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Pomona College

Publication Date

Spring 2007

Program Name

Chile: Economic Development and Globalization


This paper employs a political economy approach to investigate Law No. 20.026 of June 2005, the so called Royalty II. The paper starts with an analysis of the economic theory that justifies royalties including an investigation of classical rent theory. The paper then analyses the impacts of the new law within that framework, concluding that the law has increased tax collection in Chile and has not significantly damaged the investment climate. In fact, it is probable that Chile could impose a more stringent royalty without damaging competitiveness. The paper then investigates prominent issues and actors that influenced the development of the law leading up to 2005. The conclusion from this section shows that socio-economic factors such as the weakness of the Chilean economy and the controversial sale of la Disputada de las Condes provided politically favorable conditions for the creation of the law. However, in spite of this, legislative restrictions and the need to compromise with opposition forces gave way to a weaker law than had been envisaged. As a final reflection, the development of this law proves that the denomination “technocratic democracy,” often attributed to Chile, reflects reality.



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