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Chilean economy serves as a model for Latin America.

Chilean history is a study in highs and lows. From the time Ferdinand Magellan became the first European to sight Chilean shores in 1520, the country has undergone much upheaval. Diego de Almagro lead the first Spanish expedition to explore Chile in 1535 and, just five years later, Pedro de Valdivia conquered the country.

In 1647 and 1730, earthquakes destroyed much of the capital city of Santiago. Greater independence from the Viceroyalty of Peru came in 1759 with the advent of bourbon reforms and in 1810, Criollo leaders of Santiago declared independence from Spain. But Chilean independence would not come so easily, as Spanish troops from Peru reconquered the country in 1814. After four more years of battles, Chile finally won formal independence on April 5, 1818, following the defeat of the last large Spanish force.

The next 170 years saw more bloodshed, as Chile endured civil war, dictatorial rulers, and wars with neighboring countries. Despite all of its travails, the relatively small nation has endured and emerged in recent years as an economic model for other countries in South America.

Economic and political reform came to Chile in the early 1990s. With General Pinochet out of power and a democratically elected government in place, Chile has become known as one of the best-managed economies in Latin America, and one of the best in the world among newly industrialized countries. Switzerland's World Economic Forum ranked Chile the fifth most competitive newly industrialized country in the world, behind only Singapore, Hong Kong, Taiwan, and Malaysia.

Transformation to Market Economy

Since 1973, Chile's economy has been transformed from an autarkic, state-dominated system into a market economy in which the private sector reigns supreme, Banks, copper companies, and many factories were once nationalized and the government instituted price controls on many products. Today, the budget is in surplus and investment continues to pour in as exports pour out. Chileans have been known to boast that theirs is the most open economy in the Americas, with fewer non-tariff barriers than either Canada or the U.S.

Looking at some of the statistics, it's clear why Chile has become the most-talked-about and most-studied country in South America. Twenty years ago, exports comprised about 12 percent of Chile's Gross Domestic Product (GDP); that figure now stands at about 35 percent. Inflation, which hit an astronomical 505 percent in 1974, hovered around 9 percent last year. At just 4 percent, Chile's unemployment rate is so low that just about anyone who can work has a job. And the growth rate looks promising for the remainder of the century.

Marianne Rupas, scholar at the Center for Chilean Affairs and expert on the Chilean culture and economy, said, "Chile has struggled and overcome many obstacles to become the success it is today."

That success is expected to continue, as economic reform plans are maintained and even accelerated. The privatization of Codelco, Chile's largest copper company, has long been ruled out despite the privatization of other companies, which began eight years ago. Copper is an important natural resource for Chile and the government depends upon it for much of its revenue. There is much talk now of privatizing Codelco and forming joint ventures with private partners.


Copper is Chile's biggest export, comprising half of the country's total exports. Other chief exports include: other metals and minerals (7 percent), wood products (6.5 percent), fish and fishmeal (9 percent), and fruits (5 percent). In 1993, Chile was the third-largest supplier of wine to the U.S. after Italy and France. Chile's main imports include: petroleum, wheat, capital goods, spare parts, and raw materials.

In addition to its agricultural exports, Chile is one of the most highly industrialized countries in Latin America, with manufacturing accounting for nearly 21 percent of the GDP. Industrial exports totaled US$4 billion in 1992, surpassing copper exports for the first time.

"Chile has worked miracles to overcome its problems," said Rupas. "The economy and market have gone from one of the most closed in the world to one of the most open in a relatively short period of time."

The Pinochet Coup

One of the causes of Chile's dramatic economic policy changes is the repressive rule of General Pinochet. The coup of 1973 was viewed by many Chileans as necessary to rid the country of Marxism, avert class war, restore order, and salvage the economy. Pinochet's coup brought a sense of Nationalism to the country, as the military's primary task became an effort to defeat domestic enemies who had infiltrated the schools, churches, political parties, and the media. Military officers took control of most government positions at the national and local levels, while civilians filled prominent economic posts.

Thousands of civilians were murdered, jailed, tortured, brutalized, or exiled in the first four years of the dictatorship. By the mid-1970s, the dictatorship switched from destroying the old order to building a new one. Old economic policies that protected industrialists and organized workers were overturned and the government instituted a conversion to free-market economics in 1975.

After the free-market conversion, the administration began a program of economic liberalization and privatization, slashing tariffs and welfare programs. The economy grew during this period from 1976-1981, in what became known as "The Chilean Miracle."

From 1982 to 1990, Chile underwent five key changes that ultimately brought back democratic rule:

1. The economic collapse of 1982 provoked some adjustments to the neoliberal model and sparked widespread protests against the regime.

2. Although most of the regime's supporters in the business community and the armed forces held fast, the 1980s saw a weakening of their attachment to authoritarianism.

3. Civilian demonstrations against Pinochet began to spread. From organized labor to members of the middle class, to the urban poor, Chileans were emboldened.

4. The once-defunct political parties were resurrected.

5. General Pinochet became isolated as other South American countries along with the U.S. and Western Europe began pressuring Chile to institute democratic elections.

Ultimately, the Pinochet government lost power in 1990 and the country went democratic. One important legacy of the Pinochet years concerns the shift in Chile away from a state-controlled economy to a more market economy.

Banking and Credit

By the end of the Allende period in 1973, commercial banks in Chile served merely as cash vaults. Credit availability was low and lending patterns were distorted. But during 1975-1990, the financial sector experienced a boom. Banks now perform a variety of operations and the stock exchange is gaining in importance.

"Modernizing Chile's financial sector was no easy task," said Rupas. "Several important banks failed along the way due to a credit crisis in the early 1980s."

But by the late 1980s, the number of banks stabilized: 13 domestic and 22 foreign-owned. Today, their level of operation continues to rise, as Chile stands out as one of the strongest economies in Latin America. Political leaders continue to stress the importance of export-oriented, market-based policies.

Despite the progress and status of the Chilean economy, several areas of concern remain, including improving the environment and the infrastructure. But if the past is any indication, Chile has the capability of successfully addressing and resolving these and other future obstacles in an attempt to continue in its stature as Latin America's model to the world.

Kevin C. Naff is communications associate/editor, NACM.
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Author:Naff, Kevin C.
Publication:Business Credit
Date:Jun 1, 1995
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