Chile 2007 :A pragmatist approach to global

integration

Jacques de LarosièreAdvisor to the Chairman of BNP

Paribas and Former Managing Director of

the International Monetary Fund

Latin American Economic Outlook Conference

Vittorio CorboPresident, Central Bank of Chile

Paris 29th January 2007

2

The Chilean Economy I

The Chinese ConnectionII

ConclusionsIII

3

Chile is one of the few Latin-American countries converging with the US

0

5,000

10,000

15,000

20,000

25,000

1850 1870 1890 1910 1930 1950 1970 1990

1990 G

eary

-Kham

is in

tern

atio

nal

dolla

rs

Mexico

Brazil

Chile

USA

Average LA8

Source: OECD Development Centre, 2007.

Based on Angus Madison, Historical Statistics. The World Economy, Paris, OECD, 2003.

GDP per capita absolute terms

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1850 1870 1890 1910 1930 1950 1970 1990

% G

DP U

SA

Chile

Mexico

Brazil

Average LA8

GDP per capita relative to US

Plebiscite in Chile, 1988

4

Chile has also been able to take advantage of globalization by opening up and attracting

FDI

0

10

20

30

40

50

1980 1985 1990 1995 2000 2005

Mexico

USA

Chile

Brazil

Exports % GDP

Fuente: UNCTAD and World Development Indicators, World Bank, 2006.

• Chile is one of the most successful countries in the region attracting FDI

• It has also become a champion exporter

% G

DP

% G

DP

-1%

9%

19%

29%

39%

49%

59%

69%

1980 1985 1990 1995 2000 2005

Mexico

USA

Chile

Brazil

Foreign Direct Investment % GDP

5

0

20

40

60

80

100

120

140

160

Mala

ysia

Kore

a

Chile

Phili

ppin

es

Bra

zil

Mexic

o

%

Private credit/ GDP Stock market capitalization/ GDP

One of the strongest motors of growth for Chile has been its dynamic financial system

0

10

20

30

40

50

60

70

Chile

Mexic

o

Mala

ysia

Bra

zil

Kore

a

Phili

ppin

es

%

Financial strength index

Private bonds/ GDP

Source: Betancour, C. De Gregorio, J. Jara A. “Improving the Banking System: The Chilean Experience”. BIS Papers. No. 28, 2006.

Financial Development in Chile

• Chile’s financial system is one of the most dynamic in the region, but it still has to catch up with other emerging economies in some aspects

• In some aspects, e.g. stock market capitalization, Chile is doing even better than Korea

Financial Strength Index based on Moody’s index of financial system strength, based on a numerical scale assigned to weighted average bank ratings by country.

6

Pension reform in Chile has had a significant impact on growth rates and productivity

PENSION REFORM CONTRIBUTION TO GROWTH

3.14.1

0.5

0

1

2

3

4

5

6

GDP Growth 1960-1980 GDP Growth 1981-2001

(%)

Pensions reform contribution to growth

Growth rate

TOTAL FACTOR PRODUCTIVITY 1962-2002

80

90100

110120

130

140150

160

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

Base

year

1960=

100

Source: Vittorio Corbo, Klaus Schmidt-Hebbel. “Efectos Macroeconómicos de la Reforma de Pensiones en Chile”. Banco Central de Chile, Septiembre 2003. Based on data from Instituto Nacional de Estadística, Chile.

SAVING RATES (% TOTAL INVEST.)

75

80

85

90

95

100

105

110

115

120

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

% o

f In

vest

.

PENSION FUND ASSETS AND LABOUR FORCE ENROLMENT

0

10

20

30

40

50

60

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

% G

DP

0

2

4

6

8Pension Funds Assets (left axis)

Pension Workers Pension FundsAdmin. (right axis)

7

The Chilean Economy I

The Chinese ConnectionII

ConclusionsIII

8

China has become a major trading partner for Latin America and for Chile in particular

Source: Dirección General de Relaciones Económicas Internacionales de Chile, 2006.

0

2

4

6

8

10

12

Chile

Peru

Arge

ntin

a

Braz

il

Vene

zuel

a

Colo

mbi

a

Boliv

ia

Mex

ico

% o

f to

tal ex

por

ts

2000 2005

0

2

4

6

8

10

12

Chile

Peru

Mex

ico

Colo

mbi

a

Arge

ntin

a

Braz

il

Boliv

ia

Vene

zuel

a

% o

f tot

al im

port

s

2000 2005

Latin American exports to China (share of total exports)

Latin American Imports from China (share of total imports)

9

Chile’s exports destinations have diversified

North America (Nafta),

23%

Europe 25%

Asia36%

Latin America

12%

Others 4%

Regional distribution of Chilean exports to the world in 2005

Others13%

China31%

South Korea16%

India4%

Japan32%

Country distribution of Chilean exports to Asia in 2005

Source: Dirección General de Relaciones Económicas Internacionales de Chile, 2006.

10

This is very good news and a wise strategic bet

Source: OECD Development Centre, Agnus Madison database, and DIRECON, 2006.

0

2

4

6

8

10

12

Chin

a

Mal

aysi

a

Thai

land

Phill

ipin

es

Kor

ea

Indo

nes

ia

Avera

ge G

DP G

row

th r

ate

2000-2

005

The Asian drivers0%

5%

10%

15%

20%

25%

30%

1950 1960 1970 1980 1990 2000

% W

orl

d G

DP USA

China

Japan

% of World GDP

• Asia is a good bet for the future

• Other alliances with Asian economies are a bigger opportunity for Chile

11

Chile openness to trade and investment is remarkable, but export specialization is still

high

Share of Main Chilean Exported Goods2005

0

5

10

15

20

25

30

35

Copper Ores, slag Fish andderivatives

Fruits Wood related

Pulp ofwood,fibrous

materials

%

Source: OECD Development Centre, 2007.Based on: Intracen, Economist Intelligence Unit and Index of Economic Freedom (Wall Street Journal).

Share of Chilean Exports to China

0

2

4

6

8

10

12

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

% o

f Tota

l Export

s

12

A potential pitfall is that Chile’s exports to China are becoming more concentrated in

mining

0

10

20

30

40

50

60

70

80

90

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

% o

f to

tal e

xpor

ts t

o Chi

na

Agriculture Mines Industry

Chile: exports to China, by sector

Source: Dirección General de Relaciones Económicas Internacionales de Chile y Banco Central de Chile, 2006.

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ions

USD

Agriculture Mines Industry

Chile: exports to the world excluding China, by sector

13

The Chilean Economy I

The Chinese ConnectionII

ConclusionsIII

14

Conclusion: Chile is looking towards Asia

19961993-

94 1998 1999

Economic Agreements

BoliviaColombiaEcuador

VenezuelaFTA CanadaAssociation

with Mercosur

FTA MexicoEconomic

Agreement Peru

FTA Central America

2002

Economic Association

EU

2003

FTA USA EFTA

South Korea

2005

FTA ChinaEconomic

Association P-4

2006

Partial Scope Agreement

India

Current negotiations with India and JapanStudy for an

FTA with Thailand

2007

Western Hemisphere Asia

Source: Dirección General de Relaciones Económicas Internacionales de Chile, 2006.

EFTA: European Free Trade Association: Iceland, Liechtenstein, Norway, Switzerland.Note: TheP-4 group are: Brunei Darussalam, Chile, New Zealand, Singapore.

15

Concluding Remarks

Chile has made significant improvements to become a leading model for the region:

Financial sector development. Pension Reform. Trade openness and international insertion.

New trading partners, particularly Asia, have become increasingly important for Chile.

Chile 2007 :A pragmatist approach to global

integration

Jacques de LarosièreAdvisor to the Chairman of BNP

Paribas and Former Managing Director of

the International Monetary Fund

Latin American Economic Outlook Conference

Vittorio CorboPresident, Central Bank of Chile

Paris 29th January 2007

17

ANNEX

18

The good news is that Chile need not fear competition with China on a global level

Source: Blázquez, Rodríguez and Santiso, 2006.

Chinese trade competition with Latin America

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.0 0.1 0.2 0.3 0.4 0.5 0.6

Mexico

Brazil

Colombia

VenezuelaChile

Argentina

Peru

Costa Rica

Chinese global trade competition

0.2

0.3

0.4

0.5

0.6

0.7

0.30 0.35 0.40 0.45 0.50 0.55 0.6

Mexico

ThailandHungary

USA Czech R.

Spain

Poland

Japan

High specialisationCoefficient of specialisation

Coeffi

cien

t of

con

form

ity

Coeffi

cien

t of

con

form

ity

Note: Both CS and CC coefficients are indicators of trade competition, based on the export structure of each country. As coefficients approach to zero, competition between countries tends to be small, due to export complementarities. When coefficients increase, competition increases.

Low specialisation

19

Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research Source: Blázquez, Rodríguez and Santiso, 2006.

China’s demand for commodities: a bonanza or a threat?

*Value of exports to US from China in same product categories as country´s exports, as % of country´s total exports to US

*Arithmetic average of the following indexes: CC= and CS=

where ajt and ait equals the share of item “n” over total exports of countries j (China) and i in time t.

å --n

njt

nit aa

2

11

åå

å

n

njt

n

nit

n

njt

nit

aa

aa

22 )()(

Asian countries competition*

vs. Chinese exports to US, %

010203040506070

Thailand

Taiw

an

Indo

nesia

Mal

aysia

Philipp

ines

Sout

h Ko

rea

Sing

apor

e

Japa

n

Latin American countries competition* vs. Chinese main export products

0%

10%

20%

30%

40%

50%

60%

Méx

ico

Brazil

Colom

bia

Argen

tina

Peru

Urugu

ay

Chile

Venez

uela