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Backgrounds: Chile Economy
After a decade of impressive growth rates, Chile experienced a moderate recession in 1999 brought on by the global economic slowdown. The economy began to recover in 2000 with 5.4% growth, but the rate of growth slowed to 3.0% in 2001 and 1.9% in 2002. Chile's GDP is expected to grow 3%-4% in 2003.
Chile has pursued generally sound economic policies for nearly three decades. The 1973-90 military government sold many state-owned companies, and the three democratic governments since 1990 have continued privatization at a slower pace. The government's limited role in the economy is mostly limited to regulation, although the state continues to operate copper giant Codelco and a few other enterprises. Chile is strongly committed to free trade and has welcomed large amounts of foreign investment. High domestic savings and investment rates also helped propel Chile's economy to average growth rates of 8% during the 1990s. The privatized national pension system has encouraged domestic investment and contributed to an estimated total domestic savings rate of approximately 20.7% of GDP in 2002.
Unemployment has hovered in the 8%-10% range in recent years, well above the 5%-6% average for the 1990s. Wages have risen faster than inflation 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. Chile's independent Central Bank pursues a policy of maintaining inflation between 2% and 4%. Inflation has not exceeded 5% since 1998. Chile registered an inflation rate of 2.8% in 2002 and is expected to see a 3% increase in 2003. Most wage settlements and spending decisions are indexed, reducing inflation's volatility. Under the compulsory private pension system, most regular workers pay 10% of their salaries into privately managed funds.
Both foreign and domestic investment in Chile have declined since the boom years of the 1990s. Total foreign direct investment flows in 2002 fell to $1.6 billion, down from $4.6 billion in 2001, $3.6 billion in 2000 and $9.2 billion in 1999. Sluggish global economic growth and volatility in other Latin American markets have reduced investment flows to Chile, although the Chilean economy has avoided crisis. The Chilean Government committed in early 2002 to undertake a series of microeconomic reforms designed to create new incentives for private investment. The government also has encouraged the use of Chile as an "investment platform" for multinational corporations planning to invest in the region.
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 lifted in May 1999 a 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 required international investors to place a percentage of portfolio investment in non-interest-bearing accounts for up to 2 years, also has been effectively suspended through reduction to zero of the applicable percentage; the mechanism could be resurrected depending on economic circumstances.
The U.S.-Chile Free Trade Agreement (FTA) imposes some limits on this faculty and offers a number of other investor protections.
Chilean imports fell 3.5% in 2002, to $15.9 billion, reflecting reduced consumer demand and deferred investment. Capital goods made up about 22% of total imports. The United States provided 16 % of Chilean imports in 2002. U.S market share was down from nearly 20% in 2000. As a bloc, the EU in 2002 supplied 19% of Chile's imports, while Argentina supplied a similar amount. Chile unilaterally lowered its across-the-board import tariff--for all countries with which it does not have a trade agreement--to 6% in early 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 were ruled inconsistent with Chile's WTO obligations in 2002 and the government has introduced legislation to modify them. Chile will have to phase out the price bands within 12 years under the terms of the U.S.-Chile FTA.
Successive Chilean governments have actively pursued liberalizing trade agreements. During the 1990's, Chile signed FTA's with Canada, Mexico, and Central America. Chile also concluded preferential trade agreements with 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. Continuing its export-oriented development strategy, Chile completed landmark free trade agreements in 2002 with the European Union and South Korea. In December 2002, after two years of talks, the United States and Chile concluded negotiations on an ambitious FTA and signed the agreement in June 2003. The agreement will lead to completely duty free bilateral trade within 12 years. The U.S.-Chile FTA entered into force January 1, 2004 following approval by the U.S and Chilean congresses. Chile has been a strong proponent of pressing ahead on negotiations for a Free Trade Area of the Americas (FTAA).
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