Destinations > South America > Chile

Chile Economy

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Chile has pursued sound economic policies for nearly three decades. Chile's Government has 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. 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 trade agreements with 59 countries, including a free trade agreement (FTA) with the United States, which was signed in 2003 and implemented in January 2004. A new FTA with Australia went into effect in early 2009, and Chile concluded an FTA with Turkey in mid-2009.

At present, the consensus among Chilean economists is that Chile has passed through the worst of its recession resulting from the global economic downturn. Negative economic growth is expected in 2009 (-1.2%), though a return to moderate growth is forecast for 2010 (3.4%). Unemployment remains a concern, reaching almost 11% in mid-2009. Many 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 2005.

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 U.S. dollar had helped dampen inflation. However, as the global financial crisis accelerated toward the end of 2008, the Chilean peso depreciated significantly against the U.S. 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.

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. Net foreign direct investment in Chile in 2008 was $12.1 billion, up 64% over 2007.

While Chile and the EU have signed a double taxation treaty, no such agreement exists between the U.S. and Chile. The lack of such a treaty is due largely to concern over existing bank secrecy laws in Chile. The Chilean Government has proposed legislation that would reform bank secrecy and bring national standards in line with those mandated by the Organization for Economic Cooperation and Development (OECD), to which Chile formally applied for membership in 1995. In 2007, the OECD approved a “roadmap to accession” for Chile, which may occur as early as late 2009 or early 2010.

Foreign Trade

Successive Chilean governments have actively pursued trade-liberalizing agreements. The United States and Chile signed a comprehensive trade 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 greatly expanded U.S.-Chilean trade ties, with total bilateral trade jumping by over 200% during the FTA's first five years.

In 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 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.

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. In 2008 total exports were $66.4 billion, down slightly from 2007 ($67.6 billion), while imports increased from $44.0 billion in 2007 to $57.6 billion in 2008, driven in large part by higher petroleum prices. In 2008, China was Chile’s largest export market, followed by the United States, Japan, the Netherlands, and Brazil. Chile’s most important sources of imports are the United States, China, Brazil, Argentina, and South Korea.

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 pending legislation proposing additional liberalization. Over the last 10 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. The global financial crisis affected liquidity in the Chilean banking system, making it harder for some companies to maintain access to capital. Chile's private pension system, with assets worth roughly $70 billion at the end of 2008, has been an important source of investment capital for financial markets. 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.

High domestic savings and investment rates helped propel Chile's economy to average growth rates of almost 8% during the 1990s. The privatized national pension system (AFP) has encouraged domestic investment and contributed to high gross domestic savings rates, almost 26% of GDP in 2007. 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. The Bachelet administration still plans to reform the AFP during its last year in office.

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. In 2008, 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 2.25% of GDP at the end of 2007.

Energy and Environment

Chile is facing a series of energy and environmental policy challenges, including how to supply the projected additional 12,000 MW of electricity it needs over the next 10 years with appropriate concern for climate change impacts. Chile-U.S. collaboration in these areas includes projects under the Environment and Climate Partnership of the Americas (ECPA) announced at the April 2009 Summit of the Americas and a memorandum of understanding (MOU) on clean energy and energy efficiency cooperation signed during the June 2009 U.S. visit of President Bachelet. Cooperation on energy issues bolsters our partnership in key areas, including actively promoting the use of U.S. renewable energy technologies (solar, wind, and geothermal), science and technology (S&T), innovation, education, and ways to address greenhouse gas emissions and climate change.

U.S.-Chile collaboration on the environment focuses on issues identified in the U.S.-Chile Free Trade Agreement environment chapter and environmental cooperation agreement, e.g., sustainable development, air pollution, energy efficiency, conservation and wildlife management, marine protected areas, environmental law enforcement, and agricultural best practices. In 2008, Chile’s premier national park, Torres del Paine, and the U.S. Yosemite National Park signed a sister park agreement to promote information and expert exchanges; in April 2009, Santiago’s Parque Metropolitano and San Francisco’s Golden Gate Park also became sister parks.


Information by U.S. Department of State




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