The real deal. (Trade Talk).

Chilean President Ricardo Lagos is leading his country toward increased integration with the world's largest markets. Chile recently completed a free-trade agreement with the European Union and expects to soon finish a long-delayed deal with the United States. Lagos, who holds a doctorate in economics from Duke University in North Carolina, spoke with LATIN TRADE Correspondent Jonathon Franklin about the challenges of negotiating trade accords amid turbulent economic markets.

Why and when do you personally take part in trade negotiations?

Sixty percent of our GNP is represented by our exports and imports. Therefore, trade is essential for us. We have started negotiations with Europe, with the U.S. and some other countries. In some of those cases, when you're approaching the end of the negotiation, then it's a tough time. It's very obvious that the president ... is not going to follow the details of the negotiations, but, in some particular areas, it is essential to do that. It was very clear that if Chile was going to be linked to the fate of the Mercosur negotiation vis-a-vis Europe ... we wouldn't have had an agreement. I talked to some European leaders and explained why the Chilean case was a little bit different and, therefore, it was possible to have the negotiations with Chile and not with the others.

Many doubted that a trade deal with the United States would ever get done. What has been the biggest sticking point?

The major problem was that the U.S. was negotiating the Trade Preferences Act (TPA). Areas like labor and environment were essential for the TPA to be approved. Until then, it was very difficult for the U.S. to take a position vis-a-vis Chile. I guess that I will be able to answer this question after the next round of negotiations because it's the first time that we are going to have a negotiation following the TPA.

Did negotiating the European Union deal help Chile avoid mistakes in talks with the United States?

Yes and no. This is a very tricky question because we have, for instance, an agreement with Canada. To what extent do our American friends think that what we offered to Canada is the starting point? In the case of Europe, we have tremendous access to that market, and it seems to me that they were quite open to Chilean demands. But, as you know, our European friends work with quotas. In the case of the U.S., sometimes it is much more difficult to gain access to that market.

When Wall Street decides to shift its portfolio away from Latin America, why does Chile suffer along with the rest of the countries in Latin America?

It's unfair. I would like to think that the markets are going to be able to differentiate between countries. But if the markets say/Look, Latin America is in trouble, Let's get out of Latin America,' there is no questioning it. Ruling a country that is living in a global world means that you have to look after your citizens but also you have to watch what's going on abroad with country risk. It's a strange decision because you have a duty to the 15 million Chileans, but if you're going to do things in the right way, and [if] you are going to take a decision about interest rates or fiscal policy, somebody's going to give you a grade, not in your own country, but abroad. And the grade may have tremendous influence on your country. Therefore, you also have to get good grades abroad.

How will getting "good grades" and global financial gyrations affect your policies?

Everybody will say, 'Why don't you privatize Estate-run oil company] Enap?' And I say, 'Look, what am I going to sell? Are they going to pay me for the know-how of the professionals and engineers at Enap?" Enap used to produce almost 100% of all the oil that Chile needed. Not anymore. Now it produces only 5%. But its know-how has allowed it to do explorations in Egypt, to produce oil in Iran and to reach an agreement in Ecuador. Enap is expected to produce, when I leave government in 2006, about 30% of the country's oil needs. Of course, most of our oil will probably come from Argentina or Texas. But the oil that we produce either in Ecuador or in Egypt or in Iran will provide, how do you put it, a "cushion" for what's going on.

So ENAP is a long-term strategic resource?

Of course. That's what I think And that resource is not because we have oil. It is because we used to have oil and now we have the know-how. Do you know what Outokumpu is? Outokumpu is one of the major copper producers in the world. Outokumpu has quite a large investment in Chile and is one of the major firms in Finland. Does Finland have copper? No sir. Finland used to have it. And Outokumpu was formed when it had copper. Now Finland has the know-how and they produce copper everywhere. And, in addition, of course, Finland sells us capital goods for copper. You see? So, what used to be the raw material now has changed to know-how, and this is what is being done in Enap.

Is the global system adequate for today's financial markets?

Our financial institutions were established after Bretton Woods, after the Second World War. The World Bank was established in order to rebuild Europe. That is why the World Bank is called the bank of reconstruction and development; the reconstruction was for Europe. It was for countries like Chile that they added the word 'development.' But this was in the '40s and the '50s. The IMF was established to oversee exchange rates between the most-developed countries after the gold standard was dropped. What is the situation now? The world has changed. My question would be: Is it possible to live in a world where, in 1 998, you have the Russian crisis; in 1999, you have the Brazilian one; in the year 2000, you have Turkey; in 2001, you have Argentina?

And the United States...

And now you have the United States. Is it possible to live in a world where every year you have a crisis like that? To what extent will it be necessary to establish a financial architecture appropriate for what is going on in the 21st century when not billions but trillions of dollars move every day with the click of a computer key? That has nothing to do with the financial world of the '40s or the '50s in the 20th century. It's a new world, and now we are fighting against this new thing: terrorism. We have to do it with all of our strength. We have to say 'no' to terrorism. But whenever mankind has said no to something, then we have to say yes to something. The yes to something is: What kind of financial architecture are we going to build? Some people think that U.S. leaders--in responding to domestic [political] demands--will shape the new world.

Are IMF or World Bank remedies outdated, unfair, or wrong?

Well, there are some questions about accounting practices at the country level that are unfair. Another point is the Washington Consensus. The Washington Consensus stressed the need to have certain monetary or fiscal policies, free trade, low tariffs and low barriers. Fine. But in addition to that, you need to have social policies that are essential to diminish the differences in income and provide access to opportunities. We were able [in Chile] to reduce poverty from 40% to 20% in 10 years. Growth has meaning for many Chileans because now they have better schooling, better health, better housing and better access to a university education. Therefore, the question is, if we had had growth without social policies in order to improve these areas, what would have happened to Chilean society?

Can you give me an example?

We have invested a lot of money in the area of education during the last 12 years. We almost tripled the budget in education in real terms. Educar Chile is a (Web] portal for the educational community that was developed with the [public-private research institute] Fundacion Chile. The program is now being provided to several Latin American countries. It is an effort to produce software in developing countries for developing countries.

Where do you see Ricardo Lagos in 10 years?

Well, first I would like to be in good health, But, in addition to that, as former Colombian President Belisario Betancur once said, the best profession is that of a former president. The only problem with that profession is that in order to become a member of that profession, first you have to be president.