Economy of Chile

Mother Earth Travel > Country Index > Chile Map Economy History

After a decade of highly impressive growth rates, Chile experienced a moderate recession in 1999 brought on by the global economic slowdown. The economy recovered with 5.4% growth in 2000, with Asian markets rebounding and copper prices edging up. GDP growth in 2001 slowed to 2.8% and is projected to be around 3.3% in 2002.

The government's limited role in the economy, Chile's openness to international trade and investment, and the high domestic savings and investment rates that propelled Chile's economy to average growth rates of 8% during the decade before the recession, are still in place. The 1973-90 military government sold many state-owned companies, and the three democratic governments since 1990 have continued privatization at a slower pace. Policy measures such as the privatization of the national pension system encourage domestic investment, contributing to an estimated total domestic savings rate of approximately 22% of GDP in 2000.

Unemployment peaked well above Chile's traditional 9%-11% range during the recession and is stubbornly remaining in the 8%-10% range well into the economic recovery. Despite recent labor troubles, wages have on average risen faster than inflation over the last several years as a result of higher productivity, boosting national living standards. The share of Chileans with incomes below the poverty line--defined as twice the cost of satisfying a person's minimal nutritional needs--fell from 46% of the population in 1987 to 21% in 2001.

Maintaining a moderate inflation level is a foremost Central Bank objective. December-to-December inflation stood at 4.7% in 1998, fell to only 2.3% during the 1999 recession, rose to 4.5% in 2000, and fell again to 2.6% in 2001. Most wage settlements and spending decisions are indexed, reducing inflation volatility. The establishment of a compulsory private sector pension system in 1981 was an important step toward increasing domestic savings and the pool of investment capital. Under this system, most regular workers pay 10% of their salaries into privately managed funds. This large capital pool has been supplemented by substantial foreign investment.

Total public and private investment in the Chilean economy has remained high despite current economic difficulties. The government recognizes the necessity of private investment to boost worker productivity. The government also is encouraging diversification, including such nontraditional exports as fruit, wine, and fish to reduce the relative importance of basic traditional exports such as copper, timber, and other natural resources.

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 Central Bank decided in May 1999 on the removal of the 1-year residency requirement on foreign capital entering Chile under Central Bank regulations, generally for portfolio investments. A modest capital control mechanism known as the "Encaje," which requires international investors to place a percentage of portfolio investment in noninterest-bearing accounts for up to 2 years, has been effectively suspended through reduction to zero of the applicable percentage; the mechanism could be resurrected depending on economic circumstances.

Total foreign direct investment flows in 2001 grew to $4.6 billion, up from $3.6 billion in 2000 but down from $9.2 billion in 1999. In 2000, Chile experienced an inflow of $.64 billion, largely the result of increased inward foreign investment and diminished levels of Chilean direct investment abroad ($3.8 billion).

Foreign Trade
Chile's economy is highly dependent on international trade. In 2001, exports decreased to $17.4 billion from $18.2 billion in 2000, and imports decreased to $15.9 billion from $16.7 billion the previous year. Exports accounted for about 25% of GDP. Chile has traditionally been dependent upon copper exports; the state-owned firm CODELCO is the world's largest copper-producing company. Foreign private investment has developed many new mines, and the private sector now produces more copper than CODELCO. Copper output continued to increase in 2001. Nontraditional exports have grown faster than those of copper and other minerals. In 1975, nonmineral exports made up just over 30% of total exports, whereas now they account for about 60%. The most important nonmineral exports are forestry and wood products, fresh fruit and processed food, fishmeal and seafood, and wine.

Chile's export markets are fairly balanced among Europe, Asia, Latin America, and North America. The U.S., the largest-single market, takes in 18% of Chile's exports. Latin America has been the fastest-growing export market in recent years. The government actively seeks to promote Chile's exports globally. Since 1991, Chile has signed free trade agreements with several countries, including Canada, Mexico, Venezuela, Colombia, and Ecuador. An association agreement with Mercosur--Argentina, Brazil, Paraguay, and Uruguay--went into effect in October 1996. Chile, a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. Chile hopes to conclude a free trade agreement with the European Union in 2002.

In keeping with its trade-oriented development strategy, Chile is currently in negotiations with the U.S. on a free trade agreement. Chile's 1996 free trade agreement with Canada was modeled largely on NAFTA in anticipation of an eventual trade pact with the United States; similarly, Chile broadened its bilateral free trade agreement with Mexico in August 1998. Chile has been a strong proponent of pressing ahead on negotiations for a Free Trade Area of the Americas (FTAA) agreement.

Imports were down in 2001, reflecting reduced consumer demand and deferred investment. Capital goods make up about 22% of total imports. The United States is Chile's largest-single supplier, supplying 22.4% of the country's imports in 2001, up from 18.5% in 2000. Chile unilaterally is lowering its across-the-board import tariff--for all countries with which it does not have a trade agreement--by a percentage point each year until it reaches 6% in 2003. Higher effective tariffs are charged only on imports of wheat, wheat flour, vegetable oils, and sugar as a result of a system of import price bands. The price bands are under challenge in the WTO.

Finance
Chile's financial sector has grown faster than other areas of the economy over the last few years; a banking law reform 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. Domestically, 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 been accompanied by increased use of traditional instruments such as loans and credit cards. Chile's private pension system, with assets worth roughly $36 billion at the end of September 2000, has provided an important source of investment capital for the stock market. Chile has maintained one of the best credit ratings (S+P A-) in Latin America despite the 1999 economic slump. In recent years, many Chilean companies have sought to raise capital abroad due to the relatively lower interest rates outside of Chile. There are three main ways Chilean firms raise funds abroad: bank loans, issuance of bonds, and the selling of stock on U.S. markets through American Depository Receipts (ADRs). Nearly all of the funds raised go to finance investment. The government is paying down its foreign debt. The combined public and private foreign debt was roughly 50% of GDP at the end of 2001, low by Latin American standards.
 

GDP: purchasing power parity - $153.1 billion (2000 est.)
GDP - real growth rate: -1% (1999 est.), 5.5% (2000 est.)
GDP - per capita: purchasing power parity - $12,400 (1999 est.), $10,100 (2000 est.)
GDP - composition by sector:
agriculture:  8%
industry:  38%
services:  54% (2000)
Population below poverty line: 22% (1998 est.)
Household income or consumption by percentage share:
lowest 10%: 1.2%
highest 10%: 41.3% (1998)
Inflation rate (consumer prices): 3.4% (1999 est.), 4.5% (2000 est.)
Labor force: 5.8 million (1999 est.)
Labor force - by occupation: agriculture 14%, industry 27%, services 59% (1997 est.)
Unemployment rate: 9% (1999), 9% (December 2000)
Budget:
revenues:  $16 billion
expenditures:  $17 billion (2000 est.)
Industries: copper, other minerals, foodstuffs, fish processing, iron and steel, wood and wood products, transport equipment, cement, textiles
Industrial production growth rate: -1.3% (1999 est.), 6% (2000 est.)
Electricity - production: 38.092 billion kWh (1999)
Electricity - production by source:
fossil fuel: 50%
hydro: 50%
nuclear: 0%
other: 0% (December 1999)
Electricity - consumption: 35.426 billion kWh (1999)
Electricity - exports: 0 kWh (1999)
Electricity - imports: 0 kWh (1999)
Agriculture - products: wheat, corn, grapes, beans, sugar beets, potatoes, fruit; beef, poultry, wool; fish; timber
Exports: $15.6 billion (f.o.b., 1999), $18 billion (f.o.b., 2000)
Exports - commodities: copper, fish, fruits, paper and pulp, chemicals
Exports - partners: EU 27%, US 16%, Japan 14%, Brazil 6%, Argentina 5% (1998)
Imports: $17 billion (f.o.b., 2000)
Imports - commodities: consumer goods, chemicals, motor vehicles, fuels, electrical machinery, heavy industrial machinery, food
Imports - partners: US 24%, EU 23%, Argentina 11%, Brazil 6%, Japan 6%, Mexico 5% (1998)
Debt - external: $39 billion (1999), $39 billion (2000)
Economic aid - recipient: ODA, $50.3 million (1996 est.), ODA, $40 million (2001 est.)
Currency: Chilean peso (CLP)

SOURCES: The World Factbook, U.S. Department of State

Mother Earth Travel > Country Index > Chile Map Economy History