Economy of Chile

Economy - overview: Chile has a market-oriented economy characterized by a high level of foreign trade. During the early 1990s, Chile's reputation as a role model for economic reform was strengthened when the democratic government of Patricio Aylwin - which took over from the military in 1990 - deepened the economic reform initiated by the military government. Growth in real GDP averaged 8% during the period 1991-1997, but fell to half that level in 1998 because of tight monetary policies implemented to keep the current account deficit in check and lower export earnings - the latter a product of the global financial crisis.

After a decade of highly impressive growth rates, Chile experienced a moderate recession in 1999 brought on by the global economic slowdown and exacerbated by a severe drought reducing crop yields and causing hydroelectric shortfalls and rationing. Chile experienced negative economic growth for the first time in more than 15 years. Despite the effects of the recession, Chile maintained its reputation for strong financial institutions and sound policy that have given it the strongest sovereign bond rating in South America. After averaging real GDP growth rates of around 7% in the 1990s, the economy grew 3.4% in 1998 and contracted 1.1% in 1999. By the end of 1999, exports and economic activity had begun to recover. The economy has recovered in 2000, with Asian markets rebounding and copper prices edging up. GDP growth for 2001 is expected in the 5%-6% range. The inauguration of Ricardo Lagos in March 2000, succeeding Eduardo Frei, will keep the presidency in the hands of the center-left Concertacion coalition that has held office since the return of civilian rule in 1990.

The government's limited role in the economy, Chile's openness to international trade and investment, and the high domestic savings and investment rates that propelled Chile's economy to average growth rates of 8% during the decade before the recession are still in place. The 1973-90 military government sold many state-owned companies, and the three democratic governments since 1990 have continued privatization at a slower pace. Policy measures such as the privatization of the national pension system encourage domestic investment, contributing to an estimated total domestic savings rate of approximately 22% of GDP in 2000.

Unemployment peaked well above Chile's traditional 4%-6% range during the recession and is stubbornly remaining in the 8%-10% range well into the economic recovery. Despite recent labor troubles, wages have on average risen faster than inflation over the last several years as a result of higher productivity, boosting national living standards. The share of Chileans with incomes below the poverty line--roughly $4,000/year for a family of four--fell from 46% of the population in 1987 to 23% in 1998.

Maintaining a moderate inflation level is a foremost Central Bank objective. In 1996, December-to-December inflation stood at 8.2%, falling to 6.1% in 1997 and to 4.7% in 1998. The rate fell to only 2.3% during the 1999 recession. Most wage settlements and spending decisions are indexed, reducing inflation volatility. The rate for 2000 was 4.75%. The establishment of a compulsory private sector pension system in 1981 was an important step toward increasing domestic savings and the pool of investment capital. Under this system, most regular workers pay 10% of their salaries into privately managed funds. This large capital pool has been supplemented by substantial foreign investment.

Total public and private investment in the Chilean economy has remained high despite current economic difficulties. The government recognizes the necessity of private investment to boost worker productivity. The government also is encouraging diversification, including such nontraditional exports as fruit, wine, and fish to reduce the relative importance of basic traditional exports such as copper, timber, and other natural resources.

Chile's welcoming attitude toward 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. The Central Bank decided in May 1999 on the removal of the 1-year residency requirement on foreign capital entering Chile under Central Bank regulations, generally for portfolio investments. A modest capital control mechanism known as the "Encaje," which requires international investors to place a percentage of portfolio investment in noninterest-bearing accounts for up to 2 years, has been effectively suspended through reduction to zero of the applicable percentage; the mechanism could be resurrected depending on economic circumstances.

Total foreign direct investment flows in 2000 contracted to $3.6 billion , down from $9.2 billion in 1999, and $4.6 billion in 1998. The 2000 figure is about 13% of GDP. In 2000, Chile experienced an outflow of $1.4 billion, largely the result of diminished inward foreign investment and--for a second year running--elevated levels of Chilean direct investment abroad ($4.8 billion).

Foreign Trade Chile's economy is highly dependent on international trade. In 1999, exports increased to $18.3 billion from $15.6 billion in 1999, and imports increased to $16.9 billion from $14 billion the previous year. Exports accounted for about 25% of GDP. Chile has traditionally been dependent upon copper exports; the state-owned firm CODELCO is the world's second-largest copper-producing company. Foreign private investment has developed many new mines, and the private sector now produces more copper than CODELCO. Copper output continued to increase in 2000. Nontraditional exports have grown faster than those of copper and other minerals. In 1975, nonmineral exports made up just over 30% of total exports, whereas now they account for about 60%. The most important nonmineral exports are forestry and wood products, fresh fruit and processed food, fishmeal and seafood, and other manufactured products.

Chile's export markets are fairly balanced among Europe, Asia, Latin America, and North America. The U.S., the largest-single market, takes in 17% of Chile's exports. Latin America has been the fastest-growing export market in recent years. The government actively seeks to promote Chile's exports globally. Since 1991, Chile has signed free trade agreements with several countries, including Canada, Mexico, Venezuela, Colombia, and Ecuador. An association agreement with MERCOSUR--Argentina, Brazil, Paraguay, and Uruguay--went into effect in October 1996. Chile, a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. Chile has begun free trade agreement discussions with the European Union.

In keeping with its trade-oriented development strategy, Chile is currently in negotiations with the U.S. on a free trade agreement; U.S. negotiating ability has been constrained in the absence of "fast-track" negotiating authority. Chile's 1996 free trade agreement with Canada was modeled largely on NAFTA in anticipation of an eventual trade pact with the United States; similarly, Chile broadened its bilateral free trade agreement with Mexico in August 1998. Chile has been a strong proponent of pressing ahead on negotiations for a Free Trade Area of the Americas (FTAA) agreement.

After growing for several years, imports were down in 1998 and 1999, reflecting reduced consumer demand and deferred investment. Imports have rebounded in 2000 and are up 19% over 1999; capital goods make up about 22% of total imports. The United States is Chile's largest-single supplier, supplying 18.5% of the country's imports in 2000, down from 21% in 1999. Chile unilaterally is lowering its across-the-board import tariff--for all countries with which it does not have a trade agreement--by a percentage point each year until it reaches 6% in 2003. Higher effective tariffs are charged only on imports of wheat, wheat flour, vegetable oils, and sugar as a result of a system of import price bands.

Finance Chile's financial sector has grown faster than other areas of the economy over the last few years; a banking law reform approved in 1997 broadened the scope of permissible foreign activity for Chilean banks. Domestically, Chileans have enjoyed the recent introduction of new financial tools such as home equity loans, currency futures and options, factoring, leasing, and debit cards.

The introduction of these new products has been accompanied by increased use of traditional instruments such as loans and credit cards. Chile's private pension system, with assets worth roughly $36 billion at the end of September 2000, has provided an important source of investment capital for the stock market. Chile has maintained one of the best credit ratings in Latin America despite the 1999 economic slump. In recent years, many Chilean companies have sought to raise capital abroad due to the relatively lower interest rates outside of Chile. There are three main ways Chilean firms raise funds abroad: bank loans, issuance of bonds, and the selling of stock on U.S. markets through American Depository Receipts (ADRs). Nearly all of the funds raised go to finance investment. The government is rapidly paying down its foreign debt. The combined public and private foreign debt was roughly 50% of GDP at the end of 2000, low by Latin American standards.

GDP: purchasing power parity - $185.1 billion (1999 est.)

GDP - real growth rate: -1% (1999 est.)

GDP - per capita: purchasing power parity - $12,400 (1999 est.)

GDP - composition by sector:
agriculture: 6%
industry: 33%
services: 61% (1999)

Population below poverty line: 22% (1998 est.)

Household income or consumption by percentage share:
lowest 10%: 1.2%
highest 10%: 41.3% (1998)

Inflation rate (consumer prices): 3.4% (1999 est.)

Labor force: 5.8 million (1999 est.)

Labor force - by occupation: agriculture 14%, industry 27%, services 59% (1997 est.)

Unemployment rate: 9% (1999)

Budget:
revenues: $17 billion
expenditures: $17 billion, including capital expenditures of $NA (1998 est.)

Industries: copper, other minerals, foodstuffs, fish processing, iron and steel, wood and wood products, transport equipment, cement, textiles

Industrial production growth rate: -1.3% (1999 est.)

Electricity - production: 37.49 billion kWh (1999)

Electricity - production by source:
fossil fuel: 50%
hydro: 50%
nuclear: 0%
other: 0% (December 1999)

Electricity - consumption: 26.665 billion kWh (1998)

Electricity - exports: 0 kWh (1998)

Electricity - imports: 0 kWh (1998)

Agriculture - products: wheat, corn, grapes, beans, sugar beets, potatoes, fruit; beef, poultry, wool; fish; timber

Exports: $15.6 billion (f.o.b., 1999)

Exports - commodities: copper, fish, fruits, paper and pulp, chemicals

Exports - partners: EU 27%, US 16%, Japan 14%, Brazil 6%, Argentina 5% (1998)

Imports: $13.9 billion (c.i.f., 1999)

Imports - commodities: consumer goods, chemicals, motor vehicles, fuels, electrical machinery, heavy industrial machinery, food

Imports - partners: US 24%, EU 23%, Argentina 11%, Brazil 6%, Japan 6%, Mexico 5% (1998)

Debt - external: $39 billion (1999)

Economic aid - recipient: ODA, $50.3 million (1996 est.)

Currency: 1 Chilean peso (Ch$) = 100 centavos

Exchange rates: Chilean pesos (Ch$) per US$1 - 520.45 (January 2000), 508.78 (1999), 460.29 (1998), 419.30 (1997), 412.27 (1996), 396.77 (1995)

Fiscal year: calendar year

See also : Chile