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Question 01: Referring to the case study , which trade theory or theories, the Chicago boys is supporting . What are the possible flaws of following this approach? (5Marks)

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Note: The Trade Theories are 1. absolute advantage 2. theory of comparative advantage 3. Theory of Factor proportions 4. product cycle theory 5. diamond of national competitive advantage please recommend one theory from it

Free-Market Reforms Revive Chile's Economy Business managers must have a good knowledge of and growers were forced to compete in world markets economic theory to be able to understand a nation's to stay in business. In addition, the lower import duties economic development strategy, which depends reduced the cost of imported capital equipment, which greatly on the beliefs and education of the govern encouraged business investment. What was the reac ment's economic planners. By closely following the action of the managers who were prepared to change to tions and speeches of government leaders, managers the new system? often can discover the economic theories on which The president of Chile's largest appliance maker. those actions and speeches are based. If they know the whose industry had been protected from foreign com underlying theories, they can anticipate changes in petition by a 1.000 percent import duty, gave his opin: government strategy and use that knowledge to their ion of the new program: "We used to have 5,000 advantage. As an example, look at what happened in workers and an annual productivity of only $9,000 per Chile after the changeover from the Marxist regime of worker. Now we have 1.860 workers and a productivity Salvador Allende of $43,000 per worker, and we are finally showing a The economy was in a shambles after Allende's profit." regime. Inflation was running over 1,000 percent annu- It was no surprise to those with knowledge of eco- ally, and the nation's debt load was totally unmanage-nomics that there would be a contraction of local in able. The Allende government had been following the dustry when companies lost their protection from policy of many developing nations at that time--heavy imports. Although the leading appliance maker men involvement in the economy. This included placing tioned above was able to compete after losing its im- high duties on imports to protect local industry, levying port protection, a number of other local appliance high income taxes on the private sector to obtain funds makers were forced to go out of business or contract for government directed investment, and granting their operations. "We're going to lose a large part of our huge subsidies to selected industries, appliance industry," conceded Alvaro Bardon, a 37. Realizing that drastic changes had to be made, the year old Chicago Boy who was then the head of the con post Allonde government appointed a group of conser tral bank of Chile, and also our electronics industry vative Chilean economists to design a new program, known as the "Chicago Boys" for having graduated from the University of Chicago, they were followers of the free market teachings of its economics professor and Nobel Prize winner Milton Friedman, The contents of the Chicago Boys' program and its impact on Chilean business did not surprise anyone with knowledge of economic theory. In fact, much of what they proposed was based on the theory of com- parative advantage Managers who understood the sig nificance of the proposals know that Chile soon would have a free-market economy that would require a mas- sive restructuring of Chilean manufacturing plants One of the most important reforms recommended by the economists and put into effect by the government was the reduction of import duties from a high of 1,000 percent to a basic level of 10 percent. Moreover, all other import barriors were removed so that virtually anyone was free to import anything. As a result, manufacturers and our automobile assembly plants." Bardon was Columbia, Ecuador, China, and Mexico. The total stock of hardly disappointed, however. "Those are products we foreign direct investment in Chile exceeds $55 billion should be importing," he said. "We have other things The Country Commercial Guide (CCG) prepared by the based on our farm products, our timberlands, our fish combined efforts of various U.S. government agencies ories, and our mineral resources that we should be reported. "Chile is one of the Latin American region's making because they give us a natural advantage over most dynamic and promising markets... Market-led other countries reforms adopted close to 30 years ago and an increas How successful were these free-market policies ingly diversified economy with strong ties to buyers and adopted by Chile's government? Growth in real GDP suppliers in the Americas, Europe and Asia have given averaged 8 percent during 1991-1997. Although tight Chile a wide range of options for further growth. Prudent monetary policies associated with a global financial cri economic policy making has secured long-term stability sis, accompanied by a severe drought, caused growth to unknown elsewhere in Latin America." decline in 1998 and 1999, Chile maintained its free Sure White BC World Bank market policies and the confidence of the international 200 W Fotok, www.net markets. Recovery began by the end of 1999, and growth CIADOWwwwww had accelerated to over 6 percent by 2006, while still artement 2.200 Denise maintaining a low inflation rate. Chile has subsequently yerdiet and Steven Lennon New YM. Weile the signed free trade agreements with several nations or re- With Wowsa 2. Alt de gions, including the European Union, Morcosur, the aa United States, Canada, Korea, Peru, Veneruela, Bolivia