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to current technologies and competitors, products remained sub-par, industries stagnated, unemployment increased dramatically and economic growth petered out. High unemployment and low wages generated general discontent amongst the lower classes, and the Left developed a strong following amongst the working class and urban poor. This culminated in 1970 when Marxist Salvadore Allende defeated Center President Eduardo Frei Montalva. In true Marxist fashion, Allende socialized the economy nationalizing foreign copper rms and banks as well as expropriating factories and estates and turning their management over to the workers and the state. Price controls, wage increases and the exploitation of unused capacity briey helped economic growth. However, these measures were insufcient to generate sustainable growth and Allendes determination to continue to expropriate factories and land only led to further disruption of the economy. The economic result of Allendes term in ofce was soaring unemployment, and the emergence of a black market. His own following split on account of disagreement of the pace of the transition to socialism. Increasing concern amongst the Center and Right wing led them to form a coalition which denounced Allendes administration as illegitimate. On September 11, 1973, General Augusto Pinochet lead a violent military coup and government takeover. During this take over, the airforce bombed La Moneda, the Presidential Palace. Salvadore Allende died the same day in the Moneda, apparently at his own hand. Pinochet would rule Chile for the next 17 years.

RECENT ECONOMIC AND POLITICAL HISTORY

Over the past 50 years, Chile has gone through a startling transformation that today has positioned her as one of the most stable economies and democracies in Latin America. This transformation has been anything but easy and has had a great impact on not just the countrys economy but on its culture as well. Today, Chile is led by its rst female President, Michelle Bachelet, and is the regional leader of Latin America exemplifying the benets of free market economy. However, despite its impressive growth, Chile, like most developing countries, faces numerous challenges. Amongst these are developing a sustainable energy plan, eradicating poverty, supporting an aging population and improving its innovation and technical skills for the future.

Despite his success in seizing power, initially his economic policies were not much more successful than those of previous administrations, and he began to search for more drastic remedies to bring about change and stabilization. He invited Milton Friedman, the well known free market economist who was visiting Chile at the time, to meet with him. Despite Friedmans explicit advice to Pinochet that economic freedom ultimately leads to political freedom, Pinochet was convinced of the efcacy of his policies. Pinochet gave free reign to a group of economists at the Universidad Catlica. Known as the Chicago Boys, these economists had studied as exchange students under Friedman at the University of Chicago. Almost overnight, the Chicago Boys instituted drastic free market policies, removing most trade barriers, lifting price controls, slashing welfare programs, privatizing a large percentage of the state-owned enterprises and deregulating the nancial sector. Over the next 6 years, the results were impressive, the economy exploded in what is widely referred to as the Chilean economic miracle, the real GDP growing at an average rate of 8.5%. Ination was reduced by almost 600%. The government borrowed heavily abroad to nance the privatization of the pension system, this combined with deregulation, rapid growth funded by foreign savings, led to large foreign debt.1 In 1982, the impact of this borrowing led to devastating economic collapse with the international debt crisis. The economic recession added to the growing number of people who were living in poverty, a problem that Chile is still dealing with today. Given the unavoidable dependence of Chile on external lenders, the increasingly open economy and growing inuence from the opposition, Pinochet was subject to everincreasing pressure to legalize political activity. Eventually, in 1989, Pinochet was voted out of power by a very narrow margin, in a plebiscite. He remained Commander in Chief of the army until 1998 when he took up his seat as Senator.2 Opinion over Pinochet, his seizure of power and his policies is still very divided in Chile. This was made abundantly clear at the time of his death when almost half of the population indicated they were in support of giving him a presidential burial. Bachelet granted him the honor of a military commanders burial.3 The overall long term economic impact of his policies have provided the foundation for what Chile is today the

Populism, Dependency Theory and Import Substitution

The Dictatorship, The Chicago Boys and Economic Development

Following the Second World War, Chilean economic policy, like that of most Latin American countries, was inuenced heavily by the economic theory of Dependency, which proposed that developing countries rich with primary materials would be exploited by the global economy if they did not protect and foster their own nascent industries. The result of this thinking was the implementation of what was known as Import Substitution Industrialization. Massive trade barriers, including tariffs and import quotas, were set up to protect new industries. However, internal capacity industrial, intellectual and market size limited the growth of the industries. Without access
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In the early years of his rule, in order to solidify his power, Pinochet imposed a state of siege(right terminology? emergency? and ruled by decree. He outlawed political parties and targeted the left as domestic enemies. It was during this time that the human rights abuses, for which the General and Chilean military are more widely known, began. Violence, torture and disappearances were frequent, and it is estimated that some 3,000 people died or disappeared and countless others, including Chiles current president, were harassed, arrested and tortured during his time in power.

By 1981, total foreign debt reached almost 50% of GDP. As much of this new debt was privately held, the government did not consider this a threat, but more a private problem. However, as can be seen by the events of 1982, the government ended up taking on all of this private foreign debt. Edwards, 1985.
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Pinochet lost his right to his Senate seat in 1998 due to the pending charges of human rights abuses. Pinochet died in December 2006 in the military hospital in Santiago, Chile Copyright 2007 Vertical

leading economic power of the region. Nevertheless, there is no denying the brutality to which the Chilean people were subjected. Political dissent was not tolerated in any form for most of his time in power, although he stands alone amongst the dictators of the world by allowing himself to be voted out of power by a democratic plebiscite in 1989. Since Pinochet left the role of President in Chile, the country has been governed by the Concertacin (The Alliance for Democracy), a Center-left coalition. During this period, great strides have been made to promote social and labor reform that were obviously absent during Pinochets rule. Not-for-prot aid organizations have emerged to help combat issues of poverty, an unemployment insurance system has been introduced as has been a minimum pension to help those at the bottom of the pyramid. Efforts have been made to put the tensions of human rights abuses to rest, when the military issued a public apology in 2004. Pinochet himself was arrested in 1998 and charged with human rights violations by a Spanish court. However, he never stood trial due to health reasons.

Chile Today

Chile has since taken a leading role in the region and today, supported by regulations that make it one of the easiest and least expensive developed countries to do business in Latin America, is doing very well. GDP continues to grow at a respectable rate, ination remains low and stable, skilled labor is available at competitive prices, immigration, traditionally very low in Chile is relatively easy compared to the rest of the region, as is opening businesses, hiring and ring of labor and ownership of property. In addition, Chile has 54 free trade agreements, including with the US, the EU, India, China and recently Japan, increasing its market size to 3.1 billion consumers. Perhaps most importantly of all, Chile has developed a strong tradition of democracy over the past 16 years making it a stable political force in the face of recent instability in much of South America. All these factors make Chile an excellent springboard for entry into the Latin American market. One of the major reasons for Chiles growth, and a signicant driver of the economy, is the abundance of copper in Chile, and its worldwide demand. Accounting for over 45% of visible exports, copper is naturally given special attention by the government, which owns the majority of Chiles large copper mines. After major increases in the copper price led to a massive appreciation of the peso in between 2003 and 2005 (from a low of 738 pesos at the end of 2002 to the average rate of 540 ), in 2006 the government elected to set up two inter4

national funds to keep the copper windfall from leading to price hikes of Chilean exports. One of these funds pay out 0.5% of the GDP annually to help decrease the national debt resulting from the 1982 crisis. The other fund is being held with the option to withdraw in 10 years to help cover the minimum pension requirement. The self-imposed tight monetary policy that prevents massive spending of the copper windfall, is regulated by the Budget Surplus Rule. Given the level of integration of Chile with the global economy, it is particularly susceptible to global nancial crises and downturns in the commodity prices, as happened in 1998 and 2001. Both years saw increases in ination and unemployment. The rule establishes that the government must maintain a minimum of a 1% GDP budget surplus provided copper is trading at medium prices in the long term. Thus preventing increased public spending in wind-

fall years and allowing for counter-cyclical spending. Nevertheless with the continued high demand for copper with development in China, Chile has maintained a budget surplus since 2001. Other major exports include salmon,4 wood chip and pulp manufacturing and agricultural goods. While Chiles economy remains well positioned, the government still faces some signicant challenges particularly in the social sector, energy and conservation. Part of these challenges are faced by the government operating on a system of public-private partnership whereby private suppliers are used to meet public demand in a BuildOperate-Transfer system. Private companies are awarded concessions for construction including highway systems, airports, prisons, railways, port facilities and public transportation allowing the government to maintain funds for public spending on social issues.

Chile is the second biggest producer and exporter of salmon in the world after Norway. Copyright 2007 Vertical

Social Security

Chile, like most developed or second world countries today faces the challenge of paying for an aging population, with a population growth rate of close to zero. While Pinochets privatization of the pension system has been seen by many as the model for social security planning, unintended consequences of the new system have created incentives for people not to participate fully and consistently in the private pension plans. One such problem is the governments commitment to top up private pension plans if the benefactor has been contributing for twenty years but does not have sufcient funds to pay out at the equivalent of the minimum wage, thus encouraging inconsistent contributions. Another problem includes the lack of compulsory contribution for the self-employed, while an assistance pension supporting all those who cannot contribute to their own fund, allows for signicant free-riding.5 Around 30% of the population are self-employed and an average of 8% unemployed, creating huge pressure on the government. Reform of the social security system remains on the top of the governments agenda.

Poverty

Chile has made tremendous advances against poverty and is one of the few countries worldwide to already meet its 2015 Millennium Goals on poverty. Since 1990, it has halved the number of people living in poverty to 18%, while those in extreme poverty from 12.9% to 4.7%. Aid programs including Un Techo Para Chile, Servicio Pais, and others work towards providing education programs to help those living in poverty improve their own situations. But, it is clear that the gap between the haves and the have-nots continues to increase. Income distribution remains a huge problem, with the bottom 10% of the population earning just 1.2% of household income. It is clear that there is still much work to be done. One particular area in which the government is attempting to make change is to help alleviate poverty in Chile is to increase the participation of women in the labor force. The 2002 National Census showed that just 35.6% of women participate despite the fact that they have a very similar level of education to men.

Energy Plan

Although between 2004 and 2005, there was a modernization of the electricity industry regulation that created conditions for increased competition in the generating sector and established clearer norms for the transmission sector, the generation of power remains a highly contentious issue in Chile. Chile is highly dependent on neighboring Argentina and Bolivia for it power supply, which in 2006 demonstrated their vulner5

ability when Argentina cut off the supply. Current plans for increased domestic generation include the damming of major rivers in the south to create hydro-electric plants. Given the volume and strength of these rivers, this could go a long way to solving Chiles power crisis. However, the South of Chile is largely dependent on tourism and the damming of these rivers would have an enormously adverse impact on the tourism income. This environmental contoversy has also attracted a great deal of international attention and publicity, placing the government in a somewhat awkward position.

Other plans the government is considering include possible use of nuclear power. This naturally has been received by an outcry from the environmentalists.

Conservation

Environmental issues abound in Chile, as many industries, including the copper industry, were left un-regulated until very recently. Currently 12 of the biggest mines in the country have signed a voluntary clean production agreement to progress towards environmentally sustainable mining, including reducing air pollutants. However there is

This problem also occurs with the public health system. Copyright 2007 Vertical

no plan to clean up abandoned mines. Air pollution in the countrys capital is substantial, and an issue the government is attempting to address head-on. Daily restrictions apply to all non-catalytic vehicles, and the government is in the process of introducing a new public transport system with more environmentally-friendly vehicles replacing older unregulated buses.6 In addition, Chile faces many challenges with deforestation, and pollution of the water systems. However, strides are being made to combat this, and increasingly natural forests are falling under park protection.

Education

Bachelets government will also need to deal with problems in the education sector made clear by the 2006 demonstrations by high school students demanding substantial improvements in the quality of education.7 Chile has made tremendous strides in education, with virtually universal participation in the compulsory primary education, as well as passing new legislation in 2003 making secondary education compulsory. In addition, almost 4 of every 10 school graduates go on to higher education and the number graduating from higher education institutions has more than doubled in the past 12 years. However, there are still many challenges to be faced. Chile needs to further improve the number of people graduating with technical knowledge to further attract foreign investment as these numbers remain low, improvements need to be made in the quality of teacher training and secondary education including further government investment in a system that is presently dominated by privately funded institutions.

Innovation Council has been set up, with the mission of redressing the institutional fragmentation. Nevertheless, Chile still has a long way to go. Public funding faces governance, interest group and allocation issues. Policy should be aimed at introducing state of the art technologies that can be adapted to business needs and geared towards fostering broad application, such as communication and information technology, to avoid focusing on programs that are already focused on value-added exports. In addition, there is the lack of human capital available to address these issues and further efforts need to be made within the education sector to address this problem. Changes are needed in the intellectual property rights legislation which in its current state a disincentive for innovation.

References and Further Readings


Britain Arrests Pinochet to face charges by Spain. The New York Times, October 18, 1998. Chile Army Admits Rights Abuses, BBC World News Service, November 5, 2004. Chile Facts At a Glance, The World Bank Group, December 8, 2006. Chile Foreign Investment Committee www.foreigninvestment.cl Chiles Innovation Challenges, Business Chile, No. 241, March 2007 Coping with the Copper Boom, The Economist, May 25, 2006. Economic Review of Chile 2006, Organization for Economic Co-operation and Development, March 2007. FX History, Historical Exchange Rates, www.oanda.com March 30, 2007. Fundacion Para la Superacion de la Pobreza www.fundacionpobreza.cl Globally Connected, Chile Foreign Investment Committee, March 2007, www.foreigninvestment.cl. Institutio de Nacional de Estadisticas, www.ine.cl International Integration and Trade, Chile Foreign Investment Committee, March 2007. OECD Economic Surveys 2003, Organization for Economic Co-operation and Development Vol: 2003, No: 17. Stabilization with Liberalization: An Evaluation of Ten Years of Chiles Experiment with Free Market Policies, Economic Development and Cultural Change, Sebastian Edwards, Vol 33, No. 3, pg 223-254. Un Techo Para Chile www.untechoparachile.cl, Violations of Intellectual Property, Business Chile, No. 241, March 2007. World Population Prospects: The 2006 Revision, United Nations Population Division, March 2007.

Innovation, Entrepreneurship and Technology

Chilean dependency on copper has had another, unexpected consequence. Chile has enormous competitive advantage in the production and sale of copper, mostly because of the sheer quantity of her resources. The result of this is that the country has been able to maintain a consistently high growth rate for most of the past twenty years without any need to innovate. This has produced a general sense of complacency in Chile, and spending on research and development lies at just 0.7% of GDP. Unless Chile makes major efforts to increase her levels of innovation, the country faces the risk of future economic stagnation. The government is already attempting to redress this, and President Bachelet has made it clear that she intends to increase both public and private funding of Research & Development to 1% of the GDP by 2010. In addition, a National
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This in itself has proved a divisive issue as the implementation has been less than smooth, with commuters being stranded all over the city. This forced Bachelet to reorganize her cabinet for the 3rd time in just over a year. These demonstrations peaked on May 30th, when just under 800,000 students took part in a protest known as the March of the Penguins becoming the largest student demonstration in three decades.
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Copyright 2007 Vertical

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