Joint General Membership Meeting
Joint General Membership Meeting
The Economic Miracle of Chile

17 April 2008 – At the joint membership meeting of the Bankers Association of the Philippines, Management Association of the Philippines, and the Makati Business Club held on 17 April 2008 at the Renaissance Hotel, the former director and chief debt negotiator of the Central Bank of Chile, Hernán Somerville, recounted the tribulations and the rewards of Chile’s transformation from being a highly protected state to becoming a globalized economy. “Being a small economy, we believed that the only way to compete in the new environment was to make our economy efficient, and the only way to achieve that was by opening our economy to the world, ” said Mr. Somerville. “We experienced an interesting process of economic reforms when no other country was going through that process in the 1970s. Many mistakes were made, but they were corrected.”

Rebuilding a Nation
The Chile we know today is far from the Chile of three decades ago. In the late 1970s and early 1980s, around 50% of its population were living below the poverty line, majority of whom experienced extreme poverty. It had the second-worst growth rate in Latin America. In 1982, its GDP fell by 20% and unemployment rate reached 30%. Today, Chile, with a population of 16 million people, has a per capita income close to US$15,000 a year, the highest in Latin America, and a GDP averaging at 5% every year. It has also considerably reduced poverty incidence to 14%, although Mr. Somerville admits that this rate is still unacceptable.

The advancement that Chile was able to achieve and maintain is, according to the guest speaker, attributable to three historical facts: the reforms by the military government in the 1970s, Chile’s transition to democracy, and the continuity of Chile’s basic economic policies in spite of a change of political system.

Chile pioneered in many economic reforms that the world now takes for granted. Soon after the military took over the government in 1973, the country experienced complete institutional collapse. From being a small, overprotective welfare state, Chile underwent substantial restructuring through privatization, deregulation of markets, and the abolition of fixed exchange rates. It completely eliminated most, if not all, of its trade barriers, opening its market to external competition. At present, Chile’s average import tariff rate is less than 1% for about 55 bilateral agreements they have entered into, and a standard of 6% for all other countries.

While these reforms were being implemented, Chile transitioned back into a democratic society. The political leaders decided that the time had come for a profound transformation of the institutional bases of Chile, not just in the economic and social realms but also in the political. Extreme ideological differences among the contending political parties were set aside. Today, Chile’s two grand coalition parties, the center-left and the center-right, differ only at the margins of most issues and they almost always manage to converge at the center.

Assets vs. Liabilities
Speaking like the banker he is, Mr. Somerville dichotomized into “assets” and “liabilities” what for him are the most significant factors in Chile’s current situation. He identified the country’s stable political, economic, and social situation, good infrastructure, and high standards of ethics as among the assets of Chile. In particular, he emphasized that the development of Chile’s high-quality infrastructure has been successful because the job has mostly been turned over to private firms.

Mr. Somerville said, however, that Chile’s most important asset is its high level of private and public ethics: “We have traditionally and historically a very committed establishment with high levels of transparency and ethical standards that are transmitted to the population.” He explained that as a country that relies on strong institutions, Chile gives the rule of law great importance. For instance, their judiciary is independent and highly respected by the populace. As for the leaders of government, he said, “There are many examples of (Chilean) presidents leaving the office poor. This has always been a source of huge national pride.”

On the liability side, Mr. Somerville shared his country’s continuing problems of large income inequality, relatively poorer quality of its public education system, weak and restrictive labor laws, and undefined environmental standards and laws. The Chilean government plans to address most of these, however, by spurring economic growth through good macro policies, making industries more competitive, sustaining a friendly business environment, improving the public educational system, and strictly enforcing the rule of law—solutions that Mr. Somerville fully agreed with. “They (Chilean government) have realized, learning lessons from the ’50s, that there are no shortcuts to reducing poverty.”

Lessons to Share
Chile still has some way to go before attaining total economic success, but its emergence from a nearly bankrupt financial system in the 1980s, to becoming one of the most desired destinations for investments today, is indeed an amazing feat. Among the many learnings Mr. Somerville shared, perhaps the most important lesson is the need to take pride in and be committed to one’s country, and allowing that to prevail in all transactions in order for a nation to move forward. As for its economic strategy, Chile plans to continue opening its markets to the world by entering into more bilateral trade agreements, particularly with ASEAN countries. “We believe that being competitive is the key,” Mr. Somerville said. “We don’t want to close the economy again.”

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ABOUT THE SPEAKERS

Hernán Sommerville
Mr. Somerville was Chile’s Central Bank director and chief debt negotiator from 1983 to 1988. He was responsible for the coordination and negotiation of the restructuring of Chile’s external debt with commercial banks and the Paris Club. Since leaving government service, he has been managing director and partner at FINTEC, an investment management company based in Santiago. He is also the president of the Chilean Association of Banks and Financial Institute and the Chilean representative to the APEC Business Advisory Council.