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DE RUEHSG #1565/01 2682111
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P 252111Z SEP 07
FM AMEMBASSY SANTIAGO
TO SECSTATE WASHDC PRIORITY 2212

UNCLAS SANTIAGO 001565 
 
SIPDIS 
 
SIPDIS 
 
FOR WHA/BSC - KMOSS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD ENRG PGOV SOCI CI
SUBJECT: SOUTHERN CHILE -- GLOBAL CHALLENGES OUTSIDE OF 
SANTIAGO 
 
REF: SANTIAGO 1404 
 
¶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 
 
SIPDIS 
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. 
 
Comment 
------- 
 
¶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 
ball. 
URBAN