What is significant about the story of Chile? International managers will often speak/ nego with government officials trained in economics Managers must be able to understand the jargon Marketers proposing large projects to governments must be certain they are economically sound If managers understand economic concepts/ international trade concepts/economic development concepts, they will be better prepared to manage strategically!
Adam Smith: A Scot and a moral philosopher and a pioneering political economist…wrote the “Wealth of Nations” (1776)
David Ricardo in 1817 argued (and proved economically) that even though a nation had an “absolute advantage” over another country in producing two different goods, that using comparative advantage to produce one…… a “win/win” situation….
Note: Outsourcing services to companies in other countries Is a process known as “offshoring”
Note: “Factor endowment” can not always be considered due to government subsidies programs, tax credit programs, legislated minimum wages & benefits (which can force the cost of labor to rise to a point greater than the value of the product that many workers can produce)
Note: countries like Australia, with a lot of land, export land-intensive products
The Japanese Government has traditionally spent trillions of Yen to push the Yen down vis-à-vis the US $ and the Euro. They keep the Yen artificially weak to reduce competitive pressures from Europe and USA..Hence, they can export more and import less
China has resisted all efforts to revalue their currency (Yuan). They simply have not allowed the Yuan to appreciate in value, thus making/helping Chinese companies have strong cost-competitiveness.
-China has strong economic growth
- China has a large trade surplus
Argentina pegged the Peso years ago to the US$. Financial stability ensued but exports were too costly-recession occurred…. In 2002 they stopped the peg and devalued the Peso ( 1 US$ to .27cents) Imports were costly but exports started to grow!
Consider also the Free-Market reforms in Chile………..
Salvador Allende: President 1970-1973 Military coup (September) the economy was in shambles
-High national debt
-Government highly involved in economy
- high duties on imports
- huge subsides to select industries
New Government: Selected Group of New Economist from the University of Chicago “The Chicago Boys” were free market advocates( influenced by Milton Friedman
“ Chicago Boys” proposed programs based on the Theory of Comparative Advantage which immediately reduced import duties to 10% from 1000%. All other import barriers were completely eliminated. Capital equipment could now be imported which encouraged “business investment”
Bottom line: A “big” correction in the economy and industries followed
-Appliance Industry almost disappeared
-The electronics industry basically vanished
-Automobile Assembly plants closed
Those are products we should import. We have better opportunities for products based on our farm products, our timberlands, our fisheries and other natural resources that we should be making because they give us a “natural advantage” over other countries
It took time but by 2006 Annual growth >6%
Inflation lowered and standard of living increased
Chile has signed free trade arrangements with several nations and the E.U, Mercosur, The USA and Canada