Chile Invest or Not Revised

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CHILE, ATTRACTIVE BUT LIMITED FOR INVESTMENT

By Beth Hall

April 13, 2011

Chile can be considered for foreign investment for many reasons. Chile has established a solid

democracy and sound financial system, successful in its economic reforms. Chile is ranked eighth

among the worlds top offshore locations in globalization scores, in terms of cost attractiveness,

business environment and availability of skills and labor, while Mexico and Brazil ranked next 11th

and

12th among the world by A.T. Kearney. Chile is considered a pioneer in the field of competition law and

policy among Latin America. Chiles other favorable qualities include the quality and reliability of

institutions and political stability; robust macroeconomic performance, stable inflation, balanced fiscal

accounts, open trade regime, and favorable legislation for foreign direct investment. Still, while Chile is

constantly on an active path to gaining leadership in Latin America on many levels, for foreign

investment purposes I believe it needs improvement on others.

Chile had a somewhat rocky path to get its trade system more attractive, but has obviously

made gains for it has coped with current economic meltdowns well. Between 1950 and 1970, Chile

made three different attempts at trade liberalization which resulted in setbacks to exchange controls,

the use of multiple exchange rates, and massive quantitative restrictions. In 1973 import tariffs varied,

averaging at 105%, some 700%, and others exempt. Quantitative restrictions were also applied,

including import prohibitions and import deposits of up to 10,000%. Protective measures were

compounded by a multiple exchange-rate system consisting of 15 different nominal exchange rates. By

August 1975, all quantitative restrictions had been eliminated, and the average tariff had been reduced

to 44%. Starting in 1979, Chile's trade policy became highly liberalized having no quantitative

restrictions, licenses, or prohibitions and a uniform import tax between 10-15% took effect. The real

exchange rate overvaluation in general was then avoided until 1980. In the mid-1980s, in the midst of

the debt crisis, temporary tariff hikes were implemented. In 1984-85 a policy of a highly competitive

real exchange rate was implemented. President Patricio Aylwin Azócar (1990-94), elected in December

1989, reduced import tariffs to a uniform 11%. (Hudson, Chile: A Country Study. Washington: GPO for

the Library of Congress 1994). The combination of these two policies--low tariffs and a competitive

real exchange rate are attractive traits for investment. According to the World Bank, by 1990 Chile was

the only country whose liberalization index reached 20, the maximum possible level, indicating

absence of external-sector distortions. It ranked first in Latin America for economic freedom in 2009



Investing in Chile - Hall Page 2 of 23

based on: government size, regulatory environment, labor policies and judicial system, among other

factors, its economic freedom stemming from its openness to global trade and investment. In the

world Chile now ranks 11th in the world Freedom Score (The Heritage Foundation & The Wall Street

Journal 2011). Consequently, in the course of over 25 years, Chile transformed its closed, state-run

economy into a model of free-trade, market-oriented capitalism. Economic growth has been helped by

growing exports, a result of sustained low tariffs and trade barriers, the approval of free trade

agreements with partners such as the U.S., European Union (EU), China, and Mexico, and a strong

business climate environment. Free trade was described as an innovative culturally good trait for

Thomas Friedmans flat world and this is where Chile specifically ranks high, in free trade.

Chiles manufacturing sector has been problematic at times. The manufacturing share in GNP dropped

from almost 29% in 1974 to 22% in 1981. Productivity in tradable sectors, however, did grow significantly, and

exports did become somewhat more diversified. By the early 1990s, the Chilean trade reform was winning

praise from multinational institutions and observers of different ideological persuasions. Chile experienced the

highest rate of GDP growth in Latin America with an annual increase of 4.2%, referred to as the "Chilean

miracle"; however, this was largely due to the export boom between 1986 and 1991, particularly fresh fruits and

manufactured products. Diversification of exports is still considered challenging; copper continues to dominate

Chilean shipments, in 2009 accounting for over 50% of the total value of exports. Chile does not appear to

progress very quickly into the industrial sector. This year, Chiles industrial production increased 1.9

percent in February from the previous year, less than half as fast as economists forecast, casting doubt

on growth and interest-rate expectations (Boyd 2011).

It also appears that Chile has not made much use of splinter supply chains since it exports

natural resources like copper, and fruits and frozen juices. Chile essentially has a commodity-based

economy whose primary exports are minerals, food, and timber as well as a world-class wine

production sector. Most of these important exports have kept Chile in a strong economic position

worldwide, as there is an ever-increasing demand for commodities especially from the developing

nations in Asia and other parts of the world. Chile is interested in expanding its exports so that it is not

so reliant on copper. In trade, Chile ranks 39th and still in the middle of the road compared to countries

around the world (A.T. Kearney, Inc. 2007). To be successful in Thomas Friedmans flat world

framework, Chile should have individuals with imagination who have the freedom to collaborate, good

digital infrastructure, and the ability to be part of the splinter supply chain. Rankings for Chile are also




sort of in the middle according to AT Kearneys 2006 GI rankings for digital infrastructure: 34 th

Technological, 46th for Telephone which may be important for connections, but 30th for Internet Users,

and 33rd for Secure Servers.

Taking this innovation theme further however, currently the share of foreign affiliates in

business research and development is far beyond Chile in comparable Latin American countries such as

Brazil, Mexico, and Argentina. If Chile does strengthen its national absorptive capabilities, that is

absorb, internalize and utilize the knowledge potentially made available to them, it can expect to

benefit in the future from the increasing globalization of R&D. Still the scope of possible exports has

remained limited, leaving the economy still relatively undiversified. The share of intra-industry trade of Chile

is much lower than for comparable countries in Latin America (Brazil, Mexico, and Argentina) (OECD 2007).

In the current paradigm where innovation is paired with success, some of the following characteristics of

the Chile should be kept in mind when assessing the current status and envisioning Chile's future innovation

system and related policies. Significant to Chile dispersing knowledge, innovation and R&D, this information was

found in a publication by Organization for Economic Co-operation and Development (OECD), titled OECD

Reviews of Innovation Policy: Chile 2007. Taking into account Chiles geography, Chile is considered remote

from major markets and knowledge centers. It stretches over 2,671 miles long. To put that in prospective, that

is about the same distance from San Francisco to New York. It also never gets wider than 150 miles wide, so its

length is more than 18 times its widest width. Its geographic position and topography are described as

challenging for developing and managing national infrastructures and for maintaining international connectivity

essential to innovation and economic growth. Also challenging for innovation is Chiles very centralized

political system. Local governments are heavily dependent on government transfers and have weak and little

policy making autonomy. Chile also has not developed the institutional capabilities and managerial skills

needed to play a strong role in innovation policy. Efforts have been made to increase participation regionally,

but results have not yet materialized (OECD 2007).

Chile's economy has been traditionally dependent on exports of its natural resources. An

innovative culture which views technology and knowledge as the main source of sustainable wealth

creation is not yet prevalent in the business community and society in Chile. They have a low research

and development expenditures (0.67% of GDP in 2002). Most research and development is financed

by the government and carried out in universities. There is a low level of R&D based innovation

activities in the business sector. They have a shortage of specialized human resources, such as

advanced training at the doctoral level, in science, technology and engineering. Chile also has




underdeveloped supporting financial market mechanisms and a very narrow market for knowledge

with barriers to entrepreneurship. Insufficient networking and cooperation in innovation, and

shortage of human resources necessary for vibrant industry-related relationships are also barriers to

innovation. Institutional frameworks to promote industry-related relationships are also considered

underdeveloped by the OECD (OECD 2007). In all, however, Chile appears to have a resilient economy

with an open trade environment friendly to international business.

Chiles economy and trade has been evolving as its government has been evolving, a bit

choppily. In the past, nitrate exports made a strong economy, spurring industrialism and massive

urbanization. In 1915-1925, World War I deeply affected the economy creating a decline in

international commerce. Germany developed artificial nitrates. Copper then became Chiles leading

export. Like Europe, inflation spiraled. There was a labor party movement which demanded better

treatment for laborers, from which a Democratic Party emerged. From the two choices, a radical party

gained support, and reformist Arturo Alessandri was elected president. In 1926-1932 Colonel Ibáñez

became president through military intervention. With the money this government borrowed from

private foreign lenders and increased revenues from copper exports, they financed import

substitution, attempting to reduce foreign dependency through the local production of industrialized

products. The depression era reinforced protectionist policies which along with oppressive rule,

sparked popular protests. Ibáñez resigned in 1932 and reformist Arturo Alessandri was reelected. In1933-1938, Alessandri enacted a new labor code and the 1925 constitution. There was then

separation of church and state, but constitution also increased the direct powers of the elected

president, who did succeed in cutting unemployment through the promotion of industry and public

works. However, opposition denounced Alessandri for limited economic nationalism and attention to

workers' needs. Pedro Aguirre Cerda, part of a democratic-leftist coalition called the Popular Front,

won the election in 1938. In 1939-1942, President Pedro Aguirre Cerda worked with the private sector

to build a mixed economy, but political infighting then eroded the Popular front and right wing partiesgrew stronger, not being happy with limited national industrial development. Conservative Radical

Juan Antonio Ríos Morales was then president 1942 to 1946, who died in office.

The Pinochet regime had established a military government in 1974, removed opponents,

stopped political activity, controlled the media, and launched a strongly guided neo-liberal trade






Verónica Michelle Bachelet Jeria, a moderate socialist, became the first woman to be the

President of Chile, winning in a runoff, beating center-right businessman and former senator Sebastián

Piñera in 2006. She is said to have campaigned on a platform of continuing Chile's free market policies,

while increasing social benefits to help reduce the country's gap between rich and poor, one of the

largest in the world. However, Chilean women are described as not having the same ranking as in

other Latin American countries. A smaller proportion of them work and fewer achieve political power.

The wage gap with men is relatively large. Women earned 19% less than men in 2003, according to a

government survey; the gap was nearly 40% in jobs requiring high levels of education. Chile may also

be more socially conservative than other South American countries. This female president was

criticized for handling situations weakly, such as being accused of taking a soft line in a dispute with

Argentina over the price of gas, which some thought unfair since Chile is dependent on this Argentine

export. Her presidency ended on March 11, 2010, when Sebastián Piñera replaced her (The Economist

2006).

When Sebastián Piñera was elected in January 2010, it was the first time in 50 years since the

rule of Pinochet that Chile elected a right-wing president. This billionaire businessman narrowly

defeated Eduardo Frei of the Concertacion, the center-left alliance that has been in power for 20 years.

Piñera said he would use his business acumen to create jobs give private industry a more prominent

role in the economy. Chile was hit by an 8.8 magnitude earthquake in February 2010 where as manyas 1.5 million people were displaced. Buildings and homes in poor areas did not fare well. Sebastián

Piñera was sworn in as President of Chile in March 2010, immediately following three major

aftershocks from the recent massive earthquake. One of his first acts as the new president was to form

an emergency response team to deal with the country's reconstruction in the aftermath of the disaster

(Infoplease 2011).

Chile certainly seems to have run a gamut of different types of governments getting their

independence from Spain, patterning their constitution on ours, but with military dictatorships,socialistic leaders, women, billionaires. In the view of many Chileans, groups at all point on this

political spectrum helped destroy the democratic order by being too ideological and too intransigent

(Hudson, Chile Introduction 1994). It hard to understand Chiles business culture as it deals with

democracy and the free market in our dictionary of terms still, and really be sure of what direction will




be next. They do seem to run a danger in what Carter indicates the danger of the gap between poor

and the rich which could lead to deep discontent. Their market sometimes looks like a better bet than

their government but perhaps first must come prosperity and then a truer so called democracy, with

more equally distributed wealth.

Chile now has a good number of trade agreements between many countries, helping to create

a healthy global climate for foreign investment. According to an article called Investment

Opportunities in Chile's Commodity-Based Economy I found on the web, Chile has weathered the

current global economic meltdown better than most countries and offers good wealth creation

opportunities for the global investor. Chile essentially has a commodity-based economy whose

primary exports are minerals, food, and timber as well as a world-class wine production sector. Most

of these important exports have kept Chile in a strong economic position worldwide, as there is an

ever-increasing demand for commodities especially from the developing nations in Asia and other

parts of the world. Chile also leads all Latin American countries with the lowest corporate tax rate.

The Chamber of Commerce in Santiago after the world report on the influx of FID by the United

Nations Conference on Trade and Development has projected that Chile's foreign investment is likely

to overtake Brazil and Mexico and would achieve record figures in 2010. Projections for this year are

pointing a range between US $15,000 and US $20,000 million. According to the Banco Central, the

Chilean Central Bank, the Chilean economy's GDP has had an increase of 6.5% in the second quarterachieving its highest advance in 5 years. Chile is ranked as one of the safest offshore locations in the

world, with a world-class telecommunications infrastructure and higher-level education (World

Market Pulse 2010). Chiles openness to foreign investors appears to be the best attraction for the

foreign investor for Chile.

Regarding Chiles financial health, in the 1960s and 1970s many Latin American countries,

notably Brazil, Argentina, and Mexico, borrowed enormous amounts of money from international

creditors for industrialization; especially infrastructure programs. Latin America had elevatedeconomies at the time so the creditors were happy to provide loans. Between 1975 and 1982, Latin

American debt to commercial banks increased at an annual rate of 20.4 percent and Latin America

quadrupled its external debt from $75 billion in 1975 to more than $315 billion in 1983, or 50% of the

region's GDP. Chile did okay in the Latin debt crisis, showing signs of stable financial health.




Regarding the Great Recession crisis, most of Latin Americas local markets were less affected

because they allow their currencies to fluctuate relatively freely. However, the global financial crisis

still affected the Chilean economy strongly in the second half of 2008, and the economy slowed down

as global demand for Chilean exports declined and terms of trade deteriorated. Their economy did

demonstrate resilience with the vigorous rebound that took place in 2010. The February 2010

earthquake caused some disruptions that led to a decline in growth by 1.5 percent in the first quarter

of 2010. Economic recovery recommenced vigorously in the second quarter of 2010, when GDP

registered a 6.5% quarterly expansion. Chile reported a balance of trade surplus equivalent to 2,393

million dollars in December, 2010. (Trading Economics n.d.) However, problems of poverty and

distorted income remain despite Chiles achievements in economic growth and stability. Chile's

business environment is among the friendliest in Latin America, consistently ranking as among the top

countries regularly in Doing Business indicators as well as in several other business environment and

competitiveness rankings.

Chilean governments have looked out for their financial health. The Chilean government

accumulates surpluses in sovereign wealth funds during periods of high copper prices and economic

growth, and allows deficit spending only during periods of low copper prices and growth. Those

sovereign wealth funds amounted to more than $20 billion in September 2008. From this fund, Chile

used $4 billion to finance an economic stimulus package to deflect recession. In December 2009, theOrganization for Economic Co-operation and Development (OECD) invited Chile to become a full

member, feeling Chile has potential for future development. While Chile has run a gamut of different

types of government from military authoritarian to socialists, and liberals, each government has tried

to improve Chile economically through trade. For instance, the democratic government of Patricio

Aylwin won election over from the military regime and intensified the economic reform already started

by the prior government. During 1991-97, growth in real GDP averaged 8% and fell to 4% in 1998

because of rigid monetary policies applied in an effort to keep the current deficits in check andbecause of lower export earnings (the latter a product of the global financial crisis). In 1999, a severe

drought made Chiles economy worse, reducing crop yields and held responsible for electricity

rationing. Chile then experienced negative economic growth for the first time in more than 15 years.

Since then, growth has averaged 4% per year. Chile has intensified its longstanding pledge to free




trade, signing free trade agreement with the United States, taking effect on January 1, 2004. Chile

claims to have more bilateral or regional trade agreements than any other country. It has 57 trade

agreements, including with the European Union, Mercosur, China, India, South Korea, and Mexico.

Chilean economy started to show signs of a rebound in the fourth quarter of 2009, and GDP grew more

than 5% in 2010. Over the past seven years, foreign direct investment inflows have quadrupled to

some $15 billion in 2010. Since returning to democracy in 1990, the government has a transparent

policy.

Chile has resiliency to recover from the recent earthquake. The 8.8 magnitude earthquake

caused considerable damage near the epicenter, located about 70 miles from Concepcion - and about

200 miles southwest of Santiago in February 2010 and was considered one of the top ten strongest

earthquakes on record. An example of Chiles resiliency can be seen in the 1990s. Chiles growth in

real GDP averaged 8% during 1991-1997, rivaled that of the Asian Tigers. Chile has a history of

recovering and rebounding from financial events like the Asian financial crisis in 1998. They boast

growth rates of 5-7% for most of the past decade, beating Brazil. By 2006, Chile had the highest

nominal GDP per capita in Latin America. It was the first Latin American country to join

the Organization for Economic Co-operation and Development (OECD), and organization dedicated to

global development and that only has 28 members, described as an exclusive club of developed

nations. Mexico is the only other Latin American member. Chile is described as being a topperformer in Latin America in the financial area.

Regarding Chilean credit, strong financial institutions and a sound policy have lent Chile to have

strongest sovereign bond rating in South America. Chile paid the lowest bond yield or spread in Latin

America when they sold their first international bond in 6 years on July 29, 2010. Investors demanded

even less than half the premium on comparable debt than they did from the higher rated Italy. Chile

sold $1 billion in 10 year notes 90 basis points above U.S. Treasuries which I perceive as a good rate for

Chile. Chile also sold $520 million bonds in pesos at 5.5%, cutting 60 basis points or $24 million fromcost by borrowing in its own currency. Chile has good credit, not that far behind United States. The

yield that Chile paid was even 60 basis points less than Brazil paid to borrow for 11 years in April so it

sounds like their credit is better than Brazil. Chile is selling international bonds to raise money to

rebuild from the earthquake in February 2010 that caused $30 billion in damage, and killed about 500




people, but luckily Santiago escaped the worst of the earthquake. The rate of the foreign bonds was

said to be the lowest rate on foreign bond sales by Chile since 1822. It means lower interest rates and

that companies will be able to borrow at lower rates, stimulating investment and employment.

It appears that Chiles credit standing is about the best in Latin America. They paid a low yield,

even and their bond has been graded differently by different companies though basically in the A

range, from the fourth highest down (Aa3) to two grades below (A3) using Moodys scales for different

companys ratings. The yield on Chilean bonds was described by Piñera as the lowest in Latin

America, very much below the rates achieved by great powers like Brazil and this figure even puts us at

a European level for borrowing. Chile has made big achievements, rather quietly, starting in 1970s

under August Pinochets military government, introducing its free market-oriented reforms with the

help of the Chicago Boys a group of University of Chicago-trained economists and have stuck to

pretty close to these reforms through leadership change. On January 4, 2011, however, Chile joined

the global currency wars and the central bank will spend up to $12 billion dollars this year to help

exporters to help the dollar against the strengthening peso. Chile is described as one of Latin

Americas most open and best managed economies. However, usually Chiles central bank is known

has having a hands-off approach to exchange rates.

Regarding demographics, facts state that the population of Chile has been decreasing since

1990. In the 2010 population pyramid, females start gaining in population compared to males, afterthe age of approximately 54. Chiles population pyramid appears to be in the beginning of

metamorphoses from a developing country into a developed country. By looking at Chiles present and

forecasted population pyramids, it appears that Chile is beginning to join the ranks of developed

countries. If the projections are true, in 2050 there will be an increased need to care of a population

over 80, particularly women. Growing older is described as an expensive enterprise for a nation.

Chiles population is 85% distributed in urban areas, and urbanization is an attractive quality for foreign

investment, with higher concentrations of people in smaller spaces. On the negative side, incomedistribution is one of the most unequal in the world and there are few opportunities for upward social

mobility (The World Bank 2010). That is a bleak picture for investment purposes, as it could lead to

social unrest and disruptions.




Looking further into demographic Chiles status, it appears that Chile is quite aware of that their

population distribution is going to age, and is preparing for this future, evidenced by the fact that the

government first created the National Policy for Senior Citizens in 1996. Then the National Service for

Senior Citizens 2003 had the following objectives for dealing with their changing demographics,

specifically the increase of their older population: integration into society, protection from

abandonment and poverty and proposing policies to resolve issues for the elderly. As part of Chiles

Strategic Orientation 2006-2010 efforts, the government joined forces with Japan to get human

resource training and to develop policies to improve the social welfare of senior citizens. Contribution

from Japans cooperation with the government of Chile led to improved planning abilities of social

welfare services at the local level, elaboration of an information manual on social welfare services for

senior citizens, and development of health-promoting programs at the local level for senior citizens.

Another achievement described was the dissemination of Kaigo Hoken social security system to local

governing bodies (Coronil 2006). The median age of Chile is increasing and the work force may be

slowly diminishing, having less time to build wealth. Taking care of the elderly may free up some of the

work force, such as females caring for their older relatives, as Chile makes the shift from a developing

country to rank among developed countries, with a stabilization in population growth, but slightly

fluctuating population distribution among age groups, the population becoming almost equally

distributed throughout the age groups, with the exception of the increase of the population over 80,particularly women.

Chile is also making gains to improve the skills of its workforce. In 2004, the Chilean Economic

Development Agency launched a plan to increase the number of English speakers to create a growing

workforce skilled in English. In five years, the number of the registered speakers increased from

14,000 to nearly 40,000, and this appears to be just a minimal estimate as some have not registered

due to serving a large domestic Portuguese speaking market.

Chile is thought of being the most economically successful country by many, but still hasreturned to socialism off and on. Some say that after gaining independence from Spain the Latin

America countries needed a strong hand, because their people were like children and were used to an

authoritarian hand or military regime as Spain was a strong hand. Perhaps this goes hand in hand with

DeSotos description that not all cultures have the same makeup in competition. In Latin America,




there was described disenchantment with civilian governments, such as the fall of Salvador Allendes

government which is said to be the most notable example in Latin America of a democratic

government falling to an authoritarian regime, since Chile is described as having the longest

democratic traditions in Latin America. The authoritarian regime, Allende, had promised to

redistribute wealth, end extreme economic and social inequalities, but when he nationalized U.S.

owned copper mines and other industries, the CIA assisted a military coup September 11, 1973 to

overthrow his regime. The takeover regime, the Pinochet dictatorship, embraced capitalism while

outlawing political opposition and restricting individual freedoms, an odd combination to me.

Relations with the Pinochet dictatorship shows that the United States government supported

authoritarian regimes that promised stability, anticommunism, and economic trade and investment

opportunities," according to David F. Schmitz, author of The United States and Right-Wing

Dictatorships, 1965-1989. He further states that "Equating dictators with freedom blinded American

leaders to the contradictions and failures of their policy." While authoritarian regimes eventually lost

legitimacy internationally with human rights violations and poor economic development, to this day

authoritarianism is still considered a force to be reckoned with in Latin America (science.jrank.org

2011).

In the conquest to explore serious problems emerging in the effort to convert the worlds

economies to capitalism and governments to democracy, the first obvious situation that comes tomind is that a stable market is what foreign investors want to see, and democracy does not always

serve this purpose. Trying to put aside my own biased belief that democracy is the best way in all

cases, perhaps the country in question is simply not ready for democracy to have capitalism work at

the same time. It may be important for the country to achieve capitalism and well being for its

population before striving towards democracy. For instance, the country may have too much of a

discrepancy between rich and poor, not enough higher education among the masses, and lack of

confidence in the market under democracy. According to the popular social open source network,Wikipedia, the relationship between democracy and capitalism is a contentious area in theory and

popular political movements. (Wikipedia 2011) An author further states that democratic capitalist

states may fight infrequently and or never with other democratic capitalist states because of political

similarity or stability rather than because they are democratic or capitalist. Chile is also given as an




example where capitalism has operated quite well under authoritarian rule for Augusto Pinochets

rule in Chile led to economic growth by using authoritarian means to create a safe environment for

investment and capitalism (Wikipedia 2011).

Chile appears to have weathered many changes in government styles because its economy

appears rather healthy, perhaps in contrast to the moral of the people when it comes to human rights.

An example of its success in the capitalistic market is that Chile is in good standing at the present time

in terms of property rights when compared to the rest of Latin America. Hernando DeSoto expressed

concern regarding particularly the status of property rights in his native Peru and how the free

economic freedom could be deterred by lack of proof of property rights for much of its population and

congruent with his philosophy, the property rights index is described as a evenly spread

subcomponent of the Index of Economic Freedom, (Global Property Rights 2004-2011) that

measures the degree to which a countrys laws protect private property rights, and the degree to

which its government enforces those laws. Chile scores the highest in the Latin American continent,

scoring 85, Brazil and Mexico scoring 50 (Global Property Rights 2004-2011). This makes Chile

attractive to investment compared to the rest of Latin America.

Chile is also given as an example that has made strides in democracy, according to James

Ferguson, Chair and Professor of the Anthropology Department at Stanford University, who states,

The good news is that over the last fifteen years democratic systems has made serious progress inmany Latin American countries, e.g. Mexico, Chile and Argentina. The bad news is that the full package

needed to support deeply democratic societies that are also stable has not yet been forged across the

hemisphere (J. Ferguson 2002). He goes onto to say that in regards to Chile, improvements in copper

mining, the strong reliance on copper exports through the 20 th century, the issue of foreign control

(largely U.S. ownership) of copper companies, and the development of unionized workers, first in the

nitrate mining of the north, then in other mining areas, helped create a volatile mix of economic

dependence and political grievance (J. Ferguson 2002). Chile does appear to have had a volatile mixbut with leaders that are currently searching for quelling solutions in their own unique way. One

seemingly unique historic characteristic of Chile is left extremists. Looking back into history at the time

of the Cold War, many Chileans appear to have been against communism as indicated by formation of

the Chilean Anti-Communist Action (ACHA), left-wing terrorists, and exemplified by the detention of




hundreds of communist leaders in the Pisagua prison camp. This is another illustration that Chile has

had many violent and opposite political forces, which have made it one of the protagonists of

ideological conflict and focusing the eyes of the great world powers in their internal politics through

the era of the Cold War (Memoria Chilena 2004).

Chile is said to be an actor and not a puppet of external forces (Fermandois 1998). While

Chileans patterned their constitution after the United States constitution, it appears that they have

followed their own unique path. United States has tried to protect their investment in Chile but

Chileans are proud of their uniqueness and that the U.S. was unable to interfere too successfully in

their small country (Memoria Chilena 2004). So it appears that Chile is moving towards democracy at

their own pace, with a capitalistic market in place, also offering stability in their economy to foreign

investors, working hard to make themselves attractive to foreign investors, and providing a stable

environment for their own population, also slowly healing from past issues of violated human rights.

The last election was rather close but Chile has a stable economy and the president seems to have

good plans to decrease unemployment, increase aid to those who are unemployed. They also are on a

mission for the green revolution.

In regards to the green evolution, Chiles southern tip appears to be on the front in the battle of

global warming and carbon dioxide pollution, as the signs of global warming are very evident in Chile.

A reporter for McClatchy Newspaper declares, With a population of 16 million people, Chile doesn'tproduce much of the greenhouse gases that cause global warming. But it's paying the price (Chang

2007). He further reports that giant glaciers are disappearing; mudslides are becoming more

common; snow no longer falls in the spring, replaced instead by tepid rains. Being long and skinny,

almost all of Chiles borders are the mountains, the ocean, and then it is situated north of Antarctica.

Scientists are scrambling to record the changes happening up and down the country's mountainous

spine. Chilean researchers monitor 120 glaciers and have found that more than half are shrinking,

many disappearing at twice the rate recorded a decade ago, including glaciers near Santiago thatprovide water to six million residents. In central Chile, where most of the population lives, the altitude

that snow falls rose by 400 feet in the winters and more than 650 feet in the summers between 1975

and 2001. Since rain now falls at higher altitudes, it causes snow packs to shrink and erosion on

mountains. While rising temperatures have produced a rise in water levels in the short term, they will




likely result in long-term water shortages at the disappearance of the glaciers. Rain levels are also

dropping in the Patagonian south, where many of the country's hydroelectric dams are. "It's like we're

killing the goose that lays the golden egg," said a Chilean veteran alpinist who researches snow and

water levels for Chile's government. "Rivers are growing like they never did, and they'll continue

growing for a few years, but when the glaciers are gone, then what?" Another Chilean who helps

manage a ski resort warns that the ski season has been cut from three months to one month due to

declining snowfall and that the resort must now rely on new snow-making machines to draw

customers. For some Chileans who have spent decades roaming Chile's wilds, an era has already come

to an end. They say that the mountains have changed for good, once covered with snow year-round

and now they are bare for most of the year; the legendary glaciers in south Chile are visibly in retreat.

An example of glaciers visibly in retreat, O'Higgins Glacier is one of Chiles famous glaciers,

located in Bernardo O'Higgins National Park, Chile. The bulk of the glacier is part of the ice field

plateau. It flows eastward into O'Higgins Lake (Wikipedia 2009). From Patagonian in southern Chile,

one can see the OHiggins glacier morphing into a lake, presenting a clear picture that the world is

getting warming; the glacier has thinned 92 feet in 2 years, not unique from more than 90% of world's

glaciers in retreat. This could be seen as a sign of early trouble from global warming a sign that cities

around the world may be starving for water as glacier runoffs decline. Runoffs from glaciers are said to

provide water for 1-1/5 billion, people mostly in South America, China and India. While there used tobe six foot penguins as evidenced by fossils found in Argentina, penguin chicks are declining; whole

colonies are disappearing. Their main staple, the quill, are disappearing along with the ice. Ice cores

show evidence the excessive carbon dioxide slipping into the atmosphere started with the industrial

revolution 50 years ago. With global warming, as sea level rises, there are predicted to be tremendous

changes. To play this out over decades, green house gases last a long time in atmosphere and there is

a lot up there already. It is said that the world is going to continue to warm not matter what, we can

only try to slow it down (CBS Interactive Inc 2007). I am not sure I would like the country that I want toinvest in be on the front of global warming.

Water shortages could also affect the country's mining industry and put it in jeopardy, which

produces about two-thirds of Chilean exports, and research for new ways of doing business could be

necessary. Miners use vast amounts of water to crush, screen, wash and extract minerals, and




disputes over water in the country's dry north, where many of Chile's mines are, already have sparked

demonstrations and violence. "The availability of water is definitely a concern," declared the mining

minister in 2007, Karen Poniachik (Chang 2007). In regards to Chiles water supply, in Santiago, Chile,

the water company, EMOS, found it cheaper to rehabilitate its aging pipe system and thus reduce leaks

than to pay the market price for water rights. Chile ranks 14th

renewable water sources, but Brazil

ranks very high in renewable water sources (CIA n.d.). So they are doing some renovation to keep their

renewable water sources intact.

When it comes to energy sources, many Chileans are against nuclear power, and environmental

groups wanted to protest Obama's visit this March. President Piñera said that "we have many accords

that are important for Chile to sign." In addition to energy, he said they include efforts to bring more

U.S. English teachers to Chile, and "matters of democracy and human rights, not just in Chile but in the

rest of Latin America." Other topics included education, emergencies, culture and the environment.

Chile's booming growth is being held back by limits on its imported energy supply and outdated

power grid. Both Piñera and Obama have said the solution is new technologies and clean energy, which

they define as including nuclear as well as more sustainable renewable sources such as solar, wind and

geothermal power (Quilodran 2011). Thus Chile has trouble keeping up with energy demand,

another negative factor for investment consideration.

This year Chile was faced with a drought. Measures recently implemented will hopefully allowChile to avoid power cuts. Faced with the threat of power outages, the government in early February

moved to reduce voltage on the country's main SIC power grid by 5% to 10%, accumulate more water

in the nation's reservoirs, and asked consumers to use energy more efficiently (Esposito 2011).

"Nearly half of installed capacity on the central SIC power grid, which supplies energy to over 90% of

Chile's population and runs from the northern city of Tal Tal to the southern island of Chiloe, is in

hydroelectric generation (Esposito 2011). Chile's government is working to avoid energy rationing

amid an energy squeeze, and 2011 should be calm in energy supply terms, declared the currentMining and Energy Minister, Laurence Golborne. The government has reduced voltages to save

reservoir waters as a long-lasting drought hits hydroelectric generation, seeking to fend off blackouts.

However, a mining sector in Chile's far north is powered by thermal plants, and has not been suffering




from the drought (XE News 2011). Again, Chile does not seem to have enough alternative energy

resources for their main source of income sectors to operate without disruption.

Chile is not alone. Its neighbor Argentina also faces droughts near its side of the Andes due to

dropping rain levels. Shrinking glaciers in Bolivia are threatening water supplies in some towns.

What's happening in Argentina is very similar to what's happening in Chile," said Mario Nunez,

director of the Argentine Sea and Atmosphere Investigations Center. "We're all trying to prepare for an

uncertain future (Chang 2007)." Thus, when it comes to environment and energy, it appears that Chile

is on the front of the worlds battle in global warming and energy needs, with a lot at stake, a risk for

investment.

In regards to the green evolution, Chile might be making some headway in leadership. An

example of this may be King George Island which is off the coast of Antarctica. The island has been

claimed by Chile, Argentina, and the United Kingdom, and Russia and the U.S. have also expressed

interest in the island. Chilean scientists from Universidad Austral have devised a geotagging system

with a satellite-equipped buoy and a Global Positioning system. This helps them study and organize all

of their findings on the immense biodiversity in the waters around the island. The lead investigator of

the study told La Tercera, a newspaper in Chile the following: The data will be important for climate

change research because the poles are experiencing the biggest temperature increases on the globe. If

theres a 4ºC rise globally, we could experience a 16º rise in the North Pole and up to an 8ºC rise inAntarctica. Its massive. The article also informs us of the following: Antarctica is home to a large

range of biodiversity and, unlike the Arctic Circle, possesses a continental shelf that hosts a variety of

life forms. Antarctica contains a relatively untouched preserve of biodiversity because, although there

are climate change effects, there is little direct impact from humans. According to scientists, this is

important for understanding the consequences of man-made climate change (Seitz 2011). Santiago,

Chile, however, is a major source of pollution, although not ranked among the top ten cities in

countries like China, India, Peru, Russia, Ukraine, Azerbaijan and Zambia. Thus while Chile has thepotential to be a leader in the green revolution, without being overpowering, Santiago is still rather

polluted. This leadership seems to be mostly rather academic and not integrated into solving the

challenge of global warming, however.




Chile has tremendous beauty, diverse landscape, climate and culture. Its vibrant culture is a

fusion of European influences and indigenous heritage. After several years of tumultuous political

conditions, Chile has established a solid democracy and sound financial system that makes it an

attractive place for foreign investment. An awareness of its unique business and social culture is also

paramount for anyone doing business in Chile. Chilean culture values personal relationships, sincere

interest in others and socializing with each other. The right contacts are used to get information and

conduct business. Third party introductions are common and often necessary. Punctuality is

appreciated and expected, but flexibility to time is also important. Chilean humor can be perceived as

offensive if not completely understand and is frequently used in Chilean conversations. Economic and

political conditions in Chile stabilized after the end of the tumultuous period of the junta rule. Chile has

since gained a reputation as a role model for successful economic and political reforms within South

America. The countrys sound economic policies extensive trade agreements and reputation for strong

financial institutions have made Chile one of the most attractive locations in South America for foreign

investment. Chilean culture is very group-oriented and building deep and lasting relationships is

important. Personal contacts and networks are prerequisites for successful deals where the

establishment of trust, loyalty and strong bonds facilitates business operations in Chile. Chileans are

usually friendly and warm but tend to be very proud and easily offended. Saving face and respecting

each others honor is therefore essential (Langhans 2010). These are helpful points to know if doingbusiness in Chile, and would have to be taken into account, if one wanted to be successful in business

relationships.

Should we choose to invest in Chile among Latin America? Well, I voted for Brazil, its closest

rival in my opinion. Chile and Brazil are the two are the top contenders for foreign investment in Latin

America. While Chile has had tremendous economic growth over the last 20 years, Brazil still attracts

more foreign capital and currently I am going to follow the crowd. For instance, global stock market

indices for non-U.S. markets by Morgan Stanley Capital International (MSCI) show the followinginformation: In the last 10 years, the MSCI Brazil Index has grown by 470% while the MSCI Chile Index

has increased by only 270%. Both the countries performed very well when compared to the MSCI

World Index, which fell by about 5% during the same period. Despite the strong performance of the

Brazilian market, some investors prefer Chile over Brazil. In 2008, during the global financial crisis, the




MSCI Brazil Index crashed over 60% whereas the MSCI Chile Index fell only 20%. In addition, the

annualized volatility rates for the past 10 years for Chile and Brazil are 16.3% and 25.4% respectively

(Hunkar 2010).

Differentiating itself from Brazil, as I mentioned before, Chile is heavily dependent on

commodity exports, particularly copper. Brazils economy is more diversified. With a larger population

and rising income levels among the middle class, Brazil offers a wider range of opportunities for

investors. Brazil is, however, more prone to higher volatility since the foreign investment dollars is so

large that is flowing into the country. Here is an illustration of this fact: iShares MSCI Brazil exchange

trade fund (EWZ) offers exposure to the Brazilian market. The fund has an asset base of $10.4B and 76

holdings in the portfolio. Investors can access Chilean equities via the iShares MSCI Chile Investable

Market exchange trade fund (ECH). This exchange trade fund (ETF) has an asset base of $365.0M and

32 holdings in the portfolio. The difference in net assets between the two ETFs is huge since more

investors choose Brazil over Chile (Hunkar 2010). (A graph comparing the above growth rates of Chile

and Brazil Morgan Stanley Capital International Investable Markets is below.)

Thus, I while I respect Chile with all of its gains and believe it is a great place to visit, I stand by

my decision to choose Brazil out of Latin America. Brazil may have somewhat bigger risks, but at this

time I think it has more potential, because it is larger and more diversified, with more choices, with less

susceptible than Chile from environmental catastrophes such as earthquakes and droughts, which cangreatly affect Chile as its economy is dependent on exporting commodities.

(Hunkar 2010)




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