EXPORTS AND GROWTH : THE CASE OF CHILE

1. EXPORTS AND GROWTH: THE CASE OF CHILE Rolf J. Lüders Institute of Economics Catholic University of Chile WB, Washington, D.C. 9.05.06

2. EXPORTS AND GROWTH: THE CASE OF CHILE • I. Introductory remarks • II. Export data • III. Trade policy: coherency with the “model” • IV. Trade promotion • V. “The Chilean export model” • V. Conclusions

3. I. INTRODUCTORY REMARKS • 1. CHILE TODAY • GDP/N US$7,000; measured at PPP US$ 13,000 • GDP US$ 115 billion • Exports US$ 46 billion (right now copper price at US$3,5/lb) • Population 17 million people

4. I. INTRODUCTORY REMARKS (continued) • 2. Recent economic systems 1940-1973: “Import substitution industrialization” (average τ = 90% in 1973) 1974- present: “Social Market Economy” (average τ = 2%) • 3. Present “model”: open market economy in which the State plays a “subsidiary” role; exports and the private sector “drive” the economy

5. Economic and export growth rates (percentages) 1820-1995 1940-70 1978-95 ρ x%ρ x%ρ x% CHILE 1,5 2,5 1,5 -0,4 3,2* 6,8* REST WORLD 1,4 2,8 2,6* 3,3* 1,5 4,4

6. CHILE 1810-2000: EXPORTS/GDP

7. CHILE 1810-2000: GROWTH PERFORMANCE

8. II. EXPORT DATA • 1. Exports/GDP (high growth rate after liberalization) • 2. Exports by sectors (significant diversification after liberalization) • 3. Regional distribution of exports (very significant diversification after liberalization)

9. Exports(q)/GDP (%)

10. Exports (%)

11. Exports (%)

12. III. TRADE POLICY: COHERENCY WITH THE “MODEL” • 1. The “model” • Remind: very open, competitive market economy with a subsidiary role of the government (among other things, “regulations to improve the working of markets”). Private sector and exports are the engine of the growth process. • Emphasizes “good” resource allocation (onlyminor discriminations between sectors and agents; government corrects for externalities; social expenditures) • No discrimination against or in favor of savings, nor against or in favor of FDI (in fact, a progressive expenditure tax a la Kaldor has been institutionalized). However, relatively high (marginal) tax rates exist.

13. III. TRADE POLICY: COHERENCY WITH THE “MODEL” • 2. All the above tends to generate a favorable investment climate. Stable political institutions and strict adherence to the “rule of law” support the described economic institutions. • 3. If at all possible, trade policydoes therefore not discriminate between tradables and no tradables, as well as inbetween tradables (imports-exports). Reduction, if notelimination, of all trade restrictions (tariff barriers, non-tarrif barriers, other). • 4. The aim of the existing economic institutions –including those in the trade area- is to make the economy as efficient and competitive as possible.

14. III. TRADE POLICY: COHERENCY WITH THE “MODEL” • 5. The trade liberalization was carried-out in two stages: • 1974-1989: tariffs were unilaterally reduced (increased) until an even tariff of 15% was reached (before the recession of 1982, 10%); non-trade barriers were eliminated • 1990-to present: general tariffs were further reduced to 6% and free trade agreements, which lower average tariffs but not necesarily lower specific effective tariffs, were negotiated (MERCOSUR, México, Canada, USA, EU, Korea, others in LA; recently China and India; etc.)

15. Average tariff (%)

16. CHILE 1974-1979: EFFECTIVE TARIFFS AÑO AGRICULTURE MINING INDUSTRIAL NO TRADABLE 1974 - 21 - 32 49 - 13 1975 - 7 - 15 32 - 10 1976 - 1 - 2 19 - 7 1977 - 3 1 13 - 5 1978 2 2 7 - 4 1979 4 4 4 - 3

17. III. TRADE POLICY: COHERENCY WITH THE “MODEL” • 6 . Only three exceptions –besides the free trade agreements- to the non-discrimination policy still exist: (1) the special tax and tariff treatment for the extreme north and south geographic zones of the country; (2) a forestry subsidy; and (3) price bands for some agricultural products. The latter will have to be abandoned to conform to WTO regulations. • 7. After 1974, efforts –not always totally successful- were made to control aggregate expenditures (through fiscal déficit control; prudent monetary expansions, etc.). The “1% structural fiscal surplus policy”. • 8. Measures were taken to matain a relatively high (pesos over US$) real exchange rate. These include, of course, the reduction in tariffs, which in itself brings about a higher real exchange rate. Also, a “copper fund” was institutionalized.

18. Real Exchange Rate (1996=100)

19. IV. TRADE PROMOTION • 1. Justified as a way to correct for externalities and eliminate any remaining discrimination against exports. • 2. Must be understood as a complement to previously described liberalization and macroeconomic measures. • 3. Includes actions of PROCHILE, drawbacks for non-traditional exports, some support for international marketing, public sector investments in infrastructure, etc. The recent role of CPC.

20. V. THE CHILEAN EXPORT MODEL • 1. As a result of the described institutions, policies, and promotions, a “Chilean export model” evolved naturally: • Exports are based to a large extend on primary products, either in their raw form or processed (copper, molibdenum, iron, grapes, wine, forestry products of different kind, fish products, etc.), although manufacturing exports also have increased. • A significant diversification in terms of products and markets has taken place. • Although there are over 4000 exporters, locals and foreigners, most of the volume of exports in each industry is carried out by a reduced number of agents.

21. V. THE CHILEAN EXPORT MODEL • In many export industries production is carried out by a large number of small and medium sized producers, most of them locals. Exporters often provide technical know-how, credit, and market access to those producers. • The government plays a significant role in creating the proper investment climate for efficient production and in facilitating access to Chile´s export products abroad, through the definition of competitive rules of the game, the provison of adecuate infrastructure, and the negotiation of free trade agreements. • Export promotion activities reduce any remaining anti-export bias and provide assistance to a large number of relatively small exporters.

22. VI. CONCLUSIONS • 1. Exports became, after 1973, again one of the engines of a relatively high growth rate in Chile • 2. Export growth in Chile is based on non-discrimination. There exists no anti-export bias any more, as in the past, nor is there any pro-export bias, as some have been advocating for. • 3. The reduction in import duties –among other measures- led to a significant real peso depreciation. • 4. A relatively free and efficient market economy (overall) and the corresponding level of the exchange rate, within the framework of stable and reliable institutions, explain therefore to a large extent the export performance of the country.

23. VI. CONCLUSIONS • 5. More than a private-public sector partnership, what exists in Chile is a relatively clear and broadly accepted definition of the role of each sector, roles which complement each other. This has been the way in which rentseeking –generally prevalent up until 1973- has been minimized and exports have been dynamized.