------------ 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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Published by EH.Net (January 2006). All EH.Net reviews are archived
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