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WEEKLY NEWSLETTER
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Chile
Index
The international debt crisis unleashed in 1982 hit the
Chilean
economy with particular severity, as foreign loans dried
up and the
international
terms of trade (see
Glossary) turned
drastically
against Chile. The policies implemented initially to face
the 1982
crisis can best be described as hesitant. In early 1983,
the
financial sector was nationalized as a way to avoid a
major banking
crisis, and a number of subsidy schemes favoring debtors
were
enacted. The decision to subsidize debtors who had
borrowed in
foreign currency during the period of fixed exchange
rates, and to
bail out the troubled banks, resulted in heavy Central
Bank losses,
which contributed to the creation of a huge deficit in
publicsector finance. This deficit, in turn, would become one of
the
underlying causes of the inflation of the early 1990s.
Different
exchange-rate systems were tried, including a floating
rate, only
to be abandoned rapidly and replaced by new plans.
Policies aimed
at restructuring the manufacturing sector, which had
entered a deep
crisis as a consequence of the collapse of some of the
major
conglomerates, the so-called groups (grupos), were
implemented. In spite of this array of measures, the
economy did
not show a significant response; unemployment remained
extraordinarily high, and the external crisis, which some
had
expected to represent only a temporary setback, dragged
on.
In early 1985, increasingly disappointed by the
economy's
performance, Pinochet turned toward a group of pragmatic
economists
who favored free markets and macroeconomic stability. Led
by newly
appointed finance minister Hernán Büchi Buc, an economist
who had
studied business administration at Columbia University,
the new
economic team devised a major adjustment program aimed at
reestablishing growth, reducing the burden of the foreign
debt, and
rebuilding the strength of the financial and manufacturing
sectors.
Three policy areas became critical in the implementation
of the
program: active macroeconomic policies, consolidation of
the
market-oriented structural reforms initiated in the 1970s,
and
debt-management policies geared toward rescheduling debt
payments
and making an aggressive use of the secondary market. With
the help
of the International Monetary Fund (
IMF--see
Glossary),
the World
Bank, and improved terms of trade, these policies
succeeded in
achieving their objectives.
The macroeconomic program of a group of Chilean
economists
known as the
"Chicago boys" (see
Glossary), who had guided
Pinochet's early economic policies, had relied on a
hands-off
"automatic adjustment" strategy. By mid-1982 this approach
had
generated a severe overvaluation of the real exchange
rate. By
contrast, the new macroeconomic program relied on active
and
carefully monitored macroeconomic management. An active
exchangerate policy, based on large initial exchange-rate
adjustments
followed by periodic small devaluations, became one of the
most
important policies of the post-1982 period. Between 1982
and 1988,
the international competitiveness of Chilean exports was
increased greatly by a real exchange-rate depreciation of
approximately 90 percent. This policy not only helped
generate a
boom in nontraditional exports but also contributed to
reasonable
interest-rate levels and to the prevention of capital
flight.
The adjustment program that started in 1985 also had a
structural adjustment component that was aimed at
consolidating the
market-oriented reforms of the 1970s and early 1980s,
including the
privatization process, the opening of the economy, and the
development of a dynamic capital market. There were
several
structural goals of the 1985 program: rebuild the
financial sector,
which had been nearly destroyed during the 1982 crisis;
reduce
import tariffs below the 35 percent level that they had
reached
during 1984 to a 15 percent uniform level; and promote
exports
through a set of fiscal incentives and a competitive real
exchange
rate.
Perhaps the most important aspects of these structural
reform
measures were the privatization and recapitalization of
firms and
banks that had failed during the 1982-83 crisis. As a
first step in
this process, the Central Bank bought private banks'
nonperforming
portfolios. In order to finance this operation, the
Central Bank
issued domestic credit. The banks, in turn, paid a rate of
5
percent on the nonperforming portfolios and promised to
repurchase
them out of retained profits. This recapitalization
program had as
its counterpart a privatization plan that returned the
ownership of
those banks and firms that had been nationalized in 1983
to the
private sector. Economist Rolf J. Lüders estimates that
about 550
enterprises under public-sector control, including most of
Chile's
largest corporations, were privatized between 1974 and
1990. By the
end of 1991, fewer that fifty firms remained in the public
sector.
The overall privatization program undertaken after 1985
has been
criticized by some Chileans and also by some international
economists because banks and manufacturing firms were sold
too
rapidly and at "very low prices."
Chile's structural adjustment of the second half of the
1980s
was unique from an international comparative perspective.
The most
difficult, controversial, and costly reforms--including
the bulk of
privatization, trade liberalization, financial
deregulation, and
labor market streamlining--were undertaken in Chile in the
1975-80
period; the measures taken after 1985 were minor, in
comparison.
The success of the post-1985 period was rooted in the
early
reforms. For example, the boom in nontraditional exports
that took
place in the second half of the 1980s was only possible
because of
investments begun almost ten years before. The markets'
flexible
and rapid response to incentives was also a direct
consequence of
the microeconomic reforms of the 1970s.
One of the most hotly debated issues of the Chilean
recovery of
the second half of the 1980s concerns the different
foreign-debt
conversion plans aimed at rapidly reducing foreign
indebtedness.
When the debt crisis erupted in 1982, Chile's foreign debt
was
US$17.2 billion, one of the highest debts per capita in
the world.
Through the aggressive use of a variety of debt-conversion
plans,
between 1985 and 1991 Chile retired an estimated US$10.5
billion of
its debt, most of which was converted into equity in
Chilean
companies.
Chile's net international reserves totaled US$9 billion
in
1992, enough to cover a year of imports and equivalent to
roughly
half of its foreign debt. The stock of foreign direct
investment in
Chile was estimated to be between US$10 billion and US$13
billion,
roughly 30 percent of GDP. About US$4 billion of this was
acquired
through debt-equity conversions. The debt-swap program was
ended
when the growth of direct investment and the strength of
the
economy had done away with the need for special incentives
to
attract foreign capital.
Data as of March 1994
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