Chile: The archetypal success story

1
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) Chiles real growth rate 92-97 6.5
(5 per capita)
2
Macroeconomic stabilization
Source IMF, own calculations
3
Trade liberalization
Source IMF, own calculations Note all
magnitudes in nominal terms (not adjusted for
infllation) Chiles real growth rate 92-97 6.5
(5 per capita)
4
Why trade?  Import-led growth 
Typical garment-manufacturing countrys trade
pattern
Insertion point
Infrastructure-intensive
Cotton production
Labor-intensive
Ginning
Spinning
Weaving
Dying
Cutting
Assembly
Shipping
Retailing
Natural-resource intensive
Capital-intensive
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And yet... Such a bumpy road
Source IMF, own calculations
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Why volatilitys bad changing trajectories
Traj. 3
Real growth rate
Traj. 2
Traj. 1
Real GDP level
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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
Trade liberalization
Prudent exchange-rate policy
PHASE 2
Capital account liberalization
Establishment of strong banking oversight body
rules
Internal financial liberalization
PHASE 3
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A key danger signal to watch the real exchange
rate
Index valuea
Sources First graph J.P. Morgan, unpublished
data a.1980-82100 (arbitrary) Second graph IMF,
International Financial Statistics, August 2005
growth slowly choked
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Overall lessons from a quarter-century of Chilean
history

• In the mid-seventies, Chile took the right
  direction in terms of economic policy
• 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 werent 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?
Source IMF, own calculations Note all
magnitudes in nominal terms (not adjusted for
infllation) Chiles real growth rate 92-97 6.5
(5 per capita)
12
Convergence one generation at 92-97 growth rates!
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.
Timber 1 2 4 n.a.
Semi-finished products 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.
Manufactured products 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.
Export composition Percent of total
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
2004 only
Source Central Bank of Chile, Foreign Investment
Committee, 2005, own calculations
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Cyclical downturn, or inward investment drying
out?
Gross FDI inflows Percent of total
Source Central Bank of Chile, Foreign Investment
Committee, 2005 IFS 2005 own calculations Notes
Percent of GDP graph shows net flows (in minus
out)