Chile’s economic and trade policies
Benjamin Leavenworth Honorary Consul of Chile Federal Reserve Bank of Philadelphia September 18, 2009
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HAPPY BIRTHDAY 199 YEARS TODAY!!
Chile: Location
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Chile: Shape
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Chile: Diversity
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Chile - Basic Data 2008 Population: Urban Population Annual rate of growth Literacy rate
16.6 M 85.6% 1.2% 96.3%
Area
290,000sq.miles
GDP (2008) GDP Growth (2008) GDP average 1990/2008 GDP per capita (nominal/2008) GDP per capita(PPP-2008)
US$ 169,57 B 3.2% 5.36% US$10,814 US$14,688
Annual inflation (2008) July Inflation accumulated 2009
7.1% -0,4% -1,2%
Unemployment 2008 average 2009 average April/June
7.8% 10.7%
Fiscal surplus 2008 as % of GDP
5.2% (US$8.8 B) 5 Sources: World Bank, EIU, IMF, INE,, Central Bank of Chile
Average annual GDP growth 1990 – 2008 Selected economies (%)
6
Source: International Monetary Fund, IMF (www.imf.org)
Source: Economist Intelligence Unit (www.eiu.com), March 2009 7
Source: Institute for Management Development (www.imd.ch)
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Source: World Economic Forum (www.weforum.org)
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Index of Economic Freedom - 2009 (1) (6) (11) (19) (25) (40) (49) (64) (105) (132) (138)
Source: Index of Economic Freedom 2009, The Heritage Foundation
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Corruption perception index • • • • • • • • • • • • • •
1 Denmark 9,4 1 Finland 9,4 1 New Zealand 9,4 4 Singapore 9,3 4 Sweden 9,3 6 Iceland 9,2 7 Netherlands 9,0 7 Switzerland 9,0 9 Canada 8,7 9 Norway 8,7 11 Australia 8,6 12 Luxembourg 8,4 12 United Kingdom 8,4 14 Hong Kong 8,3
• • • • • • •
15 Austria 8,1 16 Germany 7,8 17 Ireland 7,5 17 Japan 7,5 19 France 7,3 20 USA 7,2 21 Belgium 7,1
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22 Chile 7,0
• • • • • • •
25 Uruguay 6,7 46 Costa Rica 5,0 61 Cuba 4,2 68 Colombia 3,8 72 Brazil 3,5 72 Mexico 3,5 72 Peru 3,5
Source: Transparency International (www.transparency.org), 2007
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Chile: Poverty and Indigence (Percentage of total population)
50 40
Poverty Indigence
38.6 32.9 27.6
30
23.2
%
21.7
20.2
20
18.7 13.7
13 9
10
7.6
5.8
5.8
5.6
4.7
3.2
0 1990
1992
1994
1996
Years
1998
2000
Source : Ministry of Planning, CASEN survey
2003
2006
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Development Strategy Economic reforms ¾
Liberalization of prices and markets
¾
Privatization of public enterprises
¾
Consensus on key role of private sector in the productive process
¾
Openness to foreign Investments
¾
Low external tariffs: (Nominal : 6%, Global Effective: 0.4%, US Effective: 0,1%)
Government policies focused on: ¾
Maintaining stable, clear and non discriminatory rules
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Reducing poverty
¾
Preserving macroeconomic stability
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Sound and consistent Macroeconomic Policies
他
Monetary policy based on inflation targeting framework aimed at keeping annual inflation at 3 % on average within a policy period of two years, with a tolerance range of +/- 1%. Independent Central Bank.
他
Flexible exchange rate.
他
Strict fiscal discipline. Rule of structural fiscal surplus of 0.5 % of GDP.
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Foreign Investment as engine for growth
¾
Chile welcomes foreign investments as they are a very important component of the economic model. Key role in underpinning Chile’s growth.
¾
Chile needs to bring in investments to increase the accumulation of capital, expand economic activity, generate employment and to receive transfers of new technologies.
¾
Political and economic stability, as well as a friendly and neutral foreign investment regime, have attracted large inflows of FDI since 1990.
¾
From 1974 Chile has received US$ 65 billion as FDI. About 87 % of the total arrived since 1990.
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FDI in Chile by Countries of Origin Million dollars
1974-2008
Share (%) 2004-2008
Share (%)
USA
16,860
24.43
1,234
7.31
Spain
14,342
20.78
4,586
31.97
Canada
12,755
18.48
4,631
36.30
UK
5,667
8.21
4,596
8.11
Australia
3,069
4.45
834
27.17
Japan
2,239
3.24
517
23.09
Others
14,093
20.42
3,036
21.54
Total
69,023
100
15,297
100
Source: Foreign Investment Committee
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Chile: Importance of Trade
他 As Chile has a relatively small economy it was decided more than three decades ago to open it to international trade. Model of an open economy and foreign trade oriented. 他 Chile is highly dependent on foreign trade: exports plus imports of goods represents approximately 74 % of GDP in 2008. 他 Foreign trade is an essential component of its strategy of economic development (economic growth, employment and reduction of poverty).
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Chile: Trade Policy Active policy of trade liberalization through three different channels: ¾ Unilateral liberalization (1975-2002): Chile reduced unilaterally its trade tariffs and today has a flat tariff of 6 %. Effective tariff of 0.4 %. ¾ Multilateral level: Chile participates actively at the WTO and supports a world trade system governed by fair, transparent and non discriminatory rules. ¾ Bilateral and regional agreements: Very active policy of FTA negotiations since 90’s. These agreements grant preferential access to markets of special interest and ensure a framework of stability. 18
Chile has preferential access to a market of 4 billion people in 56 countries Russia
Canada
EU (25 members)
EFTA: Iceland Norway Switzerland Liechtenstein
United States
Mexico
Turke y
Cuba
Central America: ‐ Costa Rica Guatemal ‐ El Salvador a ‐ Honduras Colombia Ecuador Peru In force Signed Under negotiation: (Vietnam, Malaysia , Thailand Thailand)) (Vietnam, Malaysia,
Japan China Vietnam P4: Brunei Darussalam Singapore New Zealand Thailand
Panama Venezuela
India Malaysia
MERCOSUR: Brazil Uruguay Paraguay Argentina
Australia 19 Source: Ministry of Foreign Affairs of Chile
X + M : % of GDP
Source: Central Bank of Chile, in billions of U.S. Dollars
2003
53%
2004
57%
2005
60%
2006
64%
2007
68%
2008
70%
Source: Central Bank of Chile, in millions of U.S. Dollars
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Historical Market Participation (average 2000-2008)
Source: Central Bank of Chile
Pre-Crisis Situation •
• • • •
Fiscal regulations 1. Fiscal savings: we are net creditors 2. Sovereign funds: we accumulated 28% of GDP over a five-year period 3. Fiscal responsibility rule: stabilizes future social spending and public investments Accumulation of International Reserves 1. US$24 billion, double the reserves accumulated five years ago Flexible exchange rate 1. It adjusts to external shocks Inflation targets 1. Help to stabilize the cycle and minimize the costs of maintaining low and stable inflation (credibility) Bank supervision 1. Preventative supervision that includes the evaluation of financial institution management and solvency 23
To a large extent, we have been able to amortize external shocks thanks to our expansive macroeconomic policies
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Timely reaction to liquidity problems in late 2008 1. Central Bank 2. Government
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Fiscal policy: 1. Fiscal packet 2. Pro- credit Initiative 3. Pro-employment Accord 4. May 21st announcements Monetary policy: Aggressive reduction of the Central Bank’s interest rate
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Chile and The United States
Free Trade Agreement January 1, 2004
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Source: Central Bank of Chile, in millions of U.S. Dollars
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Main Exports to the US (2008) Products
m. $
%
Copper and articles
2.781
37.50*
Salmon
792
10.1
Gold
427
5.5
Grapes Wood and articles of wood Wines
349
4.5
243
3.1
199
2.6
Iod
128
1.6
Blueberries
104
1.3
Molybdenum
96
1.2
Fresh Cherries
63
0.8
Avocados
61.2
0.8
Source : Central Bank of Chile * Share of total copper exports to the world: 55.9%
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Main Imports from the US (2008)
Products
m. $
%
Mineral Fuel, Oil, etc
3.673
33.6
Vehicles and tractors
545
5
Polyethylen
157
1.4
Wheat
150
1.4
Vehicles
97
0.9
Sodium Hydroxide (caustic soda)
80
0.7
28 Source : Central Bank of Chile
Trade facts • • •
2007 Chile with only 16 million inhabitants, imported more US goods than big countries like: Russia and Pakistan (150 million each) or Indonesia (240 million) Egypt and Turkey (more than 50 million each) Colombia (over 40 million) and Argentina (almost 40 million), etc. 10% of Chile’s trade with the U.S. goes through the Tri-State region: approx 1 billion. Several thousand jobs generated locally.
Conclusion: Free Trade has worked for Chile!!