CHILE
Rank: 11 Regional Rank: 3 of 29
hile’s economy is 78.3 percent free, according to our 2007 assessment, which makes it the world’s 11th freest economy. Its overall score is 2.9 percentage points lower than last year, partially reflecting new methodological detail. Chile is ranked 3rd out of 29 countries in the Americas and has been a regional leader for over a decade.
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The economy is 78.3% free
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Chile is a regional economic power and receives good scores in virtually all areas of economic freedom. Scores in fiscal freedom, freedom from government, monetary freedom, property rights, and labor freedom are particularly high. Despite high income taxes, corporate tax rates are an extremely low 17 percent. Total government spending as a proportion of GDP is also moderate. Inflation is low, but the state maintains certain price controls. The rule of law is transparent and fair. Though its overall record is impressive, Chile could improve in business freedom and trade freedom. Bankruptcy procedures can be cumbersome, although regulatory licensing is easy. Non-tariff barriers are also a problem, as the government restricts certain imports. BACKGROUND: Chile is richly endowed with natural resources and is now the world’s leading producer of copper. Tourism and a strong export sector have increasingly been the main engines of growth. Chile has been governed since 1990 by a center-left coalition. Michele Bachelet, a member of the Socialist Party—one of the governing coalition parties—won the presidential elections in January 2006. Her government remains committed to Chile’s successful free-market institutions. As of this writing, a free trade agreement with China, signed in November 2005, awaits congressional ratification. Chile is also engaged in negotiations on possible trade agreements with India and Japan.
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Americas Average = 62.3 World Average = 60.6
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1995
2007
QUICK FACTS
Population: 16.1 million GDP (PPP): $175.3 billion 6.1% growth in 2004 4.0% 5-yr. comp. ann. growth $10,874 per capita Unemployment: 8.8% Inflation (CPI): 1.1% FDI (net inflow): $6.7 billion Official Development Assistance: Multilateral: $25 million Bilateral: $82 million (2% from the U.S.) External Debt: $44.1 billion Exports: $38.0 billion copper, fruit, fish products, paper and pulp, chemicals, wine Imports: $29.5 billion Primarily petroleum and petroleum products, chemicals, electrical and telecommunications equipment, industrial machinery, vehicles, natural gas
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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CHILE’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 68.9 72.4 85.7 87.6 79.9 70 70 90 73 85.3
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INVESTMENT FREEDOM — 70%
Foreign and domestic investments receive equal treatment, and there are no restrictions on repatriation. Some restrictions apply for foreign ownership of local enterprises and joint ventures in the petroleum industry, uranium mining and other specialty mineral resources, communications, shipping, and fishing. In recent years, the authorities have lifted all remaining exchange controls, eliminated the minimum stay period on foreign investments, and eased procedures for placements in local capital markets. Both residents and non-residents may hold foreign exchange accounts. There are no controls on current transfers and capital transactions, but some restrictions apply.
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BUSINESS FREEDOM — 68.9%
Starting a business takes an average of 27 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license is relatively simple, but closing a business can be difficult. The time and cost of going through bankruptcy can be burdensome. The overall freedom to start, operate, and close a business is relatively well protected by the national regulatory environment.
FINANCIAL FREEDOM — 70%
Chile’s financial system is among the strongest and most developed among all emerging markets. The banking system is efficient and well supervised. There are strict limits on lending to a single debtor or group of related companies. There are 14 domestic banks and 12 foreign banks. Foreign banks controlled 39 percent of assets in 2005. The state-owned Banco Estado is the nation’s third largest, accounting for about 13 percent of banking assets. A series of laws have substantially widened the range of operations in which banks and other financial services may engage and have streamlined and regularized the regulation of capital and credit markets. Chile’s advanced private pension system has been a model for other countries and an important source of investment capital. Foreign banking and insurance companies are treated the same as domestic companies. The insurance sector is large and diverse, with over 50 insurance companies offering a variety of services. Chile’s liberal capital market is the largest in Latin America as a proportion of GDP.
TRADE FREEDOM — 72.4%
Chile’s weighted average tariff rate was 3.8 percent in 2004. Chile generally has few non-tariff barriers to imports, but imports of agricultural products and processed food require approval, some imports are banned, and issues related to the enforcement and protection of intellectual property rights also contribute to the cost of trade. Consequently, an additional 20 percent is deducted from Chile’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 85.7%
Chile has a high income tax rate but a low corporate tax rate. The top income tax rate is 40 percent, and the top corporate tax rate is 17 percent. Other taxes include a value-added tax (VAT), a tax on check transactions, and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 15.9 percent.
PROPERTY RIGHTS — 90%
Private property is well protected. Contractual agreements are secure, and court administration is transparent and efficient at executing trials. Expropriation is highly unlikely and receives compensation. Judicial corruption is rare.
FREEDOM FROM GOVERNMENT — 87.6%
Total government expenditures in Chile, including consumption and transfer payments, are very moderate. In the most recent year, government spending equaled 20.4 percent of GDP, and the government received 8.2 percent of its total revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 73%
Corruption is perceived as minimal. Chile ranks 21st out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 85.3%
The labor market operates under flexible employment regulations that enhance employment and productivity growth. The non-salary cost of employing a worker is very low, and dismissing a redundant employee is relatively costless. Chile’s labor market flexibility is one of the 20 highest in the world.
MONETARY FREEDOM — 79.9%
Inflation is relatively low, averaging 2.5 percent between 2003 and 2005. Relatively low and stable prices explain most of the monetary freedom score. Many prices are determined in the market, but the government maintains prices for utilities, including water, fixed-line telecommunications, and electricity, and prices for certain agriculture products are controlled within price bands. Consequently, an additional 10 percent is deducted from Chile’s monetary freedom score to adjust for measures that distort domestic prices.
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2007 Index of Economic Freedom