Case Analysis of "Chile - The Latin American Tiger"

1. CHILE: THE LATIN AMERICAN
TIGER?
GROUP – 7
SHANTANU KUMAR – DM14144
SINDHUJA DHARANI – DM14147
SHIVEN SALUJA – DM14248
TULSI CHOUDHARY – DM14256
VIJAY KRISHNAN A – DM14257
RAMYAA RAMESH – DM14266

2. ECONOMIC HISTORY
Salvador Allende
4 November 1970 – 11 September
1973
Augusto Pinochet
17 December 1974 – 11 March 1990
Post Pinochet
The 1990s

3. Chile: During Allende
• Imposed Price Controls
• Nationalized many sectors of economy
• Tightened Exchange controls
• Result:
– 1973 Inflation: 473%
– 1973 Public Sector Deficit – 25% of GDP
– 1973 Currency reserves Depleted

4. Chile: Pinochet Era
• Stabilization Policies
– Balance federal budget, reduce inflation, stabilize
currency
– Monetary policy tightened
– Result: Inflation in triple digits, wage controls imposed
– Exchange rate: ₱ 39 to $ 1 ; fixed (1978)
• Structural Reforms
– Tariffs Average: 100%, Reduced gradually
– Introduced VAT, liberalized domestic capital
• Social Policies
– 1979: revised labor laws
– Privatized social security and health

5. 1982 Crisis
• 1982 – Mexico suspended interest
payments on $80 billion, leading to
capital flight from Chile
– ₱ was devalued
– GDP fell by 14%
– Inflation doubled to 21%
– Unemployment jumped to 22%
• Counter measures:
– VAT increased to 20%
– Import tariffs increased to 35% (from 10%)

6. ROSTOW’S ANALYSIS
Chile

7. TIGER GROWTH

8. 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
Crawled Peg (0.45$, 0.3DM, 0.25¥)
, $14,833 million
4 Managing Fiscal Policy Resource Allocation: Well done
Income 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

9. Chile’s Dilemma
• Who to join?
1. NAFTA
2. Mercosur
3. No one (Continue bilateral PTA)

10. PORTER’S DIAMOND
MODEL

11. FACTOR CONDITIONS
Factors Applicable
Skilled Labor 
Infrastructure Needs Improvement
Arable Land Cannot be created
Natural Resources 
Capital 
Graduate Engineers & Scientists Needs to be grown
1. Very Abundant Natural Resource is an advantage
2. Capital is high due to high savings through pension
plans

12. 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 industry
• Tourism can be
supported by
retailing, wine industry
• (Question: Can Wine
industry grow, given less
arable land?)

13. OTHER ATTRIBUTES
(contd.)
FIRM STRATEGY ,
STRUCTURE & RIVALRY
• Variety of firms across
industries: Mining,
tourism, salmon farming,
methanol production –
promotes
competitiveness
• Sustainable commitment?
GOVERNMENT
• Regulation of Home
demand – Through tariffs
• Improving Factor – Invest
in education?
• Purchases – Stimulate
related & supporting
industries
• Firm strategy – Anti trust
policy?

14. 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)

15. DECISION ANALYSIS
• Joining NAFTA
– May lead to increase in trade of mining industries
– May have cost advantage
– Not sustainable (After Copper, What?)
• Joining Mercosur
– Existing Trade tariffs become obsolete
– Trade with other countries may get affected
– Will lead to seclusion
• Bilateral Trade Agreements
– Safe option
– Good for the short run

16. RECOMMENDATIONS
1. Improve Demand Conditions in domestic market
2. Improve attributes of related and supporting
industries
3. Improve Education factor, promote more
research in technology which will lead to
sustainable development
4. Government should facilitate the above
attributes
Upon the implementation of the above mentioned
recommendations, Chile can think about joining
NAFTA or Mercosur

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

18. APPENDIX –A:
VALUE CHAIN ANALYSIS
Source: Competitive Advantage of Nations, Michael E.