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Chile
Index
After assuming power in November 1970, the UP rapidly
began to
implement its program. In the area of structural reforms,
two basic
measures were immediately begun. First, agrarian reform
was greatly
intensified, and a large number of farms was expropriated.
Second,
the government proposed to change the constitution in
order to
nationalize the large copper mines, which were jointly
owned by
large United States firms and the Chilean state.
Government expenditures expanded greatly, and in 1971
real
salaries and wages in the public sector increased 48
percent, on
average. Salaries in the private sector grew at
approximately the
same rate. In the first two quarters of 1971,
manufacturing output
increased 6.2 percent and 10.6 percent compared with the
same
periods in the previous year. Manufacturing sales grew at
even
faster rates: 12 percent during the first quarter and 11
percent
during the second quarter. Overall, the behavior of the
economy in
1971 seemed to vindicate the UP economists: real GDP grew
at 7.7
percent, average real wages increased by 17 percent,
aggregate
consumption grew at a real rate of 13.2 percent, and the
rate of
unemployment dipped below 4 percent. Also, and more
important for
the UP political leaders, income distribution improved
significantly. In 1971 labor's share of GDP reached 61.7
percent,
almost ten percentage points higher than in 1970. All of
this
created a sense of euphoria in the government.
On June 11, 1971, Congress approved unanimously an
amendment to
the constitution nationalizing large copper mines. As a
result,
reform of the banking system and large manufacturing firms
was more
difficult because the government lacked the institutional
means to
implement nationalization. Initially, this obstacle was
alleviated
because the government purchased blocks of shares,
especially bank
shares, at high prices. These share acquisitions were
complemented
by a process of requisition or expropriation of
foreign-owned
companies based on an old, and until then forgotten,
decree law
promulgated during Marmaduke Grove Vallejo's short-lived
Socialist
Republic of 1932.
All did not remain well in the economy in 1971. The
UP's
macroeconomic policies were rapidly generating a situation
of
repressed inflation. The high growth rate of GDP was
largely the
result of an almost 40 percent increase in imports of
intermediate
goods. The fiscal deficit had jumped from 2 percent of GDP
in 1970
to almost 11 percent in 1971. The rate at which the money
supply
grew exceeded 100 percent in 1971. As a result, the stock
of
international reserves inherited by the Allende government
was
reduced by more than one-half in that year alone. A rapid
reduction
of inventories was another important factor in the
expansion of
consumption.
By the end of 1971, the mounting inflationary pressures
had
become evident. The economy was experiencing the
consequences of an
aggregate demand for goods and services well above the
aggregate
supply at current prices. This imbalance was aggravated by
a series
of labor disputes in many large establishments that
resulted in the
takeover of those firms by their workers. In fact, this
procedure
became the institutionalized way in which the government
seized a
large number of firms.
During 1972 the macroeconomic problems continued to
mount.
Inflation surpassed 200 percent, and the fiscal deficit
surpassed
13 percent of GDP. Domestic credit to the public sector
grew at
almost 300 percent, and international reserves dipped
below US$77
million.
The underground economy grew as more and more
activities moved
out of the official economy. As a result, more and more
sources of
tax revenues disappeared. A vicious cycle began: repressed
inflation encouraged the informal economy, thus reducing
tax
revenues and leading to higher deficits and even higher
inflation.
In 1972 two stabilization programs were implemented, both
unsuccessfully.
When evaluating the problems faced by the economy, UP
economists generally held the view that the authorities
had failed
to impose appropriate controls in implementing Allende's
program.
This view guided the first, rather weak, attempt at
stabilizing the
economy that was launched in February 1972. Price controls
were the
main ingredient of the program. By mid-1972 it was
apparent that
the February stabilization program was a failure. The
underground
economy was now widespread, output had begun to fall, open
inflation reached an annual rate of 70 percent in the
second
quarter, foreign-exchange reserves were very low, and the
blackmarket value of the currency was falling rapidly.
Parliamentary
elections scheduled for March 1973 made the situation
particularly
difficult for the UP. In August 1972, a new stabilization
program
was launched under the political monitoring of the PCCh.
This time,
not only prices were officially controlled, but the
distribution
channels were taken over by the government, in an attempt
to reduce
the extent of the black market.
Unlike the previous plan, the August 1972 stabilization
program
was based on a massive devaluation of the escudo (for
value of the
escudo--see Glossary).
The government expected that the
result
would be an easing of the mounting pressures on the
balance of
payments. The program also called for two basic measures
to contain
fiscal pressures. First, nationalized firms were
authorized to
increase prices as a means of reducing the financing
requirements
of the newly formed nationalized sector. Second, the
program called
for a massive increase in production, especially in the
recently
nationalized manufacturing and agriculture sectors (large
manufacturing firms and farms had been expropriated
arbitrarily).
The devaluation and a large number of price increases
resulted in
annualized inflation rates of 22.7 percent in August and
22.2
percent in September.
In mid-August 1972, the government announced that it
had
drafted a new wage policy based on an increase in publicand
private-sector wages by a proportion equal to the
accumulated rate
of inflation between January and September. In addition,
the new
policy called for more frequent wage adjustments.
During the first quarter of 1973, Chile's economic
problems
became extremely serious. Inflation reached an annual rate
of more
than 120 percent, industrial output declined by almost 6
percent,
and foreign-exchange reserves held by the Central Bank
were barely
above US$40 million. The black market by then covered a
widening
range of transactions in foreign exchange. The fiscal
deficit
continued to climb as a result of spiraling expenditures
and of
rapidly disappearing sources of taxation. For that year,
the fiscal
deficit ended up exceeding 23 percent of GDP.
The depth of the economic crisis seriously affected the
middle
class, and relations between the UP government and the
political
opposition became increasingly confrontational. On
September 11,
1973, the UP regime came to a sudden and shocking end with
a
military coup and President Allende's suicide.
When the military took over, the country was divided
politically, and the economy was a shambles. Inflation was
galloping, and relative price distortions, stemming mainly
from
massive price controls, were endemic. In addition,
black-market
activities were rampant, real wages had dropped
drastically, the
economic prospects of the middle class had darkened, the
external
sector was facing a serious crisis, production and
investment were
falling steeply, and government finances were completely
out of
hand.
Data as of March 1994
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