CHILE: THE LATIN AMERICAN TIGER?

GROUP – 7SHANTANU KUMAR – DM14144SINDHUJA DHARANI – DM14147SHIVEN SALUJA – DM14248TULSI CHOUDHARY – DM14256VIJAY KRISHNAN A – DM14257RAMYAA RAMESH – DM14266

ECONOMIC HISTORY

Salvador Allende4 November 1970 – 11 September 1973

Augusto Pinochet17 December 1974 – 11 March 1990

Post PinochetThe 1990s

Chile: During Allende

• Imposed Price Controls• Nationalized many sectors of

economy• Tightened Exchange controls• Result:

– 1973 Inflation: 473%– 1973 Public Sector Deficit – 25% of

GDP– 1973 Currency reserves Depleted

Chile: Pinochet Era

• Stabilization Policies– Balance federal budget, reduce inflation, stabilize

currency– Monetary policy tightened– Result: Inflation in triple digits, wage controls imposed– Exchange rate: ₱ 39 to $ 1 ; fixed (1978)

• Structural Reforms– Tariffs Average: 100%, Reduced gradually– Introduced VAT, liberalized domestic capital

• Social Policies– 1979: revised labor laws– Privatized social security and health

1982 Crisis

• 1982 – Mexico suspended interest payments on $80 billion, leading to capital flight from Chile– ₱ was devalued– GDP fell by 14%– Inflation doubled to 21%– Unemployment jumped to 22%

• Counter measures:– VAT increased to 20%– Import tariffs increased to 35% (from 10%)

ROSTOW’S ANALYSIS

Chile

TIGER GROWTH

Chile in 1997

1 Coping with Inflation 3% per year, Independent Central Bank

2 Stimulating Capital Investment Savings – 26% of GDP used as investment

3 Managing Foreign Exchange Reserves

Crawled Peg (0.45$, 0.3DM, 0.25¥) , $14,833 million

4 Managing Fiscal Policy Resource Allocation: Well doneIncome Distribution: Exhibit 8

5 Dealing with Unemployment 6.4 %

6 Coping with external shocks Came back strongly from 1982 crisis

Ideal Situation to think of Trade Policies

Chile’s Dilemma

• Who to join?1. NAFTA2. Mercosur3. No one (Continue bilateral PTA)

PORTER’S DIAMOND MODEL

FACTOR CONDITIONS

Factors Applicable

Skilled Labor

Infrastructure Needs Improvement

Arable Land Cannot be created

Natural Resources

Capital

Graduate Engineers & Scientists Needs to be grown

1. Very Abundant Natural Resource is an advantage2. Capital is high due to high savings through pension plans3. Skilled labor is high – everyone have high school education

OTHER ATTRIBUTES

DEMAND CONDITIONS• Home demand: Mix

and Character not matching mining industry, services match (33% of GDP)

RELATED AND SUPPORTING INDUSTRIES• Mining industry can be

supported by heavy machinery industry

• Tourism can be supported by retailing, wine industry

• (Question: Can Wine industry grow, given less arable land?)

OTHER ATTRIBUTES (contd.)

FIRM STRATEGY , STRUCTURE & RIVALRY

• Variety of firms across industries: Mining, tourism, salmon farming, methanol production – promotes competitiveness

• Sustainable commitment?

GOVERNMENT

• Regulation of Home demand – Through tariffs

• Improving Factor – Invest in education?

• Purchases – Stimulate related & supporting industries

• Firm strategy – Anti trust policy?

CONCLUSION OF DIAMOND MODEL ANALYSIS

• Chile has 2 favorable attributes – Factor conditions & Firm Strategy and Structure

• Competitive advantage based on these two attributes is possible, but not sustainable (Resource driven economy)

DECISION ANALYSIS

• Joining NAFTA– May lead to increase in trade of mining industries– May have cost advantage– Not sustainable (After Copper, What?)

• Joining Mercosur– Existing Trade tariffs become obsolete– Trade with other countries may get affected– Will lead to seclusion

• Bilateral Trade Agreements– Safe option– Good for the short run

RECOMMENDATIONS

1. Improve Demand Conditions in domestic market2. Improve attributes of related and supporting

industries3. Improve Education factor, promote more research

in technology which will lead to sustainable development

4. Government should facilitate the above attributesUpon the implementation of the above mentioned recommendations, Chile can think about joining NAFTA or Mercosur

REFERENCES

1. Porter, Michael E. (1990). Determinants of National Competitive Advantage. In: Porter, Michael E The Competitive Advantage of Nations. New York: The Free Press. p69-130

2. Kotler, Philip ,Jatusripitak,Somkid , Maesincee, Suvit. (1997). Developing the Nation's Macroeconomic Policies. In: Kotler, Philip The Marketing of Nations. New York: The Free Press. p259-278.

APPENDIX –A:VALUE CHAIN ANALYSIS

Source: Competitive Advantage of Nations, Michael E. Porter