Intermediate inputs in Dutch disease. Copper in Chile

Purpose: By means of a practical model, the paper discusses the role of intermediate inputs in the ability of a booming extractive sector to draw resources out of lagging sectors, giving rise to Dutch disease. Methods: The model is for the Chilean economy and follows an 'extended' input-output structure, with 35 production sectors. Once calibrated and parameterized, the model can be solved numerically to estimate the resource movement effect and the spending effect of a copper boom. Findings: The numerical exercises show that, when the use of intermediate inputs is taken into account, the resource movement effect is of similar magnitude to the spending effect in explaining deindustrialization in Dutch disease. The key mechanism here is that, when the copper sector expands, its effects on real wages and good prices can be significant, due to the use of intermediate inputs. Implication: This implies that the policies that are commonly recommended to avoid Dutch disease (fiscal rules, sovereign wealth funds, etc.) may not be very effective if they are not accompanied by others aimed at promoting greater provision or efficient use of scarce resources. Originality: The present study contributes to the literature on Dutch disease in two ways. On the one hand, it provides an estimate of the resource movement effect and the spending effect of a commodity boom. On the other hand, it provides evidence in favour of the hypothesis that extractive activities can lead to direct deindustrialization.