Chile: The Road to Development

The guest speaker at an AmCham breakfast on May 24, Economy, Development and Tourism Minister Pablo Longueira started by asking a question – why, he wondered, is Chile, a small country, the only one in Latin America poised on the threshold of development?

Why, he continued, should incoming foreign direct investment (FDI) have climbed to a record US$17.5 billion in 2011, a year when Chile was, after all, in the headlines for its student protests rather than its economic achievements? And why, in the first four months of this year, has the Foreign Investment Committee, which reports to the Economy Ministry, received applications for an inflow of a further US$6.1 billion under the country’s DL 600 Foreign Investment Statute?

The answer, Minister Longueira told AmCham members and their guests, is that Chile is a “serious country” in which investors find the legal certainty they require to develop their projects. “Companies don’t invest just because a project is attractive; they also need an institutional framework,” he pointed out.

Look, he said, at the dispute that arose last year between Codelco, Chile’s state-owned copper producer, and UK-based Anglo American. Even though a state company is involved, the rule of law is not in doubt and institutions are doing their work, noted Minister Longueira. 

Chile’s success in attracting FDI is generally explained in terms of the country’s track record of economic stability. But, according to Longueira – who, before becoming Economy, Development and Tourism Minister in July 2011, sat for 21 years in Congress and, before that, was one of the founders of the Independent Democratic Union (UDI) party – there is a deeper, political explanation.

Public opinion of politicians is, today, at a low ebb, he admitted. “But Chile has good politicians,” he argued, “and it is those politicians who have built a country and institutions that work.”

According to Minister Longueira, the story started 30 years ago with the economic reforms introduced under the 1973-1990 military government. They would, however, have counted for little had it not been for subsequent policy stability.

The big difference between Chile and other Latin American countries, he argued, is that Chile was able to make the transition from military government to democracy and then maintain the same policy strategy through four center-left governments and on into today’s center-right government. “That’s the success of Chile, that’s what creates confidence, that it has two broad coalitions that alternate in power but share a common project for the country,” he insisted. 

Free trade has been a key component of that policy strategy. Chile now has more Free Trade Agreements (FTAs) than any other country in the world, pointed out Longueira, and they give its companies access to markets that represent 94% of global GDP.

Protectionism – currently rearing its head again in Latin America – was, in the past, the main culprit for income inequality and poverty in the region, he argued. “Free trade is crucial to give citizens access to the best goods and services at the lowest prices,” he said.

The government of President Sebastián Piñera is, indeed, planning to further open the Chilean economy. Under its proposed tax reform, announced in early May and currently before Congress, the 6% flat-rate duty that Chile levies on imports from countries with which it does not have a trade agreement would gradually be eliminated, dropping to 4% in 2013, 2% in 2014 and 0% in 2015.

As regards FDI, the challenge for Chile, with its small domestic market, is to develop as a platform from which overseas companies target Asian markets, said Minister Longueira. That is partly why, in June, the government hopes to sign the Pacific Alliance, bringing together Chile, Peru, Colombia and Mexico in an area across which not only goods and services but also capital and people would move freely. 

But Chile also has to continue to manage its own affairs well. There are other countries in Latin America that are infinitely richer, pointed out Longueira – “transatlantic ships that, if they had good captains, could already be developed countries” – compared to which Chile is a “small sailboat that always has to be fixing its rigging… in order to grow at 6%”.

Competitiveness is also vital and, in this field, the Economy Ministry is implementing “a very ambitious agenda”, said Minister Longueira. Transport services are a key component of many of Chile’s exports – the salmon, for example, that reaches European markets in just 48 hours – and, in a bid to increase the competitiveness of those services, Chile has become the only country to unilaterally renounce reciprocity in the air transport market, he noted, while a bill before Congress would also liberalize sea freight transport.

Another crucial factor in attracting FDI – “particularly in Latin America” – is social stability for which, according to Minister Longueira, education and entrepreneurship are key in order to create social mobility. “Social mobility is what gives the sensation of a fair society,” he pointed out, “and, without it, there is the social instability that exposes countries to [political] adventures.”

And there, he suggested, lies the key not only to Chile’s past success but also its future prospects. At a time of crisis in political leadership around the world, Chile “must avoid the scenarios of populism and demagogy that can divert us from what is a long road, a road travelled not under just one government but under a series of governments of different colors”, he emphasized.

After all, he warned, there are far more countries that have reached the stage of Chile today and faltered than have managed to stay on the road to development. 

Ruth Bradley is a freelance journalist based in Santiago and a former editor of bUSiness CHILE.