MONGABAY.COM
Mongabay.com seeks to raise interest in and appreciation of wild lands and wildlife, while examining the impact of emerging trends in climate, technology, economics, and finance on conservation and development (more)
WEEKLY NEWSLETTER
|
|
Chile
Index
In September 1970, Salvador Allende, the UP candidate,
was
elected president of Chile. Over the next three years, a
unique
political and economic experience followed. The UP was a
coalition
of left and center-left parties dominated by the Socialist
Party
(Partido Socialista--PS) and the Communist Party of Chile
(Partido
Comunista de Chile--PCCh), both of which sought to
implement deep
institutional, political, and economic reforms. The UP's
program
called for a democratic "Chilean road to socialism"
(see Salvador
Allende's Leftist Regime, 1970-73
, ch. 1).
When Allende took office in November 1970, his UP
government
faced a stagnant economy weakened by inflation, which hit
a rate of
35 percent in 1970. Between 1967 and 1970, real GDP per
capita had
grown only 1.2 percent per annum, a rate significantly
below the
Latin American average. The
balance of payments (see
Glossary) had
shown substantial surpluses during all but one of the
years from
1964 to 1970, and, at the time the UP took power, the
Central Bank
of Chile (see Glossary) had a stock of international
reserves of
approximately US$400 million.
The UP had a number of short-run economic objectives:
initiating structural economic transformations, including
a program
of nationalization; increasing real wages; reducing
inflation;
spurring economic growth; increasing consumption,
especially by
poorer people; and reducing the economy's dependence on
the rest of
the world. The UP's nationalization program was to be
achieved by
a combination of new legislation, requisitions, and stock
purchases
from small shareholders. The other goals--output and
increased
consumption, with rising salaries and declining
inflation--were to
be accomplished by a boost in aggregate demand, mainly
generated by
higher government expenditures, accompanied by strict
price
controls and measures to redistribute income.
The UP's macroeconomic program was based on several key
assumptions, the most important being that the
manufacturing sector
had ample underutilized capacity. This provided the
theoretical
basis for the belief that large fiscal deficits would not
necessarily be inflationary. The lack of full utilization
was, in
turn, attributed to two fundamental factors: the
monopolistic
nature of the manufacturing industry and the structure of
income
distribution. Based on this diagnosis, it was thought that
if
income were redistributed toward the poorer groups through
wage
increases and if prices were properly controlled, there
would be a
significant expansion of demand and output.
In regard to inflation, the UP program placed blame on
structural rigidities (namely, slow or no response of
quantity
supplied to price increases), bottlenecks, and the role of
monopolistic pricing, and it played down the role of
fiscal
pressures and money creation. Little attention was paid to
the
financial sector, given the orientation of the new
regime's
economic technocrats toward the import-substitution,
structuralist
philosophy of the Economic Commission for Latin America.
In fact,
Allende's minister of foreign relations and vice
president,
Clodomiro Almeyda, relates in his memoirs how in the first
postelection meeting of the economic team, these
technocrats argued
expressly and convincingly that monetary and financial
management
did not deserve too much attention. Alfonso Inostroza, the
Central
Bank president, stated in early 1971 that the main
objective of the
monetary policy was to "transform it into a key instrument
. . . to
achieve the complete mobilization of productive resources,
and
their allocation to those areas that the government gives
priority
to . . . ." This was consistent with the view of inflation
of those
espousing
structuralism (see
Glossary).
The UP perspective on the way the economy functioned
ignored
many of the key principles of traditional economic theory.
This was
reflected in the greatly diminished attention given to
monetary
policies, but also in the complete disregard of the
exchange rate
as a key variable in determining macroeconomic
equilibrium. In
particular, the UP program and policies paid no attention
to the
role of the real exchange rate as a determinant of the
country's
international competitive position. Moreover, the UP
failed to
recognize that its policies would not be sustainable in
the medium
term and that capacity constraints were going to become an
insurmountable obstacle to rapid growth.
Data as of March 1994
|
|