Cablegate: Southern Chile -- Global Challenges Outside Of


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1. Summary. Southern Chile is known more for its natural
beauty -- lakes, volcanoes and rivers -- than for its
globally integrated economy. However, it exports everything
from timber to salmon to a large part of Chile's
manufacturing output. Businesses in the region are closely
following the sharp drop in U.S. housing starts. They are
keenly aware of the need to diversify exports to minimize an
overdependence on one export market. Concepcion is Chile's
second largest city and anchors the south as a commercial and
educational center. Further south, Valdivia is a product of
German immigration with a strong independent streak, but
finds itself struggling to take advantage of Chile's web of
trade agreements. It is also soon to become the capital of a
new region and, by its own estimates, will immediately be
Chile's poorest. End Summary.

2. Senior Econoff visited Concepcion in the Bio Bio region
and Valdivia in the Lakes Region from September 10-14 for
outreach to universities, regional government leaders and
business groups. In a series of press interviews he also
explained a new bilateral scholarship program. As reported
reftel, Secretary Spellings visited Chile in August to
promote the program for 100 Chileans annually to earn U.S.
doctorates in math and science. In a first, this program
does not require English as a pre-requisite, offering instead
an intense English language course up front. This program
offers a unique opportunity for Chileans in the regions, who
are less likely to have had a private education that includes
a strong English component. However, as is often the case in
Chile, communication between Santiago and the regions remains
weak. Despite Spellings' efforts in Santiago, not a single
person in Concepcion or Valdivia was aware of the new
scholarships. Through a half dozen press interviews and
individual meetings, the visit made good progress in
disseminating information on the new scholarships.

The Old Frontier

3. For hundreds of years, the Bio Bio river was the frontier
between the Spanish Empire (and later Chile) and the Native
American Mapuche Indian civilization. Santiago was founded
in 1541 on a rocky island in the middle of a raging river for
safety against Mapuche attacks. In the south, Concepcion was
founded in 1550 and barely survived the brilliantly-organized
Mapuches uprising of November 1599. After studying Spanish
battle techniques, the Mapuches effectively ejected
Spain/Chile from the south for nearly 300 years. For most of
those three centuries (until the Chilean military began to
integrate the area in the 1870s), the northern bank of the
Bio Bio river on which Concepcion sits was the frontier.
Eventually, the 300-year War of the Araunco ended with the
inclusion of Mapuche areas into modern Chile. However,
resistance is not over. Numerous interlocutors spoke of
Mapuche activists burning library books (especially
colonial-era books) and summer homes on spiritually important
lakes. While the Mapuches may have lost the war, they have
not given up entirely.

The Countercyclical Region

4. Concepcion is Chile's second city and the capital of the
Bio Bio region, which has nearly 2 million inhabitants. With
the population of Greater Conception close to 700,000, it is
the commercial and educational epicenter of southern Chile.
According to the city's chamber of commerce, the region's
economy traditionally moves out of cycle with the rest of
Chile. In the words of the chamber's president, "I don't
know whether we're leading or following, but we're always
different." The numbers bear out his observation. The Bio
Bio region is growing at a strong 8.4 percent this year,
while Chile's national growth has vacillated between four and
six percent. The other side of this countercyclical coin is
that the unemployment figures in Bio Bio are higher than the
national average. While the national unemployment average in
Chile is finally returning to pre-Asian Financial Crisis
figures of around seven percent, unemployment in the south,
is at 8.4 percent.

5. The Bio Bio region has seen some local industry, such as
coal mining and textiles, fold in the face of foreign
competition. However, the region has become adept at
exporting its primary resources -- fish, forestry products
and agricultural goods. Those three sectors make up 75
percent of the region's exports. The U.S. is the region's
main commercial partner, with 25 percent of total exports
going there. However, the recent sharp downturn in housing
starts in the U.S. has southern Chile worried. According to

Concepcion's Chamber of Commerce, forestry product exports to
the U.S. are down over 20 percent so far this year. Business
leaders expect the drop to grow more severe. Regional
business leaders say the housing crisis in the U.S has taught
them that the region must further diversify its economy.
However, they add that Chile's conservative streak is even
more pronounced in the regions and developing new business
sectors is much easier said than done.

A University Town

6. Concepcion and the Bio Bio region have a strong
educational background to draw upon to develop tomorrow's
business leaders and sectors. Concepcion alone has a dozen
major universities, with nearly 40,000 students. According
to faculty, however, the challenges in educating these
students are nearly as diverse as they campuses they attend.
Professors at several universities spoke of how poorly
prepared the students coming out of the public education
system are for university work. As opposed to Santiago,
where there is a proliferation of private secondary schools,
most university students in Concepcion are publicly educated.
Faculty say that the majority of them cannot do basic math
(algebra level) or consistently read Spanish for
comprehension when they enter university. While these
students are not technically illiterate, they require at
least several semesters of remedial work before they can
properly begin their university studies.

7. Yet at the same time, Concepcion boasts some of Chile's
most advanced research centers. Catholic University of
Concepcion has a biotech center that is at the cutting edge
of Chile's search for energy independence. The biotech
center is working on biofuels based on the wide spectrum of
forestry products native to the region. In the traditional
May 21 speech to Congress, President Bachelet laid out the
importance of biofuels to Chile's economic future. The
center's director acknowledged that government-to-government
cooperation will be key to Chile's success in this area. He
is hopeful the U.S. will enter into a more strategic
partnership with Chile on energy. At the university level,
Catholic University Concepcion has set up a dual degree
system with the University of North Carolina. The center's
director is optimistic Chile will make progress on energy
independence -- the extensive research being done in
Concepcion certainly raises the possibility of success.

The South Grows a Region

8. Further south along Chile's coast sits Valdivia, a small
city known primarily as a center of German immigration. It
also suffered the world's largest recorded earthquake -- in
1960 at 9.5 on Richter scale. The earthquake, ensuing
tsunami and massive flooding a month later, caused by rivers

previously blocked by the earthquake, destroyed the city.
Today, greater Valdivia has about 140,000 inhabitants, with
60,000 of them in the city proper. As of October 1, Valdivia
will be the capital of a new Chilean region (the equivalent
of a state or province). According to Valdivia's Chamber of
Commerce, the new Region de los Rios will immediately be
Chile's poorest. The region will have a total population of
only 200,000 and should score the lowest nationally in GDP,
per capita income and employment.

9. On the plus side, the Rios region will have increased
influence over a budget that can be more closely tied to
local needs. However, the economic challenges will be larger
than ever. Much like the Bio Bio region but on a much
smaller scale, Valdivia and environs depend on forestry
products, agriculture and tourism. The business sector is
small, with only 50 members in the Chamber of Commerce. It
is clearly not accustomed to thinking internationally, with
limited knowledge of the possibilities Chile's web of trade
agreements offer. Despite Chile's trade agreements with 56
countries and the forward-leaning business approach seen in
Concepcion, in Valdivia the business sector remains decidedly
inactive. With vague plans to increase tourism, Valdivia's
civic and business leaders seem oblivious to the ubiquitous
litter around the city (known in Chile as the Pearl of the
South), which certainly does little to make it an attractive
tourist destination.


10. It is not surprising that some areas of Chile's south are
more successful than others. A large city like Concepcion or
the Bio Bio region has the size to develop the industries to
tie itself into a bigger market like the U.S. Concepcion has

the critical mass of business, academics and government
leaders who are all pulling in the same direction. These
leaders showed great enthusiasm not only for the new Ph.D.
scholarships in the U.S. but also for the value of learning
English in general. They are busy pushing the development of
Chile's own Semester Abroad program, in which the GOC hopes
that every university student will spend at least one
semester in an English-speaking country. On the flip side,
the housing crisis in the U.S. is driving home for them how
international trade offers not only new opportunities but
exposes new vulnerabilities too. Smaller cities like
Valdivia and the new, poor region it will lead are much
further behind in this whole game. As much as Chile has
traditionally existed in two parts -- Santiago and the rest
of the country -- increasingly the provinces are dividing
themselves again between those who are learning to play the
global game and those waiting for someone to throw them the

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