Chile | Country Report

1. Overview:
Chile emerged has emerged as one of South America's most stable and prosperous nations with
high-incomes and elevated living standards. Chile, officially known as The Republic of Chile,
also joined Organisation for Economic Co-operation and Development (OECD) in 2010.

2. Chile’s Economy (Real and Nominal GDP):

Chile is ranked 4th in South America with the highest degree of economic freedom. In 2006,
Chile became the country with the highest nominal GDP per capita in South America with ever
growing GDP backed by strong human development, income per capita, globalization and low
perception of corruption. Since July 2013, Chile is considered by the World Bank as a "high-
income economy”.

Chile produces over 5% of global supplies, making up for 20% of Chilean GDP and 60% of
exports. Led by sound economic policies, cuts in poverty rate by more than half in 1980s
contributed to steady economic growth in Chile. Chile began to experience a moderate
economic downturn in 1999. The economy remained slow-moving until 2003 and showed
signs of recovery after that with 4% GDP growth. Real GDP growth reached 5.7% in 2005
before falling back to 4% in 2006. Faced with an international economic downturn the
government to spur employment and growth despite global financial crisis, Chile aimed for an
expansion with production stimulus and achieved 2% to 3% increase in GDP. Hence, even
though Chile has been performing better than average Nominal OECD GDP, we can see dip in
GDP for these two terms in Chile economy with respect to Average Real OECD GDP.
3. GDP Breakdown (Composition & Sector wise):
Non-mining sectors drove economic activity was in the early months of 2017, and by the
mining sector in the second half of the year. Other sectors that grew rapidly were commerce,
communications and personal services. Commerce was sustained by stronger consumption of
durable as well as non-durable goods. Mobile telephones drove communication; while the
performance of personal services was sustained in part by higher spending on health care and
education.

GDP - composition, by end use

Chile Brazil Mexico
Household Consumption 62.3% 63.4% 67%
Government Consumption 14% 20% 11.8%
Investment (Fixed Capital) 21.5% 15.6% 22.3%
Investment (Inventories) 0.5% -0.1% 80%
Exports of Goods & Services 28.7% 12.6% 37.8%
Imports of Goods & Services -27% -11% -39.7%
Net Exp(NX) 1.7% 1% -1.9%

Contribution of agriculture remained constant over the last decade, as a percentage of total
GDP. Contribution of industry has declined, whereas the contribution of services has
increased.

4. Unemployment in Chile:
Unemployment rate reported by the National Statistics Institute for Chile is at 6.9% for the first
quarter of 2019. Unemployment amongst women was reported at 7.9% and the same for men
was 6.1%. Chile had a high unemployment rate which started reducing from the 1990s. By
1993, it reduced to 4.9%. With Lower rate compared to Chile’s counterpart in South America
and the lowest in Chile’s history, work force experienced an increase in real wages –
increase by 13.7% in 1993. These changes in unemployment was in part due to the emphasis
that Chile’s economic model wanted growth and development of the employment-intensive
industries.

Recently, the unemployment rate is seen to be rising as compared to 2017 and 2018, even
though the growth rate of the labour force is increasing. Unemployment in 2017 was recorded
at 6.4%, 6.7% in 2018 and 6.9% for the first quarter of 2019. In terms of sector segmentation,
about 67% of the work force is present in the Services sector while, 23% and 10% in Industry
sector and Agriculture sectors.
5. Inflation Trend in Chile:
Rate of inflation is based on the Consumer Price Index (CPI). To find inflation, we check the
percentage change of CPI in the current period vs. a previous period. In general, when prices
fall instead of rising for most consumer goods through a period it is said that deflation has
occurred. The inflation rate in Chile is at approximately 2.57% and has remained below 5%
from early 2000s. Chile faced a huge increase in inflation rates in the early 1970s from 20% to
upwards of 500% in 1973 and has seen a steady decline post this era. The two main reasons
behind the improvement of inflation have been trade openness and countercyclical monetary
policies. Such policies help in Consumption Smoothing by stimulating the economy when in
decline. As per Keynesian economics, such policies help in lessening/smoothing the impact
of business cycle.

6. Savings and Investment

The chart below shows that the national
saving-investment identity holds true for
Chile, as whenever investments are greater
than savings, the current account balance
meets the difference. Since 2013, savings,
investments and current account balance
have been largely stable. The current account
deficit is under control, not putting pressures
on national savings. The graph also shows
the Chilean Saving Miracle. Savings in
Chile rose from less than 5% of GDP in the early 1980s to more than 20% of GDP from late
1980s onwards. This stellar rise in savings is conjectured to have resulted from sustained GDP
growth, privatization and implementation of structural reforms. In 1981, the government
privatized the pension scheme, inducing people to add to their pension reserves and leading
to increased mandatory savings and a resultant creation of investment capital. During the same
time, tax reforms were also implemented, wherein corporate taxes were cut, and financial
markets deepened, resulting in high corporate savings. National savings were thus bolstered
by corporate savings. These savings funded investment, which was also helped by increasing
marginal productivity of capital during this period.

7. Real Interest Rate

Real interest rates for Chile have
fluctuated over time, however
there has been a downward trend
since 2012. In accordance with a
fall in the interest rate, investments
as a % of GDP are also falling,
even though the drop is very
gradual, from 25.46% in 2012 to
22.18% in 2017.

8. Tobin’s Q
Tobin’s Q theory suggests that
investment rises if Tobin’s Q is greater
than 1 and vice versa. The table above
gives a crude cross-sectional analysis
of Tobin’s Q in the major Latin
American economies. The analysis
supports the criticism of the theory,
that Tobin’s Q may not necessarily
hold true because of structural reasons.

References
Data Sources: data.oecd.org, data.worldbank.org, ceicdata.com, economywatch.com,
statista.com, inflation. eu
http://www.scielo.org.co/scielo.php?script=sci_arttext&pid=S0121-47722008000200010
https://santiagotimes.cl/2019/05/03/unemployment-in-chile-remains-stable-6-9-in-the-first-
quarter-of-2019/
What Accounts for the Chilean Saving Miracle? Cambridge Journal of Economics,
2001,25,503-516
Understanding Domestic Savings in Chile, IDB-WP-626