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A Dynamic Business Environment

A Dynamic Business Environment [1]

The positive and competitive business environment prevailing throughout Chile is the result of the design, adoption and implementation of a series of public policies aimed at the simultaneous promotion of:

  • A macroeconomic management that is both serious and responsible.
  • Higher levels of economic openness and international integration.
  • Sound institutions and a society fabric enjoying higher degrees of fairness, while advocating that all individuals alike should gain access to the benefits of economic development.

According to a Survey issued in 2004 and focused on Business Environments, it contains a forecast on the best places to conduct business in the next five years (period 2004 – 2008). [2]Chile was rated then as the first noteworthy market of this kind in Latin America with a mark of 8.05 in a 1-to-10 scale. This ranking, projected on a world league, puts Chile as country # 17 amid the 60 countries included in the survey. The analysis took into account the following factors: 

  • The degree of political and economic stability, 
  • The type of policies concerned with the development of private business initiatives,
  • The foreign investment regime, 
  • The tax system, 
  • The labour market conditions.

Business Environment Ranking for period 2004 – 2008

On the other hand, the US-based firm of consultants A.T. Kearney published a survey in which Chile is listed amid the best ten (10) places in the world for the outsourcing of services. The specific batting order awarded to Chile was 9 within a total of 25 countries listed in such league. In a regional context Brazil is listed in 7th place in this ranking - whose leading countries are India and China - thanks to its market size and the low costs associated to the business generated within its borders. However, the survey stresses that “On a regional basis, Chile offers the best business climate and the best infrastructure chiefly in the form of a sound digital network and an array of first class satellite services”.

 

THE BEST LATIN AMERICAN CITIES FOR CONDUCTIING YOUR BUSINESS, (YEAR 2005)

 

RK 2005

RK 2004

Santiago, Chile

1

1

Miami, United States

2

2

Sao Paulo, Brazil

3

3

Mexico City, Mexico

6

6

Buenos Aires, Argentina

10

11

Montevideo, Uruguay

12

12

Río de Janeiro, Brazil

14

13

Bogotá, Colombia

13

14

Tijuana, Mexico

24

21

Lima, Peru

27

25

Quito, Ecuador

32

31

Caracas, Venezuela

36

35

La Paz, Bolivia

40

40

Source: América Economía magazine (www.americaeconomia.com) May 2005

Furthermore, Santiago leads for a second consecutive year a ranking on the best cities where to do business in Latin America during year 2005, also published by América Economía magazine. The main selection criteria used for the compilation of this ranking were the GDP figures at current prices and the size of the respective regional economies through an estimation of the city’s GDP and the per capita GDP in the metropolitan areas.

The Chilean capital city of Santiago was the best evaluated in connection with benefits and costs incurred by transnational companies whenever they decide to settle in a specific city. Another survey that is also taken into account is the one compiled by Mercer Human Resources Consulting and focused on the Quality of Life indicator. This survey resorts to qualitative and quantitative variables while evaluating the social, economic, political and business environments in 235 cities worldwide.

Another factor considered in the above survey has to do with a physical security indicator showing how dangerous is a specific city with factors such as crime rate, the efficiency of the police and security forces, social unrest, terrorism, kidnapping and political instability.

GDP’s annual average growth, period 1990 – 2004 (Selected Economies – expressed as percentages).

Competitiveness

The Annual Competitive Report for year 2005 issued by the Institute for Management Development (IMD) based in Switzerland ranks Chile in place 19th with a leap forward from position 26th recorded a year earlier. In turn this has brought about its consolidation as the most outstanding Latin American nation, ahead of Colombia (47th), Brazil (51st), Mexico (56th), Argentina (58th) and Venezuela (60th). Chile was rated better than leading trading nations of the likes of the United Kingdom, France and Japan.

Key factors such as the growth of exports, the surge in inward foreign investment, the good monetary management shown by the Central Bank, her economic stability, the efficiency of large companies and the availability of qualified engineers have all allowed for Chile’s rise in the Competitive Ranking. The latter survey compares the evolution of the economies in 51 countries and 9 regions – such as Catalonia and Sao Paulo – and their specific potential for future development.

The report highlights Chile’s main strengths are associated to the growth of exports (1), and direct investment of internal flows (4) and the average number of annual working hours (8). A good mark is also allocated to the Central Bank policies, whose impact on the economic development has been rated as positive, and the immigration laws that do not prevent companies from hiring foreign labour.

The IMD also highlights the marketing policies, the transparency of the financial institutions, Chile’s overall external image, the efficiency international standards observed by the large companies and the financial skills. All these evaluation indicators are placed in the pole position in the ranking of sixty (60) economies that were scrutinized.

The Global Competitiveness Report for period 2005-2005 published by the World Economic Forum has rated Chile in place 22 among 164 economies under scrutiny. According to the report, Finland was awarded the overall first place for the third time in the past four years. Chile was classified ahead of Malaysia (31st), the Republic of Ireland (30th), China (46th) and Spain (23rd). Furthermore, Chile continues to be the most competitive economy throughout Latin America. The next Latin American country in the listing is Mexico which comes 26 positions further to be end of it.

Global Competitiveness Ranking (selected economies)

Source: World Economic Forum, 2004 - 2005

Steady Growth

The average annual growth between years 1990 and 2003 was the highest ever recorded, with a rate of 5.5%. In 1999 the GDP contraction was 1%, mainly due to both the Asian financial crisis and the sharp reduction in copper’s selling price. The latter is Chile’s largest export commodity. However, the position was reversed in year 2000 with a 4.5% growth rate with the country as a whole returning to a steady economic growth ever since. Despite the worldwide economic slowdown and the financial crisis that hit Argentina, the GDP grew by 3.4, 2.2 and 3.3% in years 2001, 02 and 03 respectively. With a 5.8% growth rate in 2004, the Chilean economy should reach growth rates ranging from 5.25 and 6.25% for year 2005 which comfortably exceed the worldwide growth rate prediction of 4.2%.[3]

Fiscal responsibility

In period 1990 – 1998 the Chilean government managed a fiscal surplus. However, during the short-lived recession in year 1999 there was deficit equivalent to 1.4% of GDP. Thereafter, the nominal fiscal balance – with deficits of 0.3 in 2001 and 0.8 in both 2002 and 2003 – has remained in line with the new policy of structural fiscal surplus. The latter has allowed the implementation of anti cyclical measures throughout the period of reduced economic growth. [4]

Inflation under control

Inflation has dropped from annual rates in the region of 30% in the early nineties to the current single digit rates. This is due to the government’s strict fiscal discipline and a prudent monetary policy implemented by an autonomous and independent Central Bank. The downward trend was temporarily interrupted in year 2000 at a time the oil world price saw a surge in its price and domestic prices went up by 4.5%. However, inflation dropped again to 2.6% in 2001 and 2.8% the following year. By year 2003 the annual rate got to 1.1%, well below the target rate of 2 – 4% set by the Central Bank.[5]

According to the Monetary Policy report issued by the Central Bank and dated January 2005:

“… the underlying inflation in the past few quarters has shown a more paused increment than hitherto predicted. The damped cost increases, particularly those associated to labour, allows us to hope that the inflation rate will get to 3% in a more gradual fashion than anticipated. In this way the Chilean economy has shown a good capacity for absorbing added demand increments without feeding back unwanted inflationary pressures. This in turn allows for, as far as the monetary policy is concerned, a continuation of a gradual return to normality which is more in line with gradual inflation convergence close to 3%. As a working assumption, and in line with the above inflation trajectory, the projections contained herein were prepared with a predicted monetary policy rate that grows at a slightly higher rhythm that the implicit one in the asset prices during the past two weeks.”

See more in the Central Bank’s report on Monetary Policy – January 2005

Low country-risk rating

International risk classification agencies have gone beyond a mere highlighting of the privileged status enjoyed by Chile and have stressed the main achievement was to secured a position within the framework of emerging nations. This is clearly reflected in the sovereign classification of Standard & Poor’s (A in January 2004), Fitch (A, in March 2005) and Moody’s (Baa1, in February 2005). Another illustration on this same topic happened on 7 March 2005 when Chile’s rating reached the lowest ever with 57 base points and excelling the previous lowest record of 58 points recorded a few months earlier, on 15 February. Chile is now trailing behind China which was allocated 50 points.[6]

Economic freedom

The results of the Economic Freedom Index jointly produced by the Heritage Foundation and other institutions show the interaction between the individual factors which have a bearing on the economic freedom: the impact of social security legislation, commercial regulations, the government intervention in the economy, the respect for private property ownership, the receptiveness to foreign investment and a set of economic factors which influence the economic development of all countries alike.

The Economic Freedom Index for year 2005 has classified Chile in place 11 amid a listing of 161 countries, thus grading her as the only “free” economy in Latin America and the Caribbean. When compared with the position recorded a year earlier (# 13), this rating entails a move forward. Those involved in producing such Index give credit for this move forward to the much enhanced economic freedom embedded in the overall commercial policy following the signing up of free trade agreements with the United States, South Korea and the European Union. Readers may recall that these agreements entailed a reduction in the average import duties from 6% to 2.9% from one year to the next and abrogated the non-tariff barriers not to mention a capital market liberalization drive.

The transparent and non-interventionist role played by the Chilean State ensures that local and foreign companies and individual businessmen alike may freely decide on the nature of their economic activities

Transparency

The Corruption Perception Index (CPI) for year 2005 produced by Transparency International, and which entails a classification of 159 countries as per the corruption perception degree for public servant and private sector operators alike, ranges from 10 (the most transparent) to 0 (the most corrupt). The mark allocated to Chile was 7.3 that place her as country # 21. The closest country marking after this in Latin America was Uruguay whose rating and country listing were 5.9 and 32 respectively.

Again Chile managed to keep a pole position throughout the region as the least corrupt country within Latin America despite a slight setback from position # 20 that was allocated to her in the same survey issued a year earlier.

 

Índice de Percepción de la Corrupción 2005

(Economías Seleccionadas)

Rango de País

País / Territorio

Puntuación del IPC 2005*

1

Islandía

9.7

2

Finlandia/Nueva Zelanda

9.6

4

Dinamarca

9.5

5

Singapur

9.4

6

Suecia

9.2

7

Suiza

9.1

8

Noruega

8.9

9

Australia

8.8

15

Hong Kong

8.3

17

Estados Unidos

7.6

19

Bélgica/Irlanda

7.4

21

Chile

7.3

Japón

7.3

23

España

7.0

32

Botswana/Qatar/Taiwán/Uruguay

5.9

40

Hungría /Italia/ Corea del Sur

5.0

51

Costa Rica /El Salvador/Letonia/Mauricio

4.2

55

Bulgaria/ Colombia/ Fiji /Seychelles

4.0

59

Cuba/Tailandia/Trinidad y Tobago

3.8

62

Belice/Brasil

3.7

64

Jamaica

3.6

65

Ghana/México/Panamá/Perú/Turquía

3.5

78

China/Marruecos/Senegal/Sri Lanka/Surinam

3.2

97

Algeria

2.8

Argentina

2.8

Madagascar

2.8

Malawi

2.8

Mozambique

2.8

Serbia y Montenegro

2.8

158

Bangladesh/Chad

1.7

www.transparency.org

See also related document:

Chile: Ten Steps for Abandoning Aid Dependency for Prosperity

Source: The Heritage Foundation www.heritage.org/research/latinamerica/bg1654.cfm. 20 May 2003

 

INTEGRATED TO INTERNATIONAL MARKETS

Since 1990, Chile has secured a significant move forward on issues such as the integration to the international economy, chiefly in the form of Trade Promotion and Double Taxation Agreements, unilateral reduction of import duties and tariffs and active export and foreign investment promotions.

As part of this strategy, the country has consolidated a network of Free Trade Agreements (FTAs) with Canada, Mexico, the United States, the European Union, the EFTA countries (Iceland, Liechtenstein, Norway and Switzerland), Central America and South Korea. These FTAs add on to a series of bilateral economic complementation agreements subscribed with other countries in Latin America (including the four members of Mercosur), the Andean nations (Peru, Bolivia, Ecuador, Colombia and Venezuela) and Central America.

Nowadays, Chile is negotiating FTAs with China and India. Likewise, economic complementation agreements are being discussed with Singapore and New Zealand. She is also involved in the negotiations aimed at a Free Trade Area of the Americas (ALCA), a free trade and Investment zone that will entail 34 countries altogether.

On the other hand, Chile is an active member of PBEC, has an observer status at OCDE, is member of the Latin American Integration Association (better known for its Spanish acronym: ALADI) and a full member of the WTO. Through this network of commercial agreements, Chile has managed to expand her market of 15 million people to more than 1.25 thousand million consumers in America, Europe and Asia.

Free Trade Agreements (FTAs)

- Mexico· Canada · The European Union · Central America· The United States - South Korea · EFTA.

Economic Complementation Agreements (ECA)

 · Argentina· Bolivia· Colombia· Ecuador· MERCOSUR · Peru · Venezuela.

Chile: Export Dynamism

  • Chile exports to 165 markets worldwide. Her main commercial partners are the United States, Japan, China, South Korea, Mexico, Italy, Brazil, Holland, France and the United Kingdom.
  • Chile exports more than 3,800 products produced by a whole host of sectors and in a wide range of processing conditions. Being the largest worldwide copper producer, it is hardly surprising that mining produce is the largest commodity category in her export catalogue.

Chile: An Open Economy

  • The real import duties are among the lowest in the world.
  • Nowadays Chile has negotiated Trade Promotion Agreements with all her main trading partners and which entails 64.7% of all Chilean shipments.

It is calculated that in Chile...

A 3% rise in exports entails, in the long run, 1% GDP growth. 

[1] Source: Ficha Chile, Comité de Inversiones Extranjeras, 2004.
[2] Produced by The Economist Intelligence Unit (EIU).
[3] Source: Ficha Chile, Comité de Inversiones Extranjeras, 2004.Informe de Política Monetaria, Banco Central, enero 2005
[4] Source: Ficha Chile, Comité de Inversiones Extranjeras, 2004.
[5] Source: Ficha Chile, Comité de Inversiones Extranjeras, 2004.
[6] Source: Chilean newspaper “La Tercera”, March 2005
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