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Press Mentions

July 27, 2004

Buoyant Chile escapes bloody past to reinvent the Latin Way

By Hannah Baldock

WHEN Chilean President Ricardo Lagos met President Bush in Washington on Monday, after celebrating an upswing in bilateral trade following last September's free trade agreement, Bush highlighted Chile's "very important role in our neighbourhood".
He had in mind the reconstruction of Haiti and advocacy of a prompt referendum in Venezuela over the divisive rule of President Hugo Chavez. He was also marking Chile's economic success, which stands in stark contrast to many of its neighbours.
According to figures from Cepal (the United Nations' Economic Commission for Latin America and the Caribbean), poverty in Latin America has increased since 1997 and 227m Latin Americans are poor.
The deep social divide with the rich of Latin America, combined with weak institutions, continues to threaten democracy and regional stability. Presidents have been ousted in Ecuador in 2000, Argentina in 2001, Bolivia in 2003 and Haiti in 2004.
Because the world economy is in recession, emerging markets are out of fashion with investors.
The most optimistic expectation in the region calls for 4% growth for the Mercosur bloc (Brazil, Argentina, Uruguay, Paraguay) plus Chile, short of the 7% growth rates to achieve effective goals of poverty reduction.
Chile remains a beacon in this bleak panorama. The sliver of a country squeezed down the continent's southern Pacific coast has grown an average 6% a year for 20 years. In the same period, Chile has reduced its poverty levels from 48% to 20%, and doubled per capita income.
In January, Standard & Poor's raised Chile's investment grade from A- to A, four levels above Mexico, the only other investment-grade country in the region.Chile has signed free trade agreements with the EU, the US and South Korea, throwing opening the borders of the country of 17m to a market of 900m in 174 countries.
More than 3,000 Chilean exporting companies have diversified their products to fit niche markets abroad and exports now constitute 35% of Chile's gross domestic product.
A recent conference organised by free markets think-tank Cadal (Centre for the Openness and Development of Latin America) in the Argentine capital Buenos Aires, was titled: "Lessons from the Chilean Experience for Argentina and Latin America."
Speakers, including former central bankers and current politicians, told how the violent swings in the past 30 years had helped to forge a new consensus.
The trauma of the disastrous socialist experiment of the 1970s, followed by the bloody 18-year dictatorship, caused traditionally conservative Chilean society to say "never again" to either and establish a consensus on the value of stability and the full incorporation of Chile into globalised trade.
The controversial regime of General Augusto Pinochet sold state-owned companies, set up a private pension fund system, dismantled restrictions on foreign investment, reduced duties on trade, and diversified an economy which was, until 1975, reliant on copper.
Chile suffered a similarly severe banking crisis in 1982 to the one Argentina suffered in 2001, as the combination of a fixed exchange rate, a currency overvaluation, a fiscal deficit due to pension fund reform, and dependency of the financial system on capital inflows caused a third of its banks to collapse and unemployment to rocket to 27%.
To overcome the crisis, Chile controlled the exchange rate from 1983 within a crawling band, introduced inflation targeting, kept moderate interest rates and retained a reserve requirement on short-term capital inflows until 1998. Chile reduced inflation from 27.3% in 1990 to 1.1% in 2004.
The Chilean government has signed 20 free trade agreements so that the effective average external trade tariff is now 2.6%, forcing local businesses to compete with foreign firms.
The Chilean government has also conducted trade missions to investigate niches in international markets and promote the country as a brand.
Speakers at the conference in Buenos Aires stressed that the rule of law underpins Chile's successful market economy - a recent transparency ranking by the World Bank puts it on a par with Spain.
Chile has established a stable two-party structure, between the ruling Concertacion, the centre-left political alliance created in 1989 to oppose Pinochet, and the right-wing Renovacion Nacional and UDI (Democratic Independent Union).
"The destructive ideological oppositions of former times have given way to a sober technocratism" wrote Mauricio Rojas, a Chilean-born economic historian.
This was demonstrated in January 2003 when the two poles reacted to a political corruption crisis by immediately agreeing on transparency legislation.
Chile's model is far from perfect - 20% still live in poverty, one of the most unequal income distributions in Latin America (on a par with Brazil and Honduras) - and the public education system is in need of an overhaul.
However, its long-term strategy of trade integration with the world has made it the only Latin American country to achieve steady and sustained growth and to strengthen its institutions.
Ricardo Lopez Murphy, leader of the centre-right political movement Recrear and 2003 presidential candidate in Argentina, a country in its second year adrift from the world financial system after the biggest debt default in history, said: "Chile has pursued the right path with seriousness, persistence, political consistency and concertedness. Chile has also integrated itself with global rules and standards, and this respect for the rules of the game has civilised it.
"Chile's reputation is perhaps the first and best indicator of the improvements is has made in living standards. The day we understand that, we in Argentina will begin to recover".