Chile’s Economy Growing but Faces Tough Challenges Ahead

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Chile’s economy rarely snags headlines like China or other booming Asian nations, its economy has been one of the strongest performers in the world in recent years. Over the last three years Chile’s economy has posted growth rates in excess of 5%. Now, in the face of dropping exports and an increasingly unstable global economy, many analysts believe that Chile will be unable to sustain growth rates in excess of 5% in the coming years.

Chile's Economy Growing but Faces Tough Challenges Ahead

The Andean nation has already achieved middle-income status with a GDP per capita of approximately USD 15,000 and features a mature and increasingly diversified economy with a strong natural resources sector. Chile has relied on exports to fuel its growth, particularly of copper but with the global economy slowing down demand will almost certainly drop. Already copper futures have been dropping in recent months and Chile’s copper exports have suffered a 6.5% drop in the first quarter (2012).

Any economy that relies so heavily one product or service will always be at risk of changing global market conditions. With approximately 1/3 of government revenues coming from copper, any down turn in demand and prices will have a major impact on the government’s fiscal health. So far the countries debt-to-GDP ratio is only at 11.2% but if copper revenues drop the government could be forced to borrow more heavily.

Chile’s economy is also complicated by extreme inequity with a Gini score of approximately 52, one the highest in the world. This means that a lot of wealth is concentrated into the hands of a few. Without debating the merits of such inequality it is important to note that high inequality means that a large number of people will be vulnerable to any economic downturn. Large portions of the population may end up lacking the funds necessary to ride out the business cycle.

And when people aren’t having their needs met, social tensions tend to mount. While the economy is growing strong in Chile right now it could turn south quickly. As the Chilean government has neglected social services and the redistribution of wealth in recent years, the impacts of any downturn could turn out to be especially hard on middle and working class people.

Chilean President Sebastián Piñera assumed office on March 11, 2011 after a hotly contested competition with rival Eduardo Frei Ruiz-Tagle. The former business man was well-known in Chile for owning and running several successful businesses. He is regarded as a right-wing, pro business politician and while his track record has been so far so good, an economic downturn could shift public opinion back to the left.

Chile’s economy has been undergoing stages of liberalization and the copper industry, completely owned and run by the Chilean government, has been opened up to private investors. If an economic downturn seriously effects civil society and if social redistribution policies are not in place there is a high-risk that pressure could mount to re-nationalize Chile’s copper industry. There have already been an increased number of protests against liberalization in recent years with miners unions taking the lead.

Chile must now do some soul searching in the face of continuously worsening conditions. With Chile’s economy and government revenues so reliant exports and copper in particular the country could face tough times ahead. Chile is beginning to launch initiatives to make the country, less reliant on exports and to continue to diversify the economy. These initiatives may help Chile in the long run but it will require a lot of time to take effect to avert the looming problems.

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