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Chile: The archetypal success story
1. Successful application of the « Washington Consensus »
• Macroeconomic stabilization
• State rollback: privatization & deregulation
• Trade and financial liberalization
• Good governance
2. Successful integration in world markets (« globalizer » country)
3. Higher growth performance than rest of LA
Source: IMF, own calculations
Note: all magnitudes in nominal terms (not adjusted for infllation); Chile’s real growth rate 92-97: 6.5% (5% per capita)
1
450.00
5
400.00
350.00
0
300.00
-5
250.00
-10
200.00
-15
150.00
Budget surplus/GDP (%)
1996
1994
1992
1990
1988
1986
1984
1982
0.00
1980
-30
1978
50.00
1976
-25
1974
100.00
1972
-20
Rate of growth of money stock
10
1970
Budget surplus as % of GDP
Macroeconomic stabilization
Money growth
Source: IMF, own calculations
2
Trade liberalization
10
Average tariff rate (%)
90
5
80
70
0
60
50
-5
40
-10
30
20
-15
10
0
Trade balance/GDP (%)
100
-20
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996
Average tariff rate
Trade balance/GDP
Source: IMF, own calculations
Note: all magnitudes in nominal terms (not adjusted for infllation); Chile’s real growth rate 92-97: 6.5% (5% per capita)
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3'500
Why trade? « Import-led growth »
3'000
Clothing
2'500
T extiles
2'000
1'500
Typical garmentmanufacturing country’s
trade pattern
1'000
500
Imports
Exports
Insertion point
Cotton
production
Laborintensive
Ginning
Spinning
Infrastructure
-intensive
Weaving
Dying
Cutting
Assembly
Shipping
Natural-resource
intensive
Retailing
Capital-intensive
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And yet... Such a bumpy road
15
10
0
-5
Real GDP growth
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Percentage points
5
Volatility of growth
-1 0
-1 5
-2 0
Source: IMF, own calculations
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Why volatility’s bad: changing trajectories
15
Real growth rate
450
400
3 50
Traj. 2
0
2 50
Traj. 1
2 00
-5
-1 0
3 00
Real GDP level
1 50
1 00
-1 5
-2 0
50
0
19
7
19 0
7
19 2
7
19 4
7
19 6
7
19 8
8
19 0
8
19 2
8
19 4
8
19 6
8
19 8
9
19 0
9
19 2
9
19 4
9
19 6
9
20 8
0
20 0
0
20 2
04
Real growth rate, %
5
Level of real GDP, 1969=100
10
Traj. 3
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Why the bumps?
Lack of experience
Sequencing of reforms: Financial liberalization too quick?
Privatization: All right but who buys? Concentration
A fragile economy
Trade liberalization: A bit brutal, perhaps?
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The proper sequencing of reforms (as we know now!)
Establishment of a
competition policy
Privatization
PHASE 1
Budget stabilization
Establishment of an
independent Central Bank
Monetary stabilization
PHASE 2
Trade liberalization
PHASE 3
Capital account
liberalization
Prudent exchange-rate policy
Internal financial
liberalization
Establishment of strong
banking oversight body & rules
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A key danger signal to watch: the real exchange rate
Index valuea
Peso appreciation vis-à-vis partner (a)
Inflation differential with partner (b)
Real appreciation vis-à-vis partner (c)=(a)+(b)
Trade shares
(d)
Real effective appreciation
(e)=(c)*(d)
Real effective exchange rate
(f)=100*(1+(e))
US
(i)
5
-1
4
0.4
1.6
Germany
(ii)
3
3
6
0.6
3.6
Total
(i)+(ii)
5.2
105.2
220
200
1 60
1 40
growth slowly choked
1 20
1 00
80
60
19
79
M
19 12
81
M
19 12
83
M
19 12
85
M
19
1
87 2
M
19 12
89
M
19 12
91
M
19 12
93
M
19 12
95
M
19 12
97
M
19 12
99
M
20 12
01
M
20 12
03
M
12
Sources :
First graph: J.P. Morgan, unpublished data
a.1980-82=100 (arbitrary)
Second graph: IMF, International Financial Statistics,
August 2005
Index value
1 80
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Overall lessons from a quarter-century of Chilean history
1. In the mid-seventies, Chile took the right direction in terms of
economic policy
2. Lots of costly mistakes were made along the way. How surprising is
this?
•
All the key choices that Chile made over those years look obvious now.
They weren’t then: nobody had tried. The « Washington Consensus »
should be called the « Santiago consensus ».
•
The Chilean government had little practical guidance on how to run the
reforms---just grand principles like « free trade is good » and
« government is bad ».
•
The international environment was rough: two oil shocks (1974-75 and
1979-80), the « Latin American debt crisis » (1982-85).
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So where do we stand today?
GDP per capita, current USD
35'000
30'000
CHL-Chile
25'000
OECD-High income
Industrial countries
LAC-Latin America &
Caribbean
20'000
EAP-East Asia & Pacific
15'000
Chile
10'000
SAS-South Asia
MNA-Middle East &
North Africa
5'000
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
0
Time
Source: IMF, own calculations
Note: all magnitudes in nominal terms (not adjusted for infllation); Chile’s real growth rate 92-97: 6.5% (5% per capita)
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Convergence: one generation at 92-97 growth rates!
GDP per capita, current USD
100'000
90'000
CHL-Chile
80'000
OECD-High income
70'000
60'000
Ind. countries at 92-97 av. growth
EAP-East Asia & Pacific
50'000
40'000
30'000
LAC-Latin America &
Caribbean
SAS-South Asia
Chile at 92-97 av. growth
MNA-Middle East &
North Africa
20'000
SSA-Sub-Saharan Africa
10'000
19
75
19
81
19
87
19
93
19
99
20
05
20
11
20
17
20
23
20
29
0
Il sorpasso!
Time
Source: IMF, own calculations
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Does Chile have a problem today?
1975
1985
1995
1998
Primary products
73
65
53
46
Copper
54
47
40
34
Other minerals
18
15
8
n.a.
1
2
4
n.a.
14
24
25
26
Products of the sea
2
8
7
n.a.
Agricultural products
5
11
8
n.a.
Cellulose
4
4
8
n.a.
12
11
22
27
Wood products
3
3
4
n.a.
Food products
4
5
9
n.a.
Beverage and tobacco
0
1
1
n.a.
Chemical products
3
2
3
n.a.
Other manufactured products
1
1
3
n.a.
Timber
Export composition:
Percent of total
Semi-finished products
Manufactured products
Source: COMTRADE database, own calculations. Discrepancies between individual items and totals due to rounding
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Foreign investment: reinforcing existing patterns (of production and exports)
or fostering change?
Average 1974-2004
Mining
1%
2%
Manufacturing
1 9%
33%
Utilities
Transport and
telecom
1 2%
Other serv ices
20%
1 3%
Construction
2004 only
Agriculture, forestry
and fishing
Mining
2%
2%
0% 7 %
9%
Manufacturing
Utilities
36%
Transport and
telecom
Other serv ices
Source: Central Bank of Chile, Foreign Investment
Committee, 2005, own calculations
44%
Construction
Agriculture, forestry
and fishing
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Cyclical downturn, or inward investment drying out?
1 6.0
Gross FDI inflows:
Percent of total
Percent of GDP
1 4.0
1 2.0
1 0.0
8.0
6.0
4.0
2.0
19
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
90
19
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
20 02
0
20 3*
04
*
0.0
Source: Central Bank of Chile, Foreign Investment Committee, 2005; IFS 2005; own calculations
Notes: Percent of GDP; graph shows net flows (in minus out)
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