Professional Documents
Culture Documents
This abridged case was prepared by Jose Joaquin Matte (MBA 02), under the supervision of Wei Li, Professor of
Business Administration. The authors gratefully acknowledge the financial assistance of Dardens Batten Institute. It was
written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative
situation. Copyright 2002 by the University of Virginia Darden School Foundation, Charlottesville, VA. All
rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means
electronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School
Foundation. Rev. 3/08.
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reduce the tariffs to zero within six years (except for some agricultural products). In 1997, the
Clinton administration failed to secure fast-track negotiating power from the U.S. Congress,2
delaying indefinitely Chiles chances to join the NAFTA.
In June 1996, Chile signed an association agreement with Mercosur, the Latin American
common market that included Argentina, Brazil, Paraguay, and Uruguay. The agreement consisted
of 40% reduction of tariffs for most traded products. Further tariffs cuts were expected to reach 70%
by 2002 and 100% by 2004.3 These trade arrangements further strengthened Chiles trade links with
its Latin American neighbors, in particular with Argentina and Brazil (Exhibit 3).
In 1996, Chile signed a framework agreement on economic cooperation with the European
Union. This agreement replaced a more restrictive one signed in 1990 and included cooperative
programs in areas such as customs, investments, environmental regulations, intellectual property,
and telecommunications. In early 1998, Chile and the European Commission agreed to a negotiation
schedule toward a free trade area that would be operational in 2005.
Overall, Chile had maintained a liberal, transparent trade regime since the free market
reforms in the 1970s. The government had a clear preference for concluding free trade agreements
that did not inhibit its own freedom to undertake further unilateral reforms. Chiles main trade policy
instrument was the uniform tariff that was introduced in the late 1970s. In December 1997, the tariff
was 11%, and further reductions to 7% or 8% had been sent to the Congress for approval. Despite an
increased emphasis on regional agreements since 1990, the authorities sought to continue the process
of unilateral liberalization by further reducing tariffs.
Chiles trade balance was highly dependent on primary goods, including copper, fruits,
forestry, and fishery products. About 10% of Chiles exports were manufactured goods, mainly
processed from natural resources. Despite export diversification efforts, Chile continued to be highly
dependent upon copper, and the economy remained sensitive to fluctuations in world copper prices.
To cope with the resulting volatility of export income, the Chilean government operated a
stabilization fund out of its copper revenues.
Reliance on Commodities
Chile had the largest reserves of copper in the world, accounting for 28% of the worlds
proven and economically viable reserves (Exhibit 4). Copper production was even more
concentrated: Chile produced 34% of the world output. Copper, therefore, played a very important
role in the Chilean economy. It represented nearly 40% of all Chilean exports (Exhibit 3). The
mining sector as a whole represented 50% of all the exports and 8% of the GDP. As with any other
2
A U.S. president with fast-track negotiating power was authorized by Congress to negotiate a free trade agreement
with a foreign country. Congress could only approve or disapprove the negotiated agreement but had no authority in
modifying it.
3
Investing Licensing and Trading in Chile. The Economist Intelligence Unit.
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commodity, the price of copper was very volatile and subject to wide swings in the short run
(Exhibit 5). Inventories, as well as international market conditions, drove the world market price of
copper. As shown in Exhibit 4, Europe, Asia, and North America were the main consumers of
copper. Given the extensive use of copper in the construction, automotive, and telecommunications
industries, an increasing share was used in Japan and other Asian countries, making the region the
most dynamic copper market in recent years.
Investment Link to Neighboring Countries
Chilean companies had been active investors themselves in Latin America. Because Chile
was the first country to undertake mass privatizations of state-owned assets, many privatized
companies in Chile had extensive experience with postprivatization enterprise restructuring. When
Argentina, Brazil, and other Latin American countries started to privatize their state-owned firms,
Chilean firms had a competitive advantage in restructuring and better access to Chilean and
international financial markets for financing. Between 1990 and 1995, Chileans made more than
USD5.5 billion in direct investment in Argentina, USD1.9 billion in Peru, and USD415 million in
Brazil. Economic weakness in neighboring countries would have an immediate impact on the
Chilean economy.
Taking Action
In June 1998, Carlos Massad was evaluating the Chilean economic situation. Structural
reforms such as trade liberalization and privatization, combined with macroeconomic policies on
exchange rates, inflation, and partial capital controls, had paid off handsomely. Nevertheless, the
Asian financial crisis could present serious challenges to other emerging market countries, including
Chile. The next domino to fall could be a Latin American country. The Brazilian real had been under
pressure since December 1997. While the Brazilian government had skillfully averted an immediate
devaluation, Massad knew that Chile had to prepare for the worst as investors continued to flee
emerging markets and commodity prices continued to be weak.
Massad had to devise a strategy to minimize the potential for harm due to the ripple effects
emanating from the Asian crisis. In the past, the Chilean central bank focused more attention on
controlling inflation and on stabilizing the exchange rate. Should the central bank continue to focus
on price stability in the changed global economic environment? Or should its policies focus more on
economic growth and employment?
Acting independently, the Chilean central bank had decided to pursue a restrictive monetary
policy by increasing the benchmark 90-day interest rate from a 6.5% real rate to 7% in January 1998,
and to 8.5% in February in an effort to make investment in Chile more attractive (Exhibit 7). But
would this be enough? Massad had to consider the overall state of the Chilean economy, commodity
prices, and investor confidence in emerging markets in general and in Chile in particular. Facing a
new interdependent world, he felt that he had to act quickly and forcefully.
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What should he do that would avert a crisis and at the same time make Chile an attractive
market for international trade and investment?
21.0%
38.9%
27.1%
Source: IMF
12.5
19.9%
7.9%
Inflation rate
Unemployment rate
Population (millions)
62,334
6.6%
64%
11%
19%
3%
3%
As % of GDP
Private consumption
Government consumption
Gross fixed investment
Increase/decrease in stocks
Net exports
238
19,069
-1,614
17,455
GDP
Net Factors Inc/payments abroad
GNP
12,205
2,075
3,703
539
5,772
5,224
Private consumption
Government consumption
Gross fixed investment
Increase/decrease in stocks
Exports of goods and services
Imports of goods and services
1987
12.8
46.5%
22.5%
31.2%
14.7%
6.3%
66,892
7.3%
60%
10%
20%
2%
7%
247
23,912
-1,958
21,954
14,325
2,478
4,855
589
8,265
6,602
1988
13.0
17.2%
35.2%
23.5%
17.0%
5.3%
73,956
10.6%
60%
10%
24%
2%
5%
297
24,795
-1,793
23,003
14,910
2,501
5,845
391
8,897
7,749
1989
13.1
23.3%
23.6%
28.1%
26.0%
5.6%
76,690
3.7%
62%
10%
23%
2%
3%
337
27,446
-1,592
25,854
16,979
2,677
6,352
541
9,502
8,604
1990
13.3
44.7%
23.9%
23.3%
21.8%
5.3%
82,802
8.0%
63%
10%
20%
3%
4%
375
32,279
-1,826
30,453
20,436
3,120
6,434
845
10,702
9,259
1991
13.5
26.3%
22.5%
23.4%
15.4%
4.4%
92,969
12.3%
65%
10%
22%
1%
1%
382
39,718
-1,821
37,897
25,877
3,842
8,906
549
12,174
11,631
1992
13.8
21.2%
24.0%
11.3%
12.7%
4.5%
99,464
7.0%
66%
10%
25%
2%
-2%
431
41,701
-1,600
40,101
27,484
4,184
10,392
660
11,468
12,487
1993
14.0
16.2%
9.9%
25.8%
11.4%
7.9%
105,141
5.7%
65%
10%
23%
1%
1%
404
52,947
-2,654
50,293
34,223
5,267
12,325
434
15,515
14,817
1994
Exhibit 1
-7-
65%
10%
25%
2%
-2%
425
66,518
-2,714
63,804
43,323
6,867
16,565
1,314
19,004
20,555
1996
65%
11%
25%
2%
-3%
440
71,775
-2,570
69,205
46,645
7,548
18,290
1,252
20,186
22,146
1997
14.2
22.2%
27.0%
19.6%
8.2%
7.3%
14.4
16.2%
20.6%
16.3%
7.4%
6.4%
14.6
20.2%
15.2%
9.6%
6.1%
6.1%
63%
10%
24%
2%
2%
407
63,556
-2,718
60,839
39,759
6,247
15,172
1,220
19,416
18,258
1995
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519
-519
-548
-21
50
3,629
366
5,430
5,064
Overall Balance
Financing
Reserve assets
Use of funds and credit loans
Exceptional financing
Source: IMF
-33
1,241
1,277
83
-119
-690
1,483
8,078
-6,595
-2,173
-460
-1,940
226
Current Account
Trade balance
Exports (f.o.b.)
Imports (f.o.b.)
Services and transfers
Services
Income
Transfers
1989
Balance of Payments
6,068
220
5,692
5,471
-2,323
-2,121
-209
8
2,323
-50
2,857
654
361
1,843
-484
1,284
8,373
-7,089
-1,768
-228
-1,737
198
1990
7,041
496
7,210
6,714
-1,257
-1,049
-197
-11
1,257
392
964
696
189
79
-99
1,485
8,942
-7,456
-1,584
33
-1,928
312
1991
9,168
906
9,142
8,236
-2,547
-2,344
-203
0
2,547
373
3,132
537
458
2,137
-958
722
10,007
-9,285
-1,680
-177
-1,881
378
1992
9,640
827
9,692
8,865
-428
-170
-249
-9
428
-13
2,995
600
730
1,665
-2,554
-990
9,199
-10,189
-1,565
-228
-1,656
320
1993
13,088
896
11,951
11,055
-3,151
-2,918
-210
-22
3,151
-558
5,294
1,672
908
2,713
-1,585
732
11,604
-10,872
-2,317
-149
-2,499
331
1994
14,140
1,640
14,133
12,493
-1,139
-740
-298
-101
1,139
132
2,357
2,205
34
118
-1,350
1,381
16,025
-14,644
-2,731
-324
-2,714
307
1995
14,833
1,548
15,610
14,062
-2,504
-1,107
0
-1,397
2,504
-651
6,665
3,446
1,100
2,119
-3,510
-1,091
15,405
-16,496
-2,419
-260
-2,666
507
1996
16,017
3,676
18,084
14,408
-6,812
-6,812
0
0
6,812
-3,224
8,623
1,584
3,140
3,899
1,413
2,784
18,772
-15,988
-1,371
664
-2,643
608
1997Q1
Exhibit 2
-8-
17,017
664
16,366
15,702
-3,469
-3,469
0
0
3,469
-3,108
8,894
3,924
3,024
1,946
-2,316
420
17,284
-16,864
-2,736
-388
-2,912
564
1997Q2
17,585
1,622
17,459
15,836
-2,589
-2,589
0
0
2,589
-1,970
10,511
4,908
1,936
3,667
-5,952
-3,624
15,320
-18,944
-2,328
-328
-2,564
564
1997Q3
17,306
34
18,086
18,052
132
132
0
0
-132
6,530
1,394
3,000
1,360
-2,966
-8,056
-5,812
15,276
-21,088
-2,244
236
-2,828
348
1997Q4
16,465
2,757
17,725
14,968
3,345
3,345
0
0
-3,345
-3,029
3,360
3,664
-156
-148
-3,676
-2,536
15,916
-18,452
-1,140
332
-1,748
276
1998Q1
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-9Exhibit 3
CHILE: A CHANGED JUNGLE FOR
THE LATIN AMERICAN TIGER (ABRIDGED)
International Trade
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
United States
Japan
United Kingdom
Brazil
Others
22.4%
11.0%
9.5%
6.2%
50.9%
19.3%
12.2%
11.3%
5.1%
52.1%
17.7%
13.6%
11.1%
6.1%
51.5%
Copper
Fresh fruit
Fish meal
Cellullose
Others
42.8% 48.4% 49.8% 45.5% 40.5% 38.8% 35.3% 36.6% 40.5% 39.1% 41.1%
10.2% 8.3% 6.7% 8.5% 10.5% 9.7% 9.2% 8.0% 7.0% 7.8% 7.2%
6.9% 6.5% 6.3% 4.5% 5.2% 5.4% 4.0% 3.9% 3.9% 3.9% 3.3%
5.1% 4.4% 4.0% 5.1% 5.0% 6.8% 6.7% 8.0% 9.6% 6.5% 5.8%
35.0% 32.4% 33.2% 36.4% 38.8% 39.3% 44.8% 43.5% 39.0% 42.7% 42.6%
Exports
17.4% 17.6% 16.3% 17.6% 17.3% 14.4% 16.6% 15.9%
16.2% 18.4% 16.9% 16.0% 17.0% 17.7% 16.2% 15.7%
11.0% 7.8% 6.0% 5.2% 5.0% 5.1% 4.8% 4.4%
6.5% 4.5% 5.6% 5.9% 4.5% 6.5% 5.8% 6.2%
48.9% 51.7% 55.2% 55.3% 56.2% 56.3% 56.6% 57.8%
Imports
United States
Argentina
Japan
Brazil
Source: Datastream
19.2% 19.7% 18.6% 17.7% 19.3% 19.5% 22.3% 22.3% 23.9% 23.1% 22.0%
9.6% 7.7% 10.2% 7.6% 7.9% 9.5% 7.9% 8.5% 6.4% 5.3% 9.3%
9.4% 10.9% 9.7% 7.5% 8.5% 9.8% 9.5% 8.5% 7.5% 6.0% 5.4%
4.0% 5.5% 5.5% 6.5% 6.7% 6.2% 5.2% 8.1% 8.7% 9.2% 6.3%
UV0921
-10Exhibit 4
CHILE: A CHANGED JUNGLE FOR
THE LATIN AMERICAN TIGER (ABRIDGED)
Copper Reserves (in millions of tons)
Basic Reserves Percentage of
Reserves
Percentage of
(1)
Total Reserves
(2)
Total Reserves
Chile
163
25.9%
88
27.5%
United States
90
14.3%
45
14.1%
China
37
5.9%
18
5.6%
Poland
36
5.7%
20
6.3%
Zambia
34
5.4%
12
3.8%
Russia
30
4.8%
20
6.3%
Congo (Kinshasa)
30
4.8%
10
3.1%
Mexico
27
4.3%
15
4.7%
Peru
24
3.8%
7
2.2%
Canada
23
3.7%
10
3.1%
Australia
23
3.7%
7
2.2%
Other countries
113
17.9%
68
21.3%
Total
630
320
(1): Basic Reserves include all known reserves
(2): Reserves include only reserves which are economically viable
Source: U.S. Geological Survey, Mineral Commodities Summaries (January 1998)
Consumption by Region
Consumption per region (%)
1992
1993
1994
1995
1996
1997
Europe
Germany
France
Italy
United Kingdom
Other Europe
39%
10
5
5
3
16
33%
8
4
4
3
14
33%
9
4
4
3
13
33%
9
4
4
3
13
31%
8
4
4
3
12
31%
8
4
4
3
12
Asia
Japan
China
Taiwan
South Korea
Other Asia
34%
13
8
4
3
6
37%
13
9
4
4
7
35%
12
7
5
4
7
37%
12
9
5
4
7
38%
12
9
4
5
8
38%
11
9
4
5
9
Americas
United States
Canada
Mexico
Other America
25%
20
1
1
3
28%
21
2
2
3
30%
23
2
2
3
27%
21
2
1
3
28%
21
2
2
3
28%
21
2
2
3
1%
1%
1%
1%
1%
1%
Africa
Oceania
Total
Source: IMF
1%
1%
1%
2%
2%
2%
100%
100%
100%
100%
100%
100%
UV0921
-11Exhibit 5
CHILE: A CHANGED JUNGLE FOR
THE LATIN AMERICAN TIGER (ABRIDGED)
Copper Price
Copper Price - Grade A3
(USD per metric ton @ Dec 97 prices - using GDP deflator)
4500
4000
3500
3000
2500
2000
1500
1/1/1987
5/15/1988
Source: DataStream.
9/27/1989
2/9/1991
6/23/1992
11/5/1993
3/20/1995
8/1/1996
12/14/1997
UV0921
-12Exhibit 6
CHILE: A CHANGED JUNGLE FOR
THE LATIN AMERICAN TIGER (ABRIDGED)
IMACEC Index of Monthly Economic Activity
1.50%
1.00%
0.50%
-0.50%
The IMACEC Index measured more than 90% of the components of the GDP.
Source: Banco Central de Chile
Jan-98
Jul-97
Jan-97
Jul-96
Jan-96
Jul-95
Jan-95
Jul-94
Jan-94
Jul-93
Jan-93
Jul-92
Jan-92
Jul-91
Jan-91
Jul-90
Jan-90
Jul-89
Jan-89
Jul-88
Jan-88
Jul-87
Jan-87
Jul-86
Jan-86
0.00%
UV0921
-13Exhibit 7
CHILE: A CHANGED JUNGLE FOR
THE LATIN AMERICAN TIGER (ABRIDGED)
Interest Rates
90-day real Interest Rate
(Middle Rate - Real Rate)
14%
12%
10%
8%
6%
4%
2%
0%
1/1/1994
7/20/1994
2/5/1995
8/24/1995
3/11/1996
9/27/1996
4/15/1997
11/1/1997
5/20/1998
UV0921
-14Exhibit 8
CHILE: A CHANGED JUNGLE FOR
THE LATIN AMERICAN TIGER (ABRIDGED)
Exchange Rate
Chilean Nominal Exchange Rate
(pesos per USD)
500
450
400
350
300
250
200
150
100
Jan-87
May-88
Sep-89
Feb-91
Jun-92
Nov-93
Mar-95
Aug-96
Dec-97
Source: DataStream
USD Billions
20.00
18.00
130.00
16.00
120.00
14.00
12.00
110.00
10.00
100.00
8.00
6.00
4.00
2.00
90.00
70.00
19
8
7M
19 1
87
M
19 7
88
M
19 1
88
M
19 7
89
M
19 1
89
M
19 7
90
M
19 1
90
M
19 7
91
M
19 1
91
M
19 7
92
M
19 1
92
M
19 7
93
M
19 1
93
M
19 7
94
M
19 1
94
M
19 7
95
M
19 1
95
M
19 7
96
M
19 1
96
M
19 7
97
M
19 1
97
M
19 7
98
M
1
0.00
80.00
UV0921
-15Exhibit 9
CHILE: A CHANGED JUNGLE FOR
THE LATIN AMERICAN TIGER (ABRIDGED)
Changes in the URR
Date
Measure
Motivation
Jun 1991
20% URR was introduced for all new credit inflows. 20%
of the credit inflows was required to be posted with the
central bank in a non-interest-bearing account. The holding
period varied from 90 days to one year depending on the
maturity of the debt.
Jan 1992
20% URR extended to foreign currency deposits with To close the deposit loophole
proportional holding period
May 1992
URR was raised to 30% for bank credit lines. The holding To increase the cost on foreign
period was set at one year regardless of loan maturity.
borrowings; unify duration to
facilitate enforcement
Aug 1992
URR was raised to 30% on all foreign borrowing, foreign To close a loophole and increase
investments in Chilean debt securities and foreign deposits the cost of implied tax on foreign
in Chile.
borrowings
Jan 1995
Jul 1995
Dec 1995
Oct 1996
Dec 1996
Mar 1997
Source: Jos De Gregorio, Sebastian Edwards, Rodrigo O. Valds, NBER Working Paper 7645 (2000).