Empirical analysis of Chile's copper boom and the Dutch Disease through causality and cointegration tests

Abstract

Over the period 1990–2018, Chile has experienced the great copper boom manifested in an initial phase of the strong expansion of the productive base, followed by a period of high copper prices derived from the supercycle. Over this period, Chile has achieved great social progress in poverty and wealth indicators that have allowed it to decouple its progress from that of its peers in the region. However, it is valid to ask whether, as a consequence of the mining boom, Chile has suffered from an industrial weakening and other negative effects as a result of the Dutch Disease (DD), jeopardizing the country's long-term economic progress. This paper proposes a methodology to evaluate whether the Chilean copper boom induced the DD symptoms in its economy through Granger-causality, cointegration, and impulse-response function over a vast set of socioeconomic variables. According to the authors' knowledge, the approach implemented allowed for the broadest empirical DD evaluation in the Chilean economy taking into account four crucial aspects: i) the political and economic regime established and consolidated along the 1990–2018 period; ii) the full Chilean copper industry expansion cycle; iii) the complete supercycle of the commodity prices; iv) data availability. The results suggest that the copper mining industry has not only allowed the country to enjoy an income surplus but actually levered the country's development. The proven success over the last three decades of Chile's mining development and windfall management should be a strong argument in favor of the model continuity and as a valid benchmark for macroeconomic management purposes by other countries in similar macroeconomic and idiosyncratic contexts.