# **1. SMALL AND MEDIUM ENTERPRISES AND THE CHILEAN ECONOMY**

Chile’s extraordinary record of economic growth is based on nearly two decades of fiscal reform and monetary discipline. Between 1984 and 1998, the annual gross domestic product (GDP) growth rate ranged from 5 percent to 12 percent, with an average of 7.7 percent. Even in the face of external shocks between 1999 and 2002, Chile maintained a positive growth rate, (except 1999). As Figure 1.1 shows, Chile’s growth rate outpaced the average of the high-income member countries of the Organization for Economic Cooperation and Development (OECD). Such strong growth is the result of a strong fiscal and monetary discipline, a relatively well developed financial system, modern institutions, and a supportive business environment.

First and second generation reforms focused on export facilitation, competition policies and regulations, the privatization of the pension, health and education systems, using social policies to target extreme poverty and a reduction of the role of the State in the economy. These reforms have made Chile an attractive country for international financial markets, and a reference point for successful structural reform for the region. The annual growth rate of foreign direct investment (FDI) has remained above 4 percent since 1994, peaking at 12 percent in 1999. Chile’s FDI outpaced the Latin American average, and the averages of high and upper middle-income OECD member countries. Further, Chile’s ratio of exports to GDP has grown by up to 30 percent per year (see Figures 1.1 and 1.2).<sup>1</sup> Chile’s remarkable economic growth has led to significant reductions in poverty and improvements in social indicators. Income poverty dropped by more than half, from about 40 percent of the population in 1987 to 17 percent in 1998. By the end of the 1990s, only 4 percent of the total population was indigent. Life expectancy and infant mortality rates had reached OECD levels, and participation in primary education was almost universal. A recent World Bank report on poverty in Chile confirmed that economic growth was the main determinant of poverty reduction, responsible for 73 percent of the observed decline between 1987 and 1998.<sup>2</sup> However, this openness to the international economy left Chile vulnerable to external events. Between 1998 and 2002, when a series of external shocks and a recession struck the region, the country’s growth fell to an annual average of 2.6 percent. This was a dramatic decline from the 7.6 percent annual average growth achieved between 1993 and 1997. This situation reached a critical level in 1999, when the growth rate registered a negative level (-1.1 percent) for the first time since 1983. Likewise, the unemployment rate reached 9.9 percent, a sharp increase from the 5.3 percent annual average recorded between 1990 and 1998. This vulnerability has led Chile to engage in further analysis and a third generation of reform.

> 1Closing the Gap in Education and Technology, World Bank Latin American and Caribbean Series, de Ferranti, et. al., 2003; OECD (2003) Economic Assessment of Chile. Economic Policy Seminar. Draft, Economic Assessment by the Secretariat. A large share of Chilean exports are natural resource-based products, such as mining, foods and other agriculture and livestock products. These categories amount to 80 percent of total exports in 2000 (World Development Indicators, World Bank). 2 World Bank (2001); World Bank, Poverty and Income Distribution in High Growth Economy. Latin America and the Caribbean Region (2001).  Chile New Economy, World Bank (2004).