Highest Degree of Economy

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Introduction:

The republic of Chile is a wonderful country on the coast of Southern South America. It borders the South Atlantic Ocean and the South Pacific Ocean, between Argentina and Peru. As of July 2008, Chile had 16,758,114 people; 4.3 million of them live in the capital of the country, Santiago. Chile has a surface area of 292,133 square miles. Mining is important to the Chilean economy. It has the world's largest reserve of copper. In addition, iron ore, nitrates, precious metals, and molybdenum are also mined. Also important to the Chilean economy is forestry. Their main wood exports are pine, eucalyptus, pulp, and paper.

Chile presents bountiful opportunities for investment in various industries. Compared to other South American countries, Chile offers the highest degree of economic freedom in terms of welcoming outside investment: in the 2010 index its freedom score is 77.2 - making its economy the 10th freest world-side. Chile is Latin America's fifth largest economy (BMI business forecast report Q1). Liberal investment legislation has been in place since 1974 in the country. The financial system is one of the world's most developed: it exercises prudential lending and is continuously increasing competition in the range of financial operations by reforming capitalization requirements and shareholder obligations. It boasts the shortest time required for starting a business in the world: 27 days. The government exercises a rule-based countercyclical fiscal policy (CIA Factbook) with strict financial sector overview and cautious fiscal policy (ic.gc.ca).

It is the successful financial institutions and open trade policies of the government that allow for a Chile to sustain its fast-growing, market-oriented economy. In fact, the country had an average GDP growth of 4.1% - making it the fastest growing economy in the Latin American realm over the past decade. The decline of investment and spending worldwide inevitably impacted Chile as well dropping it's GDP to approximately $7 billion in 2009. However, this 1.5% decrease in real GDP growth did not significantly impact the trade relationships and job-growth in the country. The spending strategies of the government actually sheltered Chile within reasonable extent from the global downturn. With exports accounting for nearly 50 percent of the country's GDP, Chile maintains 57 bilateral and/or regional trade agreements including agreements with the European Union, Mercosur, China, India, South Korea and Mexico. (CIA Factbook). It also has federal trade agreements in process with Panama, Peru and Colombia with developing agreements in New Zealand, Singapore, Australia, Vietnam, Ecaudor, Malaysia and Thailand.

Despite continual demand for its commodities, Chile faces several obstacles in terms of maintaining its long-term competitiveness. For a country that boasts a relatively high income population - the distribution of income is vastly unequal with 38.6% of the national income allotted to ten percent of the population and about 15% of the Chilean population living below the poverty line. With the Chilean economy being led by the industrial and service sectors, it is extremely sensitive to and potentially hindered by the fluctuations in the energy security. Chilean demand for oil is estimated to account for 4.55% of the total Latin American region's demand (bmi forecast). Rising electricity costs have the potential to severely impact the energy-dependant commodity sectors - especially those of forestry and mining (ic.gc.ca). Therefore, overreliance on the export of one commodity, namely copper, makes the Chilean economy very sensitive to market instability and changes.

The relationship between Chile and Canada is especially significant in regards to the energy concerns of the country as Chile imports the majority of its oil and coal resources from Canada and the Canadian imports from Chile are dominated by the products of its mining industry. Of all the Free Trade Agreements Chile upholds, the Canadian FTA is one of the most important and signifies a very strong relationship both economically and politically between the countries.

Chile is further constrained by the level of business, fiscal, and labor-related freedoms it grants to foreign investors relative to other economies. While regulatory licensing is not an issue, tasks like assigning intellectual property rights and procedures related to bankruptcy and closing a business are expensive and difficult. Still, regulations in regards to foreign versus domestic investments are transparent.

The mining industry for the most popular metal and copper is composed of both private enterprises and the government. In fact, the government has an entire sector devoted to the mining industry: Ministereo de Mineria. Codelco is the largest producer of copper in Chile and in the world - it is a state-owned enterprise.

Economic and Financial Environment:

Since 1990, Chile has implemented public policies to foster and consolidate serious and responsible macroeconomic management, greater economic openness and international integration, solid institutions and a fairer society in which all citizens can enjoy the benefits of economic development. Economic growth has been accompanied by a sharp drop in public debt, the stabilization of the country's external accounts and an increase in its international reserves. Chile has, in other words, given clear proof of its commitment to serious and responsible economic management.

These attractive advantages are further reinforced by the existence of an open economy that has meant greater competitiveness, growing international trade and rapid integration into world markets. In addition, Chile's modern telecommunications systems, its internationally competitive banking sector, its world-class public infrastructure, its high-quality services and the ready availability of skilled workers are key factors that cause a favorable impression among foreign investors.

Macroeconomics:

The Chilean economy is widely distinguished for its track record of sustained growth. Between 1990 and 2008, it expanded at an average annual rate of 5.8% and, according to the International Monetary Fund (IMF), was among the world's thirty most dynamic economy. The Central Bank of Chile estimates that, in 2008, GDP at current prices reached US$169.5 billion, up from US$31.5 billion in 1990. Between 1990 and 2008, per capita income measured in terms of purchasing power parity (PPP) trebled to US$14,688.

Annual average growth reached 7.2% between 1990 and 1998. This strong performance was temporarily interrupted in 1999 when activity contracted by 0.7%, following the Asian financial crisis and a sharp drop in the price of copper, Chile's main export. However, the contraction was short and in 2000, GDP expanded by 4.5%. Between 2001 and 2007, the economy expanded at an average annual rate of 4.3% before dropping to 3.2% in 2008.

Foreign Direct Investment:

Over the past quarter of a century, Foreign Direct Investment (FDI) has played a decisive role in Chile's economic growth and development. Incoming FDI has maintained an upward trend, helping to increase Chile's competitiveness through not only resources and new markets but also technological development.

Chile has achieved widespread international recognition for its success in attracting FDI.

According to the 2008 World Investment Report, published by the United Nations Conference on Trade and Development (UNCTAD), Chile holds third place among the ten most successful Latin American and Caribbean countries in attracting foreign direct investment (FDI).

The study reported that, in 2007, Chile attracted FDI worth US$14,457 million, ranking immediately after the much larger Brazilian and Mexican economies. UNCTAD also anticipated a further increase in 2008, due to the impact of high commodity prices and the region's solid growth on the earnings of multinational companies.

Chile's position as a highly attractive destination for foreign investment is due mainly to its political and economic stability, its excellent communications, its broad network of trade agreements and the legal security and stability that it offers. This is a particular advantage during crises as was seen in 1999 - in the wake of the Asian crisis - and in 2008 with its international economic uncertainty. In both cases, FDI in Chile reached record levels, consolidating the country's position as a safe place to which to commit foreign capital.

Between 1974 and 2008, 24.2% of total Chile's FDI originated in the United States, followed by Spain (20.8%), Canada (18.5%). During this period, the member of European Union accounted for 39.6% of total Chile's FDI.

During this period, the mining sector accounted for 33.7% of gross inflows of FDI. It was followed by the electricity, gas and water sector (20.6%), services (19.1%) and manufacturing (11.6%). In the services sector, the most important segments were investment companies (21.8%), banks (20.0%) and insurance (15.9%).

Financial System:

In last report by IMF regarding financial system stability assessment, the Chilean financial system is found to be sound, flexible to shocks, and well-supervised. Banks are well capitalized, profitable, internationally integrated, and have relatively low nonperforming loans. Stress tests indicate they would absorb substantial macroeconomic shocks with only a moderate impact on their function. This was supported by a steady monetary stabilization, low single digit inflation rates, a long record of fiscal management and a comprehensive and far reaching program of financial structural reforms. In the financial area some of key initiatives included:

  1. The consistent promotion of price-indexed financial instruments;
  2. The buildup of monetary policy credibility;
  3. The introduction of comprehensive capital market reforms (the 2001 Capital Markets I law);
  4. A recent review of monetary and public debt management practices;

Chile's economic performance and financial development are supported by well-functioning institution.

Economic and Financial risks:

Global demand:

The main Chile's economic risks are external, as Chile's acceleration of economic growth is reliant on global demand, a sharper than expected decline in global economic activity would have a significant impact on export earnings, fiscal revenue, and GDP growth. A gentle slowdown of demand in major markets such as the US and China will bring a sharp decline in international prices for copper, Chiles main export, and a sharp deceleration of export growth. In the midst of the world economic slowdown, the Chilean economy should grow at a more moderate rate this year. High food and energy prices compounded by the firmness of private consumption have generated inflationary pressures that resulted in a tightening of monetary policy.

Although, no country is immune to the impact of the current uncertainty in the international economy, Chile had proved itself to be on a strong footing to weather the crisis. In mid-April of 2009, the IMF forecast that Chile would escape a significant economic contraction, thanks to the fiscal stimulus measures implemented by the government and the Central Bank's reduction of interest rates. The IMF praised Chile for having run a large budget surplus over the past five years, accumulating savings that now stand it in good stead. The IMF anticipates that Chile's GDP will show virtually no change in real terms in 2009 (growth of just 0.1%) but will expand by 3% in 2010, while inflation drops to 2.9% this year before rising to 3.5% next year.

Income gap:

Latin America is a region well-known for its inequalities, especially in Chile where the economy has grown substantially since the mid-1980s and income disparities have remained steadily high. Chile is the richest country in Latin America in terms of GDP per capita, but it also has the highest level of income inequality which, according to the Gini coefficient, was 0.549 at the end of 2007.

While Chile's economic growth has positively affected poverty levels, it has not ensured a significant reduction in inequality, while the poorest workers received higher incomes, the richest workers also received them and the income inequality has remained roughly the same throughout the last 20 years of Chile's economic growth. These sustained high levels of inequality in Chile are not necessarily associated with decreased welfare because inequality has remained steady in the presence of income increases in both rich and poor households. In other words, despite high inequality, both the lives of both rich and the poor are better due to the country's economic growth.

Most economic studies suggest that unequal income distribution is bad for economic growth. It is often emphasized that inequality can lead to inefficient policies that actually harm growth, in an attempt to compensate for severe inequality. Most often, this means the introduction of inefficient taxation for the purposes of redistribution. However, there are more ways in which inequality impedes economic growth due to its influence on the quality of economic policy triggered by social conflicts. Countries with more unequal income distributions are more likely to have characteristics and policies that are bad for growth.

Economic environment summary:

Strengths

  • The country has benefited from economic expansion for the past twenty years, coupled with a relative consensus on the established economic policy pursued.
  • The growing number of free-trade agreements has facilitated geographic diversification of exports.
  • Political stability, quality institutions and infrastructure, and a solid financial system have fostered foreign investment in the country and its development as a regional platform.
  • The world's leading copper producer, Chile is endowed with abundant mining, agricultural, piscicultural (notably salmon) and forestry resources, as well as comparative advantages in those areas.

Weakness

  • The economy remains too dependent on copper exports (half total sales abroad) and low added-value sectors.
  • To meet its energy needs the country remains dependent on foreign sources, particularly Argentine gas.
  • The income gap - still among the world's highest due especially to disparities in the education system - has been a source of social tensions.

Political Environment and Risks:

Legal System:

Social-cultural (People) Environment and Risks:

Source

  • https://www.cia.gov/library/publications/the-world-factbook/geos/ci.html
  • http://rru.worldbank.org/BESnapshots/Chile/default.aspx
  • http://www.minmineria.cl/574/propertyvalue-1983.html
  • http://www.doingbusiness.org/ExploreEconomies/?economyid=41#ProtectingInvestors
  • http://rru.worldbank.org/BESnapshots/Chile/default.aspx
  • http://www.oecd.org/LongAbstract/0,3425,en_2649_33763_34384329_1_1_1_1,00.html
  • http://www.ic.gc.ca/eic/site/ibi-iai.nsf/eng/bi18733.html
  • http://www.companiesandmarkets.com/Summary-Country/chile-business-forecast-report-q1-2010-195629.asp
  • http://www.pr-inside.com/recently-released-market-study-chile-r1685337.htm
  • http://www.heritage.org/index/Country/Chile
  • http://www.cinver.cl/english/clima/macroeconomia_fundsolid_crecimiento.asp
  • https://www.imf.org/external/pubs/ft/scr/2004

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