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Chile - Economy

Chile is the fifth largest economy in South America and has the second highest GDP per capita in the region. It is a liberal, open market economy, with strong macroeconomic stability due to a solid fiscal responsibility rule, an inflation-targeting Central Bank, the lowest corruption rating in Latin America and a tradition of rule of law. Chile has pursued sound economic policies for nearly three decades. 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, including one state-owned bank--Banco Estado. Chile joined the Organization for Economic Cooperation and Development (OECD) in 2010, the first South American nation to do so.

Chile is a country with rich natural resources, and its economy has been oriented historically towards the export of primary products. During the international economic crisis of the 1930s, however, the market for Chilean exports collapsed and international capital markets effectively were closed to both private and public sector Chilean borrowers. In reaction, successive governments sought to reduce Chile's dependence on foreign trade by implementing import substitution policies designed to promote domestic industries and discourage imports. The strategy was supplemented by giving the state a role in the development of some key sectors (including electricity and steel). As a result of these policies, its role in the economy expanded in the following decades.

As part of the government's efforts to liberalize Chile's economy between 1964 and 1966, the administration of President Eduardo Frei Montalva (1964 to 1970) lowered external tariffs and greatly reduced other non-administrative import barriers. In addition to these economic reforms, the administration tried to professionalize Chile's monetary policy by recruiting career economists to the Central Bank and the Ministry of Finance. Despite these more liberal economic policies, Chile's economy was still heavily regulated by the late 1960s.

The socialist government of President Salvador Allende (1970 to 1973) further increased the government's role in the economy by implementing a widespread nationalization program, deepening agrarian reform and increasing government expenditures. By 1973, inflation reached an annual rate of more than 500%, industrial output declined more than 6% and the Central Bank's foreign exchange reserves stood at slightly above US$40 million.

Following the military coup d'etat in 1973, the military government led by General Augusto Pinochet (1973 to 1990) introduced liberal economic reforms designed to open the economy to foreign investment, liberalize foreign trade and reduce the central government's size and influence in the economy. Although the military government was able to reduce inflation, eliminate budget deficits and initiate an economic recovery, Chile's economy continued to suffer in the early 1980s due to macroeconomic policies and a global recession that resulted in an external debt crisis. The government's decision to implement an austerity program and depreciate the peso contributed to a sharp recession that began in 1982 with real GDP decreasing 13.4% during that year. In 1983, real GDP further decreased 3.5% and unemployment reached a peak of 20.5% (without taking into account certain ad-hoc emergency employment programs developed by the government).

However, from 1984 to 1989, these measures resulted in: increased exports; an average GDP growth of 6.7% per year; a 66.6% reduction in the current account deficit; and a steady rise in international reserves. In 1985, the government launched a series of privatizations with the objective of broadening the base of equity owners (so-called "popular capitalism"). These economic policies and the government's expansionary monetary policy led to an approximately 22.8% increase in domestic spending for the two-year period from 1987 to 1989, which in turn led to increases in inflation. When the elected government of President Aylwin took office in 1990, it implemented a contractionary macroeconomic policy designed to correct these economic imbalances.

In December 1989, the government redefined the Central Bank as a fully autonomous agency functioning independently from the central government. At the time, the autonomous and independent status of Chile's Central Bank was unique in Latin America. The Central Bank's two main objectives are to reduce inflation and to ensure the regular flow of external and domestic payments. The government also undertook a deliberate effort to coordinate macroeconomic policies between the Central Bank and the Ministry of Finance.

During the 1990s, the coalition governments of President Patricio Aylwin (1990 to 1994) and President Frei Ruiz-Tagle (1994 to 2000), the son of the former President Eduardo Frei (1964 to 1970), sought to provide stability and economic growth to Chile. Both administrations attempted to construct a wide consensus around free-market economic principles including respect for private property, the limited role of the government in economic affairs, free trade, open and fair competition and sound fiscal policies. The government attributes economic growth during this period primarily to increases in investment as well as exports, with a focus on diversifying exports away from copper.

Chile is strongly committed to free trade and has welcomed large amounts of foreign investment. The business climate is generally straightforward and transparent. Chile's sound, market-oriented policies have created significant opportunities for foreign investors to participate in the country's steady economic growth. Foreign investors receive treatment similar to Chilean nationals in nearly all sectors. There are generally no special exemptions or incentives for foreign investment as a matter of policy. A broad political consensus on the advantages of foreign investment means that Chile's policies toward foreign direct investment are unlikely to change. The country has trade agreements with 60 countries, including a free trade agreement (FTA) with the United States, which was signed in 2003 and implemented in January 2004. The United States and Chile are participating in trade negotiations in the Trans-Pacific Partnership, along with seven other nations.

Chile's overall trade profile has traditionally been dependent upon copper exports. The state-owned firm CODELCO is the world's largest copper-producing company, with recorded copper reserves of 200 years. Several large Chilean and international private copper companies also operate in Chile. Chile has made an effort to expand nontraditional exports. The most important non-mineral exports are forestry and wood products, fresh fruit and processed food, fishmeal and seafood, and wine. In 2010 total exports were $69.6 billion, an important increase from 2009 ($53.7 billion) due mainly to cooper prices. Imports increased from $39.7 billion in 2009 to $54.5 billion in 2010, driven in large part by higher petroleum prices. In 2010, China was Chile’s largest export market, followed by Japan, the United States, Brazil, and the Netherlands. Chile’s most important sources of imports are the United States, China, Brazil, Argentina, and South Korea.

Chile's approach to foreign direct investment is codified in the country's foreign investment law, which gives foreign investors the same treatment as Chileans. Registration is simple and transparent, and foreign investors are guaranteed access to the official foreign exchange market to repatriate their profits and capital. Net foreign direct investment in Chile in 2010 was $18.2 billion, up 43% over 2009.

Chile's Government received high marks from economists and its citizens for its countercyclical spending in 2009 (financed largely from saved copper revenues) to offset the effects of the global economic crisis. Chile has emerged from the recession that resulted from the global economic downturn as well as the economic dislocation caused by the February 2010 earthquake. Economic growth was 1.5% in 2009 and 5.2% in 2010; the economy is expected to grow around 6.5% in 2011.

The government is required by law to run a fiscal surplus of at least 1% of GDP; however, this rule was changed to 0.5% of GDP in 2008, and waived for 2009, given the pressures from the global economic crisis. The government had a structural deficit of 1.2% in 2010.

Unemployment reached almost 11% in mid-2009; however, it averaged 8% in 2010. Wages have risen faster than inflation as a result of higher productivity, boosting national living standards. The percentage of Chileans with incomes below the poverty line--defined as twice the cost of satisfying a family of four's minimal nutritional needs--fell from 46% in 1987 to around 18% by 2005; since 2006, the percentage of Chileans below the poverty level had been between 13% and 14%, but the economic downturn drove these numbers back up over 15% in 2009.

Chile's independent Central Bank currently pursues an inflation target of 3%. In 2007, inflation inched toward 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 2009 and 2010, inflation in Chile decreased to between 2% and 2.7%--within the Central Bank’s target range.

The Chilean peso floats freely. However, the Chilean Central Bank has made significant purchases in the foreign-exchange market on occasion in recent years to mitigate the effects of the peso’s appreciation. In March 2008, the Central Bank began a program of buying dollars to slow the appreciation of the peso, and then suspended those operations in November 2008 when the peso depreciated significantly because of the global financial crisis. The peso strengthened 8.4% in 2010, and in January 2011, the Central Bank announced it would purchase $12 billion in reserves over 2011 to slow the appreciation of the peso.

A devastating magnitude 8.8 earthquake (at that time, the fifth-largest ever recorded) struck Chile on February 27, 2010. The earthquake and its aftershocks were felt throughout the central part of Chile, home to 75% of the population. The earthquake and subsequent tsunamis caused considerable damage in the two regions nearest the epicenter about 70 miles from Concepcion (200 miles southwest of Santiago); over 500 people were killed, hundreds of thousands of homes were destroyed or damaged, and nearly two million people were affected. By 2011, the economy had recovered from the effects of the earthquake, and most of the damaged infrastructure was restored. In certain areas heavily affected by the earthquake, some groups expressed concern about the availability of permanent housing.

The Chilean Government estimated that the February 27, 2010, earthquake and tsunamis destroyed 3% of Chile’s capital stock and cost around $30 billion, more than 17% of Chile’s GDP. The government spent several hundred million dollars on emergency relief measures and committed an initial $8.4 billion for reconstruction focused in four main areas: rebuilding homes, reconstructing schools, restoring public infrastructure, and providing health care in heavily affected areas. Chile has made significant progress on rebuilding infrastructure (roads, bridges, potable water) and schools since the earthquake.

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Page last modified: 04-12-2012 19:01:38 ZULU