Chile: Economic Growth and the Social Agenda

On August 28, 2007, the Americas Society and Council of the Americas (AS/COA) held the annual Santiago conference, jointly organized with AmCham Chile and El Mercurio. The event, part of AS/COA’s 2007 Latin American Cities conference series, attracted over 300 senior-level private and public sector representatives for presentations and panel discussants on Chile’s economic expansion and social agenda.

“Chile: Economic Growth and the Social Agenda” featured expert speakers and two panel discussions.

Keynote speakers included:

• H.E. José Miguel Insulza, Secretary General, Organization of American States
• H.E. Andres Velasco, Minister of Finance
• H.E. José Antonio Viera Gallo, Minister Secretary General of the Presidency
• H.E. Vittorio Corbo, President, Central Bank of Chile

• Alejandro Bertuol, Managing Director, Fitch Ratings
• Tulio Vera, Managing Director, Merrill Lynch
• Ricardo V. Marino, President, Banco Itaú Chile
• Alberto Gómez, Chief Economist, Banamex, Mexico
• María Garaña Corces, Regional Director for Southern Cone, Microsoft
• José Antonio Ocampo, Professor of International and Public Affairs, Columbia University
• Fernando Concha, General Manager, Citibank, N.A., Agencia en Chile

Chile boasts one of the strongest economies in Latin America, with high rates of investment and employment. The Chilean market is one of the region’s most open, with 57 different free-trade agreements. Recently, there has been growing concern over Chile’s ability to sustain its prosperity and promote economic equality in the context of an uncertain world market. To promote dialogue on Chile’s economic outlook, the Americas Society and Council of the Americas brought together private sector representatives, government leaders, and academics for the annual Santiago conference. 

The Santiago Conference focused on Chile’s outlook for economic growth within the current world market dynamics and the falling value of the U.S. dollar. Domestically, social inclusion was highlighted as crucial for Chile’s continued progress. As one of Latin America’s strongest and most open economies, Chile has recently diversified its international free-trade agreements and has continued to employ sound macroeconomic policies. 

Chile has some of Latin America’s highest rates of investment, growth, and employment. Thus far, the economy has remained relatively unharmed by global market anxieties. Vittorio Corbo of Chile’s Central Bank cites the country’s sound macroeconomic and financial policies as a reason. Corbo and Andrés Velasco, the Chilean minister of finance, both stressed the importance of sound monetary, exchange, and fiscal policy for Chile’s advancements. This progress can be seen in Chile’s increased foreign investment and lowered unemployment rates. Chile’s economy is projected to grow around 5.8 percent this year, commented Velasco. He predicted a strong recuperation of investment in fixed capital, with 14 percent in the second trimester. Meanwhile, José Miguel Insulza defined the three most important factors to Chile’s progress within the global economy as open markets, good management of the macroeconomy, and effective public spending. 

Looking ahead, Velasco pointed to various positive indicators for future economic growth and stability: record low debt, historically high real copper prices, overall growth in consumer good sales. Alberto Gómez of Banamex also touted that Chile holds the highest regional ranking of home loans as percentage of total GDP. Citing this example and others, Gómez surmised that both the quality and quantity of Chile’s growth appeared strong. 

Panelists agreed that, to set an example for the region, Chile must not only practice sound macroeconomic policies but also address its problems of social inequality. Chile has had substantial success in implementing policy to integrate economic growth with social inclusion, as Minister Secretary General of the Presidency José Antonio Viera Gallo noted. However, Chile continues to have low levels of equality—a problem that remains one of the country’s main weaknesses for rating agencies, said Alejandro Bertuol of Fitch Ratings. 

Chile risks falling into the polarizing populist discourse that tends to produce strong leaders in weak institutions, noted Bertuol. However, the country boasts the advantage of solid political consensus on economic policy: no free trade agreement has been rejected. Within this framework, as Insulza noted, it is important that Chile begin discussing the issue of income distribution. The main challenges to achieving growth with integration are improving market competitiveness while strengthening education and workforce development. 

Panelists addressed current hikes in inflation rates as obstacles to addressing social inequality. Corbo attributed elevated inflation to higher costs for non-perishable food items such as grains, oil, and powdered milk. Furthermore, rising energy prices have pushed annual inflation to a rate of 4 percent. Yet Corbo argued that if Chile’s inflation was measured by the same standards used in the United States (excluding all foodstuffs, not just perishables) the annual variation would only be 1.4 percent. Corbo noted that the Central Bank is prepared to adjust its monetary policy to anticipate inflation. 

When addressing world market circumstances, Velasco compared Chile’s economy with that of Mexico, Brazil, Argentina, Korea, and Thailand. The Chilean economy has shown much less volatility in terms of sovereign risk. Merrill Lynch’s Tulio Vera advised emerging markets, with the exception of Mexico, to diversify from the U.S. market. He pointed out that Chile has an advantage over other Latin American countries due to its lower percentage of trade with the United States—only 21 percent of Chilean exports are directed at NAFTA economies. For him, world market fluctuations will have a limited impact on Chile. The country’s open economy exposes the market to risk, but it also allows for diversified trade. 

Yet panelists also agreed on the importance of following developed market economies, including the U.S. economy. Striking a note of caution, Columbia University professor José Antonio Ocampo warned against underestimating the potential impact of international financial development. In the late 1990s, the implications of the Asian financial crisis were not properly considered. This mistaken optimism led Chile into a recession, with employment levels only recently reaching pre-crisis levels. 

For sustainable growth, panelists agreed that Chile must invest more in social integration, with a focus on education and information technology. Maria Garaña Corces, Microsoft’s regional director for the Southern Cone, said that if Chile were to invest 1.4 percent of its GDP in technology, it would rank number one in Latin America. However, it would still lag behind Europe and the United States to rank thirty-first in the world. 

With respect to economic growth, Velasco voiced optimism, citing a steady rise in investments since 2003. Chile attracted $7.1 billion in investment in 2006, and Velasco forecasted a rise to $8.1billion in 2007. Generating more free-trade agreements and improving Chile’s world image were cited as essential to the country’s continued success. 

Joining others’ positive projections, Tulio Vera predicted a strong finish. Given the current global market situation, Vera further noted that Asian and non-U.S. bonds are expected to rise in value. Increases in inflation, global market volatility, and investment outside the U.S. market are all expected to rise.