wealth penalties for those countries seeking to
implement them (Edwards, 2019; Grier and Maynard, 2016; Spruk, 2019). Further work is
31

necessary in fully assessing different ‘anti-liberalization’ episodes and their negative effects
on growth and development (Absher, et al., 2020). We believe that cases of ‘growth
divergence’, such as Chile today, can help us to understand how ideology, public policy
regime shifts, and tax reforms could affect the long-run trend in economic growth of
developing countries, underscoring how economic success is never a given, as well as the
perils that undergird public policy frameworks in terms of missed opportunities or misguided
ideologically-laden choices for middle-income countries going forward.
32

Appendix
$16.000
$15.000
$14.000
$13.000
$12.000
$11.000
$10.000
$9.000
$8.000
$7.000
$6.000
$5.000
1990 1995 2000 2005 2010 2015
Synthetic - Group I Real Chile
Fig. 1 Appendix. Per-capita income. Note: The solid blue line represents real GDP per
capita (constant 2015 US$) in Chile, 1990-2019; the red line represents the synthetic
control only with countries in group I. The vertical black dotted line indicates the end of
the pre-treatment years (1990-2013).
33

Fig. 2 Appendix. GDP per capita current US$. Note: The solid blue line represents
observed income per-capita in Chile, 1990-2019; the dashed red line represents the
synthetic control. The vertical black dotted line indicates the end of the pre-treatment
years (1990-2013).
34

Fig. 3 Appendix. GDP per capita current US$ trends with HP filter. Note: The solid blue
line represents observed per-capita income trend in Chile, 1990-2019; the dashed red line
represents the trend of the synthetic control. The vertical black dotted line indicates the
end of the pre-treatment years (1990-2013).
35

$27.000
$25.000
$23.000
$21.000
$19.000
$17.000
$15.000
$13.000
$11.000
$9.000
1990 1995 2000 2005 2010 2015
Fig. 4. Appendix. GDP per capita PPP constant 2017 international $. Note: The solid
blue line represents observed income per-capita in Chile, 1990-2019; the red line
represents the synthetic control. The vertical black dotted line indicates the end of the pre-
treatment years (1990-2013).
36

$27.000
$25.000
$23.000
$21.000
$19.000
$17.000
$15.000
$13.000
$11.000
$9.000
1990 1995 2000 2005 2010 2015
Synthetic Chile Trend Real Chile Trend
Fig. 5 Appendix. GDP per capita PPP constant 2017 international $ trends with
HP filter. Note: The solid blue line represents observed per-capita income trend in
Chile, 1990-2019; the red line represents the trend of the synthetic control.
37

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The great divergence:

assessing the lost decade of the Latin American miracle

Emiliano Toni* Pablo Paniagua†* Patricio Órdenes† **

Keywords: Synthetic control; Economic growth; Policy regime changes; Economic

* St. Gallen University (HSG-FGN), St. Gallen, Switzerland.

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2. The Chilean divergence: some stylized facts

Chile’s economy is today a sort of paradox in economic development, transitioning from a

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GDP per capita growth GDP per capita growth

1970-1974 -0,1% 2,3% -2,5%

2.1. Debating the Chilean puzzle: domestic or external factors?

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2.2. Establishing Chile’s structural break

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3. Creating the synthetic control for Chile

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3.1. Assembling the data

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Group I Group II (Expanded pool)

Table 2. Estimated synthetic control weights.

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Actual Chile Synthetic Chile Sample Mean Source

GDP per capita 9200,43 9245,28 11979,81

Population Growth 1,20 1,30 1,36

Life Expectancy 76,64 76,04 73,03

Crude Birth Rate 16,60 17,45 20,28

Government Consumption 0,15 0,16 0,15

Gross Capital Formation 25,46 25,30 22,78 Penn World Table

Trade Openess 62,59 63,42 59,16 Our World in Data

Mean Years of Schooling 9,30 7,34 8,04 Human Development Index

Table 3. Chile’s Indicator fits, GDP per capita.

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3.2. Results and estimations on per-capita income

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4.1. “In-time” placebo test and RMSPE time ratios

The in-time placebo test follows the methodological recommendations of Abadie

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Real GDP per capita constant 2015 US$ $13.000

4.2. Country placebo test and RMSPE country ratios

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Costa Rica 0,51 16,39