By Giorgio Buttironi
Chile has come a long way since transitioning back to democracy in 1990. Having been the theatre to intense political strife in the second half of the twentieth century, Chile currently enjoys a reputation of political stability and economic prosperity. Bordering the Pacific Ocean with its 6,435 km of coastline, Chile extends from the centre to the southernmost tip of South America over an area of 756,096 sq. kilometres. Although traditionally export-oriented in its international trade, the country has recently attracted more imports than exports in recent years and has become an attractive place for business.
The Pinochet Years
In 1973, General Augusto Pinochet toppled the Socialist government headed by President Salvador Allende, who had been elected three years before. Pinochet installed a right-wing military government and forced the enactment of a new constitution in 1980 through a popular plebiscite, amid allegations of electoral fraud. The power of the junta came to an end when Pinochet failed to secure support for another eight-year presidential term in a referendum on 5th October 1988, where 55.9% of the electorate voted against him. This poll paved the way for Chile’s transition back to democracy over the next two years, which resulted in the election of the Christian Democrat Patricio Alwyn as President of Chile in March 1990.
Since 1990, the country has been predominantly governed by centre-left coalitions who focused on maintaining an efficient market economy and amending the contentious ‘1980 Constitution’. Although this contentious charter had already been amended heavily in the constitutional referendum of June 1989, some undemocratic articles were not fully removed until quite recently. A final round of amendments abolishing remaining unconstitutional elements, such as the presence of non-elected senators and the impossibility for the president to dismiss the Army’s Commander-in-Chief, was ultimately passed in 2005.
Economically speaking, governments over the last two decades have generally applied limited interference into the economy, keeping both the public debt and government deficit under acceptable levels. According to the 2014 Index of Economic Freedom, Chile has been ranked seventh best performing country in the world for its level of economic freedom, topping every other state in South America. Its credit rating also enjoys a ‘double-A’ status with stable outlook, according to Standard & Poor’s and Fitch. Chile’s economy has proved quite resilient throughout the global financial crisis and – despite suffering a contraction of 1% in its annual output in 2009 – the country’s GDP quickly recovered by registering growth levels of respectively 5.8% in 2010 and 5.9% in 2011.
The Chilean economy has traditionally been oriented towards exports, due to its reputation as the world’s foremost producer of copper. In fact, this resource accounted for 53.9% of Chilean exports in 2013, followed by alimentary products (e.g. fruit, wine, and other agricultural produce) at 17.6%. Nevertheless, figures from the World Banks show that Chile’s predilection for exports has shifted in recent years. In 2011, total exports ($81.5 billion) substantially exceeded imports ($75.2 billion) by over $6 billion. This recurring trend changed in 2013, when total imports ($79.6 billion) slightly exceeded the country’s exports ($77.4 billion) for the first time.
Chile: A Business Haven?
Renowned as the easiest place to do business in South America by the World Bank, Chile does indeed possess features making it a business-friendly economy.
First, Chile is known for being the most competitive economy is South America because of its continued economic growth and open attitude towards trade. According to the Global Competitiveness Index 2013-2014, Chile has been ranked 34th out of 148 countries in the world for its degree of competitiveness.
Second, the fiscal system encourages both individuals and companies to invest in Chile thanks to its transparency and clarity. Income Tax is roughly similar to the British system, with the lowest band at 20% and the highest band not exceeding 40%, with tax returns being filed extensively online with the Chilean Internal Revenue Service (SII).
Furthermore, Chile has signed treaties with 25 countries across the world in order to avoid double taxation on individuals or companies and has recently concluded negotiations with the United States over a similar agreement.
Third, Chile has an impressive network of 23 free trade agreements with 61 countries across the world. According to the Chilean Trade Commission in the UK, this is “the largest network of Free Trade Agreements in the world” and allows Chile to have free access to 94% of its export market and 85% of the world’s total GDP.
Despite not offering fiscal benefit schemes for attracting investments from foreign companies, the Chilean government has legislated to support tax-free zones in remote areas of the country. These areas currently include the cities of Iquique and Punta Arenas and are administered by private bodies where the government has a significant stake. Companies or individuals importing goods in these zones are thus exempt from income tax, custom duties and any other applicable levy. To operate in a tax-free zone, an individual or company must be registered with the Chilean Revenue Service, be liable to the lowest category of income tax, and provide full accounting of commercial activities.
An example of special measures adopted by the Chilean government to favour investment and entrepreneurship into remote areas of the country is the so-called ‘Navarino Law’. Applicable to the Magallanes region, it provides any company undertaking determinate commercial activities (e.g. manufacturing, mining, fishing, tourism and transport) with total exemption from the 20% income tax band, custom duties, stamp duty, and value added tax.
Leading the world in terms of copper exports, the government has made remarkable efforts in recent years to attract investment in the energy and food industries.
The country still relies quite heavily on fossil fuels for its energy needs. According to government figures, in 2012 coal accounted for 41% of electricity generation in 2012, gas for 19%, and diesel for 5.9%. Consequently, the government started offering advantageous terms to encourage investments into alternative and renewable energies. The Wilefko Wave Energy Project – to be developed in the regions near Santiago and Valparaiso – seeks to harness coastal wave energy, which is apparently an abundant and underexploited clean energy resource in Chile. Faced with forecasts showing increasing electricity demand of 5% each year, Chile has sought to expand its share of productivity in alternative and renewable energies, which currently only provide 4.8% of electricity generation.
Alimentary products are Chile’s second most important exporting resource. Chile is the fifth most important global wine producer, as well as raking second in the world for its production of farmed salmon. Interesting opportunities for investment are thus available in the cultivation of berries and walnuts, organic wine, and salmon caging services. In the region of Valparaiso, a private initiative for the production of walnuts managed by Agricola y Comercial San Juan has been advertised by the Chilean foreign investment committee. With an estimated investment between $400,000 and $800,000 and a production capacity of 200 tonnes per season, it makes an interesting investment opportunity in a vital sector of the country’s economy.