Wayzata World Factbook 1996/The World Factbook - 1996 Edition - Wayzata Technology (3079) (1996).iso/pc/text/economic/chile.txt

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U.S. DEPARTMENT OF STATE
CHILE: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS







                              CHILE

                     Key Economic Indicators
        (Millions of U.S. dollars unless otherwise noted)


                                    1992      1993      1994

Income, Production and Employment:

Real GDP (1993 exchange rate)     41,100    43,700    45,400
GDP (at current prices)           40,800    43,700    48,500
Real GDP Growth (peso terms)        11.0       6.3       4.0
Real GDP by Sector:
  Agriculture                      2,930     2,970     3,050
  Utilities                        1,180     1,240     1,280
  Manufacturing                    7,260     7,550     7,970
  Construction                     2,200     2,520     2,580
  Fishing                            460       470       550
  Mining                           3,350     3,390     3,400
  Trade                            6,400     6,980     7,150
  Transport/Communications         3,100     3,350     3,650
  Other (includes services)       14,220    15,230    15,770
Real Per Capita GDP (USD)          3,030     3,170     3,250
Labor Force (000s)                 4,844     5,095     5,200
Unemployment Rate (pct.)             4.9       4.6       5.6

Money and Prices: (annual percentage growth)

Money Supply (M1A)                  40.3      19.1      17.0
Interest Rate 2/                     8.1       9.2       9.2
Wholesale Inflation (12-month)       8.9       6.7       9.0
Consumer Price Inflation (12-month) 12.7      12.2      10.5
Average Exchange Rate: (pesos/USD)
  Interbank Rate (actual)            363       404       423
  Mid-Point of Crawling Peg          390       430       460

Balance of Payments and Trade:

Total Exports (FOB)                9,986     9,202    10,700
  Exports to U.S. (FOB)            1,649     1,655     1,800
Total Imports (FOB)                9,237    10,181    10,800
  Imports from U.S. (CIF)          1,985     2,477     2,500
Aid from U.S. 3/                       4         4         4
Public Foreign Debt (yearend)      9,623     9,035     8,800
Public Foreign Debt Service 4/     1,400     1,300     1,400
Gold and Foreign Exch. Reserves    9,009     9,759    10,700
Trade Balance                        749      -979      -100
  Trade Balance with U.S.           -336      -822      -700


1/ 1994 figures are estimates based on data through August.
2/ Real (i.e., in addition to inflation) annualized rate for
90-365 day loans.
3/ Fiscal years, including all of FY-1994.  All grants.
4/ Estimate.  Includes non central government debts (e.g.,
Central Bank, public corporations) and private debts with
public guarantees.








1.  General Policy Framework

    Chile's economic expansion is now into its twelfth year.
The most notable developments over the last several years have
been the diversification of the export base and the renewed
ability of Chilean firms to obtain capital from international
markets.  Although copper remains the country's largest export
earner and foreign investment pours into the mining sector,
exports of fish, forestry products, and fresh fruit are
important as well.  Chile's credit rating is the highest in
Latin America; since Chile received an investment-grade rating
in 1992, Chilean firms have financed investment with foreign
capital by borrowing, issuing bonds, and selling stock abroad.
Domestically financed investment is also significant and
growing, and many Chilean firms are expanding abroad.

    The democratic governments of Patricio Aylwin (1990-1994)
and Eduardo Frei (1994-present) have emphasized the need to
maintain macroeconomic stability and the economy's export
orientation.  The government has generated fiscal surpluses in
each of the years 1990-1993, and it is projected to do so in
1994.  In the last few years, the government and the
independent Central Bank have privatized some firms and
gradually loosened foreign exchange restrictions, although they
remain concerned about the potential effects on the exchange
rate of rapid foreign currency inflows.  In 1994, new laws
liberalized capital markets, fixed a framework for
environmental regulation, and made money laundering a crime.  A
bill pending in Congress would allow banks to enter new
businesses.  Chile has ratified the Uruguay Round agreements
and became a founding member of the World Trade Organization
(WTO) on January 1, 1995.

    The Central Bank's monetary policy targets real interest
rates.  It has resisted calls to lower interest rates as growth
rates fell in 1993 and 1994, emphasizing the need to prevent
long-term domestic spending growth from outpacing that of the
economy as a whole.  The authorities have sought to maintain an
exchange rate which provides incentives to invest in export
industries, although rapid capital inflows since 1991 have
complicated their task by contributing to peso appreciation.

    Indicators for 1994 suggest that growth will be around four
percent as a result of decelerating domestic spending.  Growth
is being led by exports, with domestic trade and construction
(which boomed in 1993) facing difficulties.  Inflation will be
near the government's target range of 9-11 percent, while
unemployment will average between five and six percent.
Because of an unexpected increase in the price of copper, the
trade balance will be very close to even, and the current
account deficit will be around 2.5 percent of GDP.  For 1995,
preliminary Central Bank projections envision growth of over
five percent, inflation of nine percent, a slightly positive
trade balance, and a current account deficit of three percent
of GDP.  Keeping inflation on a downward path remains a high
priority, but the authorities have cautioned that the
indexation of the economy makes rapid gains unlikely in the
short-term.


2.  Exchange Rate Policy

    The Central Bank pegs the peso to a basket composed of the
U.S. dollar, the mark and the yen (weighted 50 percent, 30
percent and 20 percent, respectively).  The peg is adjusted to
reflect inflation differentials between Chile and its major
trading partners.  Although the path for the crawling peg is
determined a month in advance, the individual cross rates are
determined daily, depending on market rates for the dollar,
mark and yen.  The official interbank rate is allowed to move
within a 20 percent band around the crawling peg.

    Exporters must remit most (75 percent or all but $15
million, which ever is greater) of their foreign currency
earnings through the interbank market.  The Central Bank
intervenes in the interbank market on different occasions to
reduce short-term fluctuations.  A legal parallel market
operates, with rates typically within one percent of the
interbank rate.  The peso appreciated against the currencies of
Chile's trading partners by around 20 percent in real terms
between 1991 and 1993.  The appreciation was in large part due
to the strong capital inflows prompted by high Chilean interest
rates and the perception abroad of reduced country risk.  In
the first half of 1994, the peso appreciated by another three
percent as a result of the dollar's weakness in international
markets.


3.  Structural Policies

    Pricing Policies:  The government rarely sets specific
prices.  Exceptions are urban public transport and some public
utility prices and port charges.  State enterprises purchase at
the lowest possible price, regardless of the source of the
material.  U.S. exports enter Chile and compete freely with
other imports and Chilean products.  Import decisions are
typically related to price competitiveness and product
availability.  (Certain agricultural products are an exception.
See section five.)

    Tax Policies:  An 18 percent value-added tax (VAT) applies
to all sales transactions and accounts for 43 percent of total
tax revenue.  There is an 11 percent tariff on most imports.
There are duty-free zones in Iquique and Punta Arenas and a
limited duty-free zone in Arica; less than three percent of
Chilean imports pass through these zones.  Personal income tax
rates will fall modestly in 1995; the top marginal rate will
fall from 48 to 45 percent on annual income over approximately
$75,000.  Profits are taxed at flat rates of 15 percent for
retained earnings and 35 percent for distributed profits, with
incentives for business donations to educational institutions.
Tax evasion is not a serious problem.

    Regulatory Policies:  Regulation of the Chilean economy is
limited.  The most heavily regulated areas are utilities, the
banking sector, the securities markets, and pension funds.
There are no government regulations that explicitly limit the
market for U.S. exports to Chile (although other government
programs, like the price band system for some agricultural
commodities described below, displace U.S. exports).  In recent
years, the government has for the first time begun to allow
private firms to invest in and operate public infrastructure
projects.  Most Chilean ports are administered by a state-owned
firm, although stevedoring services are typically provided by
the private sector.


4.  Debt Management Policies

    Chile's vigorous economic growth and careful debt
management over the last decade have meant that foreign debt is
no longer a major problem.  The government restructured 1991-94
foreign debt maturities at market interest rates with its
creditor banks in September 1990.  As of mid-1994, Chile's
public and private foreign debt stock stood at $19.9 billion.
In every year since 1987, public sector debt has declined and
private sector debt has risen, the latter a result of firms
borrowing abroad to finance investment.  Public sector debt is
now less than private sector debt, and in the last few years
the overall debt level as a percentage of GDP has remained
relatively stable at around 40 percent.  (In 1985, the
debt-to-GDP ratio was 125 percent.)


5.  Significant Barriers to U.S. Exports

    Chile has few barriers to U.S. exports.  Nevertheless,
treatment in some areas, especially agricultural commodities,
diverges from this norm.  Chile agreed in the GATT Uruguay
Round not to raise its tariff rates above 25 percent (except
for a few agricultural products, for which the rate is 31
percent).  The uniform Chilean tariff rate is currently 11
percent.  Chile has free trade agreements providing for
duty-free trade in most products by the late 1990s with Mexico,
Venezuela, and Colombia, and it was expected to complete
another such agreement with Ecuador in late 1994.  In 1994,
Chile also began negotiations on a trade-liberalizing agreement
with the Mercosur nations (Argentina, Brazil, Paraguay, and
Uruguay).  Tariffs also are lower than 11 percent for certain
products from member countries of the Latin American Free Trade
Association and products imported by diplomats and the Chilean
military.  A 50 percent surcharge, in addition to the 11
percent import tariff, is applied to all imports of used goods.

    The 18 percent VAT is applied to the CIF value of imported
products plus the 11 percent import duty. This compounding adds
an effective two percent to the duty charged on the imported
good.  Duties may be deferred for a period of seven years for
capital goods imports purchased as inputs for products to be
exported. (See section 2.)

    Automobiles are subject to additional taxes based on value
and engine size.  The engine tax applies to vehicles with
engines of over 1,500 cc., while the value tax is 85 percent of
the CIF value over a certain level (around $9,700 in 1994).
These taxes discourage sales of larger and more expensive
vehicles, including most U.S.-made automobiles.  Despite these
taxes, sales of U.S.-made vehicles are growing.

    Another tax that has the effect of discouraging U.S.
exports is the 70 percent tax on whiskey, which is produced in
only small volumes domestically and which competes with other
domestically produced liquors taxed at lower rates.

    Import Licenses:  According to legislation governing the
Central Bank since 1990, there are no legal restrictions on
licensing.  Import licenses are granted as a routine
procedure.  Imports of used automobiles are prohibited.

    Investment Barriers:  Chile's foreign investment statute,
Decree Law 600, sets a standard of treatment of foreign
investors in the same manner as Chilean investors.  Foreign
investors using D.L. 600 sign a contract with the government's
Foreign Investment Committee guaranteeing the terms of their
investments.  These terms include the rights to repatriate
profits immediately and capital after one year, to exchange
currency at the official interbank exchange rate, and to choose
between either national tax treatment or a guaranteed rate for
the first ten years of an investment.  Approval by the Foreign
Investment Committee is routine.  Since 1991, investors have
been required to deposit some (currently 30 percent) of the
capital obtained from foreign loans in a non-interest bearing
Central Bank account (known as the "encaje") for one year.
There is no tax treaty between Chile and the United States, so
profits of U.S. companies operating in Chile are taxed by both
governments, although U.S. firms generally can claim credits
for taxes paid in Chile.

    Firms may invest without using D.L. 600 or registering with
the Foreign Investment Committee by bringing capital in through
foreign exchange dealers or private banks.  Few firms use this
means of investment, as it lacks the guarantees provided by the
contract with the Foreign Investment Committee.

    There are some deviations, both positive and negative, from
the nondiscrimination standard.  Foreign investors receive
better than national treatment on taxation, as they have the
option of fixing the tax rate they will pay at 42 percent for
ten years or paying the prevailing domestic rate, which is at
present lower.  Unlike domestic firms, foreign investors may
also keep all of their export earnings abroad.

    There are also examples of less than national treatment.
In an emergency, D.L. 600 allows the Central Bank to restrict
the access of foreign investors to domestic borrowing in order
to prevent distortion of local financial markets.  The Central
Bank has never exercised this power.

    Other examples of less than national treatment are the
restrictions on foreign investment in some sectors.  With few
exceptions, fishing in the country's 200-mile exclusive
economic zone is reserved for Chilean-flag vessels with
majority Chilean ownership.  Such vessels also are the only
ones allowed to transport by river or sea between two points in
Chile ("cabotage") cargo shipments of less than 900 tons or
passengers.

    Full foreign ownership of radio and television stations is
allowed, but the principal officers of the firm must be Chilean.

    A freeze in force for the last decade on the issuance of
new bank licenses means that would-be foreign (or domestic)
entrants must acquire existing banks.

    The automobile and light truck industry is the subject of
trade-related investment measures, although U.S. firms are
among those helped as well as those harmed.  Manufacturers from
the United States (GM) and France (Peugeot/Renault) receive
import protection in the form of the taxes noted above, which
protect their Chilean production.  The manufacturers also
receive tax benefits for the use of local inputs and for
exporting auto components.  Despite these measures, imports
make up around 85 percent of the market.

    Oil and gas deposits are reserved for the state.  Private
investors are allowed concessions, however, and foreign and
domestic nationals are accorded equal treatment.

    Principal Nontariff Barriers:  The main trade remedies
available to the Chilean Government are surcharges, minimum
customs values, countervailing duties, antidumping duties, and
import price bands.  Chile's most significant nontariff barrier
is the import price band system for certain agricultural
commodities, which currently applies to wheat, wheat flour,
vegetable oils, and sugar.  Surtaxes are levied on imports of
these commodities on top of the across-the-board 11 percent
tariff in order to bring import prices up to an average of
international prices over previous years.

    The Chilean Government may apply country-specific duties on
products that it determines to have received subsidies from
exporting countries and on products that it determines to have
been dumped at below-market prices.  As of late 1994, only
imports of certain textiles and garments from selected Asian
countries and imports of one industrial chemical are subject to
these duties.  Low world prices have led Chile to establish
minimum customs values for milk, spun cotton, and wheat flour.

    Animal Health and Phytosanitary Requirements:  Chile
occasionally uses animal health and phytosanitary requirements
in a nontransparent manner that has the effect of impeding
imports.  No public comment process or announcement of proposed
rule changes precedes the promulgation of these requirements.
U.S. exporters have expressed concern about the application of
phytosanitary requirements to poultry.  Chilean authorities
have in some instances eliminated or liberalized specific
requirements when presented scientific evidence by U.S. animal
health or phytosanitary officials.

    Government Procurement Practices:  The government has a
"buy Chile" policy only when conditions of sale of locally
produced goods (price, delivery times, etc.) are equal to or
better than those of equivalent imports.  In practice, given
that many categories of products are not manufactured in Chile,
purchasing decisions by most state-owned companies are made
among competing imports.  Requests for public and private bids
are published in the local newspapers.  Government officials
have on occasion urged some government agencies to buy Chilean
coal on a preferential basis.


6.  Export Subsidies

    With minor exceptions, the Chilean Government does not
provide exporters with direct or indirect support such as
preferential financing or export promotion funds.  The Chilean
Government does, however, offer a few nonmarket incentives to
exporters.  For example, paperwork requirements are simplified
for nontraditional exporters.  Small nontraditional exporters
also qualify for the government's simplified duty drawback
system.  Through this mechanism, the government returns to
producers an amount equivalent to three to ten percent of their
exports' value.  This figure represents an estimate of the
duties actually paid for imported components in the exported
merchandise.  Alternatively, qualifying exporters can apply for
the return of all paid duties.  The government also provides
exporters with quicker returns of VAT paid on inputs than other
producers receive.

    All Chilean exporters may also defer tariff payments on
capital imports for a period of seven years.  If the capital
goods are used to produce exported products, deferred duties
can be reduced by the ratio of export sales to total sales.  If
all production is exported, the exporter pays no tariff on
capital imports.

    In order to encourage forestation of land that would be of
marginal agricultural use, the government subsidizes
approximately 75 percent of planting costs as well as certain
management costs for the first generation of trees, which in
practice are almost always nonnative species.  The value of the
subsidy is adjusted for inflation and treated as taxable income
when the trees are harvested.  Forestry industry
representatives say the subsidy, when allocated over the life
of plantations, amounts to about five percent of total costs.
Both foreign investors and Chileans are eligible for the
subsidy.  The law which established the subsidy in 1974 (D.L.
701) expires in March of 1995, and discussions are ongoing
about its possible renewal or revision.


7.  Protection of U.S. Intellectual Property

    Chile's intellectual property regime is basically
compatible with international norms, and industry
representatives have welcomed government enforcement efforts.
Continuing deficiencies in patent protection, however, have
kept Chile on the USTR Special 301 watch list since 1989.
Efforts to enforce intellectual property rights in Chilean
courts have been successful.  Chile does not have an explicit
statute for protecting the design of semiconductors nor does it
have comprehensive trade secret protection.  Chile belongs to
the World Intellectual Property Organization.  Contracts may
set fees and royalties only as a percentage of sales, and
payments for the use of trade secrets and proprietary processes
are usually limited to three percent.

    Patents:  The Industrial Property Law promulgated in
September 1991 substantially improved Chile's protection of
industrial patents, but it falls short of international
standards.  The law provides a patent term of 15 years from the
date of grant.  (The term in the United States is 17 years.)
The law also does not consider plant and animal varieties or
surgical methods to be patentable.  Most importantly, the law
does not provide pipeline protection for pharmaceutical patents
filed abroad before the law's promulgation.  Because of the
lack of pipeline protection and the long lead times involved in
the marketing of new pharmaceutical products, the law will not
prevent local companies from pirating foreign pharmaceutical
patents of products introduced into the market for several more
years.  In addition, the registration procedures required by
the health ministry to market new drugs are more onerous for
first-to-file firms, which tend to be foreign firms.  Payments
for the use of patents may not exceed five percent of sales.

    Copyrights:  Piracy of video and audio tapes has been
subject to criminal penalties since 1985.  Chilean authorities
have taken aggressive enforcement measures against video, video
game, audio, and computer software pirates in recent years, and
piracy has declined in each of these areas.  In the mid-1980s,
the software piracy rate was believed to be around 90 percent;
it is currently estimated at around 70 percent.  The decline is
in part the result of a campaign by the industry, with the
cooperation of the courts and the government, to suppress the
use of pirated software.  Improved access to authorized dealers
and service has also helped to reduce the rate of piracy.
Industry sources say that penalties remain low relative to the
potential earnings from piracy and that stiffer penalties would
help to deter potential pirates.  In 1992, the Chilean Congress
approved legislation that extended the term of copyright
protection from 30 years to 50 years.  U.S. recording industry
officials have said that the copyright law grants producers
less favorable treatment vis-a-vis authors than is the
international norm.

    Trademarks:  Chilean law provides for the protection of
registered trademarks and prioritizes trademark rights
according to filing date.  Local use of the mark is not
required for registration.  Payments for use of trademarks may
not exceed one percent of sales.

    Impact of Chile's Intellectual Property Practices on U.S.
Trade:  Although it is difficult to accurately estimate
damages, most observers believe that the U.S. pharmaceutical
industry has suffered most from the infringement of its
intellectual property (in this case, patent) rights in Chile.
U.S. software industry sources have estimated that some $65
million worth of pirated software was used in 1993, although
only a fraction of this amount would go directly to U.S.
exporters if piracy were eliminated.


8.  Worker Rights

    a.  The Right of Association

    Most workers have a right to join unions or to form unions
without prior authorization, and around 11 percent of the work
force belongs to unions.  Government employee associations
operate like unions in some ways, but they do not have the same
legal protection as unions.  Legislation has been introduced to
give them the same rights as unions.

    Reforms to the labor code in 1990 removed significant
restrictions on the right to strike.  Those reforms require
that a labor inspector or notary be present when union members
vote for a strike.  Employers are required to show cause
whenever they fire workers, but "needs of the enterprise" is a
permissible cause.  Observers believe that some employers
invoke this cause to fire employees for trying to form unions.

    b.  The Right to Organize and Bargain Collectively

    The climate for collective bargaining has improved, and the
number of contract negotiations has grown steadily, but only 17
percent of eligible workers had collective bargaining
agreements as of the end of 1992.  The process for negotiating
a formal labor contract is heavily regulated, a vestige of the
statist labor policies of the 1960's.  However, the law permits
(and the Aylwin and Frei governments have encouraged) informal
union-management discussions to reach collective agreements
outside the regulated bargaining process.  These agreements
have the same force as formal contracts.

    Temporary workers -- defined in the labor code as
agricultural, construction, and port workers as well as
entertainers -- may form unions, but their right to collective
bargaining is restricted.  Some 700,000 workers, including most
agricultural workers, are limited to informal negotiations.

    c.  Prohibition of Forced or Compulsory Labor

    Forced or compulsory labor is prohibited in the
constitution and the labor code, and there is no evidence that
it is currently practiced.

    d.  Minimum Age for Employment of Children

    Child labor is regulated by law.  Children as young as 14
may legally be employed with permission of parents or guardians
and in restricted types of labor.  Economic factors have forced
many children to seek employment in the informal economy, which
is more difficult to regulate.  A UNICEF study concluded that
107,000 minors (seven percent of their age group) held jobs,
mostly in the countryside, and that many of them worked with
their parents.

    e.  Acceptable Conditions of Work

    Minimum wages, hours of work, and occupational safety and
health standards are regulated by law.  The legal workweek is
48 hours.  The minimum wage, currently around $125 per month,
is set by government, management, and labor representatives, or
by the government if the three groups cannot reach agreement.
Lower-paid workers also receive a family subsidy.  Poverty
rates have declined dramatically in recent years, and real
wages have risen, although not as rapidly as the overall GDP
has grown.

    f.  Rights in Sectors with U.S. Investment

    Labor rights in sectors with U.S. investment are the same
as those specified above. U.S. companies are involved in
virtually every sector of the Chilean economy and are subject
to the same laws that apply to their counterparts from Chile
and other countries. There are no export processing zones or
other special districts where different laws apply.



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)

              Category                          Amount

Petroleum                                              (1)
Total Manufacturing                                    229
  Food & Kindred Products                    30
  Chemicals and Allied Products             119
  Metals, Primary & Fabricated             -181
  Machinery, except Electrical                1
  Electric & Electronic Equipment           (1)
  Transportation Equipment                  (1)
  Other Manufacturing                       169
Wholesale Trade                                        204
Banking                                                374
Finance and Insurance                                1,185
Services                                               (1)
Other Industries                                       628
TOTAL ALL INDUSTRIES                                 2,869

(1) Suppressed to avoid disclosing data of individual companies
Source: U.S. Department of Commerce, Bureau of Economic Analysis
(###)