Countries in Latin America have been facing tough times recently: Venezuela’s economy has declined by 18% this year amid a failed strike aimed at toppling President Hugo Chavez. Bolivia, second only to Haiti as the region’s poorest country, recently edged closer to civil war. Argentina, often called Latin America’s Europe, became the butt of ridicule among international bankers, journalists and fellow Latin Americans as five presidents came and went over a particularly turbulent one-month period. Years after Peru claimed victory against Maoist-inspired terrorists, guerrilla activists still appear a latent threat.
Through it all, Chile has chugged along. At a time of global frailties, its economy is healthier today than it has been over the past five years. Chile’s stock market is up nearly 50% since the year’s start. Unemployment – perhaps the region’s gravest destabilizing threat – is falling, and the country’s currency has strengthened. In less than 10 years, poverty has been cut in half, according to state figures.
Although Chileans tossed out Pinochet in 1989 and has since elected three civilian leaders – aligned with the nation’s socialist party, incumbent Ricardo Lagos has been a stern Pinochet critic – the nation’s political and economic institutions have endured. The country of 15 million has stayed faithful to a course adopted 20 years ago – a path marked by clear-eyed industrial and regulatory policies designed by Pinochet’s regime after Chile underwent its own economic cataclysms.
What is behind Chile’s success and can it be sustained?
“Chile is the only country in the region that has maintained consistent policies over the last two decades,” says Fritz Du Bois, an economist with the Instituto Peruano de Economia in Lima. “Between 1983 and 1999, Chile averaged more than 6% growth a year. No other country in Latin America has done that. That’s the difference between poverty and wealth.” Even if Peru were to overnight enjoy an annual 6% growth spurt, it wouldn’t become as wealthy as its southern neighbor until the year 2035, Du Bois says.
Wharton management professor Gerard McDermott credits Chile’s blend of liberalization with a sturdy South Korean-style “state crafting” which tightened capital flows to help build up the country’s capital reserves. That, in turn, was complemented by aggressive banking regulations, which are strictly enforced. “The institutes have been educated,” McDermott says.
However people stand on the “love him or imprison him” polemic, Pinochet and his minions can be credited with constructing many of today’s political and economic pillars. (Pinochet’s reign, of course, will forever be tarnished by widespread human rights abuses. Between 4,000 and 10,000 people are believed to have disappeared or been killed during the general’s rule.)
Dictators rule as they please, and Pinochet’s dictatorship was no different. Under his order, administrators carried out quick and radical surgery on the economy. By 1975, two years after his overthrow of the communist-influenced President Salvador Allende, privatization of state assets was underway and key fiscal reforms were in the works – many of which today comprise the bedrock of Chile’s economic life.
Pensions, for example, were limited to local investments. “It forced domestic savings – and channeled these savings into investment,” McDermott says, adding that while rules on capital flows have since loosened up, the early restrictions removed volatility.
Chile was the region’s first to introduce a value-added tax, which helped ward off spiraling balance of payments and budget deficits as prices for copper started to tank, says Edgardo Barandiaran, a professor at Pontificia Universidad Catolica de Chile in Santiago.
During the 1982 debt crisis which swept Chile and other Latin American countries, Chile hunkered down and controlled public debt – whereas its neighbors historically didn’t, he adds. “The biggest difference between Chile and Argentina (in the public sector) is that Chile did the necessary adjustments to eliminate debt, whereas Argentina is still working on it,” Barandiaran says.
Because of constitutional and political differences – and, notably, Argentina’s historic tolerance for corruption – “Chile has been able to build more profound and permanent changes” than Argentina, he adds.
The billions from Chile’s privatization proceeds were plowed back into the country, notes Joaquin Vial, an economics professor at Chile’s Universidad Adolfo Ibanez. “The wealth of the government was not destroyed,” adds Vial. “There was a net increase in savings and investment. You didn’t see that in Argentina.”
Olivia Mitchell, executive director of Wharton’s Pension Research Council, says Chile’s pension structure has done a good job strengthening the financial system, which is essential for pricing risk between buyers and sellers of financial instruments. Without such reform, “participants cannot be sure of the long-term pension promise,” she says.
Strict banking regulations have also served Chilean society well, McDermott says. From Mexico to Argentina, for example, banks lure new customers with chances to win cars, trips or household goods in “libreton” lotteries. Read the small print in many such deals, however, and customers will learn there’s no deposit insurance on such bank accounts, he adds. “Chile doesn’t allow that. Chile has come up with a strong and sound banking regulatory system with lots of supervisory controls and strict rules on what banks can and cannot do.”
The iron-fisted Pinochet faced no disputatious lawmakers to question his authority and proposals – unlike Mexico’s President Vicente Fox, who grumbles that Mexico’s fractious Congress has scuttled his fiscal reform initiatives. Some who critique Chile’s progress like to argue that the country leaped ahead by sheer dint of a military dictatorship – and believe that such lasting change is impossible to accomplish in democracies.
But it doesn’t take a dictatorship to remake a country, others say. “Look at (former Argentine President Carlos) Menem and how much he did,” suggests Guillermo Mondino, an Argentine economist at the consultancy MacroVISION. The popularly-elected Menem, who served two terms, sold off Argentina’s oil, natural gas and telecom assets in a privatization burst. “A tolerance of democracy isn’t contradictory with making reforms.”
In Praise of the Avocado
Beyond big-policy matters at home, Chile won over markets abroad with an organized marketing strategy, McDermott says, noting that “Chile has a strong bureaucracy and export policy.”
McDermott pointed to the state marketing agency ProChile, which is tireless at drumming up happy-faced spin about the virtues of Chile’s products. ProChile gushes about the purity of its fruits and vegetables – “geographic barriers of the Atacama Desert, the Pacific Ocean and the Andes Mountains insulate Chile from pests and diseases” – and talks up its seafood, saying “clean, nutrient-rich waters and exceptional environmental conditions support a staggering variety of fish and seafood.” (A high percentage of Chile’s fish exports are raised on enclosed farms and fed manmade pellets.)
In fact, thanks to meeting strong sanitation requirements, Chile’s avocado growers enjoy year-round access to U.S. markets – something that eludes the U.S.’s next-door neighbor, Mexico.
“We are not doing anything new here,” says ProChile’s self-effacing Manuel Valencia Astorga, who likes to speak of a “special mystique” of professionalism among Chileans for setting and meeting sales targets. “We spend money intelligently on campaigns – and not from a Chilean perspective but by seeking the advice of distributors or importers in the U.S. or the E.U. We would never do a campaign from a Chilean point of view.”
Others chalk up the Chilean “mystique” to crisp management. “Chile’s management skills are very strong,” says Mondino, an Argentine. “There’s a higher respect for institutions than elsewhere in the region.” Mitchell suggests that a small country like Chile simplifies the demographic profile. “Chile’s fairly homogenous and well-educated. That may contribute to a higher level of financial literacy,” she says.
The Bilateral Trade Route
Unlike some of its Latin American brethren, Chile has taken a bi-lateral road when negotiating trade treaties, an approach that allows for virtually unlimited access to global markets.
While Argentina and Brazil deliberate over the fate of regional trading block Mercosur and ponder the best formula for trade pacts with the U.S. and the E.U., Chile is single-mindedly nailing down agreement after agreement. The last one was sealed this year with the U.S.
Others in the region have started to follow suit. “Peru is finally looking at going from multilateral trade agreements to bi-lateral ones – something Chile did 30 years ago,” Du Bois says. Colombia, too, is seeking a bi-lateral trade agreement with the U.S.
In addition, other Latin American countries have privatized their pension systems, a la Chilena. Mexico and Peru in the last decade privatized their pension systems using a Chilean-like model.
Chile has no lock in Latin America on a vibrant economy. Growth has also been strong in the small nations of Costa Rica and the Dominican Republic. But a single corporation – Intel – is key to Costa Rica’s economy, while remittances from Dominicans living in the U.S. and tourism are important revenue sources for the Dominican Republic – perhaps not the sturdiest of shoals for an economy’s long-term health.
Are there trade-offs to Chile’s successes?
Some Latin Americans wonder if Chileans haven’t become the region’s new Argentines, a people long viewed as being short on humility. It’s evident that Chile is a land of rules and law and order. Job bulletin boards at many grocery stores have strict rules on how customers must write up ads for such mundane things as dog-walking services, and subways list rules governing riding behavior. Chilean society can sometimes appear aloof or rigid to visitors, who are warmly welcomed elsewhere in Latin America.
“They’re obsessed with wealth and deal-making,” says Du Bois of his southern neighbors. Chileans “have developed an arrogance and think they are above the rest of Latin America.”
Nonetheless, Chile’s triumphs are a welcome contrast and serve as a beacon in a region noted by economists for its huge income disparities. Chileans may be a stolid people, in need of a lesson or three in party-throwing, but their economy remains the envy of their neighbors. Fiscal restraint and regulatory reforms, marketing smarts and poverty reduction would behoove the rest of Latin America. Says Du Bois: “There’s no reason Peruvians can’t still be as warm as they are – with a bit more wealth.”