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Chile’s economic success was no accident

The World Bank and IMF believe that Chile’s economic success is, in large part, due to the neo-liberal, export-oriented policies adopted by the military government back in 1973 and pursued to the present. These are policies based on the underlying principle of free trade and comparative advantage, which underpin the rationale of the GATT and the international trading system.

CHILE’S  ECONOMIC MIRACLE 

For the European visitor, the area around Chile’s capital city is reminiscent of the southern Mediterranean, with similar vegetation and climate. In late summer, bougainvillea scrambles over whitewashed houses, while sturdy oleander bushes, resplendent with pink or white flowers, line the straight, paved highways. Santiago itself is an elegant city, its center a mix of graceful old Spanish-style colonial buildings and smart new shopping malls, complete with coffee shops and fountains. There are wide, tree-lined streets and well-tended parks, chic restaurants, and high-quality clothes shops, museums, theatres, and art galleries. The streets bustle with activity, giving the appearance and feel of a modern, dynamic, and cultured city. It could just as well be Paris, Madrid, or New York. From here Chile’s economic success is evident.

Until 1973 Chile, like many other Latin American countries, had pursued a path of economic development which attempted to decrease the economy’s dependence on the export of a few primary commodities. In Chile these were copper and nitrates. Influenced by the ideas of Raul Prebisch and others at the Economic Commission for Latin America (ECLA), governments in many Latin American countries believed that the only way that they could escape from the periphery of the world economy as suppliers of food and raw materials was through a strategy of industrialisation.

They did this by developing local industries to produce the many manufactured consumer goods – clothes, shoes, and processed foods as well as durables like electrical equipment – which had always been imported. Such a policy affected trade, because the government gave less support to the traditional export sector, and instead invested in the new import-substituting industries. It also imposed taxes on imported consumer goods, to discourage people from buying foreign goods in preference to locally produced ones, effectively protecting the new industries.

The World Bank and the IMF have been critical of such populist policies for good reason. They argue that countries which have adopted a protectionist trade policy in order to promote industrialisation through import-substitution have industrialised less quickly and have a higher rate of poverty than those countries which have adopted an outward-oriented or free-trade strategy.

The reasons given for this are that a protectionist strategy promotes the inefficient allocation of resources because countries end up producing goods which they could import more cheaply.

In addition, such a strategy requires a costly administrative system to enforce taxes on trade and other trade barriers, and this system often becomes corrupt as we have seen in other South American economies.

The Bank also argued that the evidence is that protected industries are less efficient, because they are not exposed to the discipline of international competition, and they show little interest in adopting new technologies.

” Protectionism also prevents an economy from diversifying along lines determined by its ‘comparative advantage’ in the world economy.

Free-market ideology guided the development of economic policy in Chile after the coup in 1973 resulting in the success we see today.

Trade barriers were dismantled, and the exchange rate devalued, in an effort to shift the economy from protectionism to an outward-oriented strategy. Markets were ‘liberalised’, and government price controls and subsidies removed.

This provided new jobs and brought a lasting dynamism to the economy. The country’s export base had changed. Its dependence on copper, which in 1973 accounted for 82 percent of export earnings, had declined to 60 percent in 2017 (The state-owned firm CODELCO is the world’s largest copper producing company, with recorded copper reserves of 200 years). Chile controls 33 percent of the global copper market.

Three new export industries had also emerged – fishing, fruit, and forestry (14 percent) – and were providing Chile with 30 percent of its foreign-exchange earnings.

There has also been an impressive growth in manufactured exports linked to these sectors, particularly in paper, wood, cellulose, and fishmeal.

The success of Chile’s export policy is clear. While exports in Chile have displayed an upward trend, as the new export industries have started to contribute significantly to export earnings.

The greatest success story among the new export industries has been the fruit industry. The central valleys around Santiago are almost entirely devoted to fruit production. The Mediterranean-type climate and easy access to the ports are natural advantages favoring fruit production, but the availability of cheap labor has been crucially important too.

Apples and grapes are the two largest exports, but plums, apricots, peaches, lemons, oranges, avocados, pears, and kiwi fruit are also grown. The highway that cuts through the middle of Chile acts as the industry’s central nervous system, along which the boxed-up fruit is transported for export. Orchards and vineyards fan out from it, interspersed with huge packing houses, many of them foreign-owned, with the big US companies, United Fruit and Dole, very much in evidence.

Production is increasing each year, as newly planted areas become productive.

There is enormous potential for continued increases: a further 100’s of thousands of hectares of land that could be allocated to fruit farming. The forestry industry has also thrived. Chile’s extensive forest reserves are among the most important in Latin America. The country has 7.6 million hectares of natural forest, including larch, native pine, soapwood, and tamarugo.

Following a change in the law designed to encourage tree planting, Chile now has over 13.8 million hectares of forest; 1.4 million hectares of which is Native protected forest.  The largest percentage of planted forest is radiata pine followed by eucalyptus.

Chile boasts a considerable comparative advantage in its forestry industry because its climatic and soil conditions yield high growth rates. Combined with low labor costs, this makes Chile one of the world’s lowest-cost timber producers and means that it is poised to become one of the world’s top exporters of forestry products.

Before 1973 the forestry industry was largely state-owned and geared principally around meeting the needs of the national market. Since then it has been privatised. Foreign investment has been successfully encouraged, and the export of forestry products promoted. In terms of value, only about 30 percent of exports take the form of logs or sawn wood. Nearly half comes from cellulose. There is also expansion in the export of forestry products with a higher value-added content, such as newsprint and wood panels.

A similar policy prescription has produced comparable results in Chile’s fishing industry. Once again, with 6,435 km of coastline at its disposal, Chile has a considerable comparative advantage in this industry.

Today Chile is the world’s largest exporter of fishmeal (which represents about two-thirds of total fisheries output), ranks third among salmon exporters, is the sixth-largest producer of seaweed, and accounted for 6 percent of the world’s fish catch.

Revenues from sea products have soared, making it the country’s third-largest export earner after copper and agriculture.”China, the United States, and Japan are Chile’s most important trading partners.

For more detail read below.

Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and investment tours.

www.gatewaytosouthamerica.com

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Geoffrey McRae

About Geoffrey McRae

Geoffrey McRae is the founder of GTSA - Marketing. He is a New Zealander with a strong Agro-business and Real Estate background spanning over 30 years both in his own country and South America. I hope you enjoy reading our news site. Please share it on your social media below.

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