Journal Section: Chile
Andrea Looney
INTB 481
4.18.2009
It was my first time stepping foot out of the United States. My first time out of the country, my first time studying abroad, and I was going with one friend and twenty nine almost complete strangers; to South America of all places. The South America that housed Colombia which was known for drug trafficking. The South America I heard had of guerrilla armies fighting in the jungle heat. I had studied about the Incan culture in sixth grade and when I was 10, I played for a soccer team called “Argentina”. I can pronounce all of the South American countries in Spanish, thanks to my high school language teacher. A couple of missionaries I know have a son my age; they all lived in Ecuador for years. This was the extent of my knowledge about South America. As for Chile, I had no idea what I was getting myself into. All I knew was that I could survive if LeBow was sponsoring a trip, and I had heard that I was going to have the time of my life.
My expectation was close to the videos we had watched in Spanish class years ago: old cars, lots of graffiti, a bad fashion sense, and just a sense of being at least a decade behind. I knew it would be warm, bright and sunny the entire time we were there, I just didn’t know how much I would enjoy it. As for the economy, I anticipated that Chile would be at the beginning of a credit crunch because I had read about the propensity for credit card use. The social programs would be lacking and the people would be poor and uneducated. The crime rate would be pretty high, and the people would not be as religious as in the United States.
When we first got off the bus at the Plaza de Armes, I knew I was in for a huge change of perspective. Listening to Jiame, our tour guide, talk about Chile, Santiago, the cathedral rebuilt three times, and the past and current political situation, I knew that there would be more to the experience than I realized.
The second day in Santiago, we visited our first business lecture at Pontificia Universidad Catolica de Chile. The first lecture was by Professor Andres Ibanez and the second lecture was by Rolf Lüders. The following is my journal entry reflecting on Lüders’ lecture on “The Economy of Chile.”
3/25/2009 – Pontificia Universidad Catolica de Chile, Santiago
“The problem is not development,” Rolf Lüders said. According to one of the original “Chicago boys”, Chile’s problem is not development, but the current macro economic crisis that the United States initiated.
Before 1974 the economy in Chile was mixed. It was closed to trade and it had increased arbitrary government interventions. This led to a huge impact during Chile’s Great Depression (under a dictatorship). After 1974, Chile’s economy was transformed into a social market economy with government intervention only to correct market failures, and it became very open to international trade. Chile’s GDP actually grows faster than the U.S.’s on average, which leads to the first conclusion: with international trade and a government maintaining current policies, Chile does not have a development issue.
In terms of world views, Chile has a very small open economy which means they feel the ups and downs of the economic cycle more than bigger countries. Free trade with about 60 countries, including the U.S., Mexico, Canada, MERCOSUR, EU, and China (which is not easy to do), complete absence of non-tariff barriers, and virtually free capital movements makes for a high correlation between Chile and its trading partners. Unfortunately that means when demand goes down in the slightest, Chile feels the price decrease and the inevitable devaluation.
The crisis in America was a financial crisis and wasn’t treated adequately. This caused it to become a worldwide economic crisis. Because it was a financial and economic crisis, Chile has had a decline in trade AND a decrease in financing of trading. During the business cycle, exports suffer a lot of price fluctuations, which means for an exporting country like Chile “when developed countries get the flu, Chile gets pneumonia.” Fortunately, Chile doesn’t suffer effects until about 6-12 months after a downturn which allows them to prepare.
Projections will continue to change based on:
- How the U.S. solves bank solvency problem.
- Monetary policies which avoid any reduction in liquidity.
- An effective international effort to avoid protectionist measures (like “buy American”).
If these three things happen, the crisis may be over by 2010. Chile is currently trying to control the impact the crisis will have on their small economy. They have five important macroeconomic policies to help with the cyclical nature of the global economy.
- Inflation targeting: anticipates inflation, changes interest rates
- Flexible exchange rate regime: depreciating currency improves country’s competitive position abroad
- Full-employment fiscal surplus rule: Chile calculates surplus based on long-term price of copper. Surplus is saved, which results in huge reserve – in recessions, reserves are used.
- Copper fund: government saves the difference between calculated income and actual income and uses the fund if reverse situation.
- “Conservative” banking and financial market regulations: very solvent banks.
Chile will keep these policies, and hopefully now the U.S. will catch the flu and Chile will catch the flu also, instead of pneumonia.
A few days after Rolf Lüders and the Universidad Catolica, we went to my second favorite business lecture at Compañia Sud Americana de Vapores in Valpariaso. CSAV is a shipping company that deals with shipping exports all over the world from Chile. Back in Philadelphia, we had toured a boat sent by them and then met with people from Unifruitti, a company who was the middle man between CSAV and the stores where the exports are sold. The following is my journal entry from that portion of the day.
4/26/2009 - Compañia Sud Americana de Vapores, Valparaiso
Boris Leyten is the Operations Manager for CSAV which is located in a port town of Valparaiso. CSAV started small but acquired companies in Brazil and Uraguay so they could expand trade. They now go to ports in 108 countries, especially in Northern Europe, Asia, the Far East, and North America. CSAV relies on their excellent customer service for branding with large customers.
Leyten explained a little about CSAV. Their core business is in container transportation. Basically, this means that CSAV transports a lot of things in huge containers that can be put on a ship, truck, or railroad car. Eighty-five percent of the cargo that is transported is managed by CSAV or their partners so they can maintain a certain synergy. CSAV also has a lot of 50/50 ventures with companies around the world. This allows them to service different countries, especially those only reachable by going over land.
One of the weaknesses that CSAV faces is their lack of vessels. Leyten explained that CSAV only owns 21 of their own vessels (12 container ships, 1 bulk ship, 6 car carriers, and 2 chemical carriers). Because of this shortage, CSAV rents about 100 vessels. However, Leyten pointed out the silver lining: even though renting is a weakness, in these economic times, CSAV doesn’t have to pay for those ships’ maintenance or fixing costs. Including all vessels, CSAV ranks at 16 in the world for capacity – their goal is to make it to the top 10. To help get there, Leyten is ordering more Tues (20 Tues are in a container – this is a standard measurement of this industry).
Quality assurance is something that CSAV takes pride in. Leyten was very pleased with their award from Ford in 2004 for the best/safest car carriers. CSAV continues to invest in things to make their containers the best and safest so that companies like Ford, which provide a lot of business, will be more likely to want to use their equipment and services.
When not in a recession, CSAV profit margins are around 20-25%. An interesting note is that fuel is CSAV’s biggest cost at around 40%. During the high oil prices last year, Leyten said as much as 70% of costs were going towards oil.
CSAV carries a large quantity of Chilean fruit all over the world. Leyten talked briefly about the excellent phytosanitary conditions and quality. The reason quality is so high is because of the Andes mountains and the coast. Diseases have a hard time traveling into Chile which means they do not have to use pesticides (only what other countries, like our FDA requires when the fruit arrives). The fruit is also a good seller because when Chile harvests and sends out fruit, it is winter in America and Europe so these countries need fresh food. Chile represents 49% of all fresh fruit exports in the Southern Hemisphere.
With sadness in my heart, we boarded the plane to leave Chile. I was thinking about what to tell my friends at home about this great learning experience I had just had, and I found that I didn’t want to talk about it because I didn’t feel words would do the trip justice.
My pre-trip expectations were completely off (except for the lots of graffiti and the old car part). Chile is one of the most advanced and stable countries in South America, not anything like Columbia. The crime rate for serious crimes is practically zero. Ninety percent of the people are Catholic, Christian, or Jewish. Everyone was very nice and helpful to the Americans who couldn’t speak any Spanish. The culture was slower and places less of an emphasis on money than we do.
At Pontifica Universidad Catolica de Chile, our first lecture totally shattered my previous views of Chilean economics. At CSAV we got to see how global economies come together in reality. There were so many more eye-opening experiences. After this trip, I have a more clear view of what I would like to do in the future: start businesses in other countries. Chile might be a good place to start.
Country Report: Chile
Andrea Looney
INTB 481
4.18.2009
Executive Summary
The business environment of Chile is one that is ripe for entrepreneurship. Right now, Chile is beginning to become a major player in the global marketplace due to its openness to trade and its propensity for exporting. However, to sustain its growth, Chile must move to something other than a commodity based economy.
Politically, Chile is a sound, socialist country with minimalistic government intervention in the business world. Privatization has been a theme since the 1970s and continues today under the first woman president, Michelle Bachelet.
The Chilean population is slowly aging. About 90% of the country is Christian, which has influenced the laws and practices of the entire country. The culture revolves around family, and in business this translates to having trusting relationships. Unfortunately, the culture also focuses at the power on the top of the chain, not utilizing a chance for intraprenuership.
Free trade agreements with 58 countries belies a total belief of openness, as does the low 6% tariff for all countries not included in Chile’s FTAs. The government highly encourages FDI, but uses the money in a limited way that has not highly increased employment or revenue for the country.
Entrepreneurship could be the thing that will sustain growth for Chile. It would also raise FDI that wouldincrease employment and create revenue. Potentially it could even change Chile from a totally commodity based market to one that is more balanced and less vulnerable to downturns in the international economy.
Business Environment
Politics
Chile is a country that has experienced a fairly recent coup and military rein. In 1974 a coup was led by Augusto Pinochet and a military regime presided in Chile. The Chilean view of Pinochet is mixed, mostly because he did a lot of bad things and a lot of good things. In the 1980s, Pinochet developed open market policies and the Chilean economy experienced rapid growth. The inflation stayed low and Chile began to surpass even the United States in GDP growth (Augusto).
Now, Michelle Bachelet is the first women elect of the Republic of Chile, which is a socialistic democracy. Bachelet knows about the harm dictatorship can cause: she was exiled because of her father’s position under the Pinochet regime (Clinton). The corruption is low within the government and was scored with a 7.0 in 2007 on the Countries Perception Index; for comparison purposes, the United States scored a 7.2, only slightly lower perceived corruption (Transparency International). The government does a good job of intervening only when necessary for the good of the people. Currently the government has been, and is, very stable, and ahead of the rest of Latin America.
Culture
Chile is a very geographically long country with most of the population settled in the middle. The culture has been influenced by Incans, Germany, Ireland, and of course Spain. Spanish is the official language, although German and English are spoken in certain parts of the country.
Seventy percent of the population claims to be Roman Catholic. Another 17.2% of the people are Protestant (Chile). This means that almost 90% of the people are tied to Christian values. Religious teachings in the schools and laws of the nation are influenced heavily by Catholicism (Chile, Culture). Divorce used to be illegal, and abortion still is, only two examples of laws totally based on Christian religion.
The role of the family is very big although it has begun to decline in importance. There is a very uneven income distribution, although poverty levels have decreased in the past few years. People are judged by appearance, and therefore the dress is more formal and businesslike (Chile, Culture).
In business, the culture revolves around the power at the top (Siehl, 1). This may be one of the reasons entrepreneurship in Chile is not prevalent. Chileans have a very good work ethic, but many just want to “work for the man” rather than work for themselves. Also, because of the important role of the family, in business it is important for bosses to cultivate a sense of family and family values in the work environment. There is also an important relationship aspect in the Chilean workplace. To be an effective leader, one must develop personal relationships with colleagues, superiors, and subordinates (Siehl, 2).
Demographics
The population of Chile is gradually aging. The median age is 31 years with a growth of 0.88%. Almost 70% of the population is between 15-64 years old. The life expectancy is comparable to the United States and other developed countries at 77 years. Also, the ratio of male to female is almost 1:1 for all age categories (Chile).
Race is almost a non-issue, as 95% of the population is white and white-Amerindian. Literacy rates are in the top two in Latin America, as Chile has a literacy rate of 95.7%. There has been a trend of children going farther in education than their parents. About 3.2% of the GDP is used towards education (Chile).
Chile’s Role in the Global Economy
Chile’s Trade Policies
Transitioning from a protectionist society to one of almost open trade barriers has helped reinforce Chile’s economy to a commodity based one, rather than one motivated by entrepreneurship and market activity. During Pinochet’s reign, the government started privatizing things very rapidly, and since 1990, the government has continued this policy at a slower rate. Chile has signed free trade agreements (FTAs) with 58 countries and is currently in negotiations with India, Malaysia, Australia, and Turkey, as well as in talks with China to expand their trade agreement. Tariffs are very low and Chile is committed to free trade (Background).
Foreign Direct Investment (FDI)
As a newly, very open economy, Chile welcomes FDI in any form. In fact, they have even established an Export Processing Zone to attract more FDI into the southern and northern-most parts (Dauner 13). “Over the past five years, foreign direct investment inflows have quadrupled to some $17 billion in 2008” (Chile). Unfortunately, FDI have only gone towards four industries: electricity, gas, water and mining. Also, much of the FDI has been in the form of acquisitions and mergers, for example Aramark’s entry into Chile, and have not created the employment the government would like to see. To combat this trend, the government has established a Council on Innovation and Competition to find new areas where FDI could be applied (Background).
Not being a country focused on R&D or entrepreneurship may affect the way that other countries invest in Chile. FDI not only brings revenue, expertise, and things like engineering and managing skills, but also is supposed to bring updated technology (Dauner 9). There is a proven correlation between entrepreneurship and the inflow of FDI (Georgiou 8).
Chile’s Economic Climate