1. 1 Chile: The archetypal success story Source: IMF, own calculations Note: all magnitudes in nominal terms (not adjusted for infllation); Chile’s real growth rate 92-97: 6.5% (5% per capita) 1. Successful application of the « Washington Consensus » Macroeconomic stabilization State rollback: privatization & deregulation Trade and financial liberalization Good governance 2. Successful integration in world markets (« globalizer » country) 3. Higher growth performance than rest of LA

2. 2 Macroeconomic stabilization Source: IMF, own calculations

3. 3 Trade liberalization Source: IMF, own calculations Note: all magnitudes in nominal terms (not adjusted for infllation); Chile’s real growth rate 92-97: 6.5% (5% per capita)

4. 4 Insertion point Weaving Dying Cutting Assembly Natural-resource intensive Capital-intensive Labor- intensive Infrastructure -intensive Ginning Spinning Cotton production Retailing Shipping Why trade? « Import-led growth » Typical garment- manufacturing country’s trade pattern

5. 5 Source: IMF, own calculations And yet... Such a bumpy road

6. 6 Why volatility’s bad: changing trajectories Traj. 1 Traj. 2 Traj. 3 Real GDP level Real growth rate

7. 7 Why the bumps? Lack of experience Sequencing of reforms: Financial liberalization too quick? Privatization: All right but who buys? Concentration A fragile economy Trade liberalization: A bit brutal, perhaps?

8. 8 Budget stabilization Monetary stabilization Establishment of a competition policy Establishment of an independent Central Bank Trade liberalization Prudent exchange-rate policy Capital account liberalization Establishment of strong banking oversight body & rules Internal financial liberalization P HASE 1 P HASE 2 P HASE 3 Privatization The proper sequencing of reforms (as we know now!)

9. 9 Sources : First graph: J.P. Morgan, unpublished data a.1980-82=100 (arbitrary) Second graph: IMF, International Financial Statistics, August 2005 Index value a A key danger signal to watch: the real exchange rate growth slowly choked

10. 10 Overall lessons from a quarter-century of Chilean history 1.In the mid-seventies, Chile took the right direction in terms of economic policy 2.Lots of costly mistakes were made along the way. How surprising is this? All the key choices that Chile made over those years look obvious now. They weren’t then: nobody had tried. The « Washington Consensus » should be called the « Santiago consensus ». The Chilean government had little practical guidance on how to run the reforms---just grand principles like « free trade is good » and « government is bad ». The international environment was rough: two oil shocks (1974-75 and 1979-80), the « Latin American debt crisis » (1982-85).

11. 11 So where do we stand today? Source: IMF, own calculations Note: all magnitudes in nominal terms (not adjusted for infllation); Chile’s real growth rate 92-97: 6.5% (5% per capita)

12. 12 Convergence: one generation at 92-97 growth rates! Source: IMF, own calculations

13. 13 Does Chile have a problem today? 1975198519951998 Primary products73655346 Copper54474034 Other minerals18158n.a. Timber124n.a. Semi-finished products14242526 Products of the sea287n.a. Agricultural products5118n.a. Cellulose448n.a. Manufactured products12112227 Wood products334n.a. Food products459n.a. Beverage and tobacco011n.a. Chemical products323n.a. Other manufactured products113n.a. Export composition: Percent of total Source: COMTRADE database, own calculations. Discrepancies between individual items and totals due to rounding

14. 14 Foreign investment: reinforcing existing patterns (of production and exports) or fostering change? Source: Central Bank of Chile, Foreign Investment Committee, 2005, own calculations Average 1974-2004 2004 only

15. 15 Cyclical downturn, or inward investment drying out? Gross FDI inflows: Percent of total Source: Central Bank of Chile, Foreign Investment Committee, 2005; IFS 2005; own calculations Notes: Percent of GDP; graph shows net flows (in minus out)