T THE END of the nineteenthcentury, Chile—mired in politicaland economic stagnation—wasted a historic opportunity to

embrace a development-oriented economicstrategy. At the close of the twentieth cen-tury, it did not repeat this mistake. Takingadvantage of an increasingly effective eco-nomic and institutional infrastructure, Chileseized the opportunity and left the twentiethcentury with poverty levels significantlyreduced, the distribution of personal spend-ing notably improved, and education,judicial, and tariff systems substantiallyreformed. A decade of change left Chilepoised to strengthen its development perfor-mance and stride purposefully into the newmillennium.

Growth and stabilityOver the past decade, Chile at last broke freeof two long-standing economic handicaps: ahighly volatile pattern of economic growthand a long history of inflation. In the 1990s,Chile recorded its highest average growthrates and the least volatility in a hundredyears (see table). Between 1994 and 1998(when major crises occurred in Mexico, sev-eral Asian countries, Russia, and Brazil), theChilean economy grew an average of 6.9 per-cent a year, well above the average annual

growth rate of 3.0 percent for the twentiethcentury. For most of the past century, Chile’sgrowth rates fluctuated sharply, with thevariability in those growth rates—as repre-sented by the standard deviation of the rateof growth—several times larger than theaverage growth rate. During 1970–79, forexample, annual growth averaged 2 percent,but the standard deviation was 7.3 percent.Between 1990 and 1998, this relationshipwas reversed. Average annual growth was 7.3 percent, but the standard deviation wasjust 2.9 percent.

From 1986 through the end of the1990s—including the 1999 recession—Chileenjoyed the longest, strongest, and most sta-ble period of growth in its history. Duringthis period of vigorous, sustained growth,the country was also able to overcome itssecond economic handicap: perennially highand unstable inflation. Chile now hasbrought its inflation rate down to interna-tional levels, and its central bank hasannounced the introduction of a new infla-tion targeting system. The central bank’sinflation target is around 3.5 percent for2000 and within an annual range of2–4 percent indefinitely thereafter. To use ahorse-racing metaphor, Chile in the 1990sentered the “home stretch” toward its goal ofmature development.

Chile in the 1990sEmbracing DevelopmentOpportunitiesA review of Chile’s recent economic performance shows that,overall, the 1990s were a period of vigorous and unprecedentedexpansion, with average annual GDP growth of 6.5 percent.While 1999 was a time of economic adjustment after the falloutof the Asian crisis, Chile is now ready to resume healthy growthin 2000 and beyond.

E d u a r d o A n i n a t

Finance & Development / March 2000 19

Eduardo Aninat, Chile’sMinister of Finance from1994 to 1999, is a DeputyManaging Director ofthe IMF.

L AT I N A M E R I C A A N D T H E C A R I B B E A N

A

Decade of reformsA decade of reforms lies behind Chile’s impressive macro-economic performance. The two governments of the“Concertación” coalition led by Presidents Patricio Aylwin(1990–93) and Eduardo Frei (1994–99) broadened anddeepened a wide range of “first-generation” reforms thathad begun in the 1970s. The governments also turned thecountry’s attention to key “second- and third-generation”reforms, notably a strengthening of the country’s educationand judicial systems and a deepening of the social securityreform undertaken in the early 1980s. In line with their com-mitment to integrating Chile into the global economy, thedemocratic governments pursued trade liberalization poli-cies that included two unilateraltariff reductions (in 1991 from15 percent to 11 percent and, in1998, from 11 percent to 6 percentover five years), as well as the adop-tion of free trade agreements with anumber of Latin American coun-tries and Canada.

During the 1990s, privatizationefforts were deepened, but under afresh approach that emphasizedgreater transparency, open competi-tive bidding, and fair pricing toensure appropriate safeguards forgovernment property. Priority wasgiven to the design and prior imple-mentation of appropriate and up-to-date regulations. As a result ofthese initiatives, government pro-ceeds (in terms of constant purchas-

ing power) from privatizingpublic enterprises increasedover the past decade to $2.5billion—more than double thedollar amount of privatizationearnings collected by the mili-tary government in the previ-ous round of privatization inthe second half of the 1980s.

The democratic govern-ments also placed early em-phasis on human capitaldevelopment and institutionalmodernization that lay at theheart of the second- and third-generation reforms. Recogni-zing that human capital iscritical to achieving long-termgrowth and reducing incomeinequality, the authoritiesfocused on improving thequality of public education.

They boosted the budgetary funds allocated for the educa-tion system, introduced a comprehensive education reformplan to upgrade teacher training, increased the number ofhours that children spend in school, and modernized cur-riculums (Chart 1).

To improve the quality and efficiency of its judicial system,Chile embarked upon wide-ranging reforms that have intro-duced new criminal trial courts. These reforms are intended toenhance the timeliness, transparency, and fairness of the trialprocess and, more broadly, to improve dramatically the accessthat average citizens have to their court system.

Chile’s robust economic performance underwrote thecountry’s ability to address poverty reduction and human

development. Real per capita GDPgrew at an average rate of 5.6 percent ayear between 1990 and 1998, and realwages rose at an annual rate ofapproximately 4 percent over the pastdecade. Targeted social investmentand strong economic growth providedpowerful tools in the war on poverty.The percentage of the population offi-cially defined as living in povertydeclined to 21.7 percent in 1998 from38.6 percent in 1990. Over the sameperiod, the percentage of the popula-tion defined as living in extremepoverty fell to 5.6 percent from12.9 percent (Chart 2).

The quality of life of the populationalso recorded remarkable improve-ments. Life expectancy rose from 73 years in 1990 to more than 75 years

Main macroeconomic variables, 1880–1998(percent)

GDP Inflation Current account balance Fiscal surplus (annual change in real terms) (December–December change) (percent of GDP) (percent of GDP)

Period Standard Period Standard Period Standard Period Standardaverage deviation average deviation average deviation average deviation

1880–89 3.2 5.0 1.1 7.2 1.2 3.8 –2.8 1.31890–99 3.4 5.1 4.8 15.4 0.8 3.6 –2.6 2.31900–09 3.0 5.1 5.2 10.5 3.4 2.3 –2.2 1.01910–19 0.2 11.1 6.1 8.5 4.8 7.3 –1.7 1.71920–29 4.4 11.1 3.5 5.4 6.6 2.9 1.5 3.21930–39 1.2 15.0 5.5 8.2 n.a. n.a. 1.4 1.81940–49 3.0 7.2 17.6 7.9 n.a. n.a 1.2 1.01950–59 3.6 4.8 36.6 24.4 –1.2 1.9 –1.6 1.31960–69 4.8 3.0 24.3 12.1 –2.3 1.6 –5.6 1.91970–79 2.0 7.3 131.9 174.4 –3.2 3.2 –3.7 5.91980–89 3.3 7.0 20.5 6.3 –7.1 4.2 0.0 3.21990–98 7.3 2.9 11.5 7.3 –3.6 2.2 1.7 0.7

Source: Chilean Ministry of Finance.Note: n.a. denotes that data are not available.

Finance & Development / March 200020

0

30

60

90

120

150

Source: Chilean Ministry of Finance.

Chart 1

Real social expenditure increases, 1990–99

(percent)

Education Health Social security

Housing

in 1997. Chile strengthened its position inthe 1999 United Nations DevelopmentProgram’s Human Development Report,ranking first in Latin America and ahead ofthe Czech Republic and only slightly behindPortugal overall.

Coping with the crisisAt the end of the 1990s, Chile, like most ofLatin America, faced a one-year downturn.Its domestic economy underwent a minorrecession and its growth faltered briefly. Inearly 1999, Chile’s private sector experienceda crisis of expectations triggered by the nega-tive impact of the Asian crisis on its terms oftrade and export volumes, sharp fluctuations in domesticinterest rates, exchange rate pressures, and a serious drought(attributable to the weather phenomenon La Niña). To givefresh momentum and confidence to the market, the authori-ties embarked upon a proactive strategy to improve theexpectations of market participants and adopted direct fiscalmeasures to achieve a sustainable economic revitalization.

In 1998 and 1999, Chile pursued a countercyclical fiscalpolicy. In 1998, when aggregate demand was growing exces-sively, the government carried out three successive fiscal bud-get decreases, which together amounted to 1 percent of GDP.In 1999, after a sharp drop in private expenditure, the author-ities implemented prudent pro-employment policies. Care-fully designed measures and a credible fiscal track recordsince 1990 made it possible for the authorities to draw fromaccumulated savings and stimulate the economy with a tem-porarily expansionary fiscal policy. Chile ended 1999 with acentral government budget deficit of roughly 1 percent ofGDP, chiefly because the severe drop in private expenditurereduced the net tax yield in the first half of 1999.

Data for the third quarter of 1999point to a turnaround in fiscal rev-enue performance, reflecting a recov-ery in economic activity over thesame period. This favorable develop-ment will help to ensure that the fis-cal deficit will be reversed in 2000.Also, the fiscal policy measuresadopted during the Asian crisis havealready been fully financed or havebeen designed to take due account ofthe cyclical situation, as in the case ofthe special employment programsinitiated during 1999 and imple-mented through municipalities.

The unemployment rate peaked at11.5 percent in 1999—well above theaverage levels recorded during the1990s but significantly below the highlevels encountered during the 1980s.

Three fiscal policy packages implementedby the authorities in 1999 helped revitalizeemployment levels in vulnerable subsectorsand in the regions most severely affected bythe adjustment process. The fiscal measuresincluded a labor-intensive special publicinvestment program, government invest-ment in targeted regions, partial reschedul-ing of the debts of small-scale andmedium-scale enterprises, and the intro-duction of credit insurance for nontradi-tional exports.

Although Chile had to contend with anexternal crisis that was larger than expected,the government did not borrow from exter-

nal sources and avoided making cuts in social spending(something that did happen during the external debt crisis ofthe 1980s). Instead, Chile successfully brought inflationdown to 2.3 percent in 1999 for the first time in its historyand continued to implement its reforms in contrast withother economies in the developing world, where thesereforms were brought to an abrupt and regrettable halt.

The macro adjustment policies of 1998–99 generated theexpected results, and positive growth resumed in Septemberafter only 11 months of recession. Real GDP is expected tohave expanded by about 4 percent in the last quarter of 1999,and the unemployment rate declined to 8.9 percent inDecember.

In 2000, growth is expected to rise even more stronglytoward the country’s potential (around 6 percent a year), inan environment of low inflation and sustainable externalaccounts.

Outlook for the new centuryWith the advent of the year 2000, Chile faces further chal-

lenges. The chief priority at present isto strengthen the economic recoveryand ensure its sustainability over themedium term.

Chile’s external imbalances havebeen fully corrected and its eco-nomic fundamentals remain sound.This record should enable Chile toreturn to high rates of growth andseize the opportunity to achieve ahigh level of development whileproviding decent living standardsfor all its citizens. The very positiveperformance of the 1990s can berepeated again. But Chile must alsopersevere along its chosen path;these goals will not be achievedovernight, and consistency mustcontinue to characterize the policymix.

Finance & Development / March 2000 21

Chart 2

Trends in poverty, 1987–98

Extreme poverty(left scale)

Poverty(left scale)

Real GDP per capita(right scale)

Source: MIDEPLAN, Central Bank of Chile, INE.

0

10

20

30

40

50

(percent of population)

(1987=100)

1001987 90 92 94 96 98

150

200

“The chiefpriority at present

is to strengthenthe economic recovery and

ensure its sustainability over

the mediumterm.”

F&D

Finance & Development / March 200022

Join high-level private sector executives,senior government delegates from over 180member countries, International MonetaryFund and World Bank Group officials, andrepresentatives from the global media andnongovernmental organizations for a seriesof lively seminars, workshops, and specialevents organized around critical issues inthe global economy.

For further information please contact:2000 Annual Meetings ■ IMF — World Bank Group

Washington, D.C. 20431 U.S.A.

Friday, September 22 through Monday, September 25, 2000

Prague Congress CenterPrague, Czech Republic

Annual Meetings Host Country’s Website Accommodation (before May 1, 2000)

www.amp2000.cz

Making the GlobalEconomy Work

for Everyone