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Chile
Index
In colonial times, the segmentation of Chile into
latifundios (see
Glossary) left only small parcels for native American
and
mestizo (see Glossary)
villagers to cultivate. Cattle
raised on the
latifundios were a source of tallow and hides, which were
sent, via
Peru, to Spain. Wheat was Chile's principal export during
the
colonial period. From the inquilinos (peons),
indentured to
the
encomenderos
(see Glossary), or latifundio
owners, to
the merchants and encomenderos themselves, a chain
of
dependent relations ran all the way to the Spanish
metropolis
(see The
Colonial Economy
, ch. 1).
After Chile won its independence in 1818, the economy
prospered
through a combination of mercantilist and free-market
policies.
Agricultural exports, primarily wheat, were the mainstay
of the
export economy. By mid-century, however, Chile had become
one of
the world's leading producers of copper. After Chile
defeated
Bolivia and Peru in the War of the Pacific (1879-83),
nitrate mines
in areas conquered during the war became the source of
huge
revenues, which were lavished on imports, public works
projects,
education, and, less directly, the expansion of an
incipient
industrial sector
(see The
Liberal Era, 1861-91
, ch. 1).
Between
1890 and 1924, nitrate output averaged about a quarter of
GDP.
Taxes on nitrate exports accounted for about half of the
government's ordinary budget revenues from 1880 to 1920.
By 1910
Chile had established itself as one of the most prosperous
countries in Latin America.
Dependence on revenues from nitrate exports contributed
to
financial instability because the size of government
expenditures
depended on the vagaries of the export market. Indeed,
Chile was
faced with a severe domestic crisis when the nitrate
bonanza ended
abruptly during World War I as a result of the invention
of
synthetic substitutes by German scientists. Gradually,
copper
replaced nitrates as Chile's main export commodity. Using
new
technologies that made it feasible to extract copper from
lowergrade ores, United States companies bought existing
Chilean mines
for large-scale development.
Chile initially felt the impact of the
Great Depression (see
Glossary) in 1930, when GDP dropped 14 percent, mining
income
declined 27 percent, and export earnings fell 28 percent.
By 1932
GDP had shrunk to less than half of what it had been in
1929,
exacting a terrible toll in unemployment and business
failures. The
League of Nations (see
Glossary) labeled Chile the country
hardest
hit by the Great Depression because 80 percent of
government
revenue came from exports of copper and nitrates, which
were in low
demand.
Influenced profoundly by the Great Depression, many
national
leaders promoted the development of local industry in an
effort to
insulate the economy from future external shocks. After
six years
of government austerity measures, which succeeded in
reestablishing
Chile's creditworthiness, Chileans elected to office
during the
1938-58 period a succession of center and left-of-center
governments interested in promoting economic growth by
means of
government intervention.
Prompted in part by the devastating earthquake of 1939,
the
Chilean government created the Production Development
Corporation
(Corporación de Fomento de la Producción--Corfo) to
encourage with
subsidies and direct investments an ambitious program of
importsubstitution industrialization. Consequently, as in other
Latin
American countries, protectionism became an entrenched
aspect of
the Chilean economy.
Import-substitution industrialization was spurred on by
the
advent of World War II and the loss of access to many
imported
products. State enterprises in electric power, steel,
petroleum,
and other heavy industries were also created and expanded
during
the first years of the industrialization process, mostly
under the
guidance of Corfo, and the foundations of the
manufacturing sector
were set. Between 1937 and 1950, the manufacturing sector
grew at
an average yearly real rate of almost 7 percent.
Despite initially impressive rates of growth, importsubstitution industrialization did not produce a
sustainable
expansion of the manufacturing sector. With the
industrialization
process evolved an array of restrictions, controls, and
often
contradictory regulations. With time, consumer-oriented
industries
found that their markets were limited in a society where a
large
percentage of the population was poor and where many rural
inhabitants lived at the margins of the money economy. The
economic
model did not generate a viable
capital goods (see
Glossary)
industry because firms relied on imports of often outmoded
capital
and intermediate goods. Survival often depended on state
subsidies
or state protection. In fact, it was because of these
import
restrictions that many of the domestic industries were
able to
survive. For example, a number of comparative studies have
indicated that Chile had one of the highest, and more
variable,
structures of protection in the developing world. As a
consequence,
many, if not most, of the industries created under the
importsubstitution industrialization strategy were inefficient.
Also, it
has been argued that this strategy led to the use of
highly
capital-intensive
production (see Glossary), which, among
other
inefficiencies, hampered job creation. Additionally, the
importsubstitution industrialization strategy generated an
economy that
was particularly vulnerable to external shocks.
During the import-substitution industrialization
period, copper
continued to be the principal export commodity and source
of
foreign exchange, as well as an important generator of
government
revenues. The Chilean government's retained share of the
value of
copper output increased from about one-quarter in 1925 to
over
four-fifths in 1970, mainly through higher taxes. Although
protectionist policies better insulated Chile from the
occasional
shocks of world commodities markets, price shifts
continued to take
their toll.
Data as of March 1994
Survivors of the March 1985 earthquake in central Chile
stand among the ruins of their homes in the Santo Domingo area of
Santiago.
Courtesy Inter-American Development Bank
The Colonial Era to 1950
In colonial times, the segmentation of Chile into
latifundios (see
Glossary) left only small parcels for native American
and
mestizo (see Glossary)
villagers to cultivate. Cattle
raised on the
latifundios were a source of tallow and hides, which were
sent, via
Peru, to Spain. Wheat was Chile's principal export during
the
colonial period. From the inquilinos (peons),
indentured to
the
encomenderos
(see Glossary), or latifundio
owners, to
the merchants and encomenderos themselves, a chain
of
dependent relations ran all the way to the Spanish
metropolis
(see The
Colonial Economy
, ch. 1).
After Chile won its independence in 1818, the economy
prospered
through a combination of mercantilist and free-market
policies.
Agricultural exports, primarily wheat, were the mainstay
of the
export economy. By mid-century, however, Chile had become
one of
the world's leading producers of copper. After Chile
defeated
Bolivia and Peru in the War of the Pacific (1879-83),
nitrate mines
in areas conquered during the war became the source of
huge
revenues, which were lavished on imports, public works
projects,
education, and, less directly, the expansion of an
incipient
industrial sector
(see The
Liberal Era, 1861-91
, ch. 1).
Between
1890 and 1924, nitrate output averaged about a quarter of
GDP.
Taxes on nitrate exports accounted for about half of the
government's ordinary budget revenues from 1880 to 1920.
By 1910
Chile had established itself as one of the most prosperous
countries in Latin America.
Dependence on revenues from nitrate exports contributed
to
financial instability because the size of government
expenditures
depended on the vagaries of the export market. Indeed,
Chile was
faced with a severe domestic crisis when the nitrate
bonanza ended
abruptly during World War I as a result of the invention
of
synthetic substitutes by German scientists. Gradually,
copper
replaced nitrates as Chile's main export commodity. Using
new
technologies that made it feasible to extract copper from
lowergrade ores, United States companies bought existing
Chilean mines
for large-scale development.
Chile initially felt the impact of the
Great Depression (see
Glossary) in 1930, when GDP dropped 14 percent, mining
income
declined 27 percent, and export earnings fell 28 percent.
By 1932
GDP had shrunk to less than half of what it had been in
1929,
exacting a terrible toll in unemployment and business
failures. The
League of Nations (see
Glossary) labeled Chile the country
hardest
hit by the Great Depression because 80 percent of
government
revenue came from exports of copper and nitrates, which
were in low
demand.
Influenced profoundly by the Great Depression, many
national
leaders promoted the development of local industry in an
effort to
insulate the economy from future external shocks. After
six years
of government austerity measures, which succeeded in
reestablishing
Chile's creditworthiness, Chileans elected to office
during the
1938-58 period a succession of center and left-of-center
governments interested in promoting economic growth by
means of
government intervention.
Prompted in part by the devastating earthquake of 1939,
the
Chilean government created the Production Development
Corporation
(Corporación de Fomento de la Producción--Corfo) to
encourage with
subsidies and direct investments an ambitious program of
importsubstitution industrialization. Consequently, as in other
Latin
American countries, protectionism became an entrenched
aspect of
the Chilean economy.
Import-substitution industrialization was spurred on by
the
advent of World War II and the loss of access to many
imported
products. State enterprises in electric power, steel,
petroleum,
and other heavy industries were also created and expanded
during
the first years of the industrialization process, mostly
under the
guidance of Corfo, and the foundations of the
manufacturing sector
were set. Between 1937 and 1950, the manufacturing sector
grew at
an average yearly real rate of almost 7 percent.
Despite initially impressive rates of growth, importsubstitution industrialization did not produce a
sustainable
expansion of the manufacturing sector. With the
industrialization
process evolved an array of restrictions, controls, and
often
contradictory regulations. With time, consumer-oriented
industries
found that their markets were limited in a society where a
large
percentage of the population was poor and where many rural
inhabitants lived at the margins of the money economy. The
economic
model did not generate a viable
capital goods (see
Glossary)
industry because firms relied on imports of often outmoded
capital
and intermediate goods. Survival often depended on state
subsidies
or state protection. In fact, it was because of these
import
restrictions that many of the domestic industries were
able to
survive. For example, a number of comparative studies have
indicated that Chile had one of the highest, and more
variable,
structures of protection in the developing world. As a
consequence,
many, if not most, of the industries created under the
importsubstitution industrialization strategy were inefficient.
Also, it
has been argued that this strategy led to the use of
highly
capital-intensive
production (see Glossary), which, among
other
inefficiencies, hampered job creation. Additionally, the
importsubstitution industrialization strategy generated an
economy that
was particularly vulnerable to external shocks.
During the import-substitution industrialization
period, copper
continued to be the principal export commodity and source
of
foreign exchange, as well as an important generator of
government
revenues. The Chilean government's retained share of the
value of
copper output increased from about one-quarter in 1925 to
over
four-fifths in 1970, mainly through higher taxes. Although
protectionist policies better insulated Chile from the
occasional
shocks of world commodities markets, price shifts
continued to take
their toll.
Data as of March 1994
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