SANTIAGO, CHILE: Twice in my life have I ever heard – let alone tolerated – the sound of power tools outside my bedroom at midnight. Once was in 2005, in Northern Tibet, China. The other time was this Monday night in Santiago, Chile.
Though the machines rotated with the same noisy cutting capacity, the respective growth stories of Chile and China contrast wildly. These days, initial construction in China is paralleled by renovations in Chile. Break-neck 10% GDP growth in the Middle Kingdom has driven up prices for raw materials like copper, while Chile (which experienced 4.2% GDP growth in 2006) sits at the production end of the red-metal run-up.
As copper broke US $3 per pound on the London Metal Exchange Monday, Chile’s resource-based economy received another boost. As producer of 35% of the world’s copper, situated in mammoth mines like Escondida in the northern Atacama Desert, Chile has to balance the bounty with sound spending policy.
Me Compras Un Diploma?
This Monday, I spoke with Cristian Gardeweg, research economist at Celfin Capital, a Chilean investment powerhouse. My most important question of the interview did not have to do with Chile’s future economic direction or its capital gains tax (which is zero, by the way).
Instead, I asked, "Why am I being attacked by punk rock zombies?"
It being autumn here in the Southern Hemisphere, the school year is just beginning. Most of the younger students I see are dressed in uniforms, with collared shirts and straightforward slacks for boys or skirts for girls.
But some older students are running around painted from head to toe in bold colors, clothing tattered, one shoe on and one off. "This is their first year," Cristian told me in his 19th-floor office, far above the fray. As his smile broadened, he explained that initiation by upperclassmen at local universities means the newbies have to collect a certain amount of money by the end of the day in order to fuel their elders’ debauchery at night.
So, a peso collected is a peso drunk.
Passersby know what is going on, and playing their own part in a sort of informal economy of higher education, they chip in towards the quota.
Nevertheless, Mr. Gardeweg tells me that Chile’s economy is "boring."
"The central bank is highly independent, and practices good policy. Besides that, politicians over the past few decades have taken a non-interventionist approach to the economy, allowing free competition at all levels."
But that could not be the whole story. The behavior of government officials, even if "non-intervenionist," affects markets. In evaluating emerging markets, too many U.S.-based researchers choose to conveniently ignore political economics.
I knew enough from just a St. Patrick’s Day weekend in Santiago to want to know much more.
September 11 Avenue
Not far from the Alcantara stop on Santiago’s excellent underground Metro, very near the Celfin offices, there is a bustling thoroughfare called Avenida 11 de Septiembre.
The kid who yelled, "Yankee go home" at me late Saturday night would gladly tell you that this South American street is not a commemoration for the 2001 attacks on New York and D.C.
In Chile, as in the U.S., the date stands alone as the name of a momentous event in the shaping of the nation. On September 11, 1973, General Augusto Pinochet and his bomber jets attacked La Moneda, the former national mint and seat of the Chilean presidency. Salvador Allende, the socialist president, was deposed in a golpe de estado (or coup d’etat, since English-speakers refuse to come up with a term of our own).
The subsequent Pinochet regime was politically repressive, in the same lamentable vein as a slew of other regional military regimes at the time. But unlike Argentina, where the Mothers of the Disappeared still seek answers for kidnappings decades ago, Chile’s horrors were accompanied by the establishment of a sound economy that persists to this day.
Allende, with price controls and lack of exposure to international markets (worsened by U.S. boycotts), presided over 600% inflation. Pinochet followed his military victory with a campaign of economic reforms, recruiting the country’s best economists to establish a private pension system that now controls the bulk of the country’s investment capital, placing bets on behalf of each salaried citizen (who allocate 7% of their monthly salaries to funds of their choice).
After Pinochet began to allow political reforms in the early 80s, the center-left governments chosen by the people since then have chosen to maintain the business end of the dictator’s regime, though he has been largely condemned for his political violence. The 90s saw annual GDP growth around 7%, a boom in office building and home construction, and cemented Chile’s standing as Latin America’s healthiest economy.
But, of course, that is not the end of the story. Stay tuned for Part 2, with more economic insight and a vicarious wine tasting to boot!