was 10 years
ago, when I stayed mostly in Santiago and Valparaiso. This trip, which
extended through most of January, took me from the Atacama in the north
to near Patagonia in the south, including a couple thousand kilometers
of driving in a rental car, a couple thousand more of bus riding, and a
whole bunch of flying. The trip was a pleasure, but it wasn't a pleasure
trip; my ulterior motive in traveling six months a year is always to scope
out which of the world's countries offer the most in personal freedom and
financial opportunity.
To date,
I've visited over 100 and lived in seven; it's one way to fill those idle
hours. It's no coincidence that I'll be coming out with a considerably
expanded, revised, and updated edition of my first book, The International
Man, in the near future. And
Chile will be included this time.
When I visit
a country, my idea of seeing it doesn't have much to do with museums, churches,
and tourist gift shops-at least, after the first day. The way to get
to know a country and its people is by becoming proactive, and by logging
time with lawyers, stock brokers, real estate brokers, political pundits,
business people-and even a few cab drivers.
The Chilean
economy
As late as
the 1940s, Chile was still considered an advanced, First World country
(as were Argentina and Brazil); then politicians got the notion the country
could afford regulation, welfare, and the taxes to pay for them, and it
was all downhill from there.
A climax
was reached with the election, in 1970, of Salvador Allende, a hard-line
Marxist who was well on his way to turning the country into a replica of
Cuba when, in 1973, he was assisted in shedding this mortal coil by General
Pinochet, and perhaps the American CIA. This became a cause celebre
for leftists around the world, and Chile rose from mere obscurity to recognition
as a pariah, in a class with South Africa and Taiwan.
It's true
that Pinochet wasn't exactly Mr. Nice Guy as he proceeded to cleanse the
Chilean gene pool of at least several hundred leftists; but the toll was
much less than often accompanies violent changes of government in the Third
World. Pinochet's real crime in the eyes of the media was, of course,
his freemarket economic orientation, which resulted in a genuine boom.
In a way,
the Allende years were a blessing in disguise for the Chileans; perhaps
they needed to see a demonstration of socialism so real and graphic that
the country would be cured of further large-scale attempts at social engineering
for at least a full generation. It seems few countries are able to stop
coasting downhill until the wheels literally fall off. Chile's gone
through the catharsis which, I'm afraid, still lies ahead for the U.S.
But back to the matter at hand.
More than
most economies in the world, Chile's is fairly undiversified. Mining is
by far the biggest industry, generating half the country's foreign exchange
in a typical year. After mining, it's agriculture, forestry, and fishing-all
primary, commodity-based extractive industries.
I presented
the case for investment in Brazil in the December 1989 issue; there are
lots of similarities with Chile- relative insulation from the world economy,
expansion from a low base, low labor and land costs. But Chile has at
least three additional advantages:
1) It has
a small (13 million), generally well-educated, and ethnically homogeneous
population. The average Chilean is a mestizo, and there's no structural
underclass, unlike most places where the pure-blooded Spaniards are on
top, and the Indians and blacks are cemented to the bottom. Argentina and
Uruguay are two more exceptions, but only because there are no Indians
or blacks.
2) Unlike
any other country in Latin America that comes to mind (with the possible
exception of Paraguay),
bribery and corruption are both rare and frowned upon. You wouldn't, for
instance, dream of slipping a fat bank note into your credentials when
you're stopped by the police; in Mexico, you wouldn't dream of not bribing
them.
3) Far more
important than anything else, a sine qua non, is that Chile is a fairly
open economy, certainly the most open in South America, and one of
the most open in the world.
It's far
from a libertarian paradise, with marginal income tax rates approaching
50% and an 18% value-added tax. But it compares favorably with the competition
at the moment, and things seem to be improving further, not backsliding.
Aylwin, who was elected to replace Pinochet in 1991, has stuck with the
program, lowering import duties from 15% to I I%, the lowest level in Latin
America. The Central Bank inflates the currency at a fairly consistent
20% per year, which means that the value of the peso has collapsed from
39 to the dollar in 1979 to 380 today, but it's been a controlled collapse.
And since there are no foreign exchange controls, and interest rates are
free, the middle class has been able to build capital.
The results
have been good, despite the problems. Exports rose from $8.3 billion in
1990 to $9.3 billion in 1991. Foreign debt has dropped to 65% of GDP at
the end of 1990, down from 68% in 1989, and 116% in 1986. As a result,
Chilean debt trades at 90 cents on the dollar, compared to only 31 for
Brazil, 38 for Argentina, and 64 for Mexico. Unemployment is only 6.7%,
the standard of living is high and clearly improving. Not bad for a one-time
banana republic basket case.
The way I see
it, the trend is up in Chile (as with most of Latin America to varying
degrees) for the foreseeable future.
How to follow
the trend
What is the
most practical way of participating in the growth of this country? There
are several logical ways:
1)Buy
real estate.
When I visited Chile in 1980, 1 spent some time with a wealthy local at
his house in one of Santiago's most fashionable suburbs. The house was
typical of those owned by the upper classes in a Third World country; large,
lots of handcarved fittings and furniture, swimming pool, tennis court,
extensive landscaping, etc. At the time, it was worth about $25,000; today
it's worth well over $1,000,000. The zinger is that in 1973, before Allende
joined the ranks of the departed, the owner would have been happy to take
$25,000. That's pretty much the story for land throughout the country:
it's appreciated vastly over the years, and real bargains are long gone.
That's not
to say I think it's overpriced for what you get; comparable properties,
like meals in the restaurants, are still probably half what they'd be
in the U.S. But real estate is selling for roughly its utility value; the
risk/reward ratio isn't what it was back in the 70s, and those are the
kind of things I'd rather draw your attention to. Entirely apart from
the fact you'd be well advised to spend a good bit of time on location
before making a commitment.
2) Get into
business. That basically contemplates moving there, but there are plenty
of opportunities. One of the things that jumped out at me was the low number
of cars on the streets of Santiago, and the near-total lack of them on
the highways outside. Your first reaction is: "Great! This is like California,
but without the cars!" Exactly. The auto population is reminiscent of the
U.S. in the early 50s, with all the correlary implications. One lady I
know has cut a deal with Texaco to set up a string of gas station-cum-convenience
stores, which is a perfect way of capitalizing on the trend. If you get
on a plane, go down and spend a few weeks there, you'll see plenty of opportunities
of that nature. But that's not the subject of this article.
3) Buy into
the Chilean stock market. There are many object lessons to be had from
developing markets (although the Santiago Bolsa has been around for almost
100 years). I'd like to cover the Bolsa next month, if only because there's
a convenient way to participate in it, the Chile Fund (CH, $26). Unfortunately,
I don't think I can give this fund the kind of unreserved buy that served
us so well on Brazil Fund last year, and Korea Fund before that---despite
the fact Chile Fund is selling at a fair discount to assets.
4) Buy shares
of a foreign company with major interests in Chile, but whose shares
aren't traded in Santiago, and therefore can be had at more reasonable
levels.
