Chile's success in negotiating a central position between the major economic blocs will depend largely upon the government's ability to stay on top of all of the delicate international negotiations, to appease the left- and right-wing political factions with perhaps mutually exclusive concessions, and to continue powerful growth in the private sector with industrial diversification and labor force retraining, continuing privatization of public resources, and close supervision of the key export industries -- mining/minerals, fishing, finance, and forestry.
In January, Chile filed to participate in Mercosur. In March, its leaders began negotiations in Brussels with the European Commission to initiate close cooperation in commercial and political relations. And it is expected that, despite the setbacks to the negotiation schedule caused by the Mexican economic shock in the first quarter of 1995, Chile will begin negotiations with the U.S., Canada, and Mexico to discuss Chile's entry into NAFTA by 1996.
The frantic pace of negotiations illustrate howthe Chilean government is trying to capitalize on its successful transition to economic growth and prosperity from the period Chileans call "El Ajuste," or government policies of fiscal austerity and privatization which have accompanied Chile's democratization for the last fifteen years.
Chile depends very heavily upon foreign investment to capitalize its private sector. More than US$4.6 billion total was invested in Chile in 1994, up over 70% from 1993. Direct foreign investment increased by 48% to $2.53 billion. Investment in Chile by the NAFTA members accounted for US$1.5 billion, or about 60 percent of this total. The U.S. and Canada together represent 50 percent of Chile's capital investment. The U.S. was the largest direct investor with US$949 million in 1994. The mineral and mining, forestry, finance, and fishing sectors attract the lion's share of NAFTA members' capital. Chile's finance industry has flourished on the wave of capitalization which has infused the country in the period between 1974 and 1994.
Preliminary negotiations with Canadian and American representatives in 1994 indicated that Chilean investors can expect to enjoy preferential trading with NAFTA members, Mexico, Canada, and the United States, if not participate as a full-fledged NAFTA member. There has been some speculation since the Mexican peso's rapid devaluation and emergency bail-out by the U.S. that the pace of Chile's integration into NAFTA has slowed down. However, Chile's economy was largely protected from the peso devaluation, does not suffer from Mexico's economic symptoms, and still remains strong, with surging exports, a budget surplus, a 6% growth rate predicted for the rest of 1995, and annual inflation falling to below 9%.
According to 1994 figures from Chile's Central Bank, exports increased by 26% over 1993, to US$11.57 billion. NAFTA has the potential of rapidly expanding foreign investments in Chilean industry through a multiplier effect.
Some Chilean analysts predict that NAFTA will not offer any special benefits of access to Chile that are not already available through bilateral agreements with Mexico, scheduled to take effect in 1996. However, others speculate that NAFTA will bring new miseries to the country, including bureaucratic entanglements between Chile, other NAFTA members, and those non-NAFTA members with whom Chile already does business -- Mercosur or Aladi. Critics of Chile's participation in NAFTA suggest that it will be difficult or impossible for Chile to maintain friendly relations with all trading blocks it seeks access to and also maintain its high export levels. They postulate that eventually, Chile might have to choose, for example, between NAFTA and Mercosur, or else face greatly reduced export levels.
Chile's economic prospects, regardless, look bright. Southern Cone, February 1994, reports
"Despite the impact of the Mexican crisis, Chile's economy is on track to return to its historic growth path of around 6% per annum. Foreign investment has continued at a record rate, and although this may fall off somewhat during 1995, its contribution to growth will still be very positive. Negotiations on NAFTA membership and Mercosur associate membership will keep prospects bright for export performance. We are forecasting export growth of just under 10 percent both this year and next. Imports will grow in step with the economy."
Since La Concertacion, the coalition government opposed to the remnants of Pinochet's regime, won new national elections in 1993, the perception that Chile has graduated to free trade status has taken hold across the globe. Reassurances that the elected rule has simultaneously successfully democratized and provided a stable political base for economic growth have been a precondition for the extension of free trade offers, including NAFTA.
However, with democratic energies newly unleashed, the demands of labor long suppressed under Pinochet are finally registering in the political process in Chile. These demands are being amplified with the free trade negotiations continuing apace. Chile's largest union, the CUT, has pressured President Eduardo Frei to plan retraining programs for workers displaced from agricultural and manufacturing sectors into new industries. Workers and the government are in agreement that the country's 5% unemployment rate should not be allowed to rise.
President Frei's concessions to workers have worried Chilean executives and other proponents of NAFTA. A government sponsored law just put before Congress proposes to grant workers the right to strike indefinitely, to establish penalties for companies hiring new workers during a dispute, to create a cross-sector union with powers to intervene in labor disputes, and to establish fines for unfair dismissal. It remains to be seen whether or not these concessions will be enough ensure the survival of the left/center coalition government through the next elections, under pressure from both the left and the right.
Challenges to the ruling coalition's political vision and bargaining authority have come recently from two major opposition parties, the Union Democratica Independiente and the Renovacion Nacional. The critique has centered upon the preparedness of the government Ministry of Finance to handle the complexities of negotiating and administering the 2,000 page agreement while juggling Mercosur, EU, and Aladi negotiations in the international political arena.
However, in late January, the Minister of Finance, Eduardo Aninat, in a meeting with Canadian Commerce Minister Roy MacLaren, used the opportunity to dismiss some of these concerns, saying, "Chile is prepared to join NAFTA," and "I think that very soon Chile will be admitted to the NAFTA Club." Canadian Prime Minister Jean Cretien also visited Chile in January, remarking that he hoped Chile would be able to join NAFTA before 1996. Cretien and Frei attended the signing of an agreement by Methanex Corporation of Canada to invest $275 million in a new methanol plant in Punta Arenas, which along with Methanex's existing plant, will form the largest methanol complex in the world.
EIU Country Profile 1994-95: Chile, pp. 13, 18, 36-37
Maclean's, "Mining the mother lode," Jan 30, 1995, 108:5, p. 52
El Mercurio, Santiago, Chile
Facts on File, Jan 2, 1995
Latin American Regional Reports: Mexico and NAFTA Report
Que Pasa, Santiago, Chile, "Los Peligros del Nafta" ("The Dangers of Nafta"), Dec 17, 1994, pp. 82-84.
Southern Cone, Feb 1995, pp. 6-8, 12; Mar 1995, pp. 7-8
Washington Report on the Hemisphere, "Invitation to Chile to join NAFTA raises questions," Dec 30, 1994, p. 3