Chile’s Strong Economy: A Case of Positive Policy and Freedom

Chile continues to lead Latin America in 2013 in both economic growth and economic freedom. These positive outcomes reflect well on the solid policy choices being implemented by the Chilean government of President Sebastián Piñera.

Making it onto the 2013 Index of Economic Freedom’s list of top 10 freest countries in the world for the second year in a row, Chile was also ranked No. 1 on Forbes India’s list of 7 Hottest Emerging Markets.

And at the beginning of the year, Bloomberg confirmed that Chile’s economy grew by 5.5 percent in last year—faster than predicted, and significant growth during a period when much of the world has seen only paltry economic expansion.

Chile has seen booming exports, particularly in the mining sector of the economy. But unlike other nations with significant exports of commodities, Chile has successfully diversified its economy away from over-dependence on those exports while using property rights to avoid the destabilizing corruption and over-regulation that have afflicted “oil-cursed” neighbors such as Venezuela. According to Caiman Valores, a prominent Latin American investment consultant,

Chile is an interesting investment location. It is stable, has solid regulations and low levels of corruption coupled with a particularly strong banking and finance sector…Chile is an important addition to any investor’s portfolio, providing geographic diversification along with access to probably the most advanced economy in Latin America.

With such ringing endorsements, the mining industry alone now predicts it will see the addition of $100 billion in foreign investments in the next decade and plans to sell an estimated $55 billion in copper in 2013. The government’s outstanding management of the mining sector, combined with a stable currency, led Standard & Poor’s to upgrade Chile’s bond rating to AA- last month, a rating considered to be on par with nations like Japan and China, according toThe Financial Times.

In short, Chile’s economy is on the rise, and policy is the reason. Commenting on the upgrade, S&P said that they “expect the government to continue making gradual progress on microeconomic reforms to bolster the long-term competitiveness of the economy.”

Preliminary data released January 8 showed that due to President Piñera’s continued budgetary restraint, the private economy has been growing faster than government spending. As the Index notes, “Chile continues to be a global leader in economic freedom. With the rule of law strongly maintained by an independent and efficient judicial system, prudent public finance management has kept public debt and recent budget deficits under control.”

Chile’s continued growth is a stark contrast with David Frum’s description of South American neighbor (and fellow commodity exporter) Venezuela’s “life support” economy. As cited in a recent Heritage report:

Despite vast oil wealth, the Venezuelan economy has tumbled into terrible straits. Inflation roars at 25%, unemployment exceeds 8%, the non-oil economy stagnates, electricity flickers on and off irregularly, and basic commodities such as rice and beans have become scarce in the marketplaces and must be obtained as rations from government-controlled stores.

While Chile’s economic freedom rose in the 2013 Index, Venezuela’s score fell by 2.0 points to 36.1, to a rank of 174th. Now, “corruption is prevalent, and the rule of law is weak across the country.” Venezuela’s “regulatory encroachment on private businesses continues to increase, with heavy government control and intervention discouraging entrepreneurship.”

Contrast that bleak outlook with Chile’s entrepreneur-friendly environment, which attracted hundreds of new start-ups since 2010. Business start-ups are a crucial indicator of job creation and freedom in any economy, including the United States. Recent reports about technology start-ups in Latin America’s industry, led by Chile, indicate that the high-tech sector in South America could soon rival that of the U.S.

For the second year in a row, Chile (7th) has outpaced the United States (10th) in economic freedom. U.S. policymakers would be well advised to study the policy differences between the two, and take the better path.