How Chile Got Amazingly Rich: Free Trade

INVESTOR'S BUSINESS DAILY -- Chile was formally invited to OECD's club of developed countries on Dec. 15 — a great affirmation for a once-poor nation that pulled itself up by trusting markets. One thing that stands out here is free trade.

Chile is the first country in South America to win the honor, and in a symbolic way its OECD membership card seals its exit from the ranks of the Third World to the First. For the rest of us, it's a stunning example of how embracing free markets and free trade brings prosperity.

It's not like Chile was born lucky. Only 30 years ago, it was an impoverished country with per capita GDP of $1,300. Its distant geography, irresponsible neighbors and tiny population were significant obstacles to investment and growth. And its economy, dominated by labor unions, wasn't just closed, but sealed tight. In the Cato Institute's 1975 Economic Freedom of the World Report it ranked a wretched 71 out of 72 countries evaluated.

Today it's a different country altogether. Embracing markets has made it one of the most open economies in the world, ranking third on Cato's index, just behind Hong Kong and Singapore. Per capita GDP has soared to $15,000. Besides its embrace of free trade, other reforms — including pension privatization, tax cuts, respect for property rights and cutting of red tape helped the country grow not only richer but more democratic, says Cato Institute trade expert Daniel Griswold. "Chile's economy is set apart from its neighbors, because they have pursued market policies consistently over a long period," he said. "Free trade has been a central part of Chile's success."

Chile has signed no fewer than 20 trade pacts with 56 countries, giving its 19 million citizens access to more than 3 billion customers worldwide. When no pact was in force, Chile unilaterally dropped tariffs. This paid off handsomely.

You've heard of flat taxes? Chile has a flat tariff — only 5% on any item not exempted by a free-trade treaty. But almost nobody has signed off on free-trade treaties like Chile. "What free trade has done is it's allowed Chile to specialize," Griswold says. "Copper, salmon and fresh fruit are some of its strengths that have drawn foreign investment. Free trade has allowed resources to shift to where they have the highest return. The result has been a more disciplined private sector that has made itself efficient enough to compete globally."

The success belies claims, made mostly by protectionist unions, that free trade is a job killer and source of misery. It's also a reminder of how the U.S. has lagged on trade agreements, signing just 11 with 17 countries since 1993 — one reason why its ranks just 17th on Cato's 2009 Index of Economic Freedom.

Despite the recession, American trade pacts with Colombia, Panama and Korea are languishing into a fourth year. By contrast, Chile got to where it is by embracing trade. Its example is a shining lesson of how prosperity can be achieved no matter what the challenges — a lesson the U.S. would do well to relearn as our recovery tries to get traction.

MP: The charts above document Chile's stunning economic success. Following four decades of economic stagnation and flat real GDP per capita from 1950 to 1990, output per capita has more than doubled since 1990. And Chile's economic growth has been accompanied by a roaring bull market rally that has lifted the MSCI Chile Stock Market Index by an amazing 400% since 2002, from less than 400 points in September of 2002 to currently above 2,000 points. That translates into an average return of 24% per year for the last seven years, despite an 800 point drop in 2008.

HT: The Plaidpundit, Matt B.