Economy and Trade
After the fall of the Marxist government of Salvador Allende in 1973, through a military coup led by Augusto Pinochet, Chile endured 17 years of dictatorship before a freely elected president replaced Pinochet in 1990. Under Pinochet’s regime in the 1980s, the country implemented sound economic policies, which have continued to the present, contributing to steady growth, and more than halving the rates of poverty in the country. One of the positive steps taken by the regime was to privatize many state-owned companies, and successive democratic governments since the 1990s have continued the privatization process. Chile’s commitment to democratic, representative government, and its growing economic strength have made it a leader in the region. Chile has a market-oriented economy, characterized by a high level of foreign trade, and a reputation for strong financial institutions, and sound policy. As a result, it enjoys the strongest sovereign bond rating in South America. Exports account for 40% of GDP, with commodities making up some three-quarters of total exports. Copper alone provides one-third of government revenue.
Economic Policy over 12 Months
During the early 1990s, Chile’s reputation as a role model for economic reform was strengthened when the democratic government of Patricio Aylwin took over from the military in 1990. Growth in real GDP averaged 8% during 1991–1997, but fell to half that level in 1998 when the government implemented tight monetary policies to reign in a growing current account deficit fueled by lower export earnings—the latter a product of the global financial crisis. In 1999, Chile experienced negative economic growth for the first time in more than 15 years. In the years since then, growth has averaged 4% per year. Chile deepened its longstanding commitment to trade liberalization with the signing of a free trade agreement with the United States, which took effect on January 1, 2004. Chile claims to have more bilateral or regional trade agreements than any other country. It has 57 such agreements (not all of them full free trade agreements), including with the European Union, Mercosur, China, India, South Korea, and Mexico. A new FTA with Australia comes into effect in 2009. Negotiations with Malaysia and Turkey continued in 2008. Chile is also a member of the Trans-Pacific Strategic Economic Partnership Agreement, or P4, which includes Singapore, New Zealand, and Brunei. As such, it was very much in support of a statement by the US Trade Department in 2008 that the United States will explore joining the P4 in 2009.
Chile has enjoyed strong productivity growth in the period 2000–2007, with wages rising faster than inflation. The poverty line in Chile is defined as twice the cost of satisfying the nutritional requirements of a family of four. The government’s role in the economy is mostly limited to regulation, although the state continues to operate copper giant CODELCO, and a few other enterprises (there is one state-run bank).
Over the past five years, foreign direct investment inflows have quadrupled to some US$17 billion in 2008. The Chilean government conducts a rule-based, countercyclical fiscal policy, accumulating surpluses in sovereign wealth funds during periods of high copper prices and economic growth, and allowing deficit spending only during periods of low copper prices and low growth. As of September 2008, those sovereign wealth funds—kept mostly outside the country and separate from Central Bank reserves—amounted to more than US$20 billion.
Economic Performance over 12 Months
As a major exporter, Chile expects to feel a significant impact from the global downturn. Economic growth is expected to slow in 2009, and higher unemployment is likely. The Chilean banking system has experienced its own liquidity crisis, and, in late 2008 and early 2009, some Chilean businesses experienced difficulties financing their operations. Moreover, on November 1, 2008, the world price of copper hit its lowest point for three years. With copper accounting for more than half of all exports, the economy felt the impact sharply.
Chile has struggled to reduce the high unemployment rates of the last 15–18 years (unemployment, which averaged 5–6% in the 1990s, rose to around 10% in 1999). At the end of 2007, unemployment had been reduced to 7.1%, but it started to climb again in 2008, and is still on the rise as company layoffs continue. These factors caused many companies to reduce investment plans, cut costs, and begin layoffs towards the end of 2008. Many experts are predicting a significant increase in unemployment in 2009, largely as a result of the global economic downturn. Most international observers place some of the blame for Chile’s consistently high unemployment rate on complicated and restrictive labor laws.
Chile’s independent Central Bank currently pursues an inflation target of 3%. However, in 2007, inflation inched towards 8%—the first time inflation had exceeded 5% since 1998. In 2008, inflation increased further, hitting a high of 9.9% in October 2008, before moving lower again at the end of the year. In recent years, the Chilean peso’s rapid appreciation against the US dollar had helped dampen inflation. However, as the global financial crisis accelerated toward the end of 2008, the Chilean peso depreciated significantly against the US dollar. Most wage settlements and loans are indexed, reducing inflation’s volatility. Under the compulsory private pension system, most formal sector employees pay 10% of their salaries into privately managed funds.
Total foreign direct investment (FDI) was only US$3.4 billion in 2006, up 52% from a poor performance in 2005. However, 80% of FDI continues to go to only four sectors: electricity, gas, water, and mining. Much of the jump in FDI in 2006 was also the result of acquisitions and mergers, and has done little to create new employment in Chile. The Chilean government has formed a Council on Innovation and Competition, which is tasked with identifying new sectors and industries to promote. It is hoped that this, combined with some tax reforms to encourage domestic and foreign investment in research and development, will bring in additional FDI to new parts of the economy. In 2007, the OECD approved a “roadmap to accession” for Chile, which is still in process. The government of Chile has indicated its willingness to revisit bank secrecy laws.
Support for Inward Investment and Imports
CORFO, the Chilean Economic Development Agency, was founded in 1939 to encourage economic growth in Chile by promoting investment, innovation, and business cluster development. The InvestChile program was created by CORFO in 2000 specifically to encourage foreign investment, with a specific focus on technological companies, and companies looking to relocate to Chile. There are incentives and services available for investors. Contact CORFO and InvestChile for information.
Tax Exemptions
There is a range of incentives available; further information is available from InvestChile.
Statistics
GDP growth: 4%
GDP per capita: US$15,400
CPI: 8.8%
Key interest rate: 8.67%
Exchange rate versus dollar: pesos per US dollar—509.02 (2008)
Unemployment: 7.5%
FDI: US$108.9 billion
Current account deficit: −US$1.574 billion
Population: 16,601,7070
Source: CIA World Factbook except where stated
www.qfinance.com