------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (January 2006)  
  
Daniel Lederman, _The Political Economy of Protection: Theory and the   
Chilean Experience_. Stanford: Stanford University Press, 2005. ix +   
191 pp. $55 (cloth), ISBN: 0-8047-4917-5.  
  
Reviewed for EH.NET by Douglas A. Irwin, Department of Economics,   
Dartmouth College.  
  
  
This slim volume provides an overview of the political economy of   
trade policy in the case of Chile over two centuries. This is   
efficiently done in four chapters. The first chapter reviews the   
economics and political science literatures on the political economy   
of protection as a way of setting the stage for the analysis of   
Chilean policy. The second chapter consists of a historical overview   
of Chile's trade policy from the early nineteenth century to the   
present. Chapter three undertakes an econometric analysis of Chile's   
trade to GDP ratio since 1810, and chapter four addresses the forces   
behind Chile's open trade policies since 1974.  
  
The literature on the political economy of trade policy is such a   
large and sprawling one that it is difficult to provide a synthesis   
of the whole. Still, Lederman provides a good overview of the   
literature in both economics and political science. Economists tend   
to focus on economic interests and income distribution, while   
political scientists tend to focus on ideological and institutional   
considerations. These approaches can be complementary, but Lederman   
tends to treat them separately rather than propose an integrated   
framework that he will use throughout the book in analyzing Chile.  
  
The book then moves on to examine Chile's openness (trade to GDP   
ratio), terms of trade, and real exchange rate for as long a period   
as data exist. These indicators are then related to discrete changes   
in Chile's trade policy in terms of legislation and other policy   
actions. Of particular note is how liberalism was discredited as a   
policy approach in the economic chaos between 1911 and 1927. As a   
result of changed economic circumstances, in particular, a severe and   
negative terms-of-trade shock in 1918, interest groups and ideas   
about the economy led to an institutionalization of protection.  
  
The next chapter uses unit root tests to determine when there were   
structural breaks in Chile's openness ratio and explores how various   
independent variables (openness, fiscal balance, terms of trade,   
economic growth, etc.) affect the probability of liberalization. This   
is a rather heavy-handed use of time series econometrics that is   
informative only in a limited way. One of the major problems with the   
political economy literature, reviewed in chapter one of the book, is   
the relatively low quality of empirical work. The standard approach   
has been to throw a bunch of independent variables on the right hand   
side of the equation and predict tariffs, openness, probability of   
trade policy change, etc. It is easy to raise questions about whether   
the independent variables are truly independent, or how one should   
interpret the results. The degree of measured openness of an economy   
depends not only (or even primarily) on government policy, but also   
on economic structure at home and abroad, making it difficult to   
fully capture in a parsimonious econometric equation. (The estimation   
of more structural models of the political economy of protection has   
many problems as well.) Lederman's contribution is to look   
specifically at Chilean data rather than provide any methodological   
breakthroughs in this area.  
  
Chapter four is an interesting and enlightening case study of how   
Chile changed its trade policy toward a more liberal stance in the   
early 1970s and thereafter. Lederman describes what happened, the   
interest group participation in the change, the various compensation   
mechanisms that were employed to ensure political support for the   
change, and how the change persisted. This chapter would be excellent   
reading for anyone interested in a succinct and informative analysis   
of Chile's policy change.  
  
In sum, economic historians will benefit from the availability of   
this succinct overview of Chilean trade policy. While the economic   
history of Argentina's trade policy is known from the work of Carlos   
Diaz Alejandro in the past and Alan Taylor more recently, and   
Mexico's policy has been illuminated by the work of Stephen Haber,   
more work is needed on other important Latin American countries.   
Lederman's book is a good contribution that provides some diversity   
in historical experience beyond the standard studies of European or   
North American trade policy.  
  
  
Douglas A. Irwin is the author of _Free Trade under Fire_.  
  
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