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WEEKLY NEWSLETTER
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Chile
Index
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Monkey-puzzle trees (Araucaria araucana) of the
pine family, valued for their beautifully veined hardwood and
plentiful resin, near Temuco in southern Chile
Courtesy Embassy of Chile, Washington
There was broad agreement that the implementation of an
exchange-rate policy aimed at encouraging exports had been
at the
center of Chile's economic success. Since at least 1985,
the
members of the Chilean economic team had understood that
avoiding
exchange-rate overvaluation was crucial to the promotion
of growth
and prosperity. As a result, it was decided that a policy
based on
small daily adjustments of the nominal exchange rate would
be
adopted. In this way, exporters would be compensated for
any
increase in their domestic costs stemming from inflation.
Although the basic elements of this "crawling peg"
exchangerate policy were maintained during the 1985-92 period, the
system
went through a number of changes. The first important
innovation
was to center the "reference" exchange rate set by the
Central Bank
within a 6 percent band. Market participants were allowed
to
transact freely within the band. A second important change
was to
widen the band to 10 percent and to adjust the reference
rate
downward. Finally, in 1992 the Central Bank decided to
alter the
method used to calculate the daily adjustment of the
reference rate
by using a basket of currencies made up of the dollar, the
German
mark, and the Japanese yen in a 50-30-20 ratio, instead of
only the
dollar.
In early 1990, Chile started to receive increasing
amounts of
foreign financial flows. This generated an overabundance
of foreign
exchange, which tended to make the exchange rate
appreciate. From
a practical point of view, the increased capital inflows
were
reflected in the fact that the exchange rate moved to the
"floor"
of the band, reducing the amount of real Chilean pesos
that each
exporter received per United States dollar exported. This
development affected the profitability of a number of
export
projects, reducing the overall competitiveness of the
Chilean
economy. Also, the real appreciation of the exchange rate
affected
local industries that competed with imported goods,
including the
agricultural sector. Not too surprisingly, exporters have
tried to
persuade the government to alter its exchange-rate policy
in a way
that would increase their profits.
In 1991 the pressure of capital inflows subsided
somewhat.
However, this did not end the overabundance of foreign
exchange,
nor did it put an end to the tendency toward real
exchange-rate
appreciation. That year the current account of the balance
of
payments experienced a remarkable turnaround of almost
US$1 billion
(see
table 31, Appendix). Consequently, during 1991 the
overall
result was that external accounts were once again
positive, with
the Central Bank accumulating more than US$1.2 billion, as
compared
with US$2.4 billion in 1990.
Chilean balance of payments trends for 1990-92
generally were
positive, despite a current account deficit in 1992-93.
Although
the capital account experienced a reversal in 1991, moving
from a
large surplus in 1990 to a modest deficit, in 1992 this
tendency
appeared to be reversing itself once again, with capital
inflows
exceeding outflows. An important aspect of the balance of
payments
data for the early 1990s is the large positive figure for
"errors
and omissions," which was US$161 million in 1991. However,
there is
evidence suggesting that the government's figure
represents
"reversed capital flight" entering the country in an
illegal
fashion. Some observers have claimed that illegal
drug-related
monies were moving toward Chile in the early 1990s
(see Incidence of
Crime
, ch. 5).
Data as of March 1994
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