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Booming Chile gains an entry into Mercosur
Development Business / November 30, 1996

By Larry Luxner

SANTIAGO -- Chile's recent entry into the Southern Common Market (Mercosur in Spanish) is being billed as the country's most significant economic milestone in years -- even more crucial than eventual membership in the North American Free Trade Agreement.

Chile's associate member status in Mercosur, which took effect Oct. 1 following a 36-3 ratification vote by the Chilean Senate earlier this summer, for the first time gives it a voice in South America's most important customs union. Specifically, the deal provides Chile easier market access to 200 million consumers in Argentina, Brazil, Paraguay and Uruguay, while giving companies from those four nations the access they've long sought to Chile's Pacific ports, and hence the Pacific Rim.

Some 90% of all products traded by the five nations have already seen an immediate 40% reduction in tariffs, though trade won't be tariff-free until 2003. Even then, certain agricultural products like wheat, rice and wine will be protected from free trade for up to 15 years. For competitive reasons, Chile -- whose own economy is far more export-oriented than those of the other four countries -- will also keep its own external tariff of 11%, despite Mercosur's common external tariff of 13%.

"For us, today is an important day," said Jorge Marshall, acting president of Chile's Banco Central, during a news conference called for the occasion. Added the country's foreign minister, José Miguel Insulza: "We expect to have a [full] free-trade agreement within eight to 10 years. We feel this should give a big push to Southern Hemisphere regional integration efforts. I'm very glad we're signing this agreement."

This development comes as South America's two major trading blocs -- Mercosur and the Andean Pact -- hold talks to join forces, creating a 10-member entity that will eventually encompass all of South America except the three Guianas. Analysts say the proposed merger between Mercosur and the 27-year-old Andean Pact -- made up of Bolivia, Colombia, Ecuador, Peru and Venezuela -- also strengthens Brazil's hemispheric standing at a time when the United States is viewed as having dropped the ball following the hyped-up 1994 Miami Summit of the Americas.

Riordan Roett, director of Latin American Studies at Johns Hopkins University in Washington, says he's confident the Mercosur-Andean Pact marriage will work.

"As long as negotiations are as careful as they were with Chile, there should not be any problem," he said. "It probably won't be a complete integration process, but it does set the stage for further negotiations as we move into the next century."

While Chile has only 14 million people -- compared to Argentina's 35 million and Brazi's 160 million -- its economy, which grew 8.5% last year and is expected to finish 1996 with GDP growth of around 7%, is far more healthy than either of those other countries.

Anyone who doubts Chile's newfound prosperity need only take a drive along the modern highway leading from Santiago's gleaming new Arturo Merino Benítez International Airport to the city. Billboards advertising Hush Puppies and Puma running shoes, sprawling discount outlets -- even a J.C. Penney's and a Rolls-Royce dealership -- all attest to Chile's increasing attractiveness as a site for foreign investment.

Under President Eduardo Frei, inaugurated in March 1994 to a six-year term, Chile has continued to grow rapidly, achieving a GDP of $56.6 billion (or $4,015 per-capita) in 1995. It is already the 20th most competitive nation in the world, according to the 995 World Competitiveness Report.

That 800-page study, issued by the Geneva-based International Institute for Management Development, ranks 48 nations annually in such categories as domestic and economic strength, government, finance, management and infrastrucure. In the most recent survey, Chile scored 66.4 out of a possible 100, placing it just ahead of Malaysia, Ireland, Israel and South Korea, and well ahead of the rest of South America.

"For the first time in many years, the Chilean economy has shown 13 years of consecutive growth," said Jaime Estevez Valencia, president of Chile's Chamber of Deputies and a socialist who represents Santiago's poorest neighborhoods. The lawmaker recently visited Washington in hopes of winning Congressional support for including his country in the North American Free Trade Agreement.

"In 1995, our exports came to $16.4 billion, and our imports were $15 billion. We can't continue this expansion without free-trade agreements that break protectionism," Este-vez said in a recent interview at his Santiago office. "We want fewer obstacles to sell to the United States."

The country's welcome approach to free trade, fostered during the virulently anti-Communist dictatorship of Gen. Augusto Pinochet -- still commander of the country's armed forces -- has helped turned Chile into a model for less-developed nations to follow. Critics, however, say the wealth is very unevely distributed.

"The situation of the pobres has improved, but that of the ricos has improved more," says Estevez. "We must have better distribution of wealth throughout the country."

Some 386,000 Chileans are now out of work, 37% of them youths 15 to 24 years old. The national unemployment rate stands at 7.1%, but is 8.4% in the Santiago metro area. Although that's low by Latin standards -- the jobless rate in neighboring Argentina is over 20% -- Finance Minister Eduardo Aninat says he's quite worried.

Nevertheless, Chile earlier this year became the first Latin American nation to be assigned an "A" rating by the London-based Economic Intelligence Unit. The EIU says its decision to upgrade Chile to its top rating band follows a fall in interest payments as a share of exports, triggering an improvement in its creditworthiness.

"Chile was one of the countries worst affected by the debt crisis of the early 1980s," says EIU analyst John Bowler. "But prudent and innovative macroeconomic policies have enabled the country to achieve steady, export-led growth. As a result of fiscal prudence and the successful development of private pension funds, Chile's savings ratio is now around 28% of GDP." By comparison, Latin America's four largest economies -- Argentina, Brazil, Mexico and Venezuela -- still fall under EIU's high-risk "D" category.

Last year, Chile lured $4.32 billion in foreign investment, while Chilean capital abroad totaled $644.2 million.

"The spectacular growth of exports was due mainly to an improvement in the terms of trade, and to an 11% increase in physical volume exported," said the Chilean Embassy in Washington, adding that world prices for its principal products rose 23% last year. For example, Chilean lumber exports hit $2.35 billion, a 52% jump over 1994 figures.

Marcel Jeanneret, senior partner at J&A International Business Consultants in San-tiago, says getting into Mercosur will open up lots of possibilities for U.S. firms to export to the region as a whole, adding that "close to 40 U.S. companies already have their Andean or Latin American operations headquartered in Chile."

As important as it is, Mercosur isn't Chile's only foreign-policy priority. Last year, Chile joined the Asia-Pacific Economic Cooperation bloc. APEC member countries -- led by Japan, South Korea, Malaysia and Indonesia -- plan to create a free-trade zone in the Asia-Pacific region by the year 2020. As an example of its expanding Asian ties, Chile recently agreed to develop a computerized tactical training system for the Malaysian Army.

Chile has also signed eight treaties with Latin American countries (most recently with Cuba), ratified a free-trade agreement with the European Union and approved similar limited agreements with Canada and Mexico.

It has not, however, succeeded in getting into NAFTA -- despite intensive lobbying by the Chilean-American Chamber of Commerce and the Chilean Embassy in Washington. U.S. opposition by lawmakers still upset at free trade with Mexico, not to mention labor and environmental concerns, have prevented Congress from giving President Clinton fast-track authority on the NAFTA legislative debate.

Nevertheless, Alex Fernández, the newly elected president of AmCham, says his mission is to promote and help create new businesses within the framework of free trade.

"It is most probable that once the electoral period ends in the United States, the signing of the agreement will proceed," Fernández said of NAFTA, adding that "Chile has come of age in commercial matters and has demonstrated that it's capable of signing important documents."

Others are less optimistic. "There's no way Chile will get in next year," says Dean Alexander, director of international business development at Grant Thornton Chile. "In the United States, there's no voting base, and it's not a strategic national interest. Besides, Chile has played its cards with Mercosur."

John Biehl, Chile's ambassador in Washington, tends to agree.

"I think it's going to take time to see how the United States will continue the agree-ment and how the government is going to get fast-track," Biehl recently told the Chilean-American Chamber of Commerce, adding that Chile's membership in NAFTA "is not a matter of life or death." In the case of Mexico, he said, 85-90% of its exports go to the U.S. market, while the figure for Chile is only 18-20% (most of Chile's exports end up in Asia, Europe or other Mercosur nations). "I think we can resolve this in a mature manner, as the obsession over NAFTA has faded away," said Biehl. "Whether it's going to be a viable, universal proposition to encourage further free trade remains to be seen. And the problems with that are mainly here, in the United States."

As Roberto Matus, No. 2 official at the government promotion agency Pro-Chile, says, "nobody's waiting to make investment decisions because we're not in NAFTA. Our trade relations are flourishing, and they have been for a long time." Even so, Matus says Pro-Chile strongly supports the country's entry into NAFTA, arguing that "it's a way of locking in today's good economic environment for the long term."

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