Identifier
Created
Classification
Origin
06SANTIAGO2525
2006-12-06 18:44:00
CONFIDENTIAL
Embassy Santiago
Cable title:  

IS CHILE AN ECONOMIC TIGER OR JUST A BIG HOUSE CAT?

Tags:  ECON EFIN ETRD PREL CI 
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C O N F I D E N T I A L SANTIAGO 002525 

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/06/2016
TAGS: ECON EFIN ETRD PREL CI
SUBJECT: IS CHILE AN ECONOMIC TIGER OR JUST A BIG HOUSE CAT?

REF: A. SANTIAGO 2411

B. SANTIAGO 2523

Classified By: CDA Emi Lynn Yamauchi. Reasons: 1.4 (b and d).

C O N F I D E N T I A L SANTIAGO 002525

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/06/2016
TAGS: ECON EFIN ETRD PREL CI
SUBJECT: IS CHILE AN ECONOMIC TIGER OR JUST A BIG HOUSE CAT?

REF: A. SANTIAGO 2411

B. SANTIAGO 2523

Classified By: CDA Emi Lynn Yamauchi. Reasons: 1.4 (b and d).


1. (C) Summary: Chile continues to attract foreign direct
investment, but largely to a few traditional sectors such as
mining and electricity. Potential value-added sectors which
will be key to Chile's attaining the next stage of
development attract almost no foreign investment. Thus far,
Chile has been unwilling to offer special tax advantages to
foreign companies, so as to "not discriminate" against local
companies. For most Chileans, the lack of direct foreign
investment is not a "crisis," with the Bachelet
administration's general economic policy being "don't fix it
if it ain't broken." Fortunately for Chile, some private
sector business leaders are beginning to caution against
Chile resting on its laurels and have urged the government to
do more to attract investment. While Chile considers itself
in the same league as other economic tigers (Ireland,
Singapore, etc.),the economic indicators tell another story.
There are signs that Chile is plateauing and projections for
real GDP growth in 2006 continue to be lowered. If Chile
wishes to be more than just a big tabby, it must do more than
tinker with reform. End summary.

Foreign Investment Goes to the Basics
--------------


2. (U) As of August, new inflows of foreign direct
investments (FDI) reached just over USD 3.4 billion, up 52
percent after a dismal 2005. However, nearly 80 percent of
FDI is directed at four sectors: electricity, gas, water and
mining. Additionally, much of the jump this year has been
created through mergers and acquisitions, not by projects
leading to economic growth or significant job creation.
Osvaldo Rosales, who was the main GOC negotiator for the
U.S.-Chile Free Trade Agreement, told Senior Econoff that
"without more aggressive policies to attract FDI, it is no
surprise that FDI is not higher."


3. (SBU) As the Bachelet administration seeks to foster
innovation (reftel A),there's very little money following

the rhetoric. While there is nothing wrong with capital
being directed to core sectors, the FDI inflow is not helping
develop knowledge-based industries, which the GOC says it
needs. Additionally, domestic spending is not going to
innovation either, with only 0.6 percent of GDP spent on
research and development.

GOC: Tone Deaf?
--------------


4. (C) In recent public comments and private discussions with
GOC officials, Post has highlighted the link between
attracting foreign investment and development. We have
suggested Chile look to the Asian and European "tigers" --
particularly smaller countries like Ireland, Singapore and
New Zealand -- as examples of countries that prospered by
attracting foreign investment. It is unclear whether GOC
officials understand the connection between FDI and
development, or whether Chile is willing to take the steps
necessary to attract the investment. Foreign Ministry
Director General for External Relations Carlos Portales has
expressed doubt that the center-left Concertacion government,
given its political orientation and its criticism of
Pinochet's neoliberal economic policies, would ever offer
incentives to attract foreign investment. Such action could
be interpreted as "discriminatory" against Chilean companies.
Like many other government officials, Portales suggested
Chile was performing relatively well and did not seem overly
concerned.


5. (U) Somewhat surprisingly, Portales suggested that the
American Chamber of Commerce (AMCHAM),in conjunction with
other chambers and relevant GOC agencies, convene a seminar
to discuss the Tigers' successes and lessons that could be
applied to Chile. Post will discuss Portales' proposal with
AMCHAM.

If At First You Don't Succeed, Give Up
--------------


6. (C) As part of an effort to market Chile as a small
sometimes overlooked market, the GOC has tried to bundle
projects to improve FDI inflows. In September, President
Bachelet led a GOC roadshow to New York, hoping to obtain
investment funding for a series of energy projects. During
Colombian President Uribe's visit to Chile at the end of
November, the GOC hosted a seminar to promote "Chile as a
platform" in Latin America for doing business in Asia.
Minister of Energy and Mining Karen Poniachik -- one of the
architects of the September energy roadshow in the U.S. --
lamented to the Ambassador that the roadshow was a
disappointment and had not led to new investment. The GOC
was unlikely to try bundling again; a second leg of the
roadshow to be held in London was canceled.

Serious Reforms or Just Tinkering?
--------------


7. (SBU) On November 28, Finance Minister Andres Velasco
unveiled reforms to promote investment and business growth,
hoping to halt the Chilean economy's deceleration. With
projected real GDP growth in 2006 constantly being reduced
(at a time of continued near record copper prices),and now
down to 4.5 percent after 6.3 percent growth in 2005 and 6.1
percent growth in 2004, interest in the GOC's stance has been
high. Proposed reforms are in "government modernization,"
human capital, capital markets and labor reform. Initial
response was positive, but further analysis has led many to
conclude that it's really more tinkering than substantive
reform. The American Chamber of Commerce said the program
was at least a move in the right direction, while adding that
more was needed. Chile's ability to attract FDI to
innovative sectors will depend in part on whether it defines
-- and makes known -- a policy on intellectual property
rights. And then enforces it.

The Chilean Tiger?
--------------


8. (SBU) Some Chilean officials (including Foreign Minister
Foxley) like to think of Chile as playing in the same league
as Ireland, Singapore and the Baltic states. However, when
the GOC is unsure of itself or when it does not want to step
out in front and lead, these same officials fall back on
puffing up Chile in drawing favorable comparisons between
Chile and its less economically-successful neighbors. Former
lead FTA negotiator Rosales also told Senior Econoff that
while Chile's network of trade agreements has given trade a
big boost, they are just a first step and the real challenges
lie ahead in trying to find ways for Chile to profit from
them long term.


9. (C) On that count, there is a growing perception that
Chile is at least running the risk of stagnating
economically. Rankings from the World Bank, IMF and
international think tanks show Chile scoring poorly in labor
flexibility, Intellectual Property Rights (IPR) protection,
and government bureaucracy. While its economic achievement
and success in reducing poverty over the last 15 years are
impressive, Chile is no longer competing with its past. It
is competing with more dynamic economies in Asia and Europe,
which have clear policies on IPR, are ready to offer
incentives to foreign investors and provide labor flexibility
-- something politically impossible for Chile. Chile seeks
greater FDI inflows, but is unwilling to offer special tax
advantages to foreigners. The concept of venture capital is
not well developed in Chile, but in conversations with the
Ambassador, GOC interlocutors have made it clear Chile will
stick to its quaint notion of "equity" and not favor outside
investors over domestic ones.

Comment
--------------


10. (C) While the GOC is not eager to see growth slowing and
foreign investment flowing just to core sectors, the
newly-unveiled reforms give no sense of urgency to making
Chile more competitive. As we have seen with other issues
(e.g. UNSC election),convincing Chileans of the need to
think beyond the region is no small undertaking. The
Bachelet administration shows no signs of altering Chile's
successful economic policies. It appears content with
continuing past governments' policies of expanding the
network of free trade agreements as the most effective
vehicles to increase Chilean exports. Efforts to attract
FDI, especially to new sectors, will have to wait.


11. (C) We see no indication of a vision for the future: no
clear policies on how Chile rises to the next level
economically, and how it joins the ranks of countries like
Ireland, Singapore and New Zealand. Maybe even worse, it
would seem Chileans do not even realize they are competing
with these countries and other potential future stars like
Vietnam for capital, resources, and attention. Chileans who
travel to Asia marvel at the energy, dynamism and anything
goes mentality of a country like Vietnam. However, on a
policy level Chile tends to dismiss such a country as a
potential competitor, preferring to see it as a second-rate,
communist country. Without denigrating the value of
promoting social policy goals (education and health care),we
are not optimistic the Bachelet administration will do the
necessary to ensure that Chile makes it to the next level.
YAMAUCHI