Sunday, August 1, 2010

Free Trade Makes the Grade

Last week we took a look at inspiring Colombia. Now, we focus on another South American economic success story: Chile. Located on the western side of the continent, it is a prosperous nation with a wealth of resources and a bright future. Two recent developments have really put the nation on the map: A presidential election and inclusion into a very exclusive club...

A shocking election took place on January 17th of this year. For the last two decades following the end of the Pinochet dictatorship, the center-left Concertation Party ruled. In spite of an incumbent party approval rating of 80%, a Chilean electorate voted for change and ushered in a self-made billionaire: Sebastian Pinera. A Harvard graduate, the pro free-market Pinera became wealthy primarily from two sources. First, bringing credit cards to the Chileans in the late 1970's and second, turning around the nation's beleaguered state airline (LAN) and transforming it to South America's largest carrier.

Earlier this year, Chile was invited to join the OECD (Organization for Economic Co-Operation and Development) - aligning itself with the elite and productive economic juggernauts of the world. Only the 32nd nation to be inducted, it is South America's first inclusion. To realize just how meaningful the revolution has been, in 1975, the Cato Institute Economic Freedom of the World Report had Chile ranked 71st of 72 countries. Today it ranks third. The about-face was centered on expanding free trade, tax cuts, and respect for property rights. Three decades ago, a depleted Chile had a per capita GDP of $1300. Today that number has ballooned to $15,000.

On a down note, this February 27th, a massive earthquake rattled Chile. An enormous sum of $30 billion is required to aid reconstruction. The logical response would have been stress on the stock market. To the contrary, the country and its financial markets held strong. Not at all a coincidence, in my opinion. ECH, Chile's Exchange Traded Fund, has been remarkably resilient. Other stocks to be watched are: LFL (Pinera's turnaround story) and SQM, a producer 0f plant nutrients and chemicals.

Like Colombia, Chile has demonstrated that free trade and market-friendly policies can really represent a prosperous, secular growth story. Chile recently signed more than 20 free trade pacts with 56 nations. Still, after four years, we in the U.S. are waiting for trade pacts with countries like Colombia, Panama and Korea. The benefits of open trade agreements not only improve economies, but bolster job growth. With an unemployment rate still hovering near 10%, perhaps American Congressmen can start crossing the t's and dotting the i's.

The author holds positions in FCX, AMT, AVGO

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