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World > South America > Chile > Economy (Notes)

Chile - Economy (Notes)


ECONOMY
After a decade of impressive growth rates, Chile began to experience a moderate economic downturn in 1999, brought on by unfavorable global economic conditions related to the Asian financial crisis, which began in 1997. The economy remained sluggish until 2003, when it began to show clear signs of recovery, achieving 3.3% real GDP growth. The Chilean economy finished 2004 with growth of 6.1%. Real GDP growth reached 6.3% in 2005 before falling back to 4.0% growth in 2006. Higher energy prices as well as lagging consumer demand were drags on the economy in 2006. Higher Chilean Government spending and favorable external conditions (including record copper prices for much of 2006) were not enough to offset these drags. For the first time in many years, Chilean economic growth in 2006 was among the weakest in Latin America.

Chile has pursued generally sound economic policies for nearly three decades. The 1973-90 military government sold many state-owned companies, and the three democratic governments since 1990 have continued privatization, though at a slower pace. 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). Chile is strongly committed to free trade and has welcomed large amounts of foreign investment. Chile has signed free trade agreements (FTAs) with a whole network of countries, including an FTA with the United States, which was signed in 2003 and implemented in January 2004. Over the last several years, Chile has signed FTAs with the European Union, South Korea, New Zealand, Singapore, Brunei, China, and Japan. It reached a partial trade agreement with India in 2005 and began negotiations for a full-fledged FTA with India in 2006. Chile plans to continue its focus on its trade ties with Asia by negotiating in 2007 trade agreements with Thailand, Malaysia, and Australia.

High domestic savings and investment rates helped propel Chile's economy to average growth rates of 8% during the 1990s. The privatized national pension system (AFP) has encouraged domestic investment and contributed to an estimated total domestic savings rate of approximately 21% of GDP. However, the AFP is not without its critics, who cite low participation rates (only 55% of the working population is covered), with groups such as the self-employed outside the system. There has also been criticism of the inefficiency and high costs due to a lack of competition among pension funds. Critics cite loopholes in the use of pension savings through lump sum withdraws for the purchase of a second home or payment of university fees as fundamental weaknesses of the AFP. The Bachelet administration plans substantial reform, but not an overhaul, of the AFP during the next several years.

Unemployment stubbornly hovered in the 8%-10% range after the start of the economic slowdown in 1999, well above the 5%-6% average for the 1990s. Unemployment finally dipped to 7.8% at the end of 2006, due largely to the fact that fewer Chileans were entering the workforce rather than to a substantial and sustained creation of new jobs. Most international observers place some of the blame for Chile?s consistently high unemployment rate on complicated and restrictive labor laws. 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 2004.

Chile's independent Central Bank pursues an inflation target of between 2% and 4%. Inflation has not exceeded 5% since 1998. Chile registered an inflation rate of 3.2% in 2006. The Chilean peso?s rapid appreciation against the U.S. dollar in recent years has helped dampen inflation. 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 $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 and to new parts of the economy. As of 2006, Chile invested only 0.6% of its annual GDP in research and development (R&D). Even then, two-thirds of that was government spending. The fact that domestic and foreign companies spend almost nothing on R&D does not bode well for the Government of Chile?s efforts to develop innovative, knowledge-based sectors. Additionally, on January 8, 2007, Chile was placed on the U.S. Trade Representative?s Priority Watch List due to its poor record on protecting intellectual property rights. Chile is only the second U.S. FTA partner ever to be placed on the Priority Watch List. Chile has a poor and deteriorating record of protecting copyrighted music, films, and software. Combined with this is its institutional structure allowing local companies to produce and market pharmaceutical generics that violate existing patents. Beyond its general economic and political stability, the government also has encouraged the use of Chile as an 'investment platform' for multinational corporations planning to operate in the region, but this will have limited value given the developing business climate in Chile itself. 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. While Chile and the EU have signed a double taxation treaty, no such agreement exists between the U.S. and Chile.

Foreign Trade
2006 was a record year for Chilean trade. Total trade registered a 31% increase over 2005. During 2006, exports of goods and services totaled U.S. $58 billion, an increase of 41%. This figure was somewhat distorted by the skyrocketing price of copper. In 2006, copper exports reached a historical high of U.S. $33.3 billion. Imports totaled U.S. $35 billion, an increase of 17% compared to the previous year. Chile thus recorded a positive trade balance of U.S. $23 billion in 2006.

The main destinations for Chilean exports were the Americas (U.S. $39 billion), Asia (U.S. $27.8 billion) and Europe (U.S. $22.2 billion). Seen as shares of Chile?s export markets, 42% of exports went to the Americas, 30% to Asia and 24% to Europe. Within Chile?s diversified network of trade relationships, its most important partner remained the United States. Total trade with the U.S. was U.S. $14.8 billion in 2006. Since the U.S.-Chile Free Trade Agreement went into effect on January 1, 2004, U.S.-Chilean trade has increased by 154%. Internal Government of Chile figures show that even when factoring out inflation and the recent high price of copper, bilateral trade between the U.S. and Chile has grown over 60% since then.

Total trade with Europe also grew in 2006, expanding by 42%. The Netherlands and Italy were Chile?s main European trading partners. Total trade with Asia also grew significantly at nearly 31%. Trade with Korea and Japan grew significantly, but China remained Chile?s most important trading partner in Asia. Chile?s total trade with China reached U.S. $8.8 billion in 2006, representing nearly 66% of the value of its trade relationship with Asia.

The growth of exports in 2006 was due mainly to a strong increase in sales to the United States, the Netherlands, and Japan. These three markets alone accounted for an additional U.S. $5.5 billion worth of Chilean exports. Chilean exports to the United States totaled U.S. $9.3 billion, representing a 37.7% increase compared to 2005 (U.S. $6.7 billion). Exports to the European Union were U.S. $15.4 billion, a 63.7% increased compared to 2005 (U.S. $9.4 billion). Exports to Asia increased from U.S. $15.2 billion in 2005 to U.S. $19.7 billion in 2006, a 29.9% increase.

During 2006, Chile imported U.S. $26 billion from the Americas, representing 54% of total imports, followed by Asia at 22%, and Europe at 16%. Mercosur members were the main suppliers of imports to Chile at U.S. $9.1 billion, followed by the United States with U.S. $5.5 billion and the European Union with U.S. $5.2 billion. From Asia, China was the most important exporter to Chile, with goods valued at U.S. $3.6 billion. Year-on-year growth in imports was especially strong from a number of countries--Ecuador (123.9%), Thailand (72.1%), Korea (52.6%), and China (36.9%).

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. 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.

Successive Chilean governments have actively pursued trade-liberalizing agreements. During the 1990s, Chile signed FTAs with Canada, Mexico, and Central America. Chile also concluded preferential trade agreements with Venezuela, Colombia, and Ecuador. An association agreement with Mercosur--Argentina, Brazil, Paraguay, and Uruguay--went into effect in October 1996. Continuing its export-oriented development strategy, Chile completed landmark free trade agreements in 2002 with the European Union and South Korea. Chile, as a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. To that end, it has signed trade agreements in recent years with New Zealand, Singapore, Brunei, India, China, and most recently Japan. In 2007, Chile plans to begin negotiations with Thailand, Malaysia, and Australia.

After two years of negotiations, the United States and Chile signed an agreement in June 2003 that will lead to completely duty-free bilateral trade within 12 years. The U.S.-Chile FTA entered into force January 1, 2004 following approval by the U.S. and Chilean congresses. The bilateral FTA has inaugurated greatly expanded U.S.-Chilean trade ties, with total bilateral trade jumping by 154% during the FTA?s first three years.

Chile unilaterally lowered its across-the-board import tariff for all countries with which it does not have a trade agreement to 6% in 2003. Higher effective tariffs are charged only on imports of wheat, wheat flour, and sugar as a result of a system of import price bands. The price bands were ruled inconsistent with Chile's World Trade Organization (WTO) obligations in 2002, and the government has introduced legislation to modify them. Under the terms of the U.S.-Chile FTA, the price bands will be completely phased out for U.S. imports of wheat, wheat flour, and sugar within 12 years.

Chile is a strong proponent of pressing ahead on negotiations for a Free Trade Area of the Americas (FTAA) and is active in the WTO?s Doha round of negotiations, principally through its membership in the G-20 and Cairns Group.

Finance
Chile's financial sector has grown quickly in recent years, with a banking reform law approved in 1997 that broadened the scope of permissible foreign activity for Chilean banks. The Chilean Government implemented a further liberalization of capital markets in 2001, and there is further pending legislation proposing further liberalization. Over the last ten years, Chileans have enjoyed the 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 also been accompanied by an increased use of traditional instruments such as loans and credit cards. Chile's private pension system, with assets worth roughly $70 billion at the end of 2006, has been an important source of investment capital for the capital market. Chile maintains one of the best credit ratings (S&P A+) in Latin America. There are three main ways for Chilean firms to raise funds abroad: bank loans, issuance of bonds, and the selling of stocks on U.S. markets through American Depository Receipts (ADRs). Nearly all of the funds raised through these means go to finance domestic Chilean investment. The government is required by law to run a fiscal surplus of at least 1% of GDP. In 2006, the Government of Chile ran a surplus of $11.3 billion, equal to almost 8% of GDP. The Government of Chile continues to pay down its foreign debt, with public debt only 3.9% of GDP at the end of 2006.


Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Chilean Peso Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.



Facts at a Glance
Geography
People
Government
Economy
Communications
Transportation
Military
Climate
Current Time
Ranking Positions
Chilean Peso Exchange Rates


Notes and Commentary
People
Economy
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.





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