Economics class: Chile

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Specification:

• The Global Economy: Chile

In A-level economics it is essential to provide examples, particularly for Theme 4 ‘The Global Economy’. Students are encouraged to have a good understanding of countries at different stages of economic development. They should demonstrate knowledge and understanding of strategies that promote growth and development. Using examples in written responses will add depth and value, particularly in the essay section, and gain credit with examiners.

Chile

Context  

Chile, located in South America, has seen rapid economic growth since it embraced market economics in the 1980s under the dictator General Augusto Pinochet. A series of market-led policies at the time that included privatisation, trade liberalisation and the creation of private pensions won the country global economic admirers. Many of its market-led policies have been maintained, although more recent reforms have focused on improving social welfare and reducing poverty. Chile is an example of a developing country that has experienced rapid growth. It has followed an export-led growth strategy, with gross domestic product per capita increasing from $5,000 in 2000 to more than $15,000 in 2023 — the highest in South America after Uruguay. Economic growth averaged 3.58 per cent between 1997 and 2023.

World Bank data 

Chile has a population of 19.6mn. Everyone has electricity and 90 per cent can access the internet. The Human Development Index was 0.85 in 2021, up from 0.64 in 1980. This shows that there have been significant improvements including in life expectancy, education and the standard of living.

Economic performance  

The pandemic hit the economy significantly with a 14.8 per cent contraction in GDP. Chile in 2022 experienced a lower growth rate of 2.4 per cent. It now has higher levels of inflation, at 11.6 per cent, and unemployment of 7.8 per cent. Contractionary fiscal and monetary policies have been used to counter the inflationary build-up, which have slowed growth.

Government finances remain healthy, with a low level of debt to GDP of 36.7 per cent. The socialist government led by President Gabriel Boric has been prudent in controlling its spending as it fears higher borrowing costs in a period of global inflation.

Read: Chile’s leftist government surprises with spending squeeze

Income inequality remains an important problem, with a Gini coefficient of 0.46. Problems with corruption and the political system favouring the rich led to the election of a new socialist government in 2021. 

The roots of Chile’s social discontent

Education 

All children attend primary school, and 97 per cent of the population is literate. The Chilean government spends about 20 per cent of its budget on its education system, which is ranked 38th in the world by the Global Education Index.

One important concern is that only 6 per cent of students achieve advanced learning outcomes. Many who go to university drop out because of the high costs. Productivity and investment have been weak for prolonged periods, contributing to slower growth and rising inequality. Many consider Chile’s dependency on raw materials a significant weakness which has limited the development of value-adding industries. 

Latin America’s stagnation ‘worse than the 1980s’, says UN official

https://wisevoter.com/country-rankings/education-rankings-by-country/#tracker_introduction 

Population and employment  

Chile’s population has a median age of 36.8. This is predicted to rise to 46.8 by 2050. An ageing population is one indicator of a developed country, but it may hinder long term growth. 

According to the World Bank much of the workforce is employed in the service (54.6 per cent) and the industrial (22.6 per cent) sector. Only 9 per cent still work in agriculture, although it thrives in producing out of season vegetables for countries in the Northern Hemisphere. The Chilean Wine and Tourism sectors also have also been sources of growth in recent years. 

Chilean wines

Observatory of economic complexity 

Chile is rich in natural resources. As far back as the 15th century it exported gold. It is has substantial reserves of copper, coal, nitrate and lithium. Its growth strategy has focused on specialising in mining these commodities. It is responsible for around a third of global output in copper — a valuable component in electrical goods for which it has derived demand as the appetite for electronic gadgets grows. However, copper prices tend to fluctuate, which can affect profitability and export volumes.

Its production has also placed a significant strain on the water supply. Between 2010 and 2020, a drought caused water to be diverted to copper production, leaving many communities depending on supply by emergency tankers. The desalination industry is vital to the long-term survival of the copper industry. China is the biggest customer of copper, and when China’s economy falters, such as during the pandemic, demand and prices fall. Chile’s over-reliance on primary raw materials could be considered as a constraint on development.

World’s top copper producer bemoans spectre of speculators

Trade

Chile’s current account deficit in September 2023 was $4.5bn, though it was in surplus in the previous quarter by $1.7bn. It has forged several free trade agreements with other nations. It is part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership of 12 countries including Australia, Canada, Japan and the United Kingdom, which accounts for 13 per cent of global GDP.

Britain set to join transpacific trade group

Chile also has free trade agreements with China, which accounts for 38.3 per cent of its exports, and the US, which accounts for 16.3 per cent. Ninety-five per cent of all trade is with countries that have free trade agreements with Chile. In 2022 it also signed a free trade deal with the EU.

EU seals Chile trade deal that will improve bloc’s access to key minerals

Opportunities and challenges

Chile faces several economic challenges, including high inequality, slowing growth, high inflation, low productivity, an ageing population, water supply problems and dependency on raw materials. However, the government has embarked on a series of ambitious growth strategies and GDP per capita is forecast to rise to $20,000 by 2028.

It aims to make Chile the world’s leading exporter of green hydrogen, a fuel produced without emissions. This strategy may boost exports. It has also developed solar energy in the Atacama Desert as part of plans to become a solar version of Saudi Arabia. It is producing some of the cheapest energy in the world. This removes another barrier to growth in the economy.

Chile’s green lessons for emerging markets

Chile learns to harvest its formidable solar power opportunities

Chile’s natural resources present an opportunity for further growth. It has enough lithium to “supply the world for decades”. Lithium is a key component of batteries, which makes it increasingly important as the world transitions to electric cars.

The abundance of lithium may provide long-term export opportunities especially to China, although as with copper over-dependency, this market is a risk and could cause price volatility and external shocks. Corruption is also a problem that needs to be tackled.

Lithium: Chile’s buried treasure

The socialist government elected in 2021 promised to tackle inequality and promote socialist reforms. Whilst some improvements to the minimum wage and working hours have happened, it has struggled to implement others, and corruption and crime have recently grown.

Chile’s leftist president curbs radical transformation plans

The government’s plan to nationalise the new lithium industry has spooked international investors. It has been discussing the possibility of creating an international cartel for lithium with other nations in the region. Its leader says the commodity presents the “best opportunity to transition to a sustainable and developed economy and it simply cannot be wasted”.

Chile’s president moves to bring lithium under state control

It is clear Chile has the potential to grow and develop further. However, its dependence on raw materials remains problematic. If the government can harness and develop new manufacturing industries linked to its abundance of raw materials, growth could be even more sustainable.

Questions  

• Explain what is meant by a contractionary fiscal policy

• Using a Lorenz curve diagram explain how income inequality is measured using the Gini coefficient. Refer to the extract in your answer

• Explain why the Prebisch Singer hypothesis may be relevant to Chile

• Explain two factors that determine the demand for exports

• With the aid of a diagram explain the term export-led growth

• Evaluate strategies undertaken by the Chilean government to promote further growth and development

John Greenwood, Bromley High School for Girls