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ViewpointJanuary 28 2011

Chile's finance minister, Felipe Larraín on the country's plans to double growth

The Chilean government has ambitious plans to double growth and – ultimately – eradicate poverty, all while contending with currency appreciation.
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Chile's finance minister, Felipe Larraín on the country's plans to double growthFelipe Larraín, finance minister, Chile

As with many successful emerging markets, Chile faces challenges such as capital inflows and a rapidly appreciating currency. The country is one of the most open economies in Latin America and is embarking on a policy to spend $12bn over the course of 2011 to sell pesos, announced at the beginning of January by the central bank, a move that took the markets by surprise. This was done as the currency rose to a near three-year high against the dollar.

Chile is one of only two countries in Latin America expected to grow more this year than it did in 2010. The other one is Brazil, which has also been struggling with currency appreciation challenges for a few months now. Both countries are large exporters of commodities and high currencies can have significantly negative effects on trade. Brazil's tax on capital inflows is now 6%, and it might have been expected that Chile would have weighed in to currency markets once valuations got too high.

Chilean finance minister Felipe Larraín has publicly been in favour of the central bank's move while also expressing the government's support for local producers and exporters. The country is the world's largest copper producer and support for this and other sectors is needed if the government is to meet its ambitious economic goals.

Slow growth

In the four years to 2009, Chile's gross domestic product (GDP) did not rise at a particularly high rate, but Mr Larraín is committed to doubling the rate of growth. "Before I was finance minister, I was the coordinator of the economic programme [of the coalition led by current president Sebastián Piñera]," says Mr Larraín. "We were developing a very ambitious agenda, to substantially improve the growth rate of the economy. Over the four years to 2009, the level of GDP growth was 2.8% on average, and we said that we would double that to 6%." Analysts expect Chile to meet this target and Mr Larraín says that the government estimates the same average growth rate for the next four years.

The reconstruction efforts following last year's earthquake in Chile played a role in swinging analysts' economic forecasts upwards, along with a sense of confidence in the economic potential of the country. "The reconstruction is part of the reason the economy restarted, and the other reason is that we were able to regain the confidence of the people, investors and entrepreneurs. This is part of the reason we are having an increase in consumption levels and a big boost in investment," says Mr Larraín. "We also passed laws to incentivise investment. They were passed with the reconstruction financing bill and [include the removal of] corporate income tax for reinvested earnings of small and medium-sized businesses."

Copper demand

High copper prices have also helped Chile's economy, and they are likely to remain high in the near future. Analysts expect that domestic demand and business confidence will remain strong, while consumption will be driven by subdued inflation, credit growth and positive consumer sentiment.

But a sluggish global economy would affect copper prices negatively, and any delay in the reconstruction efforts would hinder domestic demand. A strong Chilean peso could make matters much worse and halt economic growth.

Currency appreciation has become a shared problem across Latin America, and the bigger a country's political ambitions, the bigger a problem a high local currency becomes. The Chilean government's ambitions are not modest. "Our long-term objective is to defeat poverty and become a developed country by 2018," says Mr Larraín, "and maybe be the first country in Latin America to become a developed country.

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Read more about:  Analysis & opinion , Americas , Chile , Viewpoint
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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