Success of Chile in Developing More than Other Latin American Countries

Success of Chile in Developing More than Other Latin American

Countries

By Vardges Ejuryan

Brief History

• Prior to the Spanish arrival, Chile was ruled by Incans and native Indians.

• Declared independent in 1810, won in 1818.

Location

• West of Bolivia • West of Argentina • South of Peru• Bordering on Pacific

Ocean• Chile is a Pac Rim

country.• Capital is Santiago

Specific Facts

• Population of over 16 million• Spanish is the primary spoken language• GDP is 49% industry and 44% services• Labor force is 7 million, primarily in services• With 8.3% unemployment

Significant Factors

• 18.2% of the population is below the poverty line• Inflation rate (CPI) is 2.1%• 21% of total GDP is accounted for in investment• 10.5 million out of 16 million have cell phones• 6.7 million out of 16 million are online

Political Overview of 1970ies

• In 1970, Salvador Allende (Marxist) is elected• Nixon orders CIA to intervene • Chilean military officers plan a coup, Commander-in-

chief General Rene Scheider disagrees and gets assassinated

• 1973, Political deadlock, street demonstrations and work stoppage.

• 1/3 of US embassy on CIA payroll• August 23, Allende promotes Pinochet to Commander-

in-Chief• On September 11 Pinochet performs the coup and

seizes control of government until 1990

Augusto Pinochet

Free Market Reforms

• From 1973 to 1982 (international debt crisis)• Implemented economic policies to turn Chile

from an isolationist to liberalized economy• Inflation was greatly reduced • Government deficit was eliminated• Opened economy to foreign investment

4th Time is the Charm

• This had been attempted before, three times and failed between 1950-1970

• Primary reason for failure was due to highly overvalued real exchange rate

• Secondary reason for failure was due to high restrictions on quantity

This time…

• Chile used an open trade system• Low import tariffs• Low exchange rate controls• Low trade controls • Low restrictions on capital flight

Land Market Reforms

• While under Marxist rule, 50% of total land was public

• Privatization began in 1974 and encouraged small farms to be managed by owners

• 1978 ban on corporate ownership of land lifted• 28% of land was returned to prior owners• The remainder was auctioned

Other Reforms

• Financial institution investment and development• Investment in education, following French model• Inflation control policy• Investment in macroeconomic institutions

Fiscal Discipline

• Balanced budget

• Negate deficits of a time period with surpluses of other periods

• Countercyclical

Debt Crisis

• 1982 the Debt Crisis hit Chile • Unemployment above 20%• Most banks went bankrupt• Chile in severe distress• 1983 financial sector of market was nationalized• Subsidizing and rescue of banks caused Central

Bank deficits, leading to increased inflation

Response to Crisis

• 1985 Pinochet went with economists whom advocated free markets and macroeconomic disciplines

• Adopted new policies• -reestablish growth• -reduce debt• -increase financial and manufacturing sectors

Relief

• With these new policies, capital flight controls, the help of the International Monetary Fund (IMF), and the World Bank Chile was able to cope with and end the Debt Crisis.

Importance of Capital Flight

Capital Flight During Debt Crisis

Reasons for Success of Chile

• Fiscal discipline

• Inflation control

• Strong financial and capital markets

• Excellent trade-export system

• Investment in institutions and education

Questions and Comments

FIN!

Thank you for your time!