Chile has recently emerged from a decade of economic reform to become one of Latin America's leading economies. This achievement was recently confirmed when Chile became the first South American country to be invited to join NAFTA, the North American Free Trade Agreement.
With a stable economy, dynamic private sector, growing industries, open investment policies and a growing middle class, Chile is itself an excellent market as well as a base from which to access the rest of South America's markets. The continent's consumer market of 300 million people is the world's second fastest growing region after Asia. Chile is expected to soon become a member of the Southern Cone Trade Agreement (MERCOSUR) including Argentina, Brazil, Paraguay and Uruguay, a potential free market of 200 million people.
During its transition from a military dictatorship to
democracy between 1987 and 1992, Chile's economy grew by more
than 26 percent, an average annual rate of 4.6 percent.3
Economic growth in 1993 was a steady 6 percent.
Inflation has declined from 12 percent in 1993 to 8.7 percent
in 1994. Inflation in 1995 is expected to be less than 8 percent.
Chile's credit risk rating of BBB+ is the best in Latin America.4
Unemployment for 1993 averaged 4.7 percent, the lowest in
decades.
Chile's economic prosperity has relied heavily on natural
resource-based industries, like mining, forestry, fishing and
food processing. However, the manufacturing sector has become
increasingly important over the past decade, helped in part by a
conscious government policy to diversify the economy.5
Chile's manufacturing sector has focused on exports to ensure
early access to growing Latin American markets. For instance, the
country's leading manufacturer of refrigerators, CTI, is planning
to establish a new refrigerator manufacturing facility in
Argentina or Peru over the next few years.6
Asia is Chile's largest export market (US$2.9 billion)
followed by the European Community (US$2.4 billion). Exports to
other Latin American countries have recently mushroomed, growing
at a dramatic rate of 27 percent in the first ten months of 1994,
faster than exports to any other region of the world. Latin
America is now Chile's third largest export market (US$1.8
billion), followed by North America (US$1.6 billion). Argentina,
Brazil, Peru and Mexico are Chile's top Latin American export
markets.7
Foreign investment in Chile is at an all time high. Industrial
modernization and diversification, as well as the growing
manufacturing sector, are the focus of this activity.
Mining, services, industry, and construction received the most
significant foreign investment between 1974 and 1992. Mining and
forestry projects have especially benefited from intensive
foreign investment.
In 1994, Chile's potential partners in NAFTA -- the US, Canada
and Mexico -- significantly increased their investment in Chile
over 1993. Investment from the US amounted to US$4.5 billion,
from Canada US$1.5 billion and from Mexico US$24 million.8 This
US$6 billion of investment represented over 50 percent of total
foreign investment in 1994.9
There are few barriers to imports in Chile. Local and foreign
firms are treated identically under Chilean tax laws. Chile
imposes an import tariff of 11 percent. Tariffs are lower on the
import of products from Latin American countries with which the
country has a trade agreement. Chile also has two free trade
zones, one in each of the extreme northern and southern regions
of the country. An 18 percent value-added tax (VAT) is levied on
all goods sold in the country, whether domestic or imported. For
imports, the VAT is based on the cost-insured-freight of the
product plus the 11 percent import duty.10
There are no laws restricting foreign ownership in Chile. The
liberal policy attitude toward foreign investors is illustrated
by the recent reduction, from three years to one, of the period
after which invested capital can be repatriated.11
Chilean companies pay 15 percent income tax. Foreign companies
can be taxed the same way, with an additional 35 percent tax on
repatriation of profits and dividends. Alternatively, Chile's
foreign investment committee can arrange a contract with
investors for a special tax rate of 42 percent for 10 years. This
replaces the cumulative 50 percent tax rate on foreign companies'
income and repatriated profits. Each month, all companies must
pre-pay 15 percent income tax that is credited against year-end
tax charges.12
Chile's market is not without some negative factors for the
energy efficiency industry. The population is relatively small at
14 million and distances between cities are large. However,
roughly half the country's population is situated in the central
region around Santiago.
Another drawback is the lack of government policies promoting
improved energy efficiency. As of January 1995, Chile did not
have energy performance standards or utility demand-side
management incentives. However, the National Energy Commission is
showing an increasing commitment to energy efficiency and
development of non-conventional energy resources. It plans to
develop performance standards for appliances, motors, pumps and
drives over the next few years.
In place of regulation is a progressive and dynamic private
sector that has taken responsibility for promoting the concept of
energy conservation. Private sector companies that produce or
employ energy technologies are growing more aware of the
importance of life-cycle costs, especially given Chile's high
electricity prices. The private sector has teamed with
municipalities, universities, and the National Energy Commission
to demonstrate the viability of energy efficiency. For example,
more than 150 municipalities in Chile are implementing the model
streetlighting project implemented by the municipality of
Antofagasta (see Section 5 on Lighting).
3. This and all other growth
estimates in the report are in real terms, net of inflation.
4. From Standard and Poor.
5. The Chile Inc. Sourcebook, The South Pacific Mail,
Santiago, Chile, 1994, p.39
6. Ibid.
7. El Mercurio, El Diario, Santiago, Chile, December
13, 1994.
8. El Mercurio, El Diario, Santiago, Chile, December
14, 1994.
9. Foreign Investment Committee, CIE.
10. Chile--Economic Trends, Embassy of the United
States, Santiago, Chile, January 1994, p.8.
11. Ibid.
12. The Chile Inc. Sourcebook, The South Pacific Mail,
Santiago, Chile, 1994, pp. 16-17.
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