After a decade of impressive growth rates, Chile experienced a moderate downturn in 1999, brought on by the global economic slowdown. 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 6.2% and 2005 with 6,3%. Chile is on track to achieve real GDP growth of around 6% in 2006, mainly due to record-level copper prices.
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. Chile is strongly committed to free trade and has welcomed large amounts of foreign investment. Chile has signed free trade agreements (FTAs) with several important economies, 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 South Korea, New Zealand, Singapore, Brunei, and China. It reached a partial trade agreement with India in 2005 and plans to begin negotiations for full-fledged FTAs with India and Japan in 2006. High domestic savings and investment rates also 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 coverage rates (only 55% of the working population is covered) with whole groups such as the self-employed excluded from the system. There has also been criticism of the inefficiency and high costs due to a lack of competition among pension funds. Also, 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.
Unemployment has hovered in the 8%-10% range in recent years, well above the 5%-6% average for the 1990s. Unemployment remained at 8.8% at the end of 2004 in spite of strong economic growth. Most international observers blame the high unemployment rate on Chile’s 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 person's minimal nutritional needs—fell from 46% in 1987 to around 18% by 2004.
Chile's independent Central Bank pursues a policy of maintaining inflation between 2% and 4%. Inflation has not exceeded 5% since 1998. Chile registered inflation of 2.4% in 2004 and is expected to see a 2.5% increase in 2005. Most of the inflationary rise has been caused by the Chilean peso’s rapid appreciation against the U.S. dollar in 2004 and 2005. Most wage settlements and spending decisions 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 rose to $7.1 billion in 2004, up from $2.5 billion in 2003. Both foreign and domestic investment in Chile had declined during the country’s period of slower economic growth from 1999-2003, but both now appear to be recovering strongly. The Chilean Government committed in early 2002 to undertake a series of microeconomic reforms designed to create new incentives for private investment. The government also has encouraged the use of Chile as an "investment platform" for multinational corporations planning to operate in the region. 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 U.S.-Chile Free Trade Agreement offers a number of other investor protections.
Chile's economy is highly dependent on international trade. In 2004, exports accounted for about 34% of GDP. That figure will be even higher in 2005, though somewhat further distorted by world-record copper prices. Chile’s overall trade profile has traditionally been dependent upon copper exports, and the rise in copper prices has reinforced it further. 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. In 1975, non-mineral exports made up just over 30% of total exports, whereas now they account for about 60%. The most important non-mineral exports are forestry and wood products, fresh fruit and processed food, fishmeal and seafood, and wine. The trade balance for 2004 showed a surplus of $9 billion, considerably higher than 2003. Total exports in 2004 were $32 billion, a 52.1% increase from $20.4 billion in 2003. Chile's export markets are fairly balanced among Europe (25.1%), Asia (33.1%), Latin America (15.7%), and North America (19%). The U.S., the largest national market, takes in 17.3% of Chile's exports. Asia has been the fastest-growing export market in recent years. For example, Chile’s number two, three, and four trading partners are China, Japan, and South Korea, respectively. Chile’s recent FTAs with Asian trading partners and plans to sign more in 2006 underscore the growing importance of Asia to Chile’s trade portfolio.
Chilean imports increased 30% in 2004, to $23 billion, reflecting a positive change in consumer demand and overall economic recovery. Capital goods made up about 66% of total imports. The United States provided 14.6% of Chilean imports in 2004. As a bloc, the EU in 2004 supplied 16.3% of Chile's imports, while Argentina contributed 16%. 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. Also, Chile will have to phase out the price bands within 12 years under the terms of the U.S.-Chile FTA.
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 FTAs in recent years with New Zealand, Singapore, Brunei, and most recently China. In 2006, Chile plans to begin FTA negotiations with Japan and India.
After two years of negotiations, the United States and Chile signed an agreement in June 2003. The agreement 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. Chile is a strong proponent of pressing ahead on negotiations for a Free Trade Area of the Americas (FTAA) and active in the WTO’s Doha round of negotiations, principally through its membership in the G-20 and Cairns Group.
Chile's financial sector has grown faster than other areas of the economy over the last few years; a banking reform law approved in 1997 broadened the scope of permissible foreign activity for Chilean banks. The Chilean Government implemented a further liberalization of capital markets in 2001. 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 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 $54 billion at the end of 2004, 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 continues to pay down its foreign debt. Combined public and private foreign debt was roughly 50% of GDP at the end of 2004—low by Latin American standards.
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