2009 Index of Economic Freedom

Quick Facts

Population:

• 16.4 million

GDP (PPP):

• $214.1 billion
• 4.0% growth
• 4.3% 5-year compound annual growth
• $13030 per capita

Unemployment:

• 7.0%

Inflation (CPI):

• 4.4%

FDI Inflow:

• $8.0 billion

Chile's economic freedom score is 78.3, making its economy the 11th freest in the 2009 Index. Its overall score is 0.3 point lower than last year, reflecting small declines in freedom from corruption, monetary freedom, and labor freedom. Chile enjoys the highest degree of economic freedom in the South and Central America/Caribbean region.

Chile's record of economic reform includes transparent and stable public finance management and strong protection of property rights. Macroeconomic stability and openness to global trade and investment have encouraged stable long-term growth. Chile has pursued free trade agreements with various countries around the world. Its financial system is diversified and stable compared to those of other regional economies, with a sound regulatory and supervisory framework.

Despite overall strong performance, Chile's weakest scores relative to other comparable economies are in business freedom, fiscal freedom, and labor freedom. Income taxes on individuals are high, with a top rate of 40 percent. Although overall regulatory licensing is easy, bankruptcy procedures remain cumbersome and costly.

Background Back to the top

Chile is the world’s leading producer of copper, and exports like minerals, wood, fruit, seafood, and wine are the main engine of GDP growth, which averaged 8 percent annually in the 1990s. The government’s Economic and Social Stabilization Fund manages excess copper revenues to maintain social spending during downturns. Chile emerged in 1990 from the rule of General Augusto Pinochet, who came to power after the 1973 military coup that overthrew the government of Salvador Allende, with a strong commitment to democracy and human rights. The coalition government of Socialist President Michele Bachelet remains largely committed to Chile’s successful free-market institutions, although her rhetoric emphasizes income equality over freedom. Chile is a member of the Asia–Pacific Economic Cooperation forum and has signed or is negotiating trade agreements with China and other Pacific Rim countries to supplement its important free trade agreement with the U.S.

Business Freedom 66.3 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected under Chile's regulatory environment. Starting a business takes an average of 27 days, compared to the world average of 38 days. Obtaining a business license takes about the world average of 18 procedures and less than the world average of 225 days. Closing a business can be burdensome and lengthy.

Trade Freedom 85.8 Back to the top

Chile's weighted average tariff rate was 2.1 percent in 2006. Chile is phasing out price bands for wheat, flour, and sugar, but approval requirements and stringent sanitary and phytosanitary regulations on imports of agricultural products and processed food, some import bans, import taxes, export subsidies for some sectors, and issues related to the protection of intellectual property rights add to the cost of trade. Ten points were deducted from Chile's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 78.2 Back to the top

Chile has a high income tax rate but a low corporate tax rate. The top income tax rate is 40 percent, and the top standard corporate tax rate is 17 percent. Other taxes include a value-added tax (VAT), a tax on check transactions, and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 17.1 percent.

Government Size 90.1 Back to the top

Total government expenditures, including consumption and transfer payments, are low. The government is committed to sound budget management and has implemented a new fiscal transparency law. In the most recent year, government spending equaled 18.2 percent of GDP.

Monetary Freedom77.3 Back to the top

Inflation is moderate, averaging 4.0 percent between 2005 and 2007. Many prices are determined in the market, but the government controls prices for utilities, including water, fixed-line telecommunications, and electricity, and price bands for certain agricultural products remain in effect. Ten points were deducted from Chile's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom80.0 Back to the top

Foreign and domestic investments receive equal treatment, and there are no restrictions on repatriation. The Ministry of Economy's Foreign Investment Committee reviews all foreign investment and sets the terms and conditions for all contracts involving foreign direct investment. Foreigners may invest in Chilean fishing companies and media if their countries have reciprocity arrangements with Chile. Regulatory systems tend to be transparent and efficiently run. Residents and non-residents may hold foreign exchange accounts. There are restrictions but few controls on current transfers and capital transactions.

Financial Freedom70.0 Back to the top

Chile's financial system is among the region's and the world's most stable and developed. Banking is efficient, with strict limits on lending to a single debtor or group of related companies. Reforms that include capitalization requirements and shareholder obligations have increased competition and widened the range of operations for banks and other financial services. Twelve foreign banks and 14 domestic banks compete on an equal footing. Three large banks control about 60 percent of assets. The state-owned Banco Estado is Chile's third largest bank and accounts for about 13 percent of assets. Credit is issued on market terms. Domestic and foreign banking and insurance companies receive equal treatment. Chile's liberal capital market is the region's largest.

Property Rights90.0 Back to the top

Private property is well protected. Contracts are secure, and courts are transparent and efficient. Expropriation is rare, and owners receive compensation. A stronger intellectual property rights legal framework would provide better protection for copyrights and trademarks, as well as a clear and transparent system for protecting pharmaceutical patents and proprietary clinical data. Piracy of computer software, music, and video is growing.

Freedom From Corruption70.0 Back to the top

Corruption is perceived as minimal. Chile ranks 22nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The government has instituted additional rules to clarify and modernize public employee payments, new campaign finance legislation, a permanent budget commission to oversee government spending, and simplified administrative procedures, and has reformed procedures for awarding government contracts. Chile has ratified the Organization of American States Convention Against Corruption and the OECD Convention on Combating Bribery. Judicial corruption is rare.

Labor Freedom75.0 Back to the top

The non-salary cost of employing a worker is low, but dismissing a redundant employee is relatively costly and difficult. The labor market has become more rigid as regulations and minimum wage increases have exceeded overall productivity growth. Another increase in the minimum wage was approved in 2007.