Scarring and cleansing effect of crises in Chile

Abstract

This paper studies the role of productivity on determining which plants exit during the last two crises in the Chilean economy. Using data on manufacturing plants from 1995 to 2011, I find that the process of less efficient plants exiting accentuated during the Asian Crisis. This accentuation is called cleansing effect, which is what creative-destruction theories would predict during an economic downturn. However, I find that during the Great Recession in Chile this process attenuated, i.e. productivity is less important in determining which plants exit the market. The mechanism behind this attenuation is the exposition to international competition faced by sectors. To further understand this, I use Customs data to get indirect evidence to support the idea that sectors more vulnerable also had trade partners that shrunk the most their international demand, and hence were more severely affected by the crisis, so more likely to exit.