CHILE: THE LATIN AMERICAN TIGER?

GROUP 7 SHANTANU KUMAR SINDHUJA DHARANI SHIVEN SALUJA TULSI CHOUDHARY VIJAY KRISHNAN A RAMYAA RAMESH DM14144 DM14147 DM14248 DM14256 DM14257 DM14266

ECONOMIC HISTORY

Salvador Allende
4 November 1970 11 September 1973

Augusto Pinochet
17 December 1974 11 March 1990

Post Pinochet
The 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%)

ROSTOWS ANALYSIS

Chile

TIGER GROWTH

Chile in 1997
1 2 3 Coping with Inflation Stimulating Capital Investment Managing Foreign Exchange Reserves Managing Fiscal Policy Dealing with Unemployment Coping with external shocks 3% per year, Independent Central Bank Savings 26% of GDP used as investment Crawled Peg (0.45$, 0.3DM, 0.25) , $14,833 million Resource Allocation: Well done Income Distribution: Exhibit 8 6.4 % Came back strongly from 1982 crisis

4 5 6

Ideal Situation to think of Trade Policies

Chiles Dilemma
Who to join?
1. NAFTA 2. Mercosur 3. No one (Continue bilateral PTA)

PORTERS DIAMOND MODEL

FACTOR CONDITIONS
Factors Skilled Labor Infrastructure Arable Land Natural Resources Applicable Needs Improvement Cannot be created

Capital Graduate Engineers & Scientists

Needs to be grown

1. Very Abundant Natural Resource is an advantage 2. Capital is high due to high savings through pension plans 3. Skilled labor is high everyone have high school education

OTHER ATTRIBUTES
DEMAND CONDITIONS
RELATED AND SUPPORTING INDUSTRIES

Home demand: Mix and Character not matching mining industry, services match (33% of GDP)

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

GOVERNMENT Regulation of Home demand Through tariffs Improving Factor Invest in education? Purchases Stimulate related & supporting industries Firm strategy Anti trust policy?

Variety of firms across industries: Mining, tourism, salmon farming, methanol production promotes competitiveness Sustainable commitment?

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 market 2. Improve attributes of related and supporting industries 3. Improve Education factor, promote more research in technology which will lead to sustainable development 4. Government should facilitate the above attributes Upon 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.