Leavenworth-Chile

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 (%)

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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

¾

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.

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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!!