Wednesday, 30 Oct 2013
Overseas Business Risk - Chile
Political and Economic
Sebastian Piñera took over from Michelle Bachelet as President in March 2010, ending the 20 years of centre-left government that followed the military regime of General Pinochet (1973-1990). Since the late 1980s, Chile has developed a reputation as a modern, stable and well managed economy. President Piñera has balanced pro-market policies, which have successfully created hundreds of thousands of new jobs, with a continued commitment to the welfare state and the elimination of poverty. The overriding goal is to lead Chile towards being the first ‘fully developed‘ economy of Latin America, but amongst various obstacles in its way, the high price of energy and striking inequality (the highest in the OECD) are perhaps the greatest. The latter lies behind large social protests, particularly against the poor quality of education in the state sector. Wider disaffection with the political class is reflected in low approval ratings for both the government and opposition. Presidential and parliamentary elections will take place in November 2013. The incumbent president in Chile is not allowed to run for re-election, serving one consecutive term only.
President Piñera has not made radical changes to the management of Chile’s economy, which is based on sound macroeconomic policies - fiscal responsibility, and independent Central Bank and a floating exchange rate. Chile’s economy has enjoyed long periods of steady growth and has a reputation for stability. Over the period 1980-2010, Chile enjoyed growth of 4.5% pa on average compared to a regional average of 2.8% over the same period. Growth has been around 5.5% in the last three years, and is on course for 4 - 4.5% in 2013. Inflation is below the 3% target and unemployment below 7%. Meanwhile, Chile has very low rates of national debt, over US$22bn saved in sovereign wealth funds, and around US$160bn in private pension funds. Its total GDP is US$264bn and its adjusted GDP per capita has increased to around US$ 18,000.
Chile is a good place to do business, and tops the region in indices of ease of doing business, lack of corruption, economic freedom and competitiveness. Rule of law is particularly strong, with a free press, modern transparency legislation and a demonstrably independent judicial system. Chile’s open and trade-dependent, but relatively small economy makes it highly susceptible to international economic turbulence. Despite successfully diversifying its export base, it remains highly dependent on mineral exports (mainly copper – the world’s largest producer), and so very vulnerable to, e.g. an economic correction in China, or to any other development which depresses commodity prices.
In August 2010, President Piñera’s decision to effectively veto the construction of the Barracones power plant due to be located close to the site of a marine reserve caused controversy in Chile. The plant had been granted regulatory approval by the relevant local environmental body and the President’s actions were therefore seen as creating uncertainty for business in a market renowned for its stability and adherence to the rule of law. The President, who was honouring a campaign-trail promise, has said that he will not intervene in this manner again.
But the issue reflected a wider major concern for Chile: with no oil and little gas of its own, how will it meet spiraling energy demand. On current economic growth projections Chile will need 40% more energy capacity by 2024 and 100% more by 2030, yet future project development is uncertain and shortages may be on the horizon. Uncertainty on community acceptance and legal security, as well as regular business concerns such as future fuel costs and the shape of regulation, mean that 14,000MW of environmentally permitted projects are still at the starting gate. The permit process is widely believed to be unwieldy and bureaucratic, adding to delays. There are frequent local protests throughout Chile about planned energy projects, leading to a climate of nimby-ism amongst politicians. The government has launched a new energy strategy to help to address this, but the scale of the challenge is immense and private-sector power generators think the government is still not giving enough of a lead.
Chile’s human rights record has improved hugely since the return to democracy in 1990, though the military period left a still painful legacy, with hundreds of cases from then still open in the legal system. Chile has ratified all the main international human rights treaties, and the eight core International Labour Organisation (ILO) conventions. After the rescue of 33 miners from the San Jose mine in 2010, Chile ratified the ILO conventions on health and safety. It has also ratified Convention 169, which includes a commitment to consult indigenous groups over projects affecting them, although implementation of this Convention is still being finalised.
Discrimination against women in the workplace, discrimination against minorities and poor conditions in prisons remain areas of concern. The government has indicated its commitment to tackling these challenges, though progress to date has been relatively slow and social conservatism amongst Chilean elites tends to act as a brake.
Issues also remain with Chile’s indigenous groups - about 8% of the total population - with, sometimes violent, protests for the return of traditional lands. In 2009 the UN Special Rapporteur on Indigenous Issues recognised the progress made in Chile, but commented that the country continues to face challenges, including a lack of real consultation with local communities, how to manage land rights claims, the exploitation of natural resources and policy over conflicts with the Mapuche community (by far Chile’s largest indigenous group).
Land access is a major challenge to Chile’s proposals to develop controversial new hydro-electric projects in Patagonia and the requirement for transmission lines running 2200km to Santiago. The importance of mining to the Chilean economy can pose a threat to indigenous groups, though with most of the largest projects located in the under-populated desert regions of the north, this is not the issue it is in some other countries in the region. However with Chile likely to face acute shortages of water and energy in the future, tensions could further increase.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
In 2012, Chile was ranked 20 out of 176 countries (CPI). This is the highest ranking for any Latin American country. Although present, corruption is rare in Chile and it is foolish - and sometimes dangerous - to offer illegal inducements, even of the smallest scale. For example, trying to pay off a policeman to avoid a traffic penalty will almost certainly lead to arrest and more serious charges.
Protective Security Advice
Chile, in particular Santiago, is one of the safest places in South America, though far from devoid of violent crime. So, it is important to remember that you are in a foreign city and that you need to take the same precautions you would anywhere else.
IP rights are territorial, that is they only give protection in the countries where they are granted or registered. If you are thinking about trading internationally, they you should consider registering your IP rights in your export markets.
During the last five to six years the IPR scenario in Chile has changed considerably. In an attempt to meet international standards and commitments expressed in a number of Free Trade Agreements, specifically with the US and the EU, Chile has been proactive in a number of actions and is a signatory to most major international IP agreements. However enforcement can be lax, particularly with respect to piracy of copyrights and patent protection, and the US in particular has continued to raise the issue with the Chilean government. On pharmaceutical patents, the lack of a patent linkage regime means that it is up to companies to prove their IP has been violated, rather than the Chilean system checking that generic pharmaceuticals do not infringe patents before authorising them.