Economic Growth And Development In Chile example essay topic

Excel Section IV: Extended-response question Discuss the strategies being adopted by an individual economy {other than Australia} in pursuing increased economic development in a globalised environment. With the push towards globalisation Chile has become a strong new contender as an emerging country. The Chilean economic growth levels were amongst the highest in the world, giving rise to the title, the Latin American tiger. It has used many tools to get to its current position and reach its ultimate aim of total free trade. Chile has a market-oriented economy characterised by a high level of foreign trade. During the 1990's, immediately after democracy was brought back, the government strengthened its economic reforms.

The benefits were seen quickly, with growth in real GDP averaging at 8% from 1991-1997. Chile's domestic strategies to promote economic growth and development have been just as strong as its external / foreign position. Chile has concentrated primarily upon structural reform of tariffs / protection and the national savings facet, as well as minor changes to various domestic areas. Continual good use of fiscal and monetary policies by coming governments in Chile have also aided the rebirth of this nation as the Latin American tiger. Foreign trade has become one of the key factors in the process of globalisation. Chile has been from the early years, consistent in removing trade barriers and pushing trade agreements between the United States and surrounding Latin countries, namely Argentina and Brazil.

Separate from this the European Union remain the greatest exporting partner, sizing 27% of total exports. The United States encompass 16%, Japan 14%, Brazil 6% and Argentina 5%. Like the composition of the exporter partners Chile relies upon the United States (24%), European Union (23%), Argentina (11%), Brazil (6%), Japan (6%) and Mexico (5%) as their import partners. Chile has been the world leader in the area of trade liberalisation. In 1973 tariffs in Chile were 94%, nowadays Chile averages around 8% over all industries. This is of key importance in two ways, it reflects its new position to the global community, and it also encourages businesses to tune their practices to global frequencies.

The latest example is the Chilean construction industry that has started to adopt international standards. Chile has also begun to develop its services sector, in the 1970's Chile like many other countries relied primarily on its agricultural sector for its GDP, now agriculture composes 6% of GDP and services composes 61%. The services industry has benefited greatly by tax concessions by the government and also a flourishing tourism sector. National savings is critical for long-term investments and capital accumulation in Chile. The government has been quick to realise the importance of investment and savings to sustained economic growth and development in Chile.

The government has encouraged internal and foreign investment (portfolio or direct) by lowering taxes. The restructuring of the taxation system has been a structural reform implemented to encourage national savings. From recent statistics this reform has been successful, business savings has increased by 8.3% between 1986 and 1994. Also the government has introduced a new type of pension whereby the pension, rather than being financed by the government, are funded by mandatory contributions workers make throughout their working life. Between 1989 and 1994 gross national savings has increased by 8%, and since 1985 savings has increased to a level of 25% now. As well as structural reforms in areas of tariffs, protection and savings, Chile have also achieved favourable outcomes in areas of primary industries, privatisation and speculative investment.

With competitive interest rates and high business credit rating foreign investment has poured into all areas of Chilean industries, more so in its primary industry. Between 1985 and 1990, 78% of total foreign investment in the production of goods was concentrated in the primary sector. In the last ten years, the total exports of this branch increased by US$3230 million. In an attempt to instil a greatly entrepreneurial philosophy within the nation the Chilean government has increased privatisation. This was especially effective in expanding these businesses possibilities and greatly increasing competitiveness and efficiency. The Chilean government has also solved the problem of speculative investment, or 'hot money'.

A tax has been imposed upon speculative investors, whereby 20-30% of any investment is forfeited if the investment is withdrawn within 1 year. This effectively curbs the short-term money flow in Chile, which has the potential to cripple some emerging industries, or in the long-term take the decision-making power away from the people and give it to the investors. The Chilean government has also used macroeconomic policies as well as microeconomic policies to achieve economic growth and development. The government has favoured monetary policy over fiscal policy as its main tool to maintain the economy. A growth in domestic demand prompted a contraction ary monetary stance. Interest rates increased from 6.7% to 7.5%, this caused growth rates for output and expenditure to slow in the 2nd quarter in 1996.

The dream GDP growth rate fell from 10% to 8.5%, but this was weighed against the problems faced with excessive demand in the economy. The government were quick to realise excessive demand can lead to a major boom in the business cycle, which would naturally be followed by a major recessionary period, thus it was important to soften the impact. Excessive demand also leads to increased inflation, which has flow-on effects. Chile has been at the forefront of the globalised nations for some time now, and is an example for others to follow. Structural reforms to improve foreign trade, increase savings, openness of foreign investment and legislation to curb arising problems, are amongst the countries main vices to become an integral player in globalisation.

This is a nation that once depended on its primary industries for its GDP but now we see an expansion to many other areas. The use of monetary policy effectively has also helped achieve sustained economic development. Structural reforms in conjunction with macroeconomic polices and the implementation of automatic stabilisers has helped Chile remain on a course to benefit greatly in the future. Chile, the Latin American tiger, is a prime example to the rest of the world of the capabilities that exist for other developing nations to use.