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Chile has a market-oriented economy characterized by a high level of foreign trade. During the early 1990s, Chile's reputation as a role model for economic reform was strengthened when the democratic government of Patricio Aylwin - which took over from the military in 1990 - deepened the economic reform initiated by the military government. Growth in real GDP averaged 8% during the period 1991-1997, but fell to half that level in 1998 because of tight monetary policies implemented to keep the current account deficit in check and lower export earnings - the latter a product of the global financial crisis.
After a decade of highly impressive growth rates, Chile experienced a moderate recession in 1999 brought on by the global economic slowdown and exacerbated by a severe drought reducing crop yields and causing hydroelectric shortfalls and rationing. Chile experienced negative economic growth for the first time in more than 15 years. Despite the effects of the recession, Chile maintained its reputation for strong financial institutions and sound policy that have given it the strongest sovereign bond rating in South America. After averaging real GDP growth rates of around 7% in the 1990s, the economy grew 3.4% in 1998 and contracted 1.1% in 1999. By the end of 1999, exports and economic activity had begun to recover. The economy has recovered in 2000, with Asian markets rebounding and copper prices edging up. GDP growth for 2001 is expected in the 5%-6% range. The inauguration of Ricardo Lagos in March 2000, succeeding Eduardo Frei, will keep the presidency in the hands of the center-left Concertacion coalition that has held office since the return of civilian rule in 1990.
The government's limited role in the economy, Chile's openness to international trade and investment, and the high domestic savings and investment rates that propelled Chile's economy to average growth rates of 8% during the decade before the recession are still in place. The 1973-90 military government sold many state-owned companies, and the three democratic governments since 1990 have continued privatization at a slower pace. Policy measures such as the privatization of the national pension system encourage domestic investment, contributing to an estimated total domestic savings rate of approximately 22% of GDP in 2000.
Unemployment peaked well above Chile's traditional 4%-6% range during the recession and is stubbornly remaining in the 8%-10% range well into the economic recovery. Despite recent labour troubles, wages have on average risen faster than inflation over the last several years as a result of higher productivity, boosting national living standards. The share of Chileans with incomes below the poverty line--roughly $4,000/year for a family of four--fell from 46% of the population in 1987 to 23% in 1998.
Maintaining a moderate inflation level is a foremost Central Bank objective. In 1996, December-to-December inflation stood at 8.2%, falling to 6.1% in 1997 and to 4.7% in 1998. The rate fell to only 2.3% during the 1999 recession. Most wage settlements and spending decisions are indexed, reducing inflation volatility. The rate for 2000 was 4.75%. The establishment of a compulsory private sector pension system in 1981Events January-February January Sarawak Chamber found January 1 Greece enters the EEC January 1 Palau becomes self-governing January 4 Sheffield police arrests Peter Sutcliffe, the Yorkshire Ripper January 16 Protestant gunmen shoot and wound Bernadette D was an important step toward increasing domestic savings and the pool of investment capital. Under this system, most regular workers pay 10% of their salaries into privately managed funds. This large capital pool has been supplemented by substantial foreign investment.
Total public and private investment in the Chilean economy has remained high despite current economic difficulties. The government recognizes the necessity of private investment to boost worker productivity. The government also is encouraging diversification, including such non-traditional exports as fruit, wine, and fish to reduce the relative importance of basic traditional exports such as copper, timber, and other natural resources.
Chile's welcoming attitude toward foreign direct investment is codified in the country's Foreign Investment Law, which gives foreign investors the same treatment as Chileans. Registration is simple and transparent, and foreign investors are guaranteed access to the official foreign exchange market to repatriate their profits and capital. The Central Bank decided in May 1999 on the removal of the 1-year residency requirement on foreign capital entering Chile under Central Bank regulations, generally for portfolio investments. A modest capital control mechanism known as the "Encaje," which requires international investors to place a percentage of portfolio investment in non-interest-bearing accounts for up to 2 years, has been effectively suspended through reduction to zero of the applicable percentage; the mechanism could be resurrected depending on economic circumstances.
Total foreign direct investment flows in 2000 contracted to $3.6 billionThe word billion , and its equivalents in other languages, refer to one of two different numbers. The obsolete word "milliard" can be used for 109 to avoid ambiguity, though this usage is unfamilar to some speakers of English. See long scale for a more de (3.6 G$), down from $9.2 billion in 1999, and $4.6 billion in 1998. The 2000 figure is about 13% of GDP. In 2000, Chile experienced an outflow of $1.4 billion, largely the result of diminished inward foreign investment and--for a second year running--elevated levels of Chilean direct investment abroad ($4.8 billion).