Chile WT/TPR/S/28
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I. THE ECONOMIC AND TRADE ENVIRONMENT
(1) Major Features oftheEconomy
1. Since1990,theChileaneconomyhasgenerallyexperiencedsolidgrowth,areductionofinflation,
stability intheexternal balance andanincrease intrade flows. Theadministration thattookoffice
in1990committed itselftopursuing policies thatwould ensure growth withequity. Thus, investment
inhuman capital, through anincrease inpublic expenditure onhealth andeducation, hasbecome a
priority.1Thisgoalistobeachieved using resources inafiscally responsible manner (seebelow).
2. Thehighratesofgrowth, continuing thetrendofthemid-1980s, already seemtohavetranslated
intoageneral improvement inthewell-being ofthepopulation. GDPpercapita hasmore thandoubled
since 1990, reaching some US$4,978 in1996(Table I.1). Inaddition, lifeexpectancy increased from
73years in1990 to75in1996; infant mortality perthousand livebirths decreased from 16in1990
to11in1995 andthefertility ratedeclined from 2.7births perwoman in1990 to2.6in1994. In
1995, theratios ofprimary andsecondary school enrolment stood at96and79percent.2
Table I.1
Basic economic andsocial indicators, 1990-96
1990 1991 1992 1993 1994 1995 1996
Population (thousand) 13,100 13,320 13,545 13,771 13,994 14,210 14,419
Urban population (%oftotal) 83.1 83.4 83.7 84.0 84.2 84.5 84.7
Labour force, female (%) 31.0 30.7 32.0 32.5 32.7 32.4 31.7
Total fertility rate(births perwoman) 2.7 2.6 2.6 2.6 2.6 ... ...
Infant mortality rate(per1,000 livebirths) 16.0 14.6 14.3 13.1 12.0 11.1 ...
Lifeexpectancy atbirth(years) 72.7 74.4 74.4 74.4 74.4 74.4 75.2
GDP percapita (US$) 2,308 2,571 3,143 3,305 3,719 4,727 4,978
Annual growth rateaverage (%)
-Agriculture 5.98 2.74 7.43 1.49 8.46 5.55 1.80
-Mining 5.50 4.64 2.02 0.93 2.68 7.21 11.86
-Manufactures 1.10 6.56 11.01 5.06 2.89 6.50 3.50
-Services 3.47 8.16 11.52 7.10 4.22 7.92 7.59
Share oftotalemployment (%)
-Agriculture 18.1 18.1 18.1 16.7 16.2 16.0 15.0
-Mining 2.1 2.0 1.6 1.7 1.6 1.7 1.7
-Manufacturing 15.1 15.7 16.6 16.4 15.6 15.7 15.7
-Services 58.9 58.9 61.4 63.2 63.2 64.7 64.7
Rateofunemployment 5.7 5.3 4.4 4.5 5.9 4.7 5.4
School enrollment ratios (%)
-Primary school 98 98 96 94 93 96 ...
-Primary school, female 97 97 95 98 ... ... ...
-Secondary school 74 72 72 75 80 79 ...
... Notavailable.
Source: Government ofChile; World Development Report 1996; World Bank, (STARS, World Tables 1995 update, version 3.0)for
School enrollment ratios (%); andInstituto National deEstadística (INE).
1In1996, theChilean Congress approved alawtoreform thecountry 'seducational system. Thisincludes
anincrease inschool hours, anincrease ineducational funding toschools, andfinancing toconstruct additional
classrooms (IMF Survey, 28October 1996).
2TheU.N. Human Development Report, 1997, ranks Chile 30thintheHuman Development Index (HDI)
ranking (acomposite oflifeexpectancy atbirth, adult literacy, education andrealGDP percapita onapurchasing
power parity basis) -wellabove itsrankinterms ofGDP percapita alone.WT/TPR/S/28 Trade Policy Review
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3. There hasbeenlittlechange inthestructure oftheeconomy since 1990 (Chart I.1). Services
continues tobethemostimportant sector; itsshare inGDP amounted tosome 59percentin1996.
Manufacturing isthesecond largest sector (16.2 percent), followed bymining (8.3percent), and
agriculture, forestry andfisheries (7.7percent). Theservices sector hasshown thehighest ratesof
growth since 1990 (with theexception ofagriculture andmining which grew atfaster ratesin1994
and1996) andisthemajor employer (Table I.1). However, throughout theperiod allsectors have
grown atrespectable, albeit variable, rates(Table I.1).
4. Trade hasbecome increasingly important forChile given theopening upoftheeconomy, a
policy which dates fromthe1970s. Imports andexports havebeengrowing steadily since 1986, and
theratiooftrade ingoods andnon-factor services toGDP isnowclose to90percent(Chart I.2).
Asdiscussed later, themostimportant export sectors aremining, agriculture, forestry andfisheries.
(2) Recent Economic Developments
5. Since 1990, against thebackground oflarge capital inflows, themain objectives ofChilean
macroeconomic policy havebeenthegradual reduction ofinflation, themaintenance ofasustainable
external position (acurrent account deficit ofabout 3-4percentofGDP), amanageable fiscal balance,
andthepromotion ofgrowth withequity. Monetary policy hasbeenaimed atkeeping short-term interest
rates atalevel consistent withtheinflation target. Fiscal policy hasbeenaimed atkeeping public
spending growth ataratethatwould alsoavoid inflationary pressures; thisapproach hasalsocontributed
toanincrease inpublic savings andmodest fiscal surpluses. Theexchange ratehasbeenmaintained
within arange deemed consistent withtheexternal balance, anditsvolatility hasbeenlimited through
themanagement ofanexchange rateband. Restrictions onthecapital account areintended todampenChile WT/TPR/S/28
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short-term andspeculative capital flows. These measures havebeencoupled withstructural reforms;
namely unilateral trade reform, aprogramme ofprivatization andanincrease insocial expenditure.
Theprogramme asawhole hasresulted insustained growth, lower inflation andthestrengthening
oftheexternal position.
(i) Composition andgrowth ofGDP
6. Chile hasachieved sustained economic progress inthe1990-96 period inacontext ofprudent,
market-oriented economic policies. During thisperiod annual realGDP growth averaged 7percent,
inflation fellfrom 27.3percentto6.6percent(Table I.2,Chart I.3). After theslowdown ofthe
economy in1990, following theGovernment 'scontractionary fiscal andmonetary policies tobring
inflation under control, theeconomy started growing again. However, in1994, GDP growth slowed
to4.2percentafteranother period ofadjustment, recovering strongly in1995, despite thedifficult
international context ofthepost-Mexico crisis: realoutput increased to8.5percentandinflation fell
from over8.9percentduring 1994 to8.2percentin1995 (Table I.2). During 1996 theeconomy
continued togrow, while inflation decreased to6.6percent. Unemployment alsofellfrom5.9percent
in1994 to4.7percentin1995, increasing in1996 to5.4percent(Table I.1).
7. TheIMFestimates thatoutput growth during 1990-1995 reflects inlarge partanacceleration
incapital formation together withanincrease inthequality ofcapital.3During 1991 to1995, the
accumulation ofcapital wasconsidered themainengine ofgrowth. Thesubstantial growth ofoutput
3IMF Survey, 16December 1996.WT/TPR/S/28 Trade Policy Review
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wasduemainly totheincrease intheinvestment rateandtherising share ofmachinery andequipment
intotalcapital, withassociated growth inlabour productivity.
Table I.2
Economic performance, 1990-96
1990 1991 1992 1993 1994 1995 1996
Annual growth rateaverage (%)
Gross national product 4.7 7.4 11.5 7.9 3.5 10.1 6.0
Gross domestic product 3.3 7.3 11.0 6.3 4.2 8.5 7.2
Annual growth rateaverage (%)
-Private consumption, etc. 0.4 8.9 11.6 8.1 4.4 11.7 8.8
-General gov'tconsumption 1.1 4.3 5.3 3.3 2.3 2.3 2.5
-Gross domestic investment 4.0 1.6 26.0 12.5 1.0 19.0 7.4
Resource balance (annual growth rate
average)
-Exports ofgoods &NFservices 9.7 10.7 13.5 4.2 8.2 11.4 10.5
-Imports ofgoods &NFservices 3.6 8.5 23.5 11.2 5.1 22.2 10.6
Competitiveness indicators, (annual
growth rateaverage)
-Consumer price index (Dec.-Dec.) 27.3 18.7 12.7 12.2 8.9 8.2 6.6
Annual growth rateaverage (%)
Monetary survey
-Money plusquasi-money (M2) 32.1 32.6 41.1 28.1 21.6 23.7 27.2
-Money asmeans ofpayment (M1) 15.6 43.4 40.3 19.1 17.8 22.5 16.3
Interest rates
-Deposits 90daysto1year 9.5 5.4 5.3 6.4 6.4 5.9 6.9
-Lending 90daysto1year 13.3 8.5 8.1 9.2 9.3 8.5 9.3
Share ofGDP (%)(1986 Ch$)
-Private consumption, etc. 0.4 8.9 11.6 8.1 4.4 11.7 8.5
-General gov'tconsumption 1.1 4.3 5.3 3.5 2.1 2.3 2.5
Share ofGDP (%)(current Ch$)
-Gross domestic investment 26.3 24.5 26.8 28.8 26.8 27.4 28.1
-Gross domestic saving 24.2 24.1 24.8 23.9 25.4 27.6 24.8
Fiscal balance (%ofGDP incurrent Ch$)
-Government current revenue 20.5 22.3 22.4 22.6 21.9 21.5 21.4
-Government current expenditure 18.1 18.6 17.5 17.7 17.2 16.2 16.6
-Government capital payments 2.3 2.5 2.8 3.1 3.3 3.0 3.3
-Government deficit (-)orsurplus 0.1 1.2 2.1 1.8 1.4 2.3 1.5
Source: Government ofChile.Chile WT/TPR/S/28
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8. Investment hasbeenamajor demand component since 1992, withtheexception of1994when
itdeclined substantially, increasing again in1995(Chart I.4).Consumer demand hasalsobeenpositive
throughout theperiod, butlessimportant thaninvestment. Thecontribution ofexports todemand has
traditionally beenpositive, consistent withthecontinuous process ofopening uptheeconomy since
themid-1970s. Thefocus ofgovernment spending haschanged. Overall government consumption
declined between 1992and1994, remaining stable since, asaresult oftightfiscal discipline andtargeted
public expenditure.4
9. Domestic savings havecovered anincreasing proportion ofinvestment. Savings increased
rapidly from 1985 to1988 (theGDS/GDP ratiorising from 7.5to22percent), and,since thelate
1980s, bothsavings andinvestments aspercentage ofGDP haverunclosely inparallel, showing a
steady upward trendtoreach 25percentin1995(Chart I.4).Thesavings ratioregistered small declines
onlyin1993 and1996, which coincided withadeterioration oftheterms oftrade (Table I.4).
4Social expenditure increased to61percentoftotalpublic expenditure in1995 from 55percentin1990,
withincreasesconcentratedineducation,health,andhousing.Throughoutthisperiod,socialexpenditurerepresented
13percentofGDP,whileoverallpublicexpendituredeclinedto20.9percentofGDPin1995from23.3percent
in1990 (IMF Survey, 28October 1996).WT/TPR/S/28 Trade Policy Review
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Chile WT/TPR/S/28
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(ii) Public finances
10. Thetightfiscal discipline adopted since 1990 hasgenerated anincrease inthepublic savings
andsurpluses inthefiscal balance, amounting to1.5percentofGDPin1996(Table I.2).There seems
tobeapositive correlation between copper prices andpublic finances: forinstance, theincrease in
thesurplus ofthepublic sector from 1.4percentofGDP in1994 to2.3percentin1995 occurred
attimes ofexceptionally highcopper prices.5Suchalinkage istobeexpected, given theimportance
ofcopper andthefactthatCODELCO, theworld 'sleading producer, isaState-owned company.
However, inorder toreduce thevolatility offiscal income theChilean Government operates acopper
stabilization fund. Thus, ifthepriceofcopper isfourtotencentsabove anannually determined baseline
price, thesurplus willbeevenly distributed between thefundandcurrent expenditure. Iftheprice
ofcopper istencents above thebaseline price thesurplus willbewholly deposited inthefund. The
same margins apply when theprice ofcopper fallsbelow thebaseline price andresources aredrawn
outofthefundtosupplement current fiscal income.
11. Oneofthegoals oftheGovernment thattookoffice in1990wastopromote growth withequity.
Asstated bytheauthorities, thisrequired amajor increase inpublic expenditure inareas suchashealth,
housing andeducation. However, tomeetthiscommitment while maintaining fiscal equilibrium and
macroeconomic stability, ahigher leveloftaxcollection wasdeemed necessary. Thus, in1990 the
Government introduced atemporary taxreform which, interalia,raised thecorporate income taxrate
andrestructured personal income taxbrackets toincrease moderately theprogressivity ofthepersonal
income tax.Theincome taxbasewasalsowidened. After anevaluation oftheeffects ofthe1990
reform, asecond reform in1993wasintended totakeintogreater account long-term fiscal expenditure
requirements (Box I.1). Thisreform included ascheme ofgradual reduction ofthetopincome tax
rate,andoftheVAT (during 1994-97).
12. In1995, thelawregulating income taxwasmodified tohelpreduce taxevasion. Inaddition,
theexcise taxontobacco wasincreased from 52.9 to55.4percent, andthatongasoline from
3.4893 UTM to4.4084 UTM percubic metre.6
13. Further taxreforms, currently under consideration, would include afurther reduction ofimport
duties.7Such areduction intrade taxes should improve theallocation ofresources byreducing
differential treatment oftradeables andnon-tradeables. Itshould alsoreduce thenegative effect of
import taxes onexports ofgoods andservices.
14. Despite thetwofiscal reforms neither thetaxstructure northetaxrevenue hasvaried much
(Table I.3).Total taxcollection asapercentage ofGDP, increased from14.5in1990to17.8percent
in1996. VATcontinues tobetheprincipal source ofrevenue, followed byincome taxwhose collection
interms ofGDP increased markedly between 1990 and1991, probably duetothefiscal reform. The
contribution ofimport duties hasstood ataround 2percentofGDP since 1990, thusthedecrease in
import duties from 15to11percentin1991 didnotsubstantially reduce fiscal revenue; thiscanbe
attributed tothecontinuous increase ofimports asapercentage ofGDP since 1991 (Chart I.1).
5Annual average copper prices (UScents perlb.)attheLondon Metal Exchange were: 103,57 in1992;
86.71 in1993; 104.90 in1994; 133.50 in1995; and103.89 in1996 (Banco Central deChile (1997).
6On1June 1997, 1UTM wasequivalent toCh$23,861 andUS$1 =Ch$418.6.
7Therange ofthereduction hasnotbeen officially announced, butreductions of3and4percentage points
have been reported (Wall Street Journal, 22April 1997 andElMercurio ,5June 1997).WT/TPR/S/28 Trade Policy Review
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BoxI.1: TaxReforms
1. 1990 TaxReform
Value-added tax(VAT)
- Rate raised provisionally from 16percentto18percentuntil December 1993.
Income tax
- Taxation onthebasis ofcorporate profits restored.
- Corporate income taxrateraised provisionally from 10to15percentuntil December 1993.
- Number ofpersonal income taxbrackets reduced from eight tosix,increasing taxprogressivity.
- Abatement mechanism introduced allowing 2percentofthevalue ofnewcorporate assets tobe
deducted from profits tax,uptoamaximum abatement of500UTM peryear.
- Useofthetaxsystem based onactual income restricted tosmall taxpayers intheagricultural
(annual sales below 800UTM), mining (annual sales below 72,000 UTM) andlandtransport
(annual invoicing ofservices below 3,000 UTM) sectors.
2. 1993 TaxReform
Value-added tax(VAT)
- VAT ratesetat17percent, buttobemaintained at18percentduring 1994 and1995; in1996
and1997 thePresident oftheRepublic may maintain therate orlower itaccording to
macroeconomic conditions. Thelawprovides forVAT tobedefinitively lowered to17percent
in1998. However, abilliscurrently being prepared andunder legislative discussion to
maintain theVAT rateat18percent.
Income tax
- Corporate profit taxmaintained at15percent.
- Taxscale inforce until 1990 reintroduced, with areduction inthetopratefrom 50to
45percent.
- New savings incentive introduced, consisting ofdeferred taxation ofpersonal income devoted to
saving, taxation onlywhen withdrawn from savings.
- Expenses incurred byprivate enterprises foreducational projects through grants to
non-profit-making educational establishments allowed ascredits against profits tax.
- Allowance made forChilean enterprises investing abroad forpart ofthetaxes paid on
investments indestination countries.
- Profits taxrebate increased from 2to4percentofthevalue ofnewcorporate assets, withthe
maximum rebate maintained atUS$20,000.Chile WT/TPR/S/28
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Table I.3
Taxrevenue, 1990-96
(Current Ch$billion andpercent)
1990 1991 1992 1993 1994 1995 1996
Ch$billion
Total taxcollection 1,343.6 2,012.0 2,623.7 3,250.6 3,742.7 4,400.6 5,202.8
Income tax 237.8 494.3 632.0 759.2 881.0 998.2 1,227.5
VAT 649.8 932.8 1,268.4 1,588.4 1,831.2 2,128.2 2,492.1
Tariffs 222.5 276.3 334.9 413.1 429.3 836.6 616.7
Specific taxes 177.7 240.3 292.3 342.7 393.5 476.6 574.3
Other 55.7 68.4 96.1 177.2 207.8 262.1 292.0
PercentofGDPa
Total taxcollection 14.5 16.7 16.9 17.6 17.1 16.5 17.8
Income tax 2.6 4.1 4.1 4.1 4.0 3.7 4.2
VAT 7.0 7.8 8.2 8.4 8.4 8.0 8.5
Tariffs 2.4 2.3 2.2 2.0 2.0 2.0 2.1
Specific taxes 1.9 2.0 1.9 1.9 1.8 1.8 2.0
Other 0.6 0.5 0.5 1.0 0.9 1.0 1.0
a GDP incurrent pesos.
Note: Some ofthepercentages donotaddto100.0 because ofrounding.
Source: Government ofChile.
15. Chile hascontinued theprocess ofprivatization noted intheprevious Trade Policy Review
(thefirsttworounds ofprivatization tookplace in1974-79 and1984-89).8In1993, 49percentof
thecompanies operating intheIquique duty-free zonewereprivatized. In1994, thefreight division
oftheNational Railroad company wasauctioned, andtheGovernment soldpartofitsstock inanairline
company (Lanchile) andanelectrical utility (Edelnor).9CODELCO sold26percentofitsmain
electricity plant toprivate investors inearly 1996 andisexpected tosellanother 50percentbefore
theendof1997. Procedures toprivatize amajor state-owned electricity concern wereinitiated inthe
second quarter of1997.
(iii) Monetary policy
16. Since autonomy wasgranted in1989, theCentral Bank hasfocused itspolicies towards the
systematic reduction ofinflation rates, keeping astrong growth performance andasustainable external
position. TheBank'smainobjectives arepricestability, stability offoreign transactions andpayments,
andstability ofdomestic payments. Inorder toachieve these objectives, monetary policy focuses on
ratesinstead ofmonetary aggregates. Since May1995, interbank ratesaresettocontrol absorption.
Thebasic instruments usedtocontrol interbank ratesarethediscount ratestructure, netpurchases
ofCentral Bank papers, banking reserve requirements, repurchase agreements andreverse repurchase
agreements.
8During thefirstround, banks were privatized, followed bymanufacturing firms. Thefirstround ended with
the1982 crisis (Edwards, 1996). Thesecond round ofprivatizations affected sectors suchastelecommunications,
electricity, andsteel production.
9These companies were owned bytheProduction Promotion Corporation, CORFO.WT/TPR/S/28 Trade Policy Review
Page 10
17. TheCentral Bankhasbeensuccessful inbringing down inflation. Inflation hasbeendecreasing
gradually since1990, when average CPI(December-December) growth wasover27percent,toreach
alevelof6.6percentin1996. While inflation isstillabove industrial-country levels, theauthorities
consider that,given theinflationary history ofthecountry, theachievement ofsingle-digit inflation
isasuccess. Nevertheless, monetary policy willremain consistent withtheirlong-term inflation target,
i.e.toreduce inflation toindustrial-country levels.
18. Onedifficulty inbringing down therateofinflation isthewidespread indexation intheChilean
economy. Indexation, linked topastinflation, affects goods andservices, labour, foreign exchange
andfinancial markets.10Theuseofthismechanism hascontributed toinflationary inertia, thusrequiring
stronger monetary orfiscal efforts tocurbprice increases.11Reducing inflation toindustrial-country
levels would befacilitated byreducing thescope ofindexation.
(iv) Exchange ratedevelopments
19. Since 1992, exchange ratepolicy hasbeenbased onacrawling band, whereby thereference
nominal currency value ispegged toabasket ofhardcurrencies. Since January 1997 thebasket has
beendefined 80percentontheUSdollar, 15percentontheDeutsche mark and5percentonthe
Japanese Yen. Therateofcrawl ofthereference rateisadjusted daily withrespect tothebasket of
currencies bythedifference between domestic andestimated foreign inflation. Inaddition, since
November 1995, theCentral Bank hasincluded afactor reflecting thetrend rateofappreciation of
thecurrency thatcorresponds toanassessment ofthemedium-term evolution oftherealexchange
rate. Given thedifferential inproductivity growth between Chile anditstrading partners, thisfactor
wasestimated as2percentperyear. Theinterbank exchange rateinChile, forofficial andother
transactions, isallowed tofluctuate within a12.5percentbandoneachsideofthereference rate.12
TheCentral Bank canalsointervene toadjust theexchange ratewhen itisinside theband.
20. Inrealterms, theChilean pesohasbeengradually appreciating since 1990 atanannual rate
of4.6percent, equivalent toanaccumulated appreciation of24percent, during 1990-96.13The
authorities havenoted thatthetendency ofthecurrency toappreciate corresponds totheincrease in
productivity during thesame period. Chart I.5shows thatdespite therealeffective appreciation of
20percentofthepeso,exports havegrown continuously since1990, withtheexception of1993when
theprice ofcopper declined significantly.
10Projected inflation (incontrast with pastinflation) isakeyelement indetermining public-sector wage
increases.
11Thepractice wasfacilitated bytheintroduction in1967 ofaunitofaccount, theUF(unidad defomento ),
published bytheCentral Bank onadaily basis, andlinked totheconsumer price index withalagofonemonth.
Thisunitofaccount isused inthemarkets ofdurable goods andforservices; aswellasformost financial
contracts.
12ElMercurio (International Edition), 16-22 January 1997.
13Government data.Chile WT/TPR/S/28
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21. Theofficialforeignexchangemarketconsistsofcommercialbanks,authorizedexchangehouses,
andother entities licensed bytheCentral Bank. Aninformal, butlegal, exchange market covers all
transactions notrequired tobechannelled through theofficial market. Theexchange rateisfreely
determined inthismarket.14However, theongoing liberalization ofthecapital account hasallowed
aconsiderableunificationoftheexchangeratemarket,andthespreadbetweentheprimaryandsecondary
exchange ratehasbecome negligible.
22. Foreign exchange policy complements bothmonetary andfiscal policy intheGovernment 's
objective ofachieving asustainable current account deficit (i.e.3-4percentofGDP). Thispolicy
isnottargeted atfixing therealexchange rate,butatstabilizing thelong-term value oftheexchange
rateandavoiding speculative capital movements inorder toensure asustainable-trend deficit ofthe
current account.
23. Toavoidthedamagingeffectsofspeculativecapitalthecapitalaccounthasnotbeenfullyopened;
itscomplete liberalization isoneoftheCentral Bank'smain future policy challenges. Thecurrent
regulations pursue threeobjectives: (i)tomodify thecomposition ofcapital flows, favouring long-term
andequity-related flows andtaxing relatively more volatile flows suchasshort-term inflows; (ii)to
ensure theeffectiveness ofmonetary policy; and(iii)tosupport prudential regulation offinancial
institutions.
14IMF (1996).WT/TPR/S/28 Trade Policy Review
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24. Capital control instruments include reserve requirements onportfolio anddebtinflows, one-year
minimum permanence requirement onforeign direct investment, andlimits onthequantity andtype
ofexternal assets thatfinancial institutions canhold. Among them, themostimportant istheone-year
unremunerated reserve requirement, setin1992 at30percent. Theauthorities view thisreserve
requirement onallforeign borrowing asnecessary tosupport interest ratepolicy, while avoiding
undesirableupwardpressureonthevalueofthepeso,whichcouldweakenthecompetitivenessofChilean
exports.
25. Nevertheless, thecapital account hasbeenfurther liberalized. Since June1995exporters have
notbeenrequired tosurrender export proceeds totheCentral Bank, although theyarestillrequired
toinform theCentral Bank ofthese operations forstatistical purposes. Moreover, inAugust 1995,
theCentral Bank eliminated Chapters XVIII andXIXoftheCompendium ofForeign Exchange
Regulations, thuslifting restrictions onprofit remittances abroad andcapital repatriation forselected
Chilean foreign debtinstruments. Inaddition, restrictions toaccess theformal exchange market have
beeneliminated forsome investment operations abroad andlimits forinstitutional investment abroad
havebeenwidened.
(v) Balance ofpayments
26. Asshown inTable I.4,intheperiod 1990-96, Chile ranacurrent account deficit almost every
year, withtheexception of1991 and1995. These deficits havebeenmainly financed bylong-term
capital inflows. According totheauthorities, thebulkofgrowth financing hascome from domestic
sources, showing alimited reliance oncapital inflows.
27. Fluctuations inthetrade balance ofthecurrent account arestrongly linked totheevolution
oftheterms oftrade, given theimportance ofcopper inChilean exports. Forinstance, in1993 the
external current account widened, reflecting mainly adeterioration interms oftrade.15Similarly, in
1995, theCentral Bank projected asurplus inthecurrent account for1996, which didnotmaterialize
because ofadecline intheterms oftrade.16Thus, despite increased export diversification, theChilean
economy remains highly sensitive tocopper price fluctuations (seebelow).
28. Theauthorities haveestimated thatthese deficits aresustainable aslongastheyremain around
3to4percentoftheGDP. Asnoted, current account deficits havebeenmainly financed withforeign
capital, loans being oflesser importance; therewerenetoutward payments ofloans in1995and1996.
Theauthorities consider theuseofexternal financing asafundamental complement tonational savings
tofinance investment projects. However, theynoted, thatthissource offinancing should beused
cautiously,thatthesizeofthedeficithastobemonitoredandthatoveralleconomicpolicyshouldactively
control global expenditure.
29. Thecapital account balance hasbeenpositive since 1990. Netlong-term capital inflows have
beenpositive throughout theperiod despite some fluctuations. After anacute decline in1995, mainly
because ofsignificant debtpre-payments made bytheCentral Bank andthepublic sector, andinpart
asaconsequence oftheMexican financial crisis, which reduced temporary portfolio inflows, inflows
oflong-term capital recovered in1996. Theaccumulation offoreign reserves hasbeensubstantial
throughout theperiod.
15Theprice ofcopper declined from 103.57 (UScents perlb.)in1992 to86.71 in1993 (Banco Central
deChile (1997).
16Banco Central deChile (1996).Chile WT/TPR/S/28
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Table I.4
Balance ofpayments, 1990-96
(US$ million)
1990 1991 1992 1993 1994 1995 1996
Overall balance 2,631 1,058 2,305 767 4,053 1,577 2,219
-Current account balance -537 110 -698 -2,077 -639 148 -2,918
-Trade balance -736 -230 -1,130 -2,447 -997 -162 -3,391
-Merchandise trade balance 1,336 1,587 771 -982 725 1,481 -1,147
-Merchandise exports, f.o.b. 8,373 8,941 10,008 9,199 11,604 16,136 15,353
-Merchandise imports, f.o.b. 7,037 7,354 9,237 10,181 10,879 14,655 16,500
-Non-factor services, balance -261 -8 -41 3 21 -163 -229
-Factor services, balance -1,811 -1,809 -1,860 -1,468 -1,743 -1,480 -2,015
-Private current transfers, net 54 40 74 61 53 56 101
-Official transfers, net 145 300 358 309 305 254 372
-Capital account balance 3,168 948 3,003 2,844 4,692 1,429 5,137
-Long-term capital inflow, net 1,586 366 906 1,654 3,118 789 4,718
-Long-term loans, net 651 -220 133 550 1,364 -218 603
-Foreign direct investment, net 582 400 321 374 846 971 3,013
-Foreign direct investment 590 522 699 808 1,772 1,667 4,092
-Direct investment abroad 8 122 378 434 926 696 1,079
-Other long-term capital, net 353 186 452 730 908 36 1,102
-Other capital inflow, net 1,463 463 1,978 1,071 1,455 521 300
Errors andomissions -143 298 315 -70 -740 -396 -917
Changes ininternational reservesa-2,368 -1,238 -2,498 -578 -3,194 -1,061 -1,181
Memorandum items
Terms oftrade index
(1987=100: US$based)114.8 116.6 117.4 106.6 122.9 141.2 117.6
External debt 17,425 16,364 18,242 19,186 21,478 21,736 23,049
Debt servicing/Exports ofgoods andNF
services (%)20.3 19.8 17.9 17.9 17.7 14.9 16.7
a Negative signindicates increase.
Source: Government ofChile.
30. From 1985 to1995, foreign direct investment inChile increased substantially (Chart I.6).17
Cumulative totalinflows increased fromlessthanUS$2,500 million tomore thanUS$15,000 million.
Theincrease inforeign investment hasbeenmostpronounced intheprimary sector, mainly inmining.
However, thesectoral pattern ofinvestment haschanged littlesince 1985. Historically, theprimary
sectorhasattractedmostforeigncapital,followedbyservicesandindustry.Themostimportantinvestors
inChile aretheUnited States, followed bytheEuropean Union andCanada; among theLatin American
countries Argentina isthemost important investor.18
17These datainclude onlyforeign investment transactions which have entered Chile under DL600.There
havebeennoforeign investment transactions under Chapter XIXoftheCompendium ofRules ofInternational
Exchange, which governs thepurchase ofselected Chilean foreign debtinstruments abroad, since 1991.
18Comité deInversiones Extranjeras (1996).WT/TPR/S/28 Trade Policy Review
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31. Chilean direct investment abroad hasincreased fromUS$8 million in1990toUS$1,079 million
in1996 (Table I.4). Themajor destination ofChilean investment abroad isLatin America. Chile's
outward investment inLatin America hasbeenconcentrated inservices andelectricity generation;
however, therehasalsobeensome investment inmanufacturing industries suchaspaper, steel, sweets,
ceramic andcopper.19
(3) Composition andDirection ofTrade
32. Chile haspursued trade liberalization onamultilateral basisformany years andpresently the
country maintains anopen-trade system withauniform tariff of11percent(Chapters IIandIII).
Thishascontributed toasignificant growth oftrade; exports andimports ofgoods andservices were
equivalent tosome 90percentofGDP in1996 (Chart 1.2).20There wassome variation inthe
composition anddirection oftrade intheperiod 1990-95.
(i) Composition ofmerchandise trade
33. Chile exports mainly primary products: agricultural, forestry andmining. These exports
accounted formore than80percentoftotal exports during theperiod under study (1990-95)
(Table AI.1). Copper continues tobeChile'smajor export, though itsimportance hassomewhat
declined. In1990, exports ofcopper amounted tosome 46percentoftotalexports, declining to
19Latin American Weekly Report, 22August 1996.
20Based onconstant price data.Chile WT/TPR/S/28
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40percentin1995(Chart I.7). There hasbeensome export diversification, mainly inforestry, food
products andanimal feed. Exports offorestry products andwinehaveincreased, withexports almost
doubling since 1990, butexports ofother agricultural products (such asfruits) show adecline
(Table AI.1).
34. Thecomposition ofimports hasremained more orlessstable, withmanufactured goods
amounting tosome 79percentoftotalimports in1995, ofwhich, machinery andtransport equipment
arethemost important items (Table AI.2).
(ii) Direction ofmerchandise trade
35. Chile'smajorexportdestinationin1990wastheEuropeanUnion;however,inthelastfiveyears
thismarket haslostsome significance. TheUnited States, alsobecame alessimportant destination
ofChilean exports, though itstillholds some 12percentofthemarket. Latin American and
Asian countries havebecome more important markets forChile. Inrecent years, Chile hassought
tostrengthen commercial relations withLatin American partners through trade agreements, ofwhich
themostrecent isitsassociation withMERCOSUR (Chapter II).These agreements haveresulted in
anincrease intheshare ofChile'sexports totheregion, from 12.7to19.4percentbetween 1990
and1995 (Table AI.3). Chile hasalsosuccessfully promoted itsexports intheAsian region, with
exports toEastAsiaincreasing from 25percentin1990 to33.5percentin1995.21
36. Since 1995, therehasnotbeenasubstantial change intheorigin ofChilean imports. However,
theEuropean Union again lostsome importance asasupplier, while theUnited States, and,especially,
therestoftheAmericas, havebecome more important suppliers (Table AI.4). Inthelatter case, this
mayagain beexplained bythefree-trade agreements thathavebeensigned withtheLatin American
countries.
(4) Outlook
37. Theauthorities plantocontinue thesuccessful policies adopted since 1990, placing special
emphasis onthefurther reduction ofinflation, while accelerating growth, maintaining thestability of
theexchange rateandtheexternal accounts, andincreasing investment insocial areas. TheCentral Bank
willcontinue theclosemanagement ofinterest ratestoassist inachieving thesegoals. However, despite
theexpected decrease ininterest rates, macroeconomic policy willstillneedtocounter theeffects of
substantial capital inflows, aswellasperiodic fluctuations ingovernment receipts andinthecurrent
account, linked tomovements inworld copper prices. Such inflows, andthepolicy response, have
contributed tothegradual realappreciation ofthepeso,which, while helping toreduce inflation, seems
tobeapreoccupation forexporters. Theproposed reduction intheuniform tariff should alsohelp
reduce inflation, andimprove resource allocation.
21EastAsia includes Japan, Republic ofKorea, Chinese Taipei, China, Indonesia andThailand.WT/TPR/S/28 Trade Policy Review
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