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Chilean expertise on the world stage

Article - September 8, 2011
From its national airline to flagship shopping centers to copper mining, examples of success span the range of Chile’s commerce and industry... Even the nation’s unique pension system has found international acclaim and has been emulated, either in whole or in part, by other countries
In 1981, Chile replaced its flawed and bankrupt pay-as-you-go retirement system with  the AFP (Pension Fund Administrator) system. Instead of paying social security taxes and hoping the government will deliver the promised retirement payments, Chilean workers now make a mandatory contribution of 10% of their salary (up to an established maximum) to one of six AFPs. Workers may also make additional voluntary contributions, within limits.

The pension fund administrators are privately owned and their investment policies and operations are closely regulated and supervised by the government.
On reaching retirement age, the accumulated lump sum is converted into a pension (most commonly by the acquisition of an annuity from an insurance company of the individual’s choice).

The architect of the privatized system, which has been hailed as a model for the world, was Dr. Jose Piñera, the then Minister of Labor and Social Security of Chile. Dr. Piñera, a Harvard and University of Chicago-trained economist and the elder brother of President Sebastian Piñera, is a distinguished senior fellow of the Cato Institute and president of the International Center for Pension Reform. The Wall Street Journal has referred to Dr. Piñera as the “pied piper of global pension reform”, advising many governments on the subject.

Chile’s pioneering system has been shown to act as an agent to spur economic growth, as pensions depend on workers’ own efforts, and help Chilean companies expand by providing fresh capital.

“The key to the development that Chile has experienced is based on a system of private savings through the pension funds, which has given companies access to sources of very long-term financing,” says Andres Olivos, executive vice president of Parque Arauco, Chile’s premier shopping mall developer.

Parque Arauco’s shopping centers are innovative landmarks that have positioned the company as an industry yardstick. “The key is to provide shopping experiences that are different and better, because at the end of the day, retail offerings are more or less the same everywhere. There are small differences, but 90% of the retail offer is relatively similar,” says Mr. Olivos, who adds that the company enhances shoppers’ experiences by creating retail, social and entertainment venues where people want to spend time.

The company’s first center, Parque Arauco Kennedy, opened its doors in 1982, adding the country’s first food court in 1989. Since then, more developments have been added to its portfolio in Chile, Argentina and Peru. Parque Arauco currently operates around 6.5 million square feet of gross leasable area (GLA), and it aims to double this by 2014.

“We have been able to diversify our portfolio by investing in project developments in different countries, becoming a shopping center operator with a pan-regional presence,” says Mr. Olivos.

Mining has for decades been an economic mainstay of Chile. Codelco is currently the largest copper producing company on Earth, boasting close to 20% of the world’s reserves. In 2009, Codelco produced 1.78 million metric tons of refined copper – equivalent to 11% of global production.

Although the state-owned copper mining company was established in 1976 from the foreign-owned copper companies that were nationalized five years prior, today the mining sector is open and the government strongly supports foreign investment. In fact in recent years the Ministry of Mining has modified the mining industry laws and regulations, thus creating a more favorable business climate.

Another success story that spans the region is Chile’s national carrier, LAN Airlines. Formerly LAN Chile, it operates in Chile, Argentina, Ecuador, Peru and Colombia, and is part of the global alliance oneworld. It is also currently merging with Brazil’s TAM to create LATAM, Latin America’s largest airline and one of the 10 largest in the world.