Chile is emerging as the most open economy in South America but has to undergo major structural reform if it is to maintain high levels of economic growth.

Gross domestic product (GDP) grew by 6.3% last year and by 6.1% in 2004. Exports rose to a record $47bn in 2005, up from $38bn in 2004, and imports broke new records, at $38.3bn in 2005 ($46.9bn in 2004). Last year, total FDI was more than $3.75bn against $7.15bn in 2004.

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However, the stated goal of Michelle Bachelet, who was elected president in January this year, is to take the country – with a 16 million population and GDP of $97bn – into the First World.

“Public health, education, justice and the much-hyped pension system are all crying out for overhauls, in some cases overhauling a recent overhaul,” says Armen Kouyoumdjian, an economic consultant based in Chile. “The problem is that the new president will only have a non-renewable shot of four years, with municipal elections two-thirds into the term. It may be a tall order.”

Model maker

In the past decade, Chile emerged as the economic model for its South American neighbours. It has managed to avoid the economic crises that rocked countries such as Argentina and Colombia. It has struck bilateral trade accords with the US, the EU and China. The country enjoys the most advanced capital markets in South America and the World Economic Forum ranks the country in 23rd position in terms of its international competitiveness. It is also increasingly allying itself with the economic grouping Asia Pacific Economic Cooperation rather than Mercosur, the South American trading bloc.

However, in reality, Chile has a long way to go before it will be part of the developed world. A spokesman for the Chamber of Commerce of Santiago says: “The clear bonanza during the past few years for the Chilean economy, the strong growth in the terms of trade, and therefore the comfortable situation in the external accounts, is fundamentally a transitory phenomenon. This is because the value of Chile’s exports will diminish when the period of expansion in world markets ends.”

Major export

Copper accounts for 40% of Chile’s exports and its average price was $1.7 per pound last year (it is currently $2.2 per pound). According to Chile’s central bank, the value of the country’s copper exports surged by 84.9% in 2004 and by 22.8% in 2003.

Enrique Taladriz, head of research at Santiago-based fund manager Moneda Asset Management, says: “The economy still remains very dependent on copper. There is a solid basis for economic growth of more than 4% this year but, with high copper prices, it could be 6%.”

On February 22, Chile’s Codelco, the world’s biggest copper producer, signed a strategic agreement with Minmetals, a Chinese metals group. The Chinese made an initial payment of $550m for 55,750 tonnes of copper over 15 years.

Chile has a positive attitude toward FDI that originates from its 1974 foreign investment statute, known as decree law 600. This has been the main regulatory norm for investment into the country during the past 30 years. The decree enables foreign investors to sign contracts with the Chilean state. The government’s Foreign Investment Committee establishes the terms and conditions of each investment. Applications are normally approved within days.

“In relation to the size of its economy, Chile receives more FDI per capita than any other South American country,” says Michael Mortimer, head of investment and corporate strategies at Santiago-based economic consultants the Economic Commission for Latin America and the Caribbean. “As well as the trade agreements signed, there have been three main reasons for the strong economy: the volume of exports, the repertoire of exported products, and the number of markets exported to.

“Chile’s strongest sectors are primary resources and services. Manufacturing is weaker. The banking sector has become more important over the past decade and now three foreign groups – Santander, BBVA and Citigroup – control around 50% of the banks.” He says Chile succeeded because of high productivity, due to its embrace of external markets and solid political and macroeconomic stability.

For most of the 1990s, the economy attracted large inflows of foreign capital – mostly direct investment – especially in the mining sector.

Chile’s total stock of FDI between 1974 and 2005 reached $78.4bn. Since 1990, multinational companies have committed more than $69.8bn to the country, giving it the highest FDI/ GDP ratio of any major Latin American economy. Today, more than 2800 companies from 50 countries have operations in Chile.

Mr Mortimer says the privatisations of the energy providers Enersis and Gener in the late-1980s changed the country’s investment climate.

Most of the foreign investment has come from Spain, the US and Canada. Foreign groups have invested in the mining, utility and telecoms industries and have been granted concessions to develop new high-speed highways.

Spanish energy company Endesa invested $4.5bn in Enersis in 1999 and an additional $2.2bn in 2004. In 2004, Spanish mobile phone company Telefónica Móviles acquired a subsidiary of Chilean telecoms group Telefonia CTC for $1.36bn. Last year, Mexican telecoms company American Movil purchased Chilean mobile company Smartcom for $505m. And Italian construction group Impregilo has invested $600m to develop a new 42-kilometre highway, Costanera Norte, linking 11 suburbs of Santiago.

Tough competition

Not all foreign investors have had a positive experience in Chile. For example, French retailer Carrefour pulled out of the country because it could not compete with local rivals which had a better understanding of what Chileans wanted.

In the late 1980s and early 1990s, Chile imposed strict controls on short-term capital inflows. In May 2000, the central bank lifted the one-year withholding period requirement for foreign capital entering the country. This type of investment capital can now be repatriated immediately without penalty.

In 2000, Chile removed the encaje (lock-in) which required foreign investors to deposit a proportion of foreign-sourced loan funds and portfolio investment with the central bank in a non interest-bearing account for two years.

Clear regulations

Daisy Kohan, head of statistics at the Foreign Investment Committee, the government agency promoting FDI, says: “I think Chile has attracted so much foreign investment because it has put in place clear regulations. We also have good macroeconomics, taken in a world context.”

Many Chilean companies – including retailer Falabella, retailer Ripley, supermarket group Cencosud and pharmacist Farmacias Ahumada – have invested in other Latin American countries, mainly because of the small size of the Chilean economy.

One of the major challenges for Chilean exporters has been a recent appreciation of the Chilean peso (one US dollar fetches 520 Chilean pesos today against 700 pesos three years ago). Chile’s per capita income reached a new high of $7017 in 2005. Yet, the central bank estimates it would still take 40 years for the country to catch up with Spain and Portugal if economic growth continues at the same pace as in the past 15 years.

Chile has made huge strides over the past two decades but it must invest much more in research and development and the educational system if it wants to become the true ‘tiger economy’ of Latin America.