Chile Tax Guide

chapter

STRATEGIC AND DEVELOPMENT PROFILES

STRATEGIC INFORMATION

COUNTRY OVERVIEW

Independence: September 18, 1810 (from Spain)

Population : 15,153,797

Location/Size: Southern South America/757,000 sq km (292,000 sq mi), slightly smaller than twice the size of Montana

Major Cities: Santiago (capital), Concepción, Valparaíso, Antofagasta, Puerto Montt, Punta Arenas

Languages: Spanish

Ethnic Groups: White and White-Amerindian 95%, Amerindian 3%, other 2%

Religions: Roman Catholic (89%), Protestant (11%)

Defense (8/98E): Army (51,000), Air Force (13,500), Navy (30,000), Paramilitary Security Forces (29,500)

ECONOMIC OVERVIEW

Currency: Peso

Nominal Gross Domestic Product GDP: $70.02 billion

Real GDP Growth Rate : 5.4): 4.9%

Inflation Rate (consumer prices): 2.5% (2001F): 3.0%

Major Trading Partners: United States, Japan, Brazil, Argentina, United Kingdom, and South Korea

Current Account Balance (as % of GDP, 2000E): -1.4% (2001F): -1.7%

Major Export Products: Copper, cellulose, chemicals, salmon, wood products, mollusks, wine

Major Import Products: Raw materials excluding petroleum, crude petroleum, capital goods, consumer goods

Total External Debt : $36 billion

ENERGY OVERVIEW

Proven Oil Reserves: 150 million barrels

Oil Production : 16,000 barrels per day (bbl/d), of which 8,000 bbl/d was crude oil

Oil Consumption : 256,000 bbl/d

Net Oil Imports : 240,000 bbl/d

Natural Gas Reserves: 3.5 trillion cubic feet (Tcf)

Natural Gas Production: 68.9 billion cubic feet (Bcf)

Natural Gas Consumption: 141 Bcf

Recoverable Coal Reserves: 1.3 billion short tons

Coal Production: 0.6 million short tons (Mmst)

Coal Consumption: 6.9 Mmst

Electric Generation Capacity: 8.4 million kilowatts (4.0 of which is hydropower)

Electricity Generation: 38.1 billion kilowatthours (bkwh, of which 13.3 bkwh was hydropower)

ENVIRONMENTAL OVERVIEW

Total Energy Consumption : 0.97 quadrillion Btu (0.3% of world total energy consumption)

Energy-Related Carbon Emissions : 15.7 million metric tons of carbon (0.3% of world carbon emissions)

Per Capita Energy Consumption : 64.8 million Btu (vs. U.S. value of 355.8 million Btu)

Per Capita Carbon Emissions : 1.1 metric tons of carbon (vs. U.S. value of 5.5 metric tons of carbon)

Energy Intensity : 17,978 Btu/ $1990 (vs. U.S. value of 12,638 Btu/ $1990)**

Carbon Intensity : 0.29 metric tons of carbon/thousand $1990 (vs. U.S. value of 0.19 metric tons/thousand $1990)**

Sectoral Share of Energy Consumption : Residential (21.4%), Industrial (50.4%), Transportation (23.6%), Commercial (4.6%)

Sectoral Share of Carbon Emissions : Transportation (32.1%), Industrial (52.4%), Commercial (4.1%), Residential (11.4%)

Fuel Share of Energy Consumption : Oil (50.7%), Natural Gas (15.1%), Coal (18.3%)

Fuel Share of Carbon Emissions : Oil (58.1%), Natural Gas (13.8%), Coal (28.1%)

Renewable Energy Consumption : 337 trillion Btu* (4% decrease from 1997)

Number of People per Motor Vehicle (1998): 9.1 (vs. U.S. value of 1.3)

Status in Climate Change Negotiations: Non-Annex I country under the United Nations Framework Convention on Climate Change (ratified December 22nd, 1994). Signatory to the Kyoto Protocol (June 17th, 1998).

Major Environmental Issues: Air pollution from industrial and vehicle emissions; water pollution from raw sewage; deforestation contributing to loss of biodiversity; soil erosion; desertification.

Major International Environmental Agreements: A party to the Antarctic-Environmental Protocol, Antarctic Treaty, Biodiversity, Climate Change, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Nuclear Test Ban, Ozone Layer Protection, Ship Pollution, Wetlands and Whaling.

GEOGRAPHY

Location: Southern South America, bordering the South Atlantic Ocean and South Pacific

Ocean, between Argentina and Peru

Geographic coordinates: 30 00 S, 71 00 W

Map references: South America

Area:

total: 756,950 sq km

land: 748,800 sq km

water: 8,150 sq km

note: includes Easter Island (Isla de Pascua) and Isla Sala y Gomez

Area—comparative: slightly smaller than twice the size of Montana

Land boundaries:

total: 6,171 km

border countries: Argentina 5,150 km, Bolivia 861 km, Peru 160 km

Coastline: 6,435 km

Maritime claims:

contiguous zone: 24 nm

continental shelf: 200 nm

exclusive economic zone: 200 nm

territorial sea: 12 nm

Climate: temperate; desert in north; cool and damp in south

Terrain: low coastal mountains; fertile central valley; rugged Andes in east

Elevation extremes:

lowest point: Pacific Ocean 0 m

highest point: Cerro Aconcagua 6,962 m

Natural resources: copper, timber, iron ore, nitrates, precious metals, molybdenum

Land use:

arable land: 5%

permanent crops: 0% permanent pastures: 18% forests and woodland: 22% other: 55%

Irrigated land: 12,650 sq km

Natural hazards: severe earthquakes; active volcanism; tsunamis

Environment—current issues: air pollution from industrial and vehicle emissions; water pollution from raw sewage; deforestation contributing to loss of biodiversity; soil erosion; desertification

Environment—international agreements: party to: Antarctic-Environmental Protocol, Antarctic Treaty, Biodiversity, Climate Change, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Nuclear Test Ban, Ozone Layer Protection, Ship Pollution, Wetlands, Whaling

signed, but not ratified: Climate Change-Kyoto Protocol

Geography—note: strategic location relative to sea lanes between Atlantic and Pacific Oceans (Strait of Magellan, Beagle Channel, Drake Passage); Atacama Desert is one of world’s driest regions

PEOPLE

Population: 14,973,843

Age structure:

0-14 years: 28% (male 2,137,255; female 2,044,605)

15-64 years: 65% (male 4,845,523; female 4,885,328)

65 years and over: 7% (male 440,010; female 621,122) Population growth rate: 1.23%

Birth rate: 17.81 births/1,000 population

Death rate: 5.53 deaths/1,000 population

Net migration rate: 0 migrant(s)/1,000 population

Sex ratio:

at birth: 1.05 male(s)/female

under 15 years: 1.05 male(s)/female

15-64 years: 0.99 male(s)/female 65 years and over: 0.71 male(s)/female

total population: 0.98 male(s)/female

Infant mortality rate: 10.02 deaths/1,000 live births

Life expectancy at birth:

total population: 75.46 years male: 72.33 years female: 78.75 years

Total fertility rate: 2.25 children born/woman

Nationality:

noun: Chilean(s) adjective: Chilean

Ethnic groups: white and white-Amerindian 95%, Amerindian 3%, other 2%

Religions: Roman Catholic 89%, Protestant 11%, Jewish less than 1%

Languages: Spanish

Literacy:

definition: age 15 and over can read and write

total population: 95.2%

male: 95.4%

female: 95% (1995 est.)

GOVERNMENT

Country name:

conventional long form: Republic of Chile

conventional short form: Chile

local long form: Republica de Chile

local short form: Chile

Data code: CI

Government type: republic

Capital: Santiago

Administrative divisions: 13 regions (regiones, singular—region); Aisen del General Carlos Ibanez del Campo, Antofagasta, Araucania, Atacama, Bio-Bio, Coquimbo, Libertador General Bernardo O’Higgins, Los Lagos, Magallanes y de la Antartica Chilena, Maule, Region Metropolitana, Tarapaca, Valparaiso note: the US does not recognize claims to Antarctica

Independence: 18 September 1810 (from Spain)

National holiday: Independence Day, 18 September (1810)

Constitution: 11 September 1980, effective 11 March 1981; amended 30 July 1989

Legal system: based on Code of 1857 derived from Spanish law and subsequent codes influenced by French and Austrian law; judicial review of legislative acts in the Supreme Court; does not accept compulsory ICJ jurisdiction

Suffrage: 18 years of age; universal and compulsory

Executive branch:

Legislative branch: bicameral National Congress or Congreso Nacional consists of the Senate or Senado (38 seats; members elected by popular vote to serve eight-year terms; one-half elected every four years) and the Chamber of Deputies or Camara de Diputados (120 seats; members are elected by popular vote to serve four-year terms) elections: Senate - last held 11 December 2005 (next to be held in December 2009); Chamber of Deputies - last held 11 December 2005 (next to be held in December 2009) election results: Senate - percent of vote by party - NA; seats by party - CPD 20 (PDC 6, PS 8, PPD 3, PRSD 3), APC 17 (UDI 9, RN 8), independent 1; Chamber of Deputies - percent of vote by party - NA; seats by party - CPD 65 (PDC 21, PPD 22, PS 15, PRSD 7), APC 54 (UDI 34, RN 20), independent 1

Judicial branch: Supreme Court (Corte Suprema), judges are appointed by the president and ratified by the Senate from lists of candidates provided by the court itself; the president of the Supreme Court is elected by the 21-member court

Political parties and leaders: Coalition of Parties for Democracy or CPD consists mainly of: Christian Democratic Party or PDC [Enrique KRAUSS], Socialist Party or PS [Ricardo NUNEZ], Party for Democracy or PPD [Sergio BITAR], Radical Social Democratic Party or PRSD [Anselmo SULE]; Union for the Progress of Chile or UPP consists mainly of two parties: National Renewal or RN [Alberto ESPINA] and Independent Democratic Union or UDI [Pablo LONGUEIRA]; Chile 2000’s main party is Progressive Center-Center Union or UCCP [Francisco Javier ERRAZURIZ]

Political pressure groups and leaders: revitalized university student federations at all major universities; United Labor Central or CUT includes trade unionists from the country’s five largest labor confederations; Roman Catholic Church

International organization participation: APEC, CCC, ECLAC, FAO, G-11, G-77, IADB, IAEA, IBRD, ICAO, ICC, ICFTU, ICRM, IDA, IFAD, IFC, IFRCS, IHO, ILO, IMF, IMO, Inmarsat, Intelsat, Interpol, IOC, IOM, ISO, ITU, LAES, LAIA, Mercosur (associate), NAM, OAS, OPANAL, OPCW, PCA, RG, UN, UNCTAD, UNESCO, UNIDO, UNITAR, UNMIBH, UNMOGIP, UNTSO, UNU, UPU, WCL, WFTU, WHO, WIPO, WMO, WToO, WTrO

Diplomatic representation in the US:

chief of mission: Ambassador Genaro Luis ARRIAGADA Herrera

chancery: 1732 Massachusetts Avenue NW, Washington, DC 20036

telephone: [1] (202) 785-1746

FAX: [1] (202) 887-5579

consulate(s) general: Chicago, Houston, Los Angeles, Miami, New York, Philadelphia, San

Francisco, and San Juan (Puerto Rico)

Diplomatic representation from the US:

chief of mission: Ambassador John O’LEARY

embassy: Avenida Andres Bello 2800, Santiago

mailing address: APO AA 34033

telephone: [56] (2) 232-2600

FAX: [56] (2) 330-3710

Flag description: two equal horizontal bands of white (top) and red; there is a blue square the same height as the white band at the hoist-side end of the white band; the square bears a white five-pointed star in the center; design was based on the US flag

ECONOMY

Economy—overview: Chile has a prosperous, essentially free market economy. Civilian governments—which took over from the military in March 1990—have continued to reduce the government’s role in the economy while shifting the emphasis of public spending toward social programs. Growth in real GDP averaged more than 7.0% in 1991-1997 but fell to about half of that average in 1998 because of spillover from the global financial crisis. Inflation has been on a downward trend and hit a 60-year low in 1998. Chile’s currency and foreign reserves also are strong, as sustained foreign capital inflows—including significant direct investment—have more than offset current account deficits and public debt buy-backs. President FREI, who took office in March 1994, has placed improving Chile’s education system and developing foreign export markets at the top of his economic agenda.

The Chilean economy remains largely dependent on a few sectors—particularly copper mining, fishing, and forestry. Success in meeting the government’s goal of sustained annual economic growth of 5% depends largely on world prices for these commodities, continued foreign investor confidence, and the government’s ability to maintain a conservative fiscal stance. In 1996, Chile became an associate member of Mercosur and concluded a free trade agreement with Canada.

GDP: purchasing power parity—$184.6 billion

GDP—real growth rate: 3.5%

GDP—per capita: purchasing power parity—$12,500

GDP—composition by sector:

agriculture: 6%

industry: 33%

services: 61%

Population below poverty line: 20.5%

Household income or consumption by percentage share:

lowest 10%: 1.4%

highest 10%: 46.1%

Inflation rate (consumer prices): 4.7%

Labor force: 5.8 million

Labor force—by occupation: services 38.3% (includes government 12%), industry and commerce 33.8%, agriculture, forestry, and fishing 19.2%, mining 2.3%, construction 6.4% (1990)

Unemployment rate: 6.4%

Budget:

revenues: $17 billion

expenditures: $17 billion, including capital expenditures of $NA

Industries: copper, other minerals, foodstuffs, fish processing, iron and steel, wood and wood products, transport equipment, cement, textiles

Industrial production growth rate: -1.1%

Electricity—production: 35.81 billion kWh

Electricity—production by source:

fossil fuel: 41.89%

hydro: 58.11%

nuclear: 0%

other: 0%

Electricity—consumption: 35.81 billion kWh

Electricity—exports: 0 kWh

Electricity—imports: 0 kWh

Agriculture—products: wheat, corn, grapes, beans, sugar beets, potatoes, fruit; beef, poultry, wool; timber; fish

Exports: $14.9 billion (f.o.b)

Exports—commodities: copper 37%, other metals and minerals 8.2%, wood products 7.1%, fish and fishmeal 9.8%, fruits 8.4% (1994)

Exports—partners: EU 25%, US 15%, Asia 34%, Latin America 20% (1995 est.)

Imports: $17.5 billion (f.o.b)

Imports—commodities: capital goods 25.2%, spare parts 24.8%, raw materials 15.4%, petroleum 10%, foodstuffs 5.7% (1994)

Imports—partners: EU 18%, US 25%, Asia 16%, Latin America 26% (1995 est.)

Debt—external: $31.5 billion

Economic aid—recipient: ODA, $50.3 million

Currency: 1 Chilean peso (Ch$) = 100 centavos

Exchange rates: Chilean pesos per US dollar – 515.46(2007), 560.09 (2005), 609.37 (2004), 691.43 (2003), 688.94 (2002)

Fiscal year: calendar year

COMMUNICATIONS

TRANSPORTATION

Railways:

total: 6,782 km

broad gauge: 3,743 km 1.676-m gauge (1,653 km electrified)

narrow gauge: 116 km 1.067-m gauge; 2,923 km 1.000-m gauge (40 km electrified) (1995)

Highways:

total: 79,800 km

paved: 11,012 km

unpaved: 68,788 km

Waterways: 725 km

Pipelines: crude oil 755 km; petroleum products 785 km; natural gas 320 km

Ports and harbors: Antofagasta, Arica, Chanaral, Coquimbo, Iquique, Puerto Montt, Punta Arenas, San Antonio, San Vicente, Talcahuano, Valparaiso

Merchant marine:

total: 42 ships (1,000 GRT or over) totaling 527,201 GRT/787,719 DWT ships by type: bulk 11, cargo 10, chemical tanker 5, container 2, liquefied gas tanker 1, oil tanker 4, passenger 3, roll-on/roll-off cargo 4, vehicle carrier 2

Airports: 378

Airports—with paved runways:

total: 58

over 3,047 m: 5

2,438 to 3,047 m: 6

1,524 to 2,437 m: 19

914 to 1,523 m: 19

under 914 m: 9

Airports—with unpaved runways:

total: 320

over 3,047 m: 1

2,438 to 3,047 m: 4

1,524 to 2,437 m: 13

914 to 1,523 m: 73

under 914 m: 229

MILITARY

Military branches: Army of the Nation, National Navy (includes Naval Air, Coast Guard, and Marines), Air Force of the Nation, Carabineros of Chile (National Police), Investigations Police

Military manpower—military age: 19 years of age

Military manpower—availability: males age 15-49: 3,968,176

Military manpower—fit for military service: males age 15-49: 2,943,206

Military manpower—reaching military age annually: males: 132,202

Military expenditures—dollar figure: $2.12 billion; note—includes earnings from CODELCO Company and costs of pensions; does not include funding for the National Police (Carabineros) and Investigations Police

Military expenditures—percent of GDP: 2.79%

TRANSNATIONAL ISSUES

Disputes—international: short section of the southwestern boundary with Argentina is indefinite—process to resolve boundary issues is underway; Bolivia has wanted a sovereign corridor to the South Pacific Ocean since the Atacama area was lost to Chile in 1884; dispute with Bolivia over Rio Lauca water rights; territorial claim in Antarctica (Chilean Antarctic Territory) partially overlaps Argentine and British claims

Illicit drugs: a growing transshipment country for cocaine destined for the US and Europe; economic prosperity has made Chile more attractive to traffickers seeking to launder drug profits; imported precursors pass on to Bolivia.

IMPORTANT INFORMATION FOR UNDERSTANDING CHILE

Official Name: Republic of Chile

GEOGRAPHY

Area: 756,945 sq. km. (302,778 sq. mi.); nearly twice the size of California.

Cities: Capital--Santiago (metropolitan area est. 6 million). Other cities – Concepcion-Talcahuano (840,000), Vina del Mar-Valparaiso (800,000), Antofagasta (245,000), Temuco (230,000). Terrain: Desert in north; fertile central valley; volcanoes and lakes toward the south, giving way to rugged and complex coastline; Andes Mountains on the eastern border. Climate: Arid in north, Mediterranean in the central portion, cool and damp in south.

HISTORY

About 10,000 years ago, migrating Indians settled in fertile valleys and along the coast of what is now Chile. The Incas briefly extended their empire into what is now northern Chile, but the area’s remoteness prevented extensive settlement. In 1541, the Spanish, under Pedro de Valdivia, encountered hundreds of thousands of Indians from various cultures in the area that modern Chile now occupies. These cultures supported themselves principally through slash-and-burn agriculture and hunting. Although the Spanish did not find the extensive gold and silver they sought, they recognized the agricultural potential of Chile’s central valley, and Chile became part of the Viceroyalty of Peru.

The drive for independence from Spain was precipitated by usurpation of the Spanish throne by Napoleon’s brother Joseph. A national junta in the name of Ferdinand--heir to the deposed king--was formed on September 18, 1810. Spanish attempts to reimpose arbitrary rule during what was called the Reconquista led to a prolonged struggle under Bernardo O’Higgins, Chile’s most renowned patriot. Chilean independence was formally proclaimed on February 12, 1818.

The political revolt brought little social change, however, and 19th century Chilean society preserved the essence of the stratified colonial social structure, family politics, and the influence of the Roman Catholic Church. The system of presidential power eventually predominated, but wealthy landowners continued to control Chile.

Toward the end of the 19th century, government in Santiago consolidated its position in the south by persistently suppressing the Mapuche Indians. In 1881, it signed a treaty with Argentina confirming Chilean sovereignty over the Strait of Magellan. As a result of the War of the Pacific with Peru and Bolivia (1879-83), Chile expanded its territory northward by almost one-third and acquired valuable nitrate deposits, the exploitation of which led to an era of national affluence.

Chile established a parliamentary style democracy in the late 19th century, which tended to protect the interests of the ruling oligarchy. By the 1920s, the emerging middle and working classes were powerful enough to elect a reformist president, whose program was frustrated by a conservative congress. Continuing political and economic instability resulted in the quasidictatorial rule of General Carlos Ibanez (1924-32).

When constitutional rule was restored in 1932, a strong middle-class party, the Radicals, emerged. It became the key force in coalition governments for the next 20 years. In the 1920s, Marxist groups with strong popular support developed. During the period of Radical Party dominance (1932-52), the state increased its role in the economy.

The 1964 presidential election of Christian Democrat Eduardo Frei-Montalva by an absolute majority initiated a period of major reform. Under the slogan Revolution in Liberty, the Frei administration embarked on far-reaching social and economic programs, particularly in education, housing, and agrarian reform, including rural unionization of agricultural workers. By 1967, however, Frei encountered increasing opposition from leftists, who charged that his reforms were inadequate, and from conservatives, who found them excessive.

In 1970, Dr. Salvador Allende, a Marxist and member of Chile’s Socialist Party, who headed the Popular Unity (UP) coalition of socialists, communists, radicals, and dissident Christian Democrats, was elected by a narrow margin. His program included the nationalization of most remaining private industries and banks, massive land expropriation, and collectivization. Allende’s proposal also included the nationalization of U.S. interests in Chile’s major copper mines. Elected with only 36% of the vote and by a plurality of only 36,000 votes, Allende never enjoyed majority support in the Chilean Congress or broad popular support. Domestic production declined; severe shortages of consumer goods, food, and manufactured products were widespread; and inflation reached 1,000% per annum. Mass demonstrations, recurring strikes, violence by both government supporters and opponents, and widespread rural unrest ensued in response to the general deterioration of the economy. By 1973, Chilean society had split into two hostile camps. A military coup overthrew Allende on September 11, 1973. As the armed forces bombarded the presidential palace, Allende reportedly committed suicide.

PEOPLE

Nationality: Noun and adjective--Chilean(s).

Population : 15.2 million.

Annual population growth rate: 1.2%.

Ethnic groups: Spanish-Native-American (mestizo), European, Native-American.

Religions: Roman Catholic 77%; Protestant 12%.

Language: Spanish.

Education: Years compulsory--8. Attendance--3 million. Adult literacy rate--95%.

Health: Infant mortality rate--10/1,000. Life expectancy--75 yrs.

Work force (5.8 million): Services and government--36%; industry and commerce--34%;

agriculture, forestry, and fishing--14%; construction--7%; mining--2%.

About 85% of Chile’s population live in urban centers with 40% living in greater Santiago. Most have Spanish ancestry. A small, yet influential number of Irish and English immigrants came to Chile during the colonial period. German immigration began in 1848 and lasted for 90 years; the southern provinces of Valdivia, Llanquihue, and Osorno show a strong German influence. Other significant immigrant groups are Italian, Croatian, French, and Middle Eastern. About 800,000 Native Americans, mostly of the Mapuche tribe, reside in the south-central area.

The northern Chilean desert contains great mineral wealth, primarily copper and nitrates. The relatively small central area dominates the country in terms of population and agricultural resources. This area also is the historical center from which Chile expanded until the late 19th century, when it incorporated its northern and southern regions. Southern Chile is rich in forests and grazing lands and features a string of volcanoes and lakes. The southern coast is a labyrinth of fjords, inlets, canals, twisting peninsulas, and islands. It also has small, rapidly declining petroleum reserves, which supplied about 8% of Chile’s domestic requirements during 1996.

ECONOMY

GDP: $78.8 billion.

Annual real growth rate: -1.1%.

Per capita GDP: $4,450.

Commerce (18.8% of GDP): Sales, restaurants, hotels.

Manufacturing (16.3% of GDP): Types--mineral refining, metal manufacturing, food processing, fish processing, paper and wood products, finished textiles.

Financial services (15.2% of GDP): Insurance, leasing, consulting. Mining (11.4% of GDP):

Copper, iron ore, nitrates, precious metals, and molybdenum.

Forestry, agriculture, and fisheries (8.3% of GDP): Products--wheat, potatoes, corn, sugarbeets, onions, beans, fruits, livestock, fish.

Trade (through June 2000): Exports--$10.7 billion: copper, fishmeal, fruits, wood products, paper products. Major markets--EU 25%, U.S. 17%, Japan 15%, U.K. 6%, Argentina 3%, Brazil 5%. Imports--$9.7 billion: petroleum, chemical products, capital goods, vehicles, electronic equipment, consumer durables, machinery. Major suppliers--U.S. 18%, EU 18%, Argentina 15%, Brazil 7%, China 5%, Japan 4%, Germany 4%.

After a decade of highly impressive growth rates, Chile experienced a moderate recession in 1999 brought on by the global economic slowdown. After averaging real GDP growth rates of around 7% in the 1990s, the economy grew 3.4% in 1998 and contracted 1.1% in 1999. The economy has recovered in 2000, with Asian markets rebounding and copper prices edging up. GDP growth for 2000 is expected in the 5%-6% range.

The government’s limited role in the economy, Chile’s openness to international trade and investment, and the high domestic savings and investment rates that propelled Chile’s economy to average growth rates of 8% during the decade before the recession are still in place. The 1973-90 military government sold many state-owned companies, and the three democratic governments since 1990 have continued privatization at a slower pace. Policy measures such as the privatization of the national pension system encourage domestic investment, contributing to an estimated total domestic savings rate of approximately 22% of GDP in 1999.

Unemployment peaked well above Chile’s traditional 4%-6% range during the recession and is stubbornly remaining in the 10%-11% range well into the economic recovery. Despite recent labor troubles, wages have on average risen faster than inflation over the last several years as a result of higher productivity, boosting national living standards. The share of Chileans with incomes below the poverty line (roughly $4,000/year for a family of four) fell from 46% of the population in 1987 to 23% in 1998.

Maintaining a moderate inflation level is a foremost Central Bank objective. In 1996, Decemberto-December inflation stood at 8.2%, falling to 6.1% in 1997 and to 4.7% in 1998. The rate fell to only 2.3% during the 1999 recession. Most wage settlements and spending decisions are indexed, reducing inflation volatility. The projected rate for 2000 is 3.6%. The establishment of a compulsory private sector pension system in 1981 was an important step toward increasing domestic savings and the pool of investment capital. Under this system, most regular workers pay 10% of their salaries into privately managed funds. This large capital pool has been supplemented by substantial foreign investment.

Total public and private investment in the Chilean economy has remained high despite current economic difficulties. The government recognizes the necessity of private investment to boost worker productivity. The government also is encouraging diversification, including such nontraditional exports as fruit, wine, and fish to reduce the relative importance of basic traditional exports such as copper, timber, and other natural resources.

Chile’s welcoming attitude toward foreign direct investment is codified in the country’s Foreign Investment Law, which gives foreign investors the same treatment as Chileans. Registration is simple and transparent, and foreign investors are guaranteed access to the official foreign exchange market to repatriate their profits and capital. The Central Bank decided in May 1999 on the removal of the 1-year residency requirement on foreign capital entering Chile under Central Bank regulations, generally for portfolio investments. A modest capital control mechanism known as the Encaje, which requires international investors to place a percentage of portfolio investment in noninterest-bearing accounts for up to 2 years, has been effectively suspended through reduction to zero of the applicable percentage; the mechanism could be resurrected depending on economic circumstances.

Total foreign direct investment flows in 1999 reached nearly $9.1 billion, about 11% of GDP. Spain was Chile’s largest foreign investor in 1999 ($4.6 billion), followed by the U.S., France, Canada, and the U.K.

FOREIGN TRADE

Chile’s economy is highly dependent on international trade. In 1999, exports increased to $16.1 billion from $15.1 billion in 1998, and imports slid to $15.1 billion from $18.8 billion the previous year. Exports accounted for about 20% of GDP. Chile has traditionally been dependent upon copper exports; the state-owned firm CODELCO is the world’s second-largest copper-producing company. Foreign private investment has developed many new mines, and the private sector now produces more copper than CODELCO. Copper output continued to increase in 1999 Nontraditional exports have grown faster than those of copper and other minerals. In 1975, nonmineral exports made up just over 30% of total exports, whereas now they account for about 50%. The most important nonmineral exports are forestry and wood products, fresh fruit and processed food, fishmeal and seafood, and other manufactured products.

Chile’s export markets are fairly balanced among Europe, Asia, Latin America, and North America. The U.S., the largest-single market, takes in nearly one-fifth of Chile’s exports. Latin America has been the fastest-growing export market in recent years. The government actively seeks to promote Chile’s exports globally. Since 1991, Chile has signed free trade agreements with several countries, including Canada, Mexico, Venezuela, Colombia, and Ecuador. An association agreement with MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay) went into effect in October 1996. Chile, a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. Chile has begun free trade agreement discussions with South Korea and with the European Union.

In keeping with its trade-oriented development strategy, Chile stands ready to negotiate a free trade agreement with the U.S.; U.S. negotiating ability has been constrained in the absence of fast track negotiating authority. Chile’s 1996 free trade agreement with Canada was modeled largely on NAFTA in anticipation of an eventual trade pact with the United States; similarly, Chile broadened its bilateral free trade agreement with Mexico in August 1998. Chile has been a strong proponent of pressing ahead on negotiations for a Free Trade Area of the Americas (FTAA) agreement.

After growing for several years, imports were down in 1998 and 1999, reflecting reduced consumer demand and deferred investment. Imports have rebounded in the first half of 2000 and are up 25% over 1999; capital goods make up about 22% of total imports. The United States is Chile’s largest-single supplier, supplying 21% of the country’s imports in 1999. Chile unilaterally is lowering its across-the-board import tariff (for all countries with which it does not have a trade agreement) by a percentage point each year until it reaches 6% in 2003. Higher effective tariffs are charged only on imports of wheat, wheat flour, vegetable oils, and sugar as a result of a system of import price bands.

FINANCE

Chile’s financial sector has grown faster than other areas of the economy over the last few years; a banking law reform approved in 1997 broadened the scope of permissible foreign activity for Chilean banks. Domestically, Chileans have enjoyed the recent introduction of new financial tools such as home equity loans, currency futures and options, factoring, leasing, and debit cards. The introduction of these new products has been accompanied by increased use of traditional instruments such as loans and credit cards. Chile’s private pension system, with assets worth roughly $36 billion at the end of September 2000, has provided an important source of investment capital for the stock market. Chile has maintained one of the best credit ratings in Latin America despite the 1999 economic slump. In recent years, many Chilean companies have sought to raise capital abroad due to the relatively lower interest rates outside of Chile. There are three main ways Chilean firms raise funds abroad: bank loans, issuance of bonds, and the selling of stock on U.S. markets through American Depository Receipts (ADRs). Nearly all of the funds raised go to finance investment. The government is rapidly paying down its foreign debt. The combined public and private foreign debt was roughly 43% of GDP at the end of 1999, low by Latin American standards.

GOVERNMENT AND POLITICAL CONDITIONS

Type: Republic.

Independence: September 18, 1810.

Constitution: Promulgated September 11, 1980; effective March 11, 1981; amended in 1989 and 1993.

Branches: Executive--president. Legislative--bicameral legislature. Judicial--Constitutional

Tribunal, Supreme Court, court of appeals, military courts.

Administrative subdivisions: 12 numbered regions, plus Santiago metropolitan region, administered by appointed intendentes, regions are divided into provinces, administered by appointed governors; provinces are divided into municipalities administered by elected mayors. Political parties: Major parties are the Christian Democrat Party, the National Renewal Party, the Party for Democracy, the Socialist Party, the Independent Democratic Union, and the Radical Social Democratic Party. The Communist Party has not won a congressional seat in the last three elections. Suffrage: Universal at 18, including foreigners legally resident for more than 5 years.

Following a coup in 1973, Chile was ruled by a military regime which lasted until 1990. The first years of the regime, headed by Gen. Augusto Pinochet, were marked by serious human rights violations. In its later years, the regime gradually permitted greater freedom of assembly, speech, and association, to include trade union activity.

In contrast to its authoritarian political rule, the military government pursued decidedly laissez faire economic policies. During its 16 years in power, Chile moved away from economic statism toward a largely free market economy that fostered an increase in domestic and foreign private investment.

General Pinochet was denied a second 8-year term as president in a national plebiscite in 1988. In December 1989, Christian Democrat Patricio Aylwin, running as the candidate of a multiparty, Concertación coalition, was elected president. In the 1993 election, Eduardo Frei Ruiz-Tagle of the Christian Democratic Party was elected president for a 6-year term leading the Concertación coalition, and took office in March 1994. Exceptionally close presidential elections