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Chile and Peru Economies Comparison Essay


Introduction

Despite reforms efforts by most of Latin American countries in the last three decades, the economic and social improvements are still wanting. Chile stands out to be an exception with increased economic growth of over seven percent, significant reduction in poverty rate amid average income levels and high employment rates (Corbo, Hernández and Parro 8).

The paper will be concentrating on the economies of Chile and Peru and critically examining their similarities and differences. While the economies share several aspects that are common, they are driven by diverse variables that contribute to the differences in growth and strength. The two economies are primarily driven by mining and agricultural activities.

However, during the transformations, the two countries pursued diverse policies that caused economic differences in terms of growth and stability. Depending on the current literature that emphasizes on the significance of policies and institutions, the argument is that Chile’s better economic performance was due to its economic policies that were broader and inclusive.

Essentially, during the economic reforms, Chile ended up with better macro-economic fundamentals including better policies and strong institutions that resulted in the implementation of the strategies (Acemoglu, Johnson and Thaicharoen 52). On the other hand, Peru economic transformations have been riddled with weak institutions and lack of political will to transform the economy. Despite these challenges, Peru’s economy has been recognized as one of the most significant in the region.

Comparing and contrasting the two economies

Historically, the two economies have been growing steadily over the last three decades though at different rates. Essentially, after 1940s, the Chilean and Peruvian economies grew steadily until 1980s recession that affected the economies of most countries in the region. Following the economic downturn, most of the countries in the region including Peru and Chile undertook a couple of economic policies and reforms aimed at stabilizing their economies (Gallego and Hernández 226).

The economic reforms were similar in nature and were fostered by global financial institutions mainly the IMF and the World Bank. However, the implementation of the reforms was based on each country’s’ political structure and policies (Acemoglu, Johnson and Thaicharoen 52).

As indicated, Chilean steady economic growths over the decades have been attributed to excellent macro-economic policies and well-developed financial institutions. Foreign trade is one of the policies that have contributed hugely to the recent steady growth of the economy. For instance, approximately over thirty percent of Gross Domestic Product (GDP) arises from the export of its commodities to the foreign markets (Levine 689).

Moreover, Chile continues to receive increased revenues from foreign trade compared with other countries in the region including Peru. The foreign trade policies have enabled Chile to sign various commercial treaties with different countries across the globe including countries in Asia-pacific, North Americas and the European Union. The trade agreements have expanded the economy of Chile beyond the Latin American region (Gallagher 68).

On the other hand, the economic policies of Peru have focused on the improvement of its domestic production. The diversified economy of Peru that depended on both mineral and agricultural exports required strong domestic policies and institutions to boost the development and growth.

The domestic policies pursued by the country did not open the economy to foreign trade as was expected stifling the growth to just around four percent. However, the country transformed its economic policies and pursued the export-oriented strategies that opened up the economy. Such policies contributed to the rapid development and growth in the previous three decades.

Essentially, in the last decade, the economies of both Chile and Peru have been growing at an almost equal pace (Loayza and Gallego 28). Despite the economic shocks that have affected various economies in the last ten years, Chile’s economy has been growing at an average of approximately over five percent annually. On the other hand, Peru’s economy has a steady growth of over three percent annually. Even though there is a slight difference of about one percent, the economic growth between the two countries is currently seen to be similar.

Following the economic transformations in Peru in the recent past, both Peru and Chile believe on the open market policy. For instance, like Chile, Peru has been involved in various free trade agreements with different countries across the globe and is currently in negotiations to join the Trans-Pacific Partnership Trade Agreement (TPPTA) (Taft-Morales 45).

Similarly, Chile has belonged to a number of comparable free-trade agreements with the same countries owing to its policies on trade liberalization. However, Chile is one of the Trans-Pacific Partnership Trade Agreement members and continues to be part of the wider global trade.

Besides, both Chile and Peru depends on exports based on mineral products. For instance, in Peru, the export sector depends almost entirely on minerals that include various metals. The exportation of these minerals contributes to approximately sixty percent of the country’s GDP and is probably the biggest foreign exchange earner (Taft-Morales 54). In addition, Peru exports petroleum and petroleum products. However, agricultural and fishing sectors also contribute to the export earnings.

Similar characteristics are observed in Chile where the main export commodity is Copper. The exportation of the mineral products contributes around nineteen percent of the country’s GDP. However, the Chilean exports are more developed and generally contributes to over sixty percent of the GDP. Most economic indicators show that the Chilean exports is greater compared with Peru (Perez 14).

In terms of Net Income (NI), Chile has higher NI compared with Peru. The reason is that Peru still depends on large import volumes particularly the food staffs. Peru depends on imported foodstuffs due to its inability to produce foodstuffs that can sustain its population.

Even though both countries import similar quantities of telecommunication equipments from the foreign markets, imports of food products and other items reduces the NI of Peru (Bedford 24). Apparently, Peru imports approximately over seventy billion US dollars worth of commodities compared with Chile.

However, it is beyond doubt that Chilean economy has been performing much better than the Peruvian economy as demonstrated by the social and economic growth indicators. For instance, in the past two decades, Chile has almost the highest life expectancy and lowest infant mortality rate in the entire Latin American region, which is far much better than Peru (Bedford 32). In addition, Chile has reduced poverty levels by almost half.

Reasons for the growth of Chilean economy

Actually, Chile has grown to attain the status of highest economic development. The economic development is attributed sound economic policies, institutional steadiness and economic freedom. The three factors have enabled Chile to attain high economic status according to international assessments concerning competitiveness of nations.

Specifically, within Latin America and the whole world, Chile is continuously becoming one of the highly developing economies that are attracting investments opportunities because of fair and friendly transaction contexts (Acemoglu, Johnson and Thaicharoen 58). In principle, the successes of reforms along with stability of the Chile’s institutions have received credit for the robust performance of the nation’s economy.

Despite the worldwide credit disasters and several shocking natural disasters such as earthquakes, Chile’s economy continues to remain buoyant with increased fiscal position and promising debt outline (Acemoglu, Johnson and Thaicharoen 58).

The reason why Chile’s economy has remained robust is the applications of counter-cyclical fiscal and monetary policies vital in ensuring economic equilibrium, which counterpoises cyclical vacillations experienced in the economy together with increased prices of copper that is the leading export of the country.

In addition, the robustness of Chile’s economy can be attributed to structural surplus rule, which was effected in prior to the commodities super-cycle. In other words, the implementation of the structural surplus rule has enabled Chile to construct independent affluence through efficient utilization of extra copper revenues (Williamson 9).

In reality, the Pension Reserve Fund (PRF) as well as the Economic and Social Stability Fund (ESSF), which translated to over US $20 billion in addition to cash investments totaling over US $35 billion were built using the proceeds from the export of copper (Lora 25).

Besides, through self-regulating central bank, low inflation targets as well as floating exchange rates has been the major core economic framework regarding monetary policy. Indeed, the banking structure of Chile is anchored on comprehensive monitoring plans, which have been invaluable in the reduction of the national economic unpredictability (Acemoglu, Johnson and Thaicharoen 62).

In essence, Chilean banks have continued to record balance in asset quality as well as tolerable capitalization intensities regardless of the worldwide financial crisis.

The Chilean economic reforms pegged on private pension system, free trade as well as the liberalization of financial markets have been a source of success for the economic robustness of the country (Acemoglu, Johnson and Thaicharoen 64). Actually, the source of Chile’s economic robustness can be dated back to several years. Actually, the implementation well-made and accurate public policies have been significant for the growth of the nation.

In reality, over the last twenty-five years, Chile’s economy has been characterized by political sovereignty and social equality as well as the rule of law. These political attributes has been significant in the growth of the economy (Corbo, Hernández and Parro 25). Besides, a set of bodies and free guidelines in the economic, social along with the political spheres have been of significant importance in configuring the country towards the conduit of economic constancy as well as advancement.

Most importantly, Chile’s economic model recognizes the strength of the private sector in ensuring economic progress (Corbo, Hernández and Parro 11). Indeed, Chilean economic framework stresses on furthering entrepreneurial spirit, competitiveness and investments. Additionally, the economic model of Chile provides prospects for innovation, savings as well as open borders for global trade and moderate taxes. Moreover, the nation has a social policy that emphasizes on the defenseless individuals in the society.

Through such policy framework, the private and public organizations are capable of offering a variety of services from which individuals can chose among diverse rival substitutes (Acemoglu, Johnson and Thaicharoen 64). Further, representative democracy characterized by the electoral system has also been central in fostering the adaptation of political conglomerates thereby ensuring institutional strengths.

With such undertakings, Chile has been able to register massive economic growth rates making it the leading country in Latin America in terms of economic progress. For instance, the period before 1960, the national income per capita was above neighboring countries average. In addition, in the last two decades, the average national income per capita income has tripled. Currently, Chile is the nation with the leading per capita income within Latin America.

On the same note, the levels of poverty have shown decreasing trends over the years (Acemoglu, Johnson and Thaicharoen 70). For example, data indicates that over 45% percent of the country’s population lived in poverty in 1986. However, in 2011, the poverty levels greatly reduced to a low of 14%. Further, the country’s transition to an economic freedom framework has seen inequality gaps decrease to a level of 0.5 in 2011 compared to 0.6 in 1985 (Perez 91).

Chile’s shift to democracy has also been fundamental in ensuring the economic prosperity of the nation. Undeniably, Chile’s system of governance is categorized by peacefulness, extraordinary notch of collaboration as well as consensus thereby ensuring higher levels of alliance and stability (Acemoglu, Johnson and Thaicharoen 72). As such, the citizens have been able to enjoy constitutional and civil liberties, which is considered a milestone in Latin America.

The Chilean economic challenges

Even though Chile has registered robust economic growth, several challenges have contributed negatively. In fact, the challenges are common during economic recessions. Actually, between 1990 and 1999, the Chilean economy registered an average yearly economic growth of 6.4%. However, from 2000 to 2009, the economic growth declined to a yearly average of 4% because of inadequate reforms along with ineffectual social and economic dogmas.

In this period, rates of investment and productivity registered obstinate decline. Besides, poverty levels again began soaring (Corbo, Hernández and Parro 11). Nevertheless, to counter such challenges, the government has undertaken several measures aimed at restoring the economy back to progress.

For example, the government has a program of equal opportunities where every citizen has prospects of personal self-actualization with the aim of progressing in the direction of a society founded on meritocracy as well as social agility. Besides, the presence of a vigorous civil society is fundamental in reconstructing the nation as well as providing prolific results by putting the government on toes to deliver services to the society.

Natural disasters are one of the major economic and social challenges facing Chile’s economic growth. For instance, the earthquake that hit Chile in 2010 had far-reaching effects on the GDP of the country including the loss of productive lives, destruction of cities, schools and homes as well as hospitals. Specifically, the disaster led to losses approximated to be 18% of the country’s GDP. However, the government has been able to initiate reforms, which have brought the economy back to recovery path (Corbo, Hernández and Parro 11).

For example, the government programs aimed at ensuring fiscal discipline and reducing inherited budget deficits have guaranteed sustainable economic growth since extra savings enable the country to mitigate crises as well as contain higher inflation rates. Further, the monetary and fiscal policies have been able to keep inflation to manageable levels through stable macro-economic stability. Besides, major investment undertakings by the Chilean government have managed to sustain economic progress of the nation.

Measures undertaken by Chile

Chile began undertaking massive, broader and deeper economic reforms after the debt crisis that affected the economic region in the mid seventies. In fact, the country initiated its economic reforms long before Latin American countries including Peru began thinking of initiating similar reforms (Lora 20).

For instance, one of the outstanding reforms undertaken by Chilean government was in the pension system in the early 1980s that reduced dependency on foreign aid. Much of the foreign aid was used in financing long-term investments through the provision of a wide saving base to the Chileans (Acemoglu, Johnson and Thaicharoen 62).

During the debt crisis of the 1980s, Chile adopted a relatively flexible exchange rate system to deal with inflation at a time when Latin American region was experiencing an all time high inflation rate of over 500 percent (Easterly, Loayza and Montiel 388).

The system adopted by Chile was much more different from measures undertaken by many Latin American countries that opted for exchange rate stabilization policies. In fact, the model helped Chile develop a macro-economic stability that protected it from financial crises that arose from external developments.

In addition, Chile had developed very stable and better institutions in the past few decades. From the time of the debt crisis, successive regimes in Chile have maintained good governance, integrity and a high level of accountability (Corbo, Hernández and Parro 10). Besides, the banking system was very strong and supported by a very large financial system. In addition, Chile developed strong laws that protected the institutions from exploitation by individual interests.

The strong regulatory framework enabled the Chilean economic institutions to be the strongest and most stable in the region. Moreover, Chile set up regulatory frameworks that facilitated the privatization of the state owned corporations that aimed at diversifying and distributing the concentration of wealth to a large number of investors (Corbo, Hernández and Parro 11).

In the same spirit, the government empowered the citizens economically through the provision of low-cost loans to purchase shares of large corporations that were being privatized. Monopolistic practices were avoided through the enactment of policies and laws that controlled and monitored such activities.

Challenges faced by Peruvian economy

Compared with Chile, Peru has been faced with numerous economic challenges ranging from political to poor infrastructural development (Perez 24). In fact, poor development in infrastructure has been cited to be the major drawback of Peruvian economic growth. Poor infrastructural developments have resulted into poor developments of areas that are far away from the coastal region. In addition, political instability in Peru has contributed adversely to the decline of foreign investments in the country.

The decline in foreign investments has affected critical sectors such as mining. For instance, the extraction of natural resources has greatly declined. The decline is detrimental to the economy as extraction of natural resources forms the core of Peruvian economy. Political activism, constant protests and demonstrations has been a common feature witnessed in the Peruvian political leadership for a very long time (Taft-Morales 54). Experts believe that this is a major hindrance to the economic development of the country.

Conclusion

Over the years, Chile and Peru have continued to gain recognition as the leading nations in Latin America with effectively managed economies. Actually, considering the rate of economic growth in the last ten years, Chile’s growth rate has been approximated to be over six percent. On the other hand, Peru’s growth rate is estimated to be over four percent. Besides, the countries have encountered significant poverty reductions.

Specifically, in the middle of 2001 and 2011, Peru realized a sharp reduction in poverty levels from fifty-five percent to twenty-eight percent. On the same note, Chile experiences the lowest levels of poverty at twelve percent. Core to the outstanding expansions in the economy is the firm macroeconomic outlines put in place by the governments.

More importantly, the fiscal stabilization and low inflation rates in such countries are anchored in the effective fiscal and monetary measures put in place by the policy makers. Actually, copper and precious metals, which are the major exports of the two nations, have been instrumental in motivating the countries’ economic growth rates.

Additionally, the two governments have been on then fore front in enacting policy frameworks that are critical in attracting foreign ventures. Peru and Chile have been undertaking significant developments aimed at ensuring fair business environments as well as broadening the horizons of export outlines. In this regard, both Peru and Chile have realized major developments in agricultural exports. Moreover, prospects of energy exports have been discovered in Peru.

Generally, over the past decade, the world economy has continued to experience continuous financial improbability along with gloomy opportunities for expansion. Nevertheless, Chile has been able to experience robust economic growth as well as social inclusion through farsighted macro-economic structures along with open representative societies.

Works Cited

Acemoglu, Daron, Simon Johnson and Yunyong Thaicharoen. “Institutional Causes, Macroeconomics Symptoms: Volatility, Crises and Growth.” Journal of Monetary Economics, 50.1 (2003): 49-123. Print.

Bedford, Kate. Developing Partnerships: Gender, Sexuality, and the Reformed World Bank. Minneapolis, MN: University of Minnesota Press, 2009. Print.

Corbo, Vittorio, Leonardo Hernández and Fernando Parro. “Institutions, Economic Policies and Growth: Lessons from the Chilean Experience.” Working Papers of the Central Bank of Chile, 512.317 (2005): 1-74. Print.

Easterly, William, Norman Loayza and Peter Montiel. “Has Latin America’s Post-reform Growth Been Disappointing?” Journal of International Economics, 43.4 (2007): 387-408. Print.

Gallagher, Kevin. Bamboozled by the TPP: The Small Benefits and Real Costs of the Trans Pacific Partnership Agreement. Medford, MA: Global Development and Environment Institute, Tufts University, 2012. Print.

Gallego, Francisco and Leonardo Hernández. “Microeconomic Effects of Capital Controls: The Chilean Experience during the 1990s.” International Journal of Finance & Economics, 8.3 (2007): 225-253. Print.

Levine, Ross. “Financial Development and Economic Growth: Views and Agenda”. Journal of Economic Literature, 35.2 (2007): 688-726. Print.

Loayza, Norman and Francisco Gallego. The Golden Period for Growth in Chile: Explanations and Forecasts. Santiago, Central Bank of Chile, 2012. Print.

Lora, Eduardo. Structural Reform in Latin America: What Has Been Reformed and How to Measure It? Washington, DC: Inter-American Development Bank, 2011. Print.

Perez, Paul. Growth and Development in Latin America. New York, NY: Brown Brothers Harriman, 2014. Print.

Taft-Morales, Maureen. Peru in Brief: Political and Economic Conditions and Relations with the United States. Washington, DC: Congressional Research Service, 2013. Print.

Williamson, John. “From Reform Agenda to Damaged Brand Name.” Finance and Development, 23.6 (2003): 10-13. Print.

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