TCS Daily

By Reason Or By Markets

By Rowan Callick - August 4, 2005 12:00 AM

Flamboyant, cravat-wearing bastion of Chilean capitalism Hernan Somerville spoke to me with enthusiasm, on a recent visit I made to Santiago, about a five-hour dinner he had enjoyed a few days earlier with socialist presidential candidate Michelle Bachelet. Bachelet's father, an air force general, was tortured to death under the 1973-90 dictatorship of General Augusto Pinochet. She fought as a guerrilla, was caught and tortured, and went into exile, including two years spent in Australia.


Bachelet, a former defense and health minister, is the favorite to succeed Socialist Ricardo Lagos as Chile's next president after the Dec. 11 election. Somerville, a leading banker and president of the Confederation of Chilean Manufacturing and Commerce, said: "The fact that Bachelet was in the trenches 30 years ago against Pinochet doesn't mean much today. When we talk, she is more interested in learning from me about how we can further open the economy and so on. The confederation has a superb relationship with the government. She may win the presidency, while the right will probably control the Congress. But no one in this country would now dare to change our basic economic course. I'm not going to have a nightmare about that. This is a most important asset."


Chile has maintained its inexorable climb into middle-class status as a settled, attractive, forward-looking society for a good reason -- its core economic policies are set, and wealth creation is at the center. Political debate revolves chiefly around education and health policies, and how welfare is administered and distributed.


Of all the Latin American economies today, Chile is probably the most successful. That success seemed precarious while it was surrounded by disaster zones. Now, however, the region is moving steadily ahead, with a general policy consensus that resembles the economic template by which East Asia has risen rapidly from poverty to become the world's chief engine for growth.


Chile's success is all the more surprising because of its violent and painful history. The state motto is "Por la razon o la fuerza: "By reason or by force." Often in the past, the latter has prevailed. But times have changed.


The emergence of businessman Sebastian Pinera, never identified with Pinochet, as potentially Bachelet's centre-right presidential election opponent, confirms Pinochet's irrelevance. Though Salvador Allende, who shot himself with a handgun given to him by Fidel Castro as Pinochets forces bombed the presidential palace, remains venerated by many Chileans for his courage, his program of nationalization and protection no longer exists. His views are fading away, as if still locked inside his now blocked-off former office, and most of the unions which championed him have lost their clout.


Pinochet was succeeded, after 1990, by a succession of centre-left governments, led most recently by Lagos, a distinguished lawyer and economist with a doctorate from Americas Duke University. He worked for the United Nations and returned in 1983, five years later electrifying TV viewers with a live denunciation of Pinochet that established him as a leading political opponent. In power, he has stressed the need to balance growth with social policies. The economy today is more open than most in the industrialized West. Privatizations have persisted under the centre-left Concertacion coalition. Half the country's 26 banks are now foreign-owned, and there are no restrictions on foreign ownership except of radio and TV.


In the 1970s, tariffs were 1000%. The average weighted tariff is now 2%, thanks substantially to Chile's role as a global champion -- together with Mexico -- of free-trade agreements. The country has completed 47, with new deals being negotiated with China, and with a group incorporating New Zealand, Singapore and Brunei. Seventy-five per cent of the economy is traded. The peso is strengthening. Interest rates are at U.S. levels, 2.5 % or so. The result has been steady economic growth, averaging 6.4% through the 1990s and 5.9% last year, including 7.3% in the final quarter. Debt is down to 11% of GDP while the government has produced a 2% budget surplus this year. And the poverty level, 50% in 1988, is about 6% today.


After this year, the president's son, Ricardo Lagos Weber, is likely to have a bigger say in such matters than Lagos, who is retiring. He is standing for Congress (and is expected to win) in December, and may move swiftly into an economic portfolio if the centre left coalition retains power. At present, Lagos Weber is the director of multilateral economic affairs at Chile's Foreign Ministry, and constantly on the move, not only because of Chiles many free-trade agreements, but because it is especially active in World Trade Organization issues, as a member of the Cairns Group of agricultural exporting nations and of the G20 group of developing countries that has emerged as a powerful influence on the Doha round.


Because so much of Chile's economy is traded, Lagos Weber said, it couldn't afford to wait for markets to open as the WTO talks dragged on, and it launched into its flurry of free-trade agreement deals. "Once you're in this process, you have to negotiate with everybody, that's the only way to avoid trade diversion. We are almost there, with deals with our main 20 partners, with only Japan yet to come. But we are only a small country, so we have to accommodate ourselves to our bigger partners, and seek further gains from the multilateral forum."


Rowan Callick is Asia-Pacific editor of The Australian Financial Review.



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