Chilean Economy Trades

Described by The Financial Times as "Latin America's most successful economy", Chile has had one of the best performances of any emerging economy over the past few years. From 1987 to 1997 it grew at an annual average of 7%, thus doubling its per capita income from U$ 2500 to U$ 5000. From 1990 to 2000, inflation was cut from 27% to 3%, exports doubled (from U$ 9 billion to U$ 18 billion) and foreign investment averaged some U$ 4.5 billion a year, one of the highest FDI/GDP ratios anywhere. At the same time, a variety of social programs have succeeded in cutting the poverty rate in more than half-from 39% of the population to 21%.

With a population of 15.1 million people occupying the territory of what is the longest country in the world (with a coastline of 5000 km and a length of 4200 km), Chile has many natural advantages. They range from the rich mineral resources to be found in the vast Atacama Desert in its North to the fertile agricultural lands Chile of central and southern Chile and the imposing glaciers and water resources of Patagonia, reaching all the way to the southernmost tip of the Americas. The Chilean people are also a key asset. The literacy rate is 95%, and some 16% of the population (up from 9% a decade ago) has a higher education qualification.

Over the last decade, modern transport infrastructure, advanced logistics and world-class telecommunications services have helped to eliminate many of the traditional obstacles sheer distance used to place between Chile and the rest of the world.

Chile is also deeply committed to free trade. Since 1990, it has developed an expanding network of free trade agreements (FTAs) including Mexico and Canada. In 2003, Chile made significant progress in this regard, having now in place FTAs with the United States, the European Union, the European Free Trade Association and one (still awaiting ratification by the respective Parliaments) with South Korea, the very first bilateral trade agreement between an Asian and a Western country. This means that Chilean producers have privileged access to some 1.2 billion consumers.

This is the result of a policy-driven strategy that has focused on building sound macroeconomic fundamentals and strong institutions, as well as on promoting competition and integration into the world economy, without neglecting the creation of a fairer society in which economic development reaches all. Economic growth has thus been accompanied by decreasing inflation, a sharp drop in public debt, stable external accounts and strong international reserves.

According to the Economist Intelligence Unit (2002), Chile ranks as the best Latin American country to do business in over the next five years, and, not surprisingly, Chile has thus become an attractive platform for many multinational firms targeting Latin American and other markets.

product table

 

Export-Driven Growth

The key to Chile's growth lies in its exports. To grow at 7% a year, as Chile did from 1987 to 1997, its exports had to grow at 10-12% a year, which they did. This did not happen by sheer chance, but, rather, was the result of a certain type of international economic policy, one that, over the past quarter of a century, was designed to overcome Chile's relative geographic isolation and the limitations of a small domestic market. The opening of the economy that took place in the seventies through unilateral tariff reductions was complemented in the nineties and the current decade by a growing network of Free Trade Agreements (FTAs), Bilateral Trade Agreements, Bilateral Investment Treaties, Double Taxation Agreements, Social Security Agreements and Open Skies Agreements. They have all contributed to facilitating the flow of goods, services, capital and people that makes free trade thrive.

The doubling of Chile's exports that took place between 1990 and 2000 (from U$ 9 billion to U$ 18 billion) is, in many ways, the most tangible product of these policies, but by no means the only one. Whereas in 1975, a mere 200 firms exported just 200 products to 50 countries, by 1990 these figures had changed to 4100 firms exporting 2300 products to 122 countries, and by 2003, to 6147firms exporting 5126 products to 168 countries.

Although copper remains Chile's most important export product (Chile accounts for around of a quarter of the world's reserves and is the largest producer and exporter) and still accounts for around 40% of total exports, the country has come a long way from the early seventies, when it accounted for 70% of total foreign exchange earnings. Fresh fruit (Chile is the largest exporter in the Southern Hemisphere), wood and wood products, fish meal (Chile is the world's second largest exporter), farmed salmon (where Chile is the second largest exporter) and wine are some the leading products that Chile sells today in the world's leading markets.

Moreover, Chile's exports are also geographically diversified, with four macro-regions receiving the bulk of Chile's exports, thus allowing downturns in the business cycle in one area to be compensated by redirecting exports to other ones. In 2001, 20% of Chile's exports went to the United States and Canada, 22.7% to Latin America, 26.5% to Asia and 28.2% to Europe. Significantly, Chile is the Latin American country with the highest share of its foreign trade with Asia. In fact, Japan is Chile's second largest trading partner, and China the third largest.

export table 

Prospects for Trade between Chile and India

Trade between Chile and India has almost tripled during the past five years-going from U$ 117 million in 1998 to U$ 261 million in 2002, which indicates the dynamism in the relationship between both countries. Continuing and growing demand for Chilean copper in India, and for Indian textiles in Chile are some of the driving forces behind this trend. Still, there is little doubt that current volumes of trade are only scratching the surface of the potential exchanges between both countries. Chilean agricultural products (including wine), which have received a boost after India opened its market to foreign products, and the fitosanitary agreement signed by Chile and India in 2002, are one natural growth area, as are sales of Indian software and IT services in Chile. A major obstacle for trade in goods remains the relatively high cost of transport, which should come down once greater volumes come into play.

 

A Partial Trade Agreement (PTA) between Chile in India is being considered by both countries and , were it to come into effect, should provide a considerable impetus to bilateral trade flows. It might also provide the platform from which to launch Chile's export drive into South Asia more generally (an area that has lagged behind other Asian markets for Chile) and for India to propel it into Latin America (about whose markets much the same could be said for India).