International Business. : Worldwide Recession Takes Its Toll on the Chilean Economy

ISSUE: For the past decade, Chile’s economy has grown faster than any other in Latin America, but growth has slowed dramatically this year. The government says the downturn is partly a result of its own measures to prevent the economy from overheating.

But Chile, where exports account for about 30% of its gross domestic product, has been seriously affected by the worldwide recession.

Some critics say government policy has exacerbated the impact of the global downturn. Still, nearly everyone agrees that the Chilean economy remains structurally sound, with strong capacity to rebound under better international conditions.

BACKGROUND: Chile’s economic growth has averaged 6.1% a year since 1983, outpacing the rest of Latin America. Gross domestic product grew 10.4% in 1992--the highest growth rate in the region for the year and the Chilean economy’s best performance in 27 years.

Obviously, the transition from military to democratic government in 1990 has not hurt the economy. In fact, Christian Democratic President Patricio Aylwin has continued the same basic free-market policies established under the dictatorship of Gen. Augusto Pinochet.

But this year, the economic growth rate is expected to fall to 5.5%. International prices for Chile’s main exports--copper, fish meal, fruits and cellulose--have dropped by as much as 25%, costing the economy an estimated $900 million.

Some private-sector economists say unsound fiscal and monetary management overvalued the peso, further reducing export earnings and deepening the downturn. To finance public spending, critics say, the government has had to keep interest rates high.

Critics say that as economic growth subsided, the government should have reined in spending more rapidly. Instead, they say, public spending has fueled inflation, which reached 11.9% in the first 10 months of 1993 and will almost surely surpass the official target of 12% for the year.

Some government authorities, on the other hand, say overspending in the private sector is the main cause of inflation.

OUTLOOK: The slump in Chile’s export revenues is likely to continue in 1994. The economic growth rate may dip below 4% next year, officials acknowledge, and some forecasters are predicting between 2% and 3%. But pro-government economists observe that even with the slowdown, the outlook for Chile’s economy is still better than for many industrial powers now in recession.

“The important thing is that it will grow faster than the rest of the world,” said Manuel Marfan, a consultant to the Finance Ministry. He said Chile’s rate of gross investment has grown to 27% of the gross domestic product this year, a level close to that of successful Asian economies.

Numerous investment projects are planned over the next six years in mining, manufacturing and telecommunications. New electric plants, highways and ports are also on the drawing board.

The government has opened up Codelco, the state-owned copper corporation, to ventures with private companies. The government is also privatizing railroad freight operations, while private companies are building a $1-billion gas line across the Andes from Argentina.

Presidential elections are set for Dec. 11; the winner is almost sure to be Sen. Eduardo Frei, an engineer and former businessman. Frei is among the Christian Democratic Party’s most conservative leaders on economic issues.

STRATEGY: Many analysts say Chile remains an attractive market for trade and investment. “Chile has a very open, efficient economy with stable, clearly defined rules of the game and a long history of credibility with respect for foreign investors,” said James E. Callahan, general manager of the Bank of Boston’s unit in Chile.

Many investors are looking to Chile’s mining industry, especially in copper, because of its abundance of high-grade ore that can be extracted at low cost. They are also interested in manufacturing industries that add value to raw materials such as copper, fish, fruit and wood. While Chile’s main exports have declined in value, non-traditional manufactured exports have grown this year at a rate of 10%.

Much of that growth has been in Latin American markets. Many foreign companies use Chile as a platform for investing in and exporting to other Latin American countries, often in joint ventures with Chilean companies.