Chile - the Latin american Tiger

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Case Analysis of "Chile - The Latin American Tiger"

Text of Chile - the Latin american Tiger

CHILE: THE LATIN AMERICAN TIGER?

CHILE: THE LATIN AMERICAN TIGER?

GROUP 7SHANTANU KUMAR DM14144SINDHUJA DHARANI DM14147SHIVEN SALUJA DM14248TULSI CHOUDHARY DM14256VIJAY KRISHNAN A DM14257RAMYAA RAMESH DM14266

ECONOMIC HISTORY

Salvador Allende4 November 1970 11 September 1973

Augusto Pinochet17 December 1974 11 March 1990

Post PinochetThe 1990s

Chile: During Allende

Imposed Price ControlsNationalized many sectors of economyTightened Exchange controlsResult:1973 Inflation: 473%1973 Public Sector Deficit 25% of GDP1973 Currency reserves Depleted

Chile: Pinochet Era

Stabilization PoliciesBalance federal budget, reduce inflation, stabilize currencyMonetary policy tightenedResult: Inflation in triple digits, wage controls imposedExchange rate: 39 to $ 1 ; fixed (1978)Structural ReformsTariffs Average: 100%, Reduced graduallyIntroduced VAT, liberalized domestic capitalSocial Policies1979: revised labor lawsPrivatized social security and health

1982 Crisis

1982 Mexico suspended interest payments on $80 billion, leading to capital flight from Chile was devaluedGDP fell by 14%Inflation doubled to 21%Unemployment jumped to 22%Counter measures:VAT increased to 20%Import tariffs increased to 35% (from 10%)

ROSTOWS ANALYSIS

Chile

Traditional Society: Economic change and Improvements are not sufficientTransitional Society: Development of social infrastructure and physical infrastructureTakeoff Society: Accelerated Growth RateTechnological Maturity:

6

TIGER GROWTH

7

Chile in 1997

1

Coping with Inflation

3% per year, Independent Central Bank

2

Stimulating Capital Investment

Savings 26% of GDP used as investment

3

Managing Foreign Exchange Reserves

CrawledPeg (0.45$, 0.3DM, 0.25) , $14,833 million

4

Managing Fiscal Policy

Resource Allocation: Well doneIncome Distribution:Exhibit 8

5

Dealing with Unemployment

6.4 %

6

Coping with external shocks

Came back strongly from 1982 crisis

Ideal Situation to think of Trade Policies

Chiles Dilemma

Who to join?NAFTAMercosurNo one (Continue bilateral PTA)

PORTERS DIAMOND MODEL

10

FACTOR CONDITIONS

Factors

Applicable

Skilled Labor

Infrastructure

Needs Improvement

Arable Land

Cannot be created

Natural Resources

Capital

Graduate Engineers & Scientists

Needsto be grown

Very Abundant Natural Resource is an advantageCapital is high due to high savings through pension plansSkilled labor is high everyone have high school education

OTHER ATTRIBUTES

DEMAND CONDITIONS

Home demand: Mix and Character not matching mining industry, services match (33% of GDP)

RELATED AND SUPPORTING INDUSTRIES

Mining industry can be supported by heavy machinery industryTourism can be supported by retailing, wine industry(Question: Can Wine industry grow, given less arable land?)

OTHER ATTRIBUTES (contd.)

FIRM STRATEGY , STRUCTURE & RIVALRY

Variety of firms across industries: Mining, tourism, salmon farming, methanol production promotes competitivenessSustainable commitment?

GOVERNMENT

Regulation of Home demand Through tariffsImproving Factor Invest in education? Purchases Stimulate related & supporting industriesFirm strategy Anti trust policy?

CONCLUSION OF DIAMOND MODEL ANALYSIS

Chile has 2 favorable attributes Factor conditions & Firm Strategy and Structure Competitive advantage based on these two attributes is possible, but not sustainable (Resource driven economy)

DECISION ANALYSIS

Joining NAFTAMay lead to increase in trade of mining industriesMay have cost advantageNot sustainable (After Copper, What?)Joining MercosurExisting Trade tariffs become obsoleteTrade with other countries may get affectedWill lead to seclusionBilateral Trade AgreementsSafe optionGood for the short run

RECOMMENDATIONS

Improve Demand Conditions in domestic marketImprove attributes of related and supporting industriesImprove Education factor, promote more research in technology which will lead to sustainable developmentGovernment should facilitate the above attributesUpon the implementation of the above mentioned recommendations, Chile can think about joining NAFTA or Mercosur

REFERENCES

Porter, Michael E. (1990). Determinants of National Competitive Advantage. In: Porter, Michael EThe Competitive Advantage of Nations. New York: The Free Press. p69-130Kotler, Philip ,Jatusripitak,Somkid , Maesincee, Suvit. (1997). Developing the Nation's Macroeconomic Policies. In: Kotler, PhilipThe Marketing of Nations. New York: The Free Press. p259-278.

APPENDIX A:VALUE CHAIN ANALYSIS

Source: Competitive Advantage of Nations, Michael E. Porter