Economists often compare similar economies to isolate the impact of a particular difference. This approach provides a compelling picture of the role of specific factors in driving or undermining an economy’s success.
For example, despite their common historical and cultural roots, North Korea and South Korea are very different societies. The former has a considerably lower standard of living, owing to its communist government and centrally planned economy, which contrast sharply with South Korea’s democratic government and mixed capitalist economy.
Germany’s experience after World War II provides another telling example. When the Berlin Wall fell, barely two generations after the war ended, the standard of living in communist East Germany was just one-fifth the level attained in capitalist West Germany.
The same approach can be used to understand why Chile is prospering, while neighboring Argentina is floundering.
First, the similarities. The countries are oriented along a north-south axis and are characterized by varied terrain, long shorelines and abundant agriculture, ranching and vineyards. They won independence from Spain two centuries ago. They have populations composed largely of people of European descent. They have histories of military rule. And they have recently experienced political turmoil, including large — sometimes violent — public protests.
Moreover, Chile and Argentina are democracies, which have been governed from the right and the left. In Chile, a president can serve multiple terms, but not consecutively. So Chilean President Sebastian Pinera — a centrist leading a center-right coalition — cannot be a candidate for re-election next year, though he may run in 2018.
While Chile’s governing coalition — especially Chilean Finance Minister Felipe Larrain — has done much to strengthen the country’s macroeconomic performance, it has also struggled to find a strong presidential candidate; a scandal followed an intense internal battle for succession, with the center-right coalition forced to run its third-choice candidate. The leader of the center-left alliance, the Socialist Party’s Michelle Bachelet, who was Pinera’s predecessor, won the first round handily and is expected to be elected next year.
Meanwhile, despite having expanded her office’s power, Argentine President Cristina Fernandez — who succeeded her late husband, Nestor Kirchner, in 2007 — is constitutionally prohibited from running for a third consecutive term. Her failure to win the two-thirds parliamentary majority needed to amend their constitution, together with opposition candidates’ success in recent midterm elections, suggests that Argentina may well be set for a rightward shift in 2015.
Now, the differences. The two countries’ economic policies diverge in important ways. Chile has usually followed economically sensible policies — sometimes innovatively so. For example, copper revenue, which comprises 13 percent of the budget, must be spent on the basis of a long-term, independently verified planning price, with excess revenue accumulated in a fund to be used when copper prices dip.
Furthermore, Chile’s central bank has kept inflation low — it now stands at about 2 percent — and the budget is almost balanced. The country’s pension system emphasizes private saving and individual responsibility. A bilateral free-trade agreement has facilitated a surge in trade with the US. And Chile has participated actively in the negotiations for the Trans-Pacific Partnership (TPP) trade deal.