Geographically, Chile is remote from most of the world as it lies on the western edge of South America away from the world's heavily traveled air and sea routes. Although it is not on major thoroughfares Chile has the look of a ribbon of land B long and narrow B that stretches more than 2,500 miles between Peru to the north, the Pacific to the west, Argentina and the Andes mountains to the east, and Antarctica to the south and at its narrowest point, the country's width is only 56 miles.
It wasn't long ago that Chile was a political basket-case. A decade ago it could have been correctly described as the land of the unfree and the home of the coup. That's because of the political turbulence the country experienced for two decades, from 1970 until 1990. The genesis of this turbulence lies within Chilean history and its determination to promote economic growth while trying to cure some of its major social problems, especially the issue of income distribution and the elimination of social class structures. By 1970, many Chileans were convinced that socialism could solve many social problems without adversely affecting the country's economic growth. That conviction allowed Salvador Allende to become the first freely elected Marxist president in the world. But after experiencing Allende in the presidential palace, many Chileans came to the conclusion that his policies were too radical. Moreover, having a Marxist lead the country was tilting Chile toward the Soviet camp whereas tradition and the Monroe Doctrine place the country squarely under the American tent. In 1972, after only two years of Allende governing the country, Chile faced widespread economic, political and social problems that had not existed before. Because of the chaos emanating from those problems, General Augusto Pinochet Ugarte led a military coup in 1973 that ended Allende's socialist government.
After coming to power the Pinochet military dictatorship determined that authoritarianism was better than liberal democracy, and backed by the military, he ruled by presidential decree. In 1988, feeling confident that he then had earned the support of a majority of Chileans, Pinochet permitted a plebiscite to determine if he should continue in power or allow free elections. Pinochet was surprised that he lost the plebiscite (according to Frohmann (1998) the vote tally was 53% for a democratic system and 44% for a continuation of military rule) but he did follow through on his promise and called for elections. In the elections Pinochet's choice for president was defeated by the centrist-left candidate, Patricio Aylwin Azocar. Aylwin took office in 1990 as the first elected president since 1970.
Although he was in power as a military usurper of the democratic process for seventeen years and whose administration was allegedly responsible for gross human rights abuses, including the kidnapping and murder of unknown numbers of Chilean citizens, on the economic front Pinochet can be credited with building a successful and productive economy. Aylwin built on that strong base with innovative programs, facilitating Chile's development as one of the most prosperous Latin American countries. Aylwin did not run for reelection in 1993 but supported Eduardo Frei Ruiz-Tagle, who took office in March 1994. According to Aguero (1998) the major difference between the Aylwin and Frei governments was that Aylwin's administration was focused on securing the stability of Chile's new democracy while Frei's administration is concentrating on pragmatic and ambitious development goals.
Socially, Chile has undergone major changes since 1970. These social developments are reflected in key indicators including life expectancy at birth, infant mortality, malnutrition, educational attainment, and overall literacy are more in line with higher income countries than the developing world. By the late-1990s, only about one-fourth of Chile's people live below the poverty line compared to almost half in the mid-1980s (The World Bank Group, 1996). Importantly, the Frei administration has made education a top priority and that may bode well for the future and the elimination of the disparity in income distribution -- data for more than twenty-five years still shows that Chile is far from attaining the income equity levels found in developed countries, even lagging behind countries such as South Korea, Singapore, Hong Kong although it does exceed the distribution levels of Mexico and Brazil (Diaz, 1997).
Economically, although it is relatively remote -- not on the world's most traveled pathways -- Chile is one of the world's most dynamic and promising markets for its size. However, its strength and attractiveness lie not in its size -- its population is only 14 million -- but in the energy of its entrepreneurs, the transparency of its regulations, and the predictability of its decision -makers (U.S. Embassy Santiago, 1996). This new economic vitality contrasts sharply with the period from the 1930s until the early-1970s, when the Chilean economy was one of the most heavily state-oriented economies in the world, with huge government subsidies which led to very inefficient industrial and agricultural sectors (Drope, 1997). Today, however, the Frei government has earned laudatory comments such as the one that maintained that Chile is one of Athe best-managed economies in the world [causing it to have] the highest economic growth rate in Latin America@ (Nexus, 1999).
Pinochet's uplifting of the Chilean economy contradicts Dominguez' (1997) assertion that Latin American economies collapsed when military presidents governed because the military is incompetent outside of its specific professional sphere. Pinochet showed competence in dealing with economic problems and his non-military successors have followed his lead. These initiatives have caused Chile to experience a relatively low inflation rate (3.8%) (LatinTrade, 1999), the largest growth in gross domestic product (GDP) in Latin America since 1991 averaging just over 7% (UN Economic Commission for Latin America and the Caribbean, 1997) and is forecasted to experience the largest positive real GDP change in Latin America for the year 2000 (LatinTrade, 1999).
Foreign direct investment (FDI) is viewed as a major stimulus to economic growth in developing countries. That's because it springs from an exogenous source and creates economic opportunity and activity that would otherwise not be present in a economy. Increases in FDI helps countries deal with two major obstacles that impede further development, namely, shortages of financial resources and technology and skills. Because FDI brings monies and opportunities into an economy it is viewed as a positive input for policy-makers in developing countries in particular B but even officials of the largest economies welcome FDI as a positive economic input.
As discussed above, FDI plays an important role in stimulating a country's economy. Hojman (1996) maintains that early in the Pinochet era, the expression AChicago Boys@ was coined to refer to those economists who recommended and implemented the liberalization and stabilization policies of the military government. Hojman states that the term was meant to be pejorative. Originally it was based on the theoretical guidance of Milton Friedman and other University of Chicago economists derived from a long-standing association between the University of Chicago and the Catholic University in Santiago. Hojman reasons that the most pragmatic economic policies instituted by Pinochet were mainly rooted more in Chilean history than on the ties to the AChicago Boys.@ Regardless where the policies were conceived, they seemed to have worked for Chile. Pinochet apparently understood the role of FDI and sought ways to increase it. Thus, the rules surrounding FDI were liberalized in 1974 under the banner, Decree Law 600 (Economic Commission for Latin America and the Caribbean, 1997). According to the Canadian Pro Business Connections (1996) Chile is Aone" of the most outstanding examples of how . . .foreign investments can generate economic growth in Latin America. Considered a pioneer in the region, the country is committed to . . .[encouraging] foreign investment.@
According to the International Finance Corporation (1998), Fortune 1000 company executives are almost unanimous in the view that the first step to increasing levels of foreign direct investment is for host countries to order their economic and political affairs. Thus, it stands to reason that as investor corporations and individuals start creating lists of possible FDI countries the economic and political stability of a country will determine in large measure whether it appears on the list. Moreover, it can be argued that countries that put themselves in contention for greater levels of FDI, are also better able to utilize the associated benefits arriving with the investments.
It stands to reason that investors looking for repositories for their investment monies would seek out countries which, first, welcome their investments and, second, will protect them. Chile has accomplished these major requirements by:
In the following sections, each of the above factors will be discussed, in turn, as they pertain to Chile.
According to the Office of the U.S. International Trade Representative (1995), AChile officially welcomes foreign investment.@ This welcoming attitude is embodied in the country's foreign investment law, known as D.L. (for Decree Law) 600. The law was first established in 1974 by General Pinochet and has been liberalized, both by the military regime and the civilian governments that have followed. At this time, nearly all foreign direct investment in Chile takes place through D.L. 600. While the law requires that foreign investment must be approved by a government committee, approval procedures are considered expeditious and not difficult to comply with. According to the Country Commercial Guide for Chile published by the U.S. Embassy Santiago (1998), applications are typically Aapproved" within a matter of days, and almost always within one month.@ [As an aside B the Chilean Foreign Investment Committee publishes its Foreign Investment Application and it can be located on the Internet at http://www.sea-world.com/prochile/index.en(8).html. The application is extremely simple and the instructions are only slightly over a page in length.]
According to the Chilean Commercial Guide published by the U.S. Embassy in Santiago, the provisions of D.L. 600 allow investors to have a contract between the investor and the Government of Chile. The procedure is for the investor to complete the Foreign Investment mentioned in the paragraph above, and after approval is granted by the Chilean Foreign Investment Committee, the investor signs a standardized contract issued by the Chilean Foreign Investment Committee. The contract gives the investors the right:
With respect to the effectiveness of D.L. 600, the proof is in the statistics. Appendix 1 details the inflow of FDI into Chile from 1974 thru 1996.
Evidence that D.L. 600 is working can be found in the Heritage Foundation/Wall Street Journal 2000 Index of Economic Freedom. This index measures how well 161 countries scored on a list of 50 independent variables that were divided into 10 broad factors of economic freedom. The higher the score on a factor, the greater the level of government interference in the economy and the less economic freedom in a country. These ten factors are:
The Heritage Foundation/Wall Street Journal then publishes the results of its ranking. For the year 2000 the index was authored by Gerald P. O'Driscoll, Jr., Kim R. Holmes, and Melanie Kirkpatrick under the title, 2000 Index of Economic Freedom in an Index of Global Economic Freedom. Out of 161 countries ranked in the 2000 index, Chile was ranked eleventh in the world and has the freest economy in Latin America. An abbreviated world ranking of the top-ranked fifteen countries and the bottom-ranked fifteen countries is included as Appendix 2.
In order to consider a country as a target for increased FDI, investors must have confidence in the country and risk factors must be taken into consideration. In that light a recent study by the European Roundtable of Industrialists (ERT) and reported by the International Finance Corporation (1998) gives evidence of rising investor confidence in Chile. The ERT analyzed Latin American FDI and cost-related barriers to investment in seven of the region's countries: Argentina, Brazil, Chile, Columbia, Mexico, Peru, and Venezuela. The study also compares the Latin American results with findings from a similar study of ten countries in Asia (China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand). Notably, FDI in Latin America as a whole demonstrated a more favorable environment for investment than those of their Asian counterparts. Interestingly, for a total of seventeen countries compared in the study -- seven from Latin America and ten from Asia -- Chile was found to be the country whose FDI barriers were the lowest. The ERT Survey results are shown as Appendix 3.
With respect to investment risk, two international publications, Euromoney and Institutional Investor, publishes rankings of an individual country's creditworthiness. Both ranks have similar objectives, namely providing estimates of the likelihood that a sovereign borrower will default on its debt. Interestingly, an article appearing in the International Journal of Commerce and Management (Ivanova, Arcelus & Srivivasan, 1998) reports that of nineteen Latin American countries ranked, Chile was ranked as having the lowest investment risk by both Euromoney and Institutional Investor. The Economist Intelligence Unit, a sister company of The Economist, devised a country risk rating for the year 2000. A country's overall score takes into account 77 different indicators that reflect such factors as political stability, quality of governance, monetary and fiscal policy, regulatory policy, current-account balances, debt, financial structure and liquidity risk. Political risk has a weight of 22% in the overall score. A summary of the ratings were published by The Economist (November 13, 1999) and show that out of twenty-eight countries rated, Chile's level of risk was twenty-sixth B that is, of the 28 countries ranked, Chile had the third lowest investment risk.
A new organization, Transparency International (TI), was established in 1993 to shine a laser beam on the degree of corruptive practices -- such as bribery -- around the world. With headquarters in Berlin, the non-governmental organization has published comparative information that clearly depicts how nations stack up against one another vis a vis corruption of its officialdom. Appendix 4 lists the rank ordering of ninety-nine nations by TI. The rankings are derived from scores relating to perceptions of the degree to which corruption exists within each ranked nation collected from participating businesspeople, risk analysts, and the general public by a survey instrument. Further, the index draws on surveys conducted by Gallup International, McGraw Hill Global Risk Service and data gathered from Internet sources.
According to TI's Corruption Perception Index (CPI), the countries perceived to be the least corrupt are given the highest scores out of ten. In the 1999 CPI (see Appendix 4) only Denmark scored a perfect 10. Then, Finland, was ranked second. Cameroon, on the other hand, was rank ordered at the bottom of the ninety-nine countries analyzed. Interestingly, the U.S. was ranked in 18th place, just after Austria and just ahead of Chile (Transparency International, 1999).
Promulgated by the Pinochet military dictatorship, Decree Law 600 established a policy of the free flow of foreign direct investment with no real barriers. In fact, foreign investment is encouraged by providing a hospitable, stable, legal and regulatory environment and practically all forms of business activity are permitted to the foreign investor. Chile recognizes that foreign direct investment inflows enhances an economy and has simplified the procedure for application, setting up new businesses or acquiring existing ones. Chile has also made it simple for investors to repatriate their capital and profits and has a tax system that is basically neutral B that is, it is nearly identical to the tax systems in those countries where most foreign investments originate. In essence, Chile's Decree Law 600 has transparent regulations and provisions and provides for equal treatment between Chilean and foreign-owned companies.
Given the foresight of the Pinochet military dictatorship and fine-tuned by successive democratically-elected governments, Chile has become a major destination for foreign investment from around the world. Thus, it is deriving the economic benefits from its enlightened foreign direct investment policies. Rather than continuing to pursue foreign direct investment incentives that tend to reduce the benefits derived from foreign investments, other developing countries should take a close look at Chile's Decree Law 600 and ask themselves could they institute a similar law? If so, the benefits B social, political and economic B could be enormous.
Aguero, Felipe. (1998). Chile's lingering authoritarian legacy, Current History, (February), 67.
Diaz, Alvaro. (1997). Economic dynamism and institutional rigidity in Chile: risks and opportunities at the turn of the twentieth century, Latin America in the World Economy, edited by Roberto Patricio Korzeniewize and William C. Smith, 253.
Dominguez, Jorge I. (1997). Latin America's crisis of representation, Foreign Affairs, vol. 76, no. 1, (January/February), 110
Drope, David. (1997). Overall business culture: Chile, available on the Internet at http://www.mercer.edu/~tco635/ddrpt-5.html.
Economic News. (1998). Economic digest -- Chile, (December), 1.
The Economist. (1999). Risky economies, (November 13th), 114.
Frohmann, Alicia. (1998). Structural changes in Chilean society, Chile in the International Economy, edited by Carlos D. Martin y Carla Y. Buxeda, FLACSO-Chile.
Hojman, David E. (1996). Chile: The political economy of development and democracy in the 1990s (University of Pittsburgh Press), 22-23.
International Finance Corporation. (1998). Is Latin America number one again with U.S. multinational? FDI News, vol. 21, available on the Internet at http://www.ifc.org/ PUBLICAT/FDINEWS/VOL21/P3.htm
Ivanova, Ianita M., Arcelus, Francisco J. & Srinivasan, Gopalan. (1998). Assessment of the competitiveness position of the Latin American countries, International Journal of Commerce and Management, vol. 8, no. 2, 13-14.
LatinTrade. (1999). Trends/key indicators, vol. 7, no. 11, (November), 86
Nexus. (1999). Chile market information, Nexus Education News 2, (November).
O'Driscoll, Gerald P., Jr., Holmes, Kim R., & Kirkpatrick, Melanie. (2000). 2000 index of economic freedom (New York: Heritage Foundation/The Wall Street Journal), Executive Summary available on the Internet at http://www.heritage.org/index/execsum.html
Office of the U.S. International Trade Representative. (1995). Chile, 1995 national trade estimate, available on the Internet at http://www.ustr/gov/reports/net/1995/chile.html.
Pro Business Connections. (1996). Doing business with Chile, Canada-Chile 1997, vol. 1, no. 2, (October), 5.
Transparency International. (1999). Press release: New poll shows many leading exporters using bribes. Berlin. October 26, 1999.
U.N. Economic Commission for Latin America and the Caribbean. (1997). Economic trends in Latin America (data from slides provided in a briefing in June 1998 in Santiago).
U.N. Economic Commission for Latin America and the Caribbean. (1997). Trade and growth in Chile: past performance and future prospects (30 December 1997), 32-33.
U.S. Embassy Santiago. (1996). FY 1997 country commercial guide: Chile (report released by the Bureau of Economic and Business Affairs, August 1996).
World Bank Group, The. (1996). Chile (September), available on the Internet at http:ww/worldbank.org/html/extdr/offrep/lac/chile.htm.
Appendix 1
Foreign Direct Investment in Chile
(under D.L. 600, in thousands of US$)
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Source: Frohmann, Alicia. (1998). Structural changes in Chilean society, Chile in the International Economy, edited by Carlos D. Martin y Carla Y. Buxeda, FLACSO-Chile and the Foreign Investment Committee.
Appendix 2
2000 Index of Economic Freedom Rankings
(top ranked 15 countries and bottom ranked 15 countries)
RANK COUNTRY
1 Hong Kong
2 Singapore
3 New Zealand
4 Bahrain
4 Luxembourg
4 United States
7 Ireland
8 Australia
8 Switzerland
8 United Kingdom
11 Canada
11 Chile
11 El Salvador
11 Taiwan
15 Austria
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
147 Azerbaijan
148 Guinea-Bissau
148 Turkmenistan
148 Vietnam
151 Bosnia
151 Uzbekistan
153 Angola
154 Iran
155 Laos
156 Congo, Dem. Rep.
157 Cuba
158 Somalia
159 Libya
160 Iraq
161 Korea, North
Source: O'Driscoll, Gerald P., Jr., Holmes, Kim R., & Kirkpatrick, Melanie. (2000). 2000 Index of Economic Freedom (New York: Heritage Foundation/The Wall Street Journal), Executive Summary available on the Internet at http://www.heritage.org/index/execsum.html.
Appendix 3
ERT Survey: Transaction Cost Related Barriers to FDI in Latin America
| Barrier | Argentina | Brazil | Chile | Colombia | Mexico | Peru | Venezuela | Latin America |
Asian Countries |
| Culture | 8.0 | 8.2 | 7.8 | 7.4 | 6.7 | 7.8 | 7.6 | 7.6 | 7.2 |
| Image | 6.2 | 3.5 | 6.7 | 2.7 | 3.5 | 4.1 | 5.6 | 4.6 | 5.1 |
| State Control | 7.4 | 4.0 | 5.0 | 6.2 | 5.6 | 6.2 | 2.3 | 5.2 | 5.5 |
| Transparency | 4.7 | 4.5 | 5.2 | 3.8 | 2.1 | 4.7 | 1.6 | 3.8 | 5.1 |
| Bureaucracy | 4.1 | 2.7 | 3.9 | 4.6 | 2.0 | 3.3 | 1.8 | 3.2 | 4.0 |
| Corruption | 3.1 | 3.1 | 6.9 | 2.4 | 2.0 | 4.1 | 1.9 | 3.4 | 4.1 |
| Lobbying | 4.6 | 3.9 | 5.6 | 3.8 | 4.9 | 5.8 | 3.1 | 4.5 | 4.8 |
| Local Capital Markets | 9.1 | 7.0 | 8.2 | 7.8 | 6.3 | 8.4 | 7.2 | 7.7 | 6.5 |
| Distribution System | 4.5 | 5.0 | 7.0 | 4.0 | 4.4 | 4.7 | 4.2 | 4.8 | 5.4 |
| Telecommunications | 5.6 | 5.3 | 9.0 | 4.9 | 5.0 | 5.5 | 4.5 | 5.7 | 6.3 |
| Infrastructure | 3.8 | 4.2 | 5.9 | 2.3 | 2.8 | 3.7 | 3.3 | 3.7 | 5.0 |
| Overall Assessment | 5.6 | 4.7 | 6.5 | 4.5 | 4.1 | 5.3 | 3.9 | 4.9 | 5.4 |
Notes: 1. Survey results are scaled from 0 (least favorable to FDI) to 10 (most favorable to FDI).
2. Latin American column represents the average for the seven Latin American economies.
3. Asian column represents the average for China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand.
Source: International Finance Corporation. (1998). Is Latin America number one again with U.S. multinationals? FDI News, available on the Internet at http://www.ifc.org/PUBLICAT/FDINEWS/VOL21/P3.htm.
Appendix 4
1999 International Corruption Perception Index
|
Rank |
|
| 1 | Denmark |
| 2 | Finland |
| 3 |
New Zealand Sweden |
| 5 |
Canada Iceland |
| 7 | Singapore |
| 8 | Netherlands |
| 9 |
Norway Switzerland |
| 11 | Luxembourg |
| 12 | Australia |
| 13 | United Kingdom |
| 14 | Germany |
| 15 |
Hong Kong Ireland |
| 17 | Austria |
| 18 | USA |
| 19 | Chile |
| 20 | Israel |
| 21 | Portugal |
| 22 |
France Spain |
| 24 | Botswana |
| 25 |
Japan Slovenia |
| 27 | Estonia |
| 28 | Taiwan |
| 29 |
Belgium Namibia |
| 31 | Hungary |
| 32 |
Costa Rica Malaysia |
| 34 |
South Africa Tunisia |
| 36 |
Greece Mauritius |
| 38 | Italy |
| 39 | Czech Republic |
| 40 | Peru |
| 41 |
Jordan Uruguay |
| 43 | Mongolia |
| 44 | Poland |
| 45 |
Brazil Malawi Morocco Zimbabwe |
| 49 | El Salvador |
| 50 |
Jamaica Lithuania South Korea |
| 53 | Slovak Republic |
| 54 |
Philippines Turkey |
| 56 |
Mozambique Zambia |
| 58 |
Belarus China Latvia Mexico Senegal |
| 63 |
Bulgaria Egypt Ghana Macedonia Romania |
| 68 |
Guatemala Thailand |
| 70 | Nicaragua |
| 71 | Argentina |
| 72 |
Colombia India |
| 74 |
Ivory Coast Moldova Ukraine Venezuela Vietnam |
| 80 |
Armenia Bolivia |
| 82 |
Ecuador Russia |
| 84 |
Albania Georgia Kazakhstan |
| 87 |
Kyrgyz Republic Pakistan Uganda |
| 90 |
Kenya Paraguay Yugoslavia |
| 93 | Tanzania |
| 94 |
Honduras Uzbekistan |
| 96 |
Azerbaijan Indonesia |
| 98 | Nigeria |
| 99 | Cameroon |
Source: Transparency International, Press Release: New Poll Shows Many Leading Exporters Using Bribes, October 26, 1999.
Note: To read this table, #1 country is perceived to be the Least Corrupt and as you move down the list to #99 the perceived level of Corruption increases.