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Chile’s economic recovery
Because Chile’s citizens were accustomed to a growth in the gross domestic product of more than 7 percent, the inadvertent contraction in growth during 1998 and 1999 (3.4 percent and 1.1, respectively) as well as the significant increase in unemployment, certainly took everyone by surprise. Practically all sectors of the economy were affected, except for mining, which grew 16 percent more in 1999 than in 1998. The most beaten sector was construction, with a total GDP contraction of 8.5 percent in 1999. Overall, at the end of 1999, all sectors were showing signs of improvement.
Because of the difficulties presented during the recession and the significant decline in import spending during 1999, Chile’s external accounts were improved, causing a trade surplus of $400 million. According to Chile’s Central Bank, this explains the reduction in the current account deficit from about 5.5 percent of GDP ($4.1 billion) during 1998 to 1 percent of GDP ($800 million) in 1999. The bank forecasts the deficit to be nearly 2 percent of the GDP for this year, as a result of increasing exportations. During 1999, exports increased to $15.62 billion from $14.83 billion in 1998. They are expected to reach $17.5 billion at the end of this year. President Ricardo Lagos proposed an annual 9 percent growth in exports to achieve $28 billion by 2006.
Inflation remained low during 1999 (2.3 percent), but the Central Bank, whose target inflation rate is 3.5 percent, expects it to rise up to 4 percent in 2000, as a result of the recovery process fluctuations in commodity prices.
According to Banco de Chile’s economic review, Business Pulse, “the start-up of the Chilean economic recovery seems to be on firm footing because its solid fundamentals did not waiver during the crisis. The keeping in place of an expansive monetary policy since the third quarter of 1999, a free-floating peso and the improved performance of the world economy imply that Chile could once again see GDP growth rates above 5.5 percent in 2000.”
During the first couple of months of its inauguration, the government has focused its attention on recuperating the country’s accustomed growth rate as well as a balanced budget. Lagos has promised an average annual economic growth between 6 percent and 7 percent in order to generate more employment, considering the high unemployment rate reached during 1998 and 1999 (7.2 percent and 9.7 percent, respectively). To achieve this, Lagos has emphasized the need to fully incorporate Chile into the new economy.
In light of this, Jose de Gregorio, minister of Economy, Energy and Mining, explained that “the general goal of this government is to increase growth, maintain an open market economy -— highly competitive and with competition— and integrate everyone to this process. We want growth to be accompanied by innovative initiatives, but for this we need to generate the conditions.”
Chile is known for having socioeconomic stability, non-discriminating foreign investment policies, one of the strongest standings of rule of law (Don’t try bribing anyone!), and transparent regulatory systems. In fact, Transparency International’s 1999 Corruption Perceptions Index ranked Chile in the 19th place, one place after the United States. Furthermore, in recent country risk ratings, the Economist Intelligence Unit classified Chile as the least risky country in Latin America.
“However,” added de Gregorio, “in order to advance in the development of the new economy, modernization is required. Our regulatory systems have to be adapted to this, particularly in two areas. First, we must modernize sectorial regulations to facilitate the incorporation of new technology. Second, the country needs a profound modernization in establishing the promotion of competition and anti-monopoly practices.”
The other challenge for developing the new economy has to do with fomenting the availability of venture capital funds, which the government is undertaking, conforming to its financial platform and its commitment to reinforce the investment panorama. For example, Finance Minister Nicolas Eyzaguirre recently announced the elimination of the policy that required foreign investors’ capital to prevail in the country for a minimum one-year period. The private sector considered this a positive sign and awaits more flexibility in economic and investing policies.
According to Mario Agliati, vice president of the National Chamber of Commerce, “In meetings with government officials, including President Lagos, we have found a good disposition to continue strengthening the successful economic politics that Chile has implemented as well as correcting errors. The conditions for Chile to recover its growth and dynamism are in order…the government has shown openness to the world market and there is a positive international scene. We have a healthy economy and the macroeconomics figures are good. What is left is that these projections become facts.”
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Table of Contents New president focuses on future while reconciling the past |
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After struggling with the Asian recession, Chile is beginning to see the rays shining forth from the long-awaited recovery of its social market economy. For some, it has been slower than expected, for others it’s on track. Thus, the country is experiencing a sigh of relief.