ECONOMY NATIONAL

What Could Chile’s New Constitution Mean For Business?

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In an October 2020  national referendum, 78 percent of Chilean voters supported the establishment of a new constitution. The country will elect a Constitutional Convention in April  2021 that will be charged with drawing up the document. It is worth considering what it could mean for business in Chile – one of Latin America’s most trade-friendly countries.

The overwhelming vote in favor of a new constitution in Chile followed months of social unrest over the cost of living – a relative rarity in a country that saw student protests between 2011 and 2013 gain global attention, but has otherwise experienced decades of social and economic stability, buoyed by strong economic growth.

The more recent protests were initially sparked by a rise in the cost of public transport in capital city Santiago, and spread throughout the country to include grievances such as police brutality, before the covid-19 pandemic forced protesters to stay home.

To some extent, that has given Chile the opportunity to take stock of the situation, carry out the referendum, and get to the Constitutional Convention elections with minimal turmoil – something of a silver-lining amidst the shock of the pandemic.

In that context, it is worth examining what the new constitution might mean for those doing business in Chile, after first considering the conditions for doing business in Chile over recent decades.

Chile: Decades as a Beacon of Free Trade

Since emerging as a pioneer of free-market economics in the 1970s and 1980s, Chile has positioned itself as a global leader in promoting free trade, and the country maintains an extensive array of free trade agreements (FTAs), both in the form of bilateral agreements, and via regional associations. One such association is the Pacific Alliance, in which Chile is joined by Colombia, Mexico, and Peru, with Canada, Costa Rica, Panama, and Singapore among a list of possible candidates for expanded membership.

Chile has also struck FTAs with the European Union, while an upcoming Chile-Paraguay FTA will mean the country has such agreements in place with every member of the Southern Common Market (Mercosur) – another regional economic association that also includes Argentina, Brazil, and Uruguay.

The country’s experiment with free-market economics coincided with both gross domestic product (GDP) and prosperity as measured by gross national income (GNI) steadily rising during the 1980s and 1990s, and growing exponentially in the 2000s following a brief dip in the late 90s.

Today, as well as its status as a business-friendly beacon of free-trade, Chile scored highest among all Latin American countries on the United Nations’ 2020 Human Development Index, appearing among the top 45 countries in the world and displaying greater levels of development than some European countries.

Chile is also a regional leader in education provision, with the greatest educational coverage in Latin America, while it also enjoys some of the lowest levels of violent crime in Latin America and the Caribbean. In 2019, capital city Santiago had a homicide rate lower than dozens of major U.S. cities.

Nevertheless, social tensions obviously exist, and gave rise to both the protests that ended in early 2020, and the resulting vote for a new constitution. While the expected mid- to long- term effects of the new constitution on business are of most interest, that vote also had an initial calming effect, that is also worth noting.

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An Initial Sense of Stability

The referendum result undoubtedly eased many tensions, as those who had mobilized in protest were offered the opportunity to bring about the change they craved. Obviously much will depend on the work of the Constitutional Convention being able to appease those demands without encroaching on the country’s competitiveness.

However, the referendum brought about a palpable sense of calm on the ground among the people, which was also met by positive shifts in the markets. Namely, the stability of the Chilean peso and the strong price of copper – Chile’s famed primary export.

Because while the inflation of the Chilean peso had already begun to decline once the pandemic ended the protests – having been climbing since the unrest began in late 2019 – the referendum result saw the peso returned to a U.S. dollar exchange rate similar to that seen before the protests.

Meanwhile, over the course of 2020 global copper prices reached a seven-year high, with the trajectory looking like it could challenge a 70-year high set in 2011, during Latin America’s most recent commodity boom.

Those prices were arguably boosted by the ability of Asian countries – especially China, which consumes three quarter of global copper supplies – to effectively deal with the pandemic, and begin to leave lockdowns while much of the world was closing down.

There are few conditions more important to inspiring investor confidence than stability, and with the referendum and market dynamics offering just that, in early 2021 Chile was identified as the number one country in Latin America for investment potential by independent US think tank the Milken Institute.

What to Expect from the New Constitution

Outlining expectations is difficult while the composition of the Constitutional Convention remains unclear. However, based on results from recent elections, it reasonably can be assumed that the Convention elected will reflect a broad political spectrum.

The 2017 general election saw the coalition of current President Sebastian Piñera achieve one of the best showings for conservatives in recent years, while even the worst electoral showing for a conservative candidate over the past 25 years (in 2013) saw them win close to 40 percent of the vote in the presidential runoff election.

With business-friendly candidates guaranteed to be participating in the Convention, strong voices will be heard promoting the major gains Chile has made on the international stage over recent decades, thanks to its pro-investment and pro-free trade approach.

As such, while demands to assuage the social grievances that led to the unrest in late-2019 will have to be met, it is unlikely that Chile will steer itself onto a self-harming path in which much of the good work building up Chile’s reputation on the global stage is undone.

Given Chile’s status as a hub for entrepreneurship, bolstered by ingrained cultural norms in favor of business risk, strong government policy, and well-developed infrastructure, it seems reasonable to expect that provision will be made to continue its promotion in the country.

Meanwhile, the services sector represents almost 60 percent of Chile’s GDP, and many of the likes of legal services, accounting, and tax advisory are closely related to doing business.

So while provisions will be made to combat social tensions and offer more of the benefits of Chile’s strong economic performance to the socially excluded, the Convention will have to understand that it cannot gamble with the prosperity the country has already achieved.

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Conclusions

Today Chile stands as one of the most prosperous, educated, and secure countries in Latin America and the Caribbean, thanks in no small part to the faith it has placed in promoting ease of business and free trade.

While it is too soon to say with certainty what the new constitution will mean for business in Chile, a damaging new approach that sidelines business interests is highly unlikely.

Because while the pandemic has acted as a pressure valve to ease some of the social tension seen beforehand, Chile’s strong showing in securing and dispensing vaccinations will also demonstrate the country’s ability to compete with some of the most developed nations in the world.

Chile’s Constitutional Convention will understand that competitiveness on the global stage is key to long-term prosperity, and meeting the demands of the socially excluded is achievable on a long-term basis in a prosperous and competitive country.

Craig’s bio

Craig Dempsey is the co-founder and chief executive officer of Biz Latin Hub Group, an organization dedicated to assisting investors in Latin America and the Caribbean, including through recruitment and payroll outsourcing. Craig holds a degree in mechanical engineering, a master’s degree in project management, and other certifications covering logistics, personal management, and government administration. Craig is an Australian military veteran and has been deployed overseas on numerous occasions. He is also a former mining executive with experience in Australia, Canada, Colombia, and Peru. 

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