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.