Chile: A Changed Jungle for the Latin American Tiger (a)

23 Pages Posted: 21 Oct 2008

See all articles by Wei Li

Wei Li

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Jose Joaquin Matte

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

This case has been used since 2004 in Darden's first-year Global Economies and Markets MBA course in the module on exchange regimes and financial crises. In the early 1990s, in response to massive foreign capital inflows, the Chilean government restricted the flow of capital into the country in order to achieve a competitive and stable exchange rate and to control inflation. By the late 1990s, with the onset of the financial crises in emerging-market economies, investors began to pull their capital out of Chile and other emerging markets indiscriminately. This sudden reversal of capital flows was threatening to ignite a balance-of-payments crisis in Chile. The government must decide what to do. This case also contains information on the development experience of Chile, in particular, on the legacy of General Augusto Pinochet and the economic policies of the "Chicago boys." This case may also be used with the B case, "Chile: A Jungle for the Latin American Tiger (B)" (UVA-BP-0462), which gives an update on the policies of the Chilean central bank up to 1999 and discusses the debate on the economic consequences of the policies. A teaching note (UVA-BP-0458TN) is available. An abridged version of this case exists: "Chile: A Jungle for the Latin American Tiger (Abridged)" (UVA-BP-0458). It focuses on the economic problems Chile faced from the early 1990s.

Excerpt

UVA-BP-0461

CHILE: A CHANGED JUNGLE FOR THE LATIN AMERICAN TIGER (A)

In June 1998, Carlos Massad, president of Banco Central de Chile (the central bank of Chile), was evaluating the Chilean economic situation. After a decade of spectacular economic performance with an average annual growth rate of more than 7%, Chile had earned the name “Latin American Tiger” in reference to the fast-growing tiger economies in East Asia (Hong Kong, Singapore, South Korea, and Taiwan). (See Exhibits 1 and 2 for a map of Chile and a summary of Chile's economic indicators.) Somewhat ironically, the 1997 crisis plaguing those same namesake tigers, which resulted in sharp currency devaluations and severe economic contractions in East Asia, had greatly increased the risk premium for investing in emerging markets. Investors, who once willingly poured billions of dollars into emerging markets, were now avoiding them indiscriminately. They were choosing instead to park their money in safe havens such as the United States. This sudden withdrawal or stopping of foreign investment caused severe economic difficulties in other emerging economies, including Chile, and threatened to ignite a new round of financial crises. Perhaps most worrisome, the next round of crises could be much closer to home. (See Exhibit 3 for Chile's balance of payments.)

. . .

Keywords: exchange rate risk, international trade, emerging markets, monetary policy

Suggested Citation

Li, Wei and Matte, Jose Joaquin, Chile: A Changed Jungle for the Latin American Tiger (a). Darden Case No. UVA-BP-0461. Available at SSRN: https://ssrn.com/abstract=907946

Wei Li (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
804-243-7691 (Phone)
804-243-7681 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/li.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jose Joaquin Matte

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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