Q&A: Chile's Socialist Leader Is Betting on the New Economy (extended)

President Lagos talks about how to keep Chile on track

Ricardo Lagos, the first Socialist to rule Chile since the 1973 military overthrow of Salvador Allende, recently completed his first year in office, amid growing concerns that the much-vaunted economic "miracle" is losing some of its luster. Lagos, 63, who holds a doctorate in economics from Duke University, says Chile, which led Latin American nations in adopting free-market reforms two decades ago, must now bet big on attracting high-tech industries. He's also pushing hard to seal a free-trade agreement with the U.S.

On Mar. 19 Lagos sat down with BusinessWeek's Mexico bureau chief Geri Smith and Chile correspondent Louise Egan in his office at La Moneda, the presidential palace, to discuss his plans for what remains of his six-year term. The following is an extended transcript of their hour-long conversation.

Q: The economy is set to grow by 5% or more in 2001. But unemployment is running at above 8%, and Chileans seem to feel that the best is behind them. Why's that?


We had a strong recession with the Asian crisis. But in 2000, we came out of the crisis with 5.4% growth, which isn't bad. The bulk of the 2000 growth was in the export sector. This is the most open economy there is. Exports plus imports total more than 50% of gross domestic product. If the U.S. economy slows this year, if Europe is slowing -- and everyone knows what's happening in Japan -- this could affect our growth a bit. The important thing is that we're the country with the most solid economic underpinnings in Latin America.

I've committed to having a 1% fiscal surplus in the six years of my government. Last year, we had inflation of 4.4% to 4.5%, and if you take out oil, it was 3%. We have very low tariffs: This year they're 8%, and in 2003, they'll fall to 6%. Finally, of the 50 largest companies in Chile in 2000, 72% of them increased their profits or were able to reverse the losses they'd had a year earlier. I believe we've done things well from a fiscal point of view.

Q: What can you do to inject new dynamism into the economy?


We have to help the private sector find new niches of specialization. Computer software and the Internet are one area. Chile has a very high educational level of 11 years of average schooling. And we have an excellent telecommunications infrastructure. When you put those two factors together, you can get ahead in the New Economy. I believe Chile has to make a strong bet on that. We're a small country, and we're very far away from the rest of the world. But in this New Economy, it doesn't matter if you're far away.

Q: Chile was the first Latin American country to embrace free-market reforms. What can you to to ensure that it stays ahead of the pack?


One of the most important things is to work on a free-trade agreement with the U.S. Our trade with the U.S. accounts for just 22% of our total commerce. Having a free-trade agreement with the U.S. will help not only with the flow of goods but also of investment, technology, and information. We also have to reform the state to remove the fat that still remains. Our bureaucracy is slow and cumbersome. I've proposed that we create an Internet portal so that the government and private sector can jointly make purchases internationally. There are efficiencies that we can gain through technology.

Q: Yet Chileans don't seem to share your optimism. Some say the country is suffering a "psychological recession" after having grown accustomed to high growth for a decade.


We're moving in the right direction. We have a [fiscal] surplus of 1% of gross domestic product, which is something few European countries have. We have moved ahead on market opening and social investment. Last year, we grew 5.4%, yet we had fewer jobs than before. What's negative is the unemployment. What's positive is we've had an enormous increase in labor productivity. This is what permits us to be competitive.

Q: What do you plan to do with Codelco, the state-run copper-mining company?


I'm not certain that privatizing Codelco would be the best thing for Chile. What we have to do is maximize Codelco's knowhow. It has to become international, doing joint ventures with private companies outside the country and within Chile. The five divisions it has in Chile [will remain under government control]. But whether Codelco is the majority or minority partner in the businesses outside Chile depends on the business [climate] there.

Q: You met recently with Bill Gates and other high-tech entrepreneurs on a trip to the U.S. to drum up investment. What did they tell you Chile needs to do to make it attractive for high-tech investment?


I tried to tell them that there's a small country that I want to see on their [world] map that has high educational levels, an excellent telecommunications infrastructure, and is called Chile. We're opening a small [promotional] office in Silicon Valley, and we'll send our best young people there.

Q: How important to Chile is the Free Trade Area of the Americas, which is being negotiated [by 34 countries of the Americas and the Caribbean]?


Chile's trade is regionally balanced, with around 30% with Europe, 25% to Asia, 20% to North America, and around 20% to 25% with Mercosur. Exports account for one-fourth of our GDP, compared to just 10% in Argentina and 8% in Brazil. Chile's policy is to have free-trade agreements with as many countries as possible. We already paid a tremendous human price for lowering tariffs, so we want to take advantage of opening trade further with the U.S., Europe, and the APEC countries.

Q: Have you been disappointed with your relationship with Mercosur, the customs union joining Brazil, Argentina, Uruguay, and Paraguay?


Mercosur is much more than free trade. Mercosur must be an embryo of what the European Union is today. We have to move toward a convergence of macroeconomic policies.... We should have a mechanism for conflict resolution, instead of what we have now, which is the Presidents calling each other by telephone to complain. We could have certain common labor, investment, and educational policies. We [in Chile] have to have one foot in free commerce with the rest of the world and one foot in regional integration. That's why free trade with the U.S. is very important to us.

Q: But the U.S. kept Chile waiting for years to start negotiating a free-trade pact.


I understand the political problems involved. Chile is ready to sign agreements. Before going to Quebec [for the Summit of the Americas in April], I'm going on an official visit to France, and I'll visit [the rest of] Europe afterwards, because we're pushing for a free-trade agreement with Europe as well.

Q: What does it mean to be a Socialist in Chile today?


The last Socialist presidency ended in a military coup. That was a failure.... Today I am President of a coalition that's much broader than socialism. The parties created the coalition during the dictatorship to fight to restablish democracy. And then we realized we should continue together to carry out the transition. To implement the changes that the country needed, it was better to have a broad consensus.... We learned that there's no "good" or "bad" economic policy. We learned that it's just as dangerous for democracy that a general stage a coup as it is to have a populist Finance Minister. Both things are dangerous. You have to have healthy macroeconomic policies, period.

Q: Back in the days of the dictatorship, did you ever imagine you'd see General Augusto Pinochet facing trial?


No, certainly not. We have to have a political system where any person, whether he's important, humble, or powerful, can be tried. What we've done this past year has not been easy, but it has been easier that I imagined it would be. Our institutions understood that it was in Chile's interest for the executive branch to govern, the legislature to pass laws, and the judicial branch to impart justice. What's more important than the case of General Pinochet is that Chilean society has dared to face the truth of what happened, and that was tough.

It was easier for people to say they didn't know or didn't believe [what happened]. But when you have a document from the armed forces saying that Chileans were thrown into the sea [to their deaths], that's very strong. When they handed me the document in this very room, and I began to read it, I knew I was going to have to address the nation. I respect...the armed forces for daring to say what they said -- that wasn't easy for them, either. So, I received a delegation of relatives of detained and missing people...and then discreetly left the room so that my advisers could tell them the names of their parents, who had been [tossed into] the ocean. Can you imagine?

We have taken a tremendous step forward on this. There's no doubt in my mind that when the history books are written about this period, the year 2000 will be very important because Chile demonstrated two things: that its judicial branch works and that [there has been some] recognition of the truth. I know that some people in the business world have been worried about this because they feel a loyalty to General Pinochet, whose government returned to them companies expropriated by the previous government. But deep down, they have to understand that such an independent judicial branch is a guarantee for all of us.

Q: Why do you think Chileans are so pessimistic these days, then?


I am optimistic because we were able to do all this [the human-rights trials] and at the same time keep the economy on track and bounce back from a recession. I think things are going well. I really don't think there's any reason for pessimism. We're not trying to look away from the problems, but I think we've advanced. Ten years from now, when Chile celebrates 200 years of independence, it should be a developed country with more social justice.

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