HBS Case Study on Chile

1. Case Study
Chile : The Latin American Tiger?
Group 1

2. "Chile has moved farther, faster than any other nation in
South America toward real free-market reform. The payoff is evident
to all: seven straight years of economic growth. You deserve your
reputation as an economic model for other countries in the region
and in the world. Your commitment to market based solutions
inspires the hemisphere."
-President George Bush in Chile, 1990

3. Chile's Profile
 Chile was a mineral rich, medium
income country.
 Chile was located along the western
seaboard of South America.
 Chile had the world's largest reserves
of copper (about one-fifth of the world
total) and the second largest reserves
of lithium. It also had significant
reserves of other minerals such as iron
ore, coal, gold, and silver.

4.  Historical Roots
» Chile became a parliamentary democracy in 1891.
» Chile seized several mineral-rich provinces in the north,
increasing the size of the country by more than one third and
cutting off Bolivia's access to the sea. Chile and Peru
continued to argue about the ownership of these provinces
into the 1990s.
Chile's Profile

5. Chile's Profile
 The Chilean People
» Chile’s population in 1996 was 14.3 million
» Population growth in Chile slowed from an average of 2.1 %
per year in 1960-70 to. 1.6% in 1982-92.
 Social Measures
» Health standards in Chile were among the highest in Latin
America.
» Chilean education standards compared well with other
countries in Latin America, but were below those in
developed countries.

6. Economic History
Salvador Allende
4 Nov 1970 – 11 Sep 1973
Augusto Pinochet
17 Dec 1974 – 11 Mar 1990
Post Pinochet
The 1990s

7. Chile Before Pinochet
 Chile began to provide social services in the early 1920's.
 A coalition of four groups- Socialists, Communists,
Radicals, and Christian Democrats-won a plurality in the
1970 presidential election.
 Allende's program
» Pacific transition to socialism
» Imposed price control
» Nationalized many sector of economy
» Tightened exchange controls
Result :
- Inflation 473%
- Public sector deficit 25% of GDP
- Currency reserves depleted

8. Initial Reforms: 1973-1982
The economic reforms can be divided into 3
categories :
1. Stabilization Policies
2. Structural Reforms
3. Social Policies

9. Initial Reforms: 1973-1982
1. Stabilization Policies
» Balance federal budget, reduce inflation, stabilize currency
» Monetary policy tightened
» Result : Inflation in triple digits, wage controls imposed
» Fixed exchange rate : 39 pesos to $1
2. Structural Reforms
» Tariffs Average : 100%, Reduced gradually
» Introduced VAT, liberalized domestic capital

10. Initial Reforms: 1973-1982
3. Social Policies
» 1979 : revised labor laws
» Privatized social security and health
Initial Effects of Reform
The economy was much stronger in the late 1970's
The large economic groups used their banking subsidiaries to borrow
dollars cheaply in the Euromarkets and lend to other group members
in pesos.

11. The 1982 Crisis
• Mexico suspended interest payments
on $80 billion in foreign bank loans,
leading to capital flight from Chile.
• The Chilean government
 Peso 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%)

12. Fallout from the 1982 Crisis
Promoting foreign direct
investment,
Encouraging exports through
management of the exchange rate.
Controlling short-term capital
flows.
1
The government employed two tools to manage trade :
1). tariffs
2).the exchange rate.
2
3

13. Chile after Pinochet
Group 1
The government was aimed at a
gradual reduction in inflation to 3%
per year; and the nominal exchange
rate continued its gradual decline.
Two legislative changes :
1). A tax package designed to fund new social program.
2). A reform of Pinochet’s labor law.

14. Chile in the late-1990s
•The mandatory pension program
appeared to have contributed to
Chile's high savings rate-26% of
GDP, the highest in Latin America.
•Chile attracted growing levels of
foreign direct investment.
•The labor law allowed collective bargaining by
unions at individual companies, but not across
entire industries.

15. Chile's Choice
MERCOSUR
NAFTA1
2

16. Chile's Choice : NAFTA
 Joining NAFTA
 One strong point was dispute
resolution.
 NAFTA also offered a much larger
market than Mercosur.
 May lead to increase in trade of
mining industries.
 May have cost advantage.
 NAFTA did not limit Chile's
sovereignty regarding trade
with non-member countries.

17. Chile's Choice : NAFTA
 Critics of NAFTA made three arguments.
 1). They feared the disparity in bargaining power, both
because of the difference in size between Chile and the
other members.
 2). The environmentalists claimed that the agreement
would lock Chile into an unsustainable development
strategy.
 3). There is no way we can fill a market as large as North
America.

18. Chile's Choice : Mercosur
 The Southern Common Market.
 A common market that would allow
for the free movement of goods and
services among its four member
countries.
 Mercosur members applied a
common external tariff (CET) to
imports from countries outside the
agreement.
 Chile sign an association agreement
with Mercosur in June 1996.

19. Chile's Choice : Mercosur
Those who advocated Mercosur membership over NAFTA
made several arguments.
 1). Mercosur was nearby, increases in trade were expected to
be broad bases.
 2). As a relatively rich country in a medium-income trading
block.
 3). Financial services, retailing, and infrastructure industries
were expected to benefit most from integration with Mercosur.
 4). Chile would have more negotiating leverage with Mercosur
countries than with NAFTA.
 5). The rules of origin and other border controls were scheduled
to be phased out.

20. Chile's Next Step
•Chile’s trade policy was an important part of its
development strategy.
•The final option :
 Bilateral Free Trade Agreements.
 Uruguay Round.

21. รายชื่อกลุ่ม 1
1. น.ส. พิมพ์ประภา เอี่ยมกระสินธุ์ 5620224036
2. น.ส. ทยพร จันทรสงค์ 5620224053
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8. นายกิจจา แต่งสถิต 5620224100
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10. น.ส. กฤษพร หิรัญญโชค 5620224104
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12. น.ส. สุภาวดี ชนะโชติ 5620224112
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14. น.ส. จอมขวัญ สุวรรณเครือ 5620224118
15. นายสุภวัช นวพักตร์พิไล 5620224176