CHILE'S ECONOMY ENJOYED a remarkable boom in the early 1990s, the
result of a comprehensive transformation that began in 1974 with the
adoption of free-market economic policies. Between the 1930s and the
early 1970s, the Chilean economy was one of the most stateoriented
economies in Latin America. For decades, it was dominated by the
philosophy of import-substitution industrialization. Heavily subsidized
by the government, a largely inefficient industrial sector had
developed. The sector's main characteristics were a low rate of job
creation, a virtual absence of nontraditional exports, and a general
lack of growth and development. In the early 1970s, the ruling
socialist-communist Popular Unity (Unidad Popular--UP) coalition of
President Salvador Allende Gossens (1970-73) attempted to implement a
socialist economic system. The Allende experiment came to an end with
the military coup of September 11, 1973. From that point on, Chile's
economic policies took a radical turn, as the military government
undertook, first timidly and later more confidently, deep reforms aimed
at creating a market economy.
In the early 1990s, politicians and analysts from around the world
looked to the Chilean economy for lessons on how to open up
international trade, create dynamic capital markets, and undertake an
aggressive privatization process. In early 1994, Chile had the strongest
economic structure in Latin America and, in large part because of the
military government's reforms, was emerging as a modern economy enjoying
vigorous growth. Moreover, there seemed to be a consensus among
politicians of widely varying beliefs that the existing economic model
should be maintained in the future.
Chile's income per capita, approximately US$2,800, placed the nation
squarely in the middle of what the World Bank called "middle-income
economies." Of the Latin American nations, Brazil, Uruguay,
Venezuela, Mexico, and Argentina in 1990 each had a higher gross
national product ( GNP) per capita than Chile; the rest had a lower
level. In the 1991-93 period, the rate at which Chile's GDP grew
exceeded 6.5 percent per year, making Chile's GDP during these years by
far the fastest growing in Latin America. In 1992 GDP grew at a record
10.3 percent pace, year-end unemployment was down to 4.5 percent, real
wages were up 5 percent, inflation was down to 12.7 percent, and the
public-sector surplus was equivalent to 3 percent of GDP. When a longer
period is considered, Chile still comes up ahead of the rest of the
Latin American nations. For instance, according to the United Nations
Economic Commission for Latin America (Comisi�n Econ�mica para Am�rica
Latina-- CEPAL or ECLA), Chile's GDP per capita increased by 32.2
percent between 1981 and 1993; Colombia was a distant second with an
accumulated rate of growth during the period of 23.6 percent.
The success Chile enjoyed by the 1990s resulted largely from the boom
in agricultural exports. In 1970 Chile exported US$33 million in
agricultural, forestry, and fishing products; by 1991 the total had
jumped to US$1.2 billion. This figure excluded those manufactured goods
based on products of the agricultural, livestock, and forestry sectors.
Much of the increased agricultural production in the country was the
result of rapidly improving yields and higher productivity, spurred by
an export-oriented policy.
There was little doubt that an exchange-rate policy aimed at
encouraging exports lay behind the strong performance of the Chilean
economy in the 1986-91 period. First, the liberalization of
international trade substantially lowered the costs of imported
agricultural inputs and capital goods, enabling the sector to become
more competitive. In fact, the liberalization of international trade put
an end to a long history of discrimination against agriculture. Tariffs
and other forms of import restrictions throughout the 1950s and 1960s
gave a relative advantage to those industries that produced importable
goods, making them domestically competitive at production costs above
international prices. The same policies, because they permitted an
overvalued exchange rate, punished those economic activities, like
agriculture, that could produce exportable goods. While those goods
could be sold at international prices, the foreign-exchange earnings
would be converted into domestic currency at an unfavorable exchange
rate. Second, the exchange-rate policy, pursued aggressively since 1985,
had provided incentives for the expansion of exports.
Third, an institutional framework that secured property rights to
land and water, along with reformed labor laws, had increased the
openness of factor markets and established clear signals for the
allocation of resources. Potential profits in new business initiatives
had by then become very much tied to international prices of goods and
domestic costs of resources. The likelihood of government intervention
in property rights allocation, prohibitions, special permits, and so
forth had been significantly reduced. Related reforms in the
transportation sector, particularly in air and marine transport, had
further increased access to international trade.
A fourth fundamental policy-based explanation of the increase in
agricultural exports was the pursuit of a stable macroeconomic policy
whose purpose was to give entrepreneurs confidence in the system and
enable them to plan their activities over the longer term. Many of the
export-oriented agricultural activities required sizable investments
that could only be undertaken in an environment of stability and policy
continuity. What is most remarkable, perhaps, is that since 1989 poverty
and inequality have have been reduced significantly.
Chile - EVOLUTION OF THE ECONOMY
The Colonial Era to 1950
In colonial times, the segmentation of Chile into latifundios left
only small parcels for native American and mestizo 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, or latifundio owners, to the
merchants and encomenderos themselves, a chain of dependent
relations ran all the way to the Spanish metropolis.
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. 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 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 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 (Corporaci�n
de Fomento de la Producci�n--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
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, 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.
Chile - Economic Policies, 1950-70
Between 1950 and 1970, the Chilean economy expanded at meager rates.
GDP grew at an average rate of 3.8 percent per annum, whereas real GDP
per capita increased at an average yearly rate of 1.6 percent. Over this
period, Chile's economic performance was the poorest among Latin
America's large and medium-size countries.
As in most historical cases, Chile's import-substitution strategy was
accompanied by an acute overvaluation of the domestic currency that
precluded the development of a vigorous nontraditional (that is,
noncopper) export sector. Although some agrarian reform was attempted,
the government increasingly resorted to controlling agricultural prices
in order to subsidize the urban working and middle classes. The
agricultural sector was particularly harmed by the overvaluation of
Chile's currency. The lagging of agriculture became, in fact, one of the
most noticeable symptoms of Chile's economic problems of the 1950s and
1960s. Over this period, manufacturing and mining, mainly of copper,
significantly increased their shares in total output.
By the early 1960s, most of the easy and obvious substitutions of
imported goods had already been made; the process of import substitution
was rapidly becoming less dynamic. For example, between 1950 and 1960
total real industrial production grew at an annual rate of only 3.5
percent, less than half the rate of the previous decade.
During the 1950s, inflation, which had been a chronic problem in
Chile since at least the 1880s, became particularly serious; the rate of
increase of consumer prices averaged 36 percent per annum during the
decade, reaching a peak of 84 percent in 1955. The main source of the
inflationary pressure on the Chilean economy was a remarkably lax fiscal
policy. Chile's economic history has been marked by failed attempts to
curb inflation. During the 1950s and 1960s, three major stabilization
programs, one in each administration, were launched. The common aspect
of these efforts was the emphasis placed on tackling the various
consequences of inflationary pressures, such as prices, wages, and
exchange-rate increases, rather than the root cause of money growth, the
monetization of the fiscal deficit. In spite of the efforts of
presidents Carlos Ib��ez del Campo (1927-31, 1952-58) and Jorge
Alessandri Rodr�guez (1958-64), inflation averaged 31 percent per annum
during these two decades. In 1970, the last year of the government of
President Eduardo Frei Montalva (1964-70), the inflation rate stood at
35 percent.
During the 1960s, and especially during the Frei administration, some
efforts to reform the economy were launched. These included an agrarian
reform, a limited liberalization of the external sector, and a policy of
minidevaluations aimed at preventing the erosion of the real exchange
rate. Under the 1962 Agrarian Reform Law, the Agrarian Reform
Corporation (Corporaci�n de Reforma Agraria--Cora) was created to
handle the distribution, but land reform proved to be slow and
expensive. In spite of these and other reforms, toward the end of the
1960s it appeared that the performance of the economy had not improved
in relation to the previous twenty years. Moreover, the economy was
still heavily regulated.
Chile - The Popular Unity Government, 1970-73
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".
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 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 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.
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.
Chile - Economic Crisis and the Military Coup
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. 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.
Chile - The Military Government's Free-Market Reforms, 1973-90
After the military took over the government in September 1973, a
period of dramatic economic changes began. Chile was transformed
gradually from an economy isolated from the rest of the world, with
strong government intervention, into a liberalized, worldintegrated
economy, where market forces were left free to guide most of the
economy's decisions. This period was characterized by several important
economic achievements: inflation was reduced greatly, the government
deficit was virtually eliminated, the economy went through a dramatic
liberalization of its foreign sector, and a strong market system was
established.
From an economic point of view, the era of General Augusto Pinochet
Ugarte (1973-90) can be divided into two periods. The first, from 1973
to 1982, corresponds to the period when most of the reforms were
implemented. The period ended with the international debt crisis and the
collapse of the Chilean economy. At that point, unemployment was
extremely high, above 20 percent, and a large proportion of the banking
sector had become bankrupt. During this period, a pragmatic economic
policy that emphasized export expansion and growth was implemented. The
second period, from 1982 to 1990, is characterized by economic recovery
and the consolidation of the free-market reforms.
Chile - Trade Policy
One of the fundamental economic goals of the military regime was to
open up the economy to the rest of the world. However, this was not the
first attempt at liberalizing international trade in Chile. Between 1950
and 1970, the country went through three attempts at trade
liberalization without ever reaching full liberalization. Moreover, all
three attempts quickly ended in frustration and in a reversion to
exchange controls, the use of multiple exchange rates, and massive
quantitative restrictions. A particularly interesting feature of the
three attempts at liberalization is that, although they took place under
three different exchange-rate systems, they all collapsed, at least in
part because of a highly overvalued real exchange rate.
Starting in 1974, Chile adopted unilaterally an open trade regime
characterized by low uniform import tariffs, a lack of exchange or trade
controls, and minimum restrictions on capital movements. Starting in
1979, Chile's trade policy became highly liberalized; subsequently,
there were no quantitative restrictions, licenses, or prohibitions. A
uniform import tax varying between 10 percent and 35 percent took
effect, and, until 1980, real exchangerate overvaluation generally was
avoided. By 1990 Chile was the only country, according to the World
Bank, whose index of liberalization reached the maximum possible level
of 20, indicating an absence of external-sector distortions.
In 1973 import tariffs averaged 105 percent and were highly
dispersed, with some goods subject to nominal tariffs of more than 700
percent and others fully exempted from import duties. In addition to
tariffs, a battery of quantitative restrictions were applied, including
outright import prohibitions and prior import deposits of up to 10,000
percent. These protective measures were complemented by a highly
distorting multiple exchange-rate system consisting of fifteen different
nominal exchange rates. By August 1975, all quantitative restrictions
had been eliminated, and the average tariff had been reduced to 44
percent. This process of tariff reductions continued until June 1979,
when all tariffs but one (that on automobiles) were set at 10 percent.
In the mid-1980s, in the midst of the debt crisis, temporary tariff
hikes were implemented; by 1989, however, a uniform level of 15 percent
had been established.
During the early period (1975-79) of the military regime, the opening
of Chile's external sector was accompanied by a strongly depreciated
real exchange rate. In 1979, however, the authorities adopted a
fixed-exchange rate policy that resulted in an acute overvaluation of
the Chilean peso, a loss in international competititiveness,
and, in 1982, a deep crisis. In 1984-85 this situation was reversed, and
a policy of a depreciated and highly competitive real exchange rate was
implemented. The combination of these two policies--low tariffs and a
competitive real exchange rate--had a significant impact on Chile's
economic structure. The share of manufacturing in GNP dropped from
almost 29 percent in 1974 to 22 percent in 1981. Productivity in
tradable sectors grew substantially, and exports became highly
diversified. Chile had also diversified its export markets, with the
result that no individual market bought more than 20 percent of the
country's total exports. By the early 1990s, exports had become the
engine of growth, and the Chilean trade reform was winning praise from
multinational institutions and observers of different ideological
persuasions. Largely thanks to the boom in exports between 1986 and
1991, particularly the increasing growth in exports of fresh fruits and
manufactured products, Chile experienced the highest rate of GDP growth
in Latin America (the "Chilean miracle"), with an annual
increase of 4.2 percent.
In what was perhaps the surest sign of the success of trade reform,
the new democratic government of President Patricio Aylwin Az�car
(1990-94), elected in December 1989, decided to continue the opening
process and reduced import tariffs to a uniform 11 percent.
Interestingly, Aylwin's economic team, including the minister of finance
and the minister of economy, development, and reconstruction, had been
relentless critics of the trade reform process during its implementation
in the mid- and late 1970s.
Chile - Banking Reform and the Financial Sector
A major policy objective of the military regime was the
liberalization and modernization of the banking sector. Until 1973 the
domestic capital market had been highly repressed, with most banks being
government owned. Real interest rates were negative, and there were
quantitative restrictions on credit. The liberalization process began
slowly, in early 1974, with the sale of banks back to the private
sector, the freeing of interest rates, the relaxation of some
restrictions on the banking sector, and the creation of new financial
institutions. International capital movements, however, were strictly
controlled until mid-1979. In June 1979, the government decided to begin
to liberalize the capital
account of the balance of payments, lifting some
restrictions on medium- and long-term capital movements.
The opening of the capital account resulted in a massive inflow of
foreign capital that contributed to Chile's subsequent international
debt problems. In 1980 capital inflows were more than double those of
1979--US$2.5 billion versus US$1.2 billion--and in 1981 the level of
capital inflows nearly doubled again, to US$4.5 billion.
An important result of the reforms of the financial sector was that
the number of financial institutions and the volume of financial
intervention both increased greatly. For example, in 1981 there were
twenty-six national banks, nineteen foreign banks, and fifteen savings
and loan institutions (financieras), a number significantly
higher than the eighteen national banks and one foreign bank in
operation in September 1973. Furthermore, between 1973 and 1981 the real
volume of total credit to the private sector increased by more than
1,100 percent.
At least in terms of increasing the degree of financial
intermediation, liberalization was a success. However, it was apparent
from the beginning that capital-market liberalization faced three major
obstacles. First, interest rates were very high. Second, in spite of the
significant growth in the extent of financial intermediation, domestic
savings had not increased to the extent that the proponents of the
reforms had expected. In fact, domestic savings were at one of their
lowest levels in history from 1974 to 1982. There are several possible
explanations for the behavior of domestic savings. One of the most
popular of these relies on the notion that the appreciation of domestic
assets that was taking place at the time, such as stocks and land
prices, resulted in a real accumulation of assets without saving. This
increase in private-sector wealth was consistent with higher levels of
consumption at a given income. Third, and perhaps more important, the
rapid growth of the financial sector took place in an environment in
which monetary authorities exercised no supervision. As a result, many
banks accumulated an unprecedented volume of bad loans, a situation that
led to the financial crisis of 1982-83. As a consequence of this crisis,
a number of banks went bankrupt during 1983-84, were placed temporarily
under government control, and then were reprivatized. By 1992, after
monetary authorities had learned the hard way the importance of bank
supervision, Chile's financial sector had become highly stable and
dynamic.
Chile - Rural Land Market Reform
Immediately after the 1973 coup, many labor institutions, that is,
traditional channels of influence, such as government offices, which
unions used to get their voices heard, were disbanded, and some
important unions were dissolved. Thus, wage adjustments became mainly a
function of indexation, which, given Chile's history of inflation, had
become an established element of any wage negotiation. Indexation was
kept in place until 1982, through ten years of declining inflation.
Starting in October 1973, the government mandated across- theboard
periodic wage adjustments tied to the rate of inflation. Lower wages
were adjusted proportionally more than higher ones. From 1973 to 1979,
indexation to past inflation with varying lags was the norm throughout
the economy. The 1979 Labor Plan formalized this practice by requiring
that collective bargaining agreements allow for wage adjustments at or
above the rate of inflation. In 1982 the indexation clause of the Labor
Plan was eliminated. The government continued the practice of
periodically announcing wage readjustments and bonuses, with the wage
increases usually not keeping pace with inflation and covering the
nonunionized sector only. The dynamism of the economy in the early 1990s
resulted in actual wage increases above officially announced
readjustments.
The Employment Security Law established that in the absence of
"just cause" for dismissal, such as drunkenness, absenteeism,
or theft, a dismissed employee could be reinstated to the job by a labor
court. This law was replaced by a less costly system of severance
payments in 1978. Decree Law 2,200 authorized employers to modify
individual labor contracts and to dismiss workers without
"cause." A minimum severance payment was established that was
equivalent to one month of salary per year of service, up to a maximum
of five months' pay. This new system applied to all contracts signed
after August 1981.
The changes introduced by Decree Law 2,200, along with the 1979
reforms, which established new mechanisms to govern union activity
(Decree Law 2,756) and collective bargaining (Decree Law 2,758), became
known in Chile as the Labor Plan. Decree Law 2,756 departed
significantly from traditional legislation: union affiliation within a
company became voluntary, and all negotiations would now have to be
conducted at the company level; bargaining among many companies would be
eliminated. According to the previous law, which had applied until the
1973 coup, once the majority of the workers of an enterprise chose to
join an "industrial union" all workers became part of that
union. That is, one union would have exclusive representation of all
workers in an enterprise. The right to collective bargaining was granted
to unions at the enterprise level and also to union federations and
confederations. This resulted in some negotiations at the industry level
with the participation of the Ministry of Labor and Social Welfare
through the Labor Inspectorate. As in the past, the new law required
participation of 10 percent of the workers or a minimum of twenty-five
workers (whichever was greater) for creation of a union. Workers were
not required to be represented by a union in collective bargaining.
Decree Law 2,758 stipulated that in the event of a strike, a firm
could impose a lockout and temporarily lay off workers, which the
previous law had prohibited. At the same time, Decree Law 2,758
established norms about collective bargaining, and in its Article 26 the
law established that unionized workers' nominal wages should be adjusted
to at least match the rate of inflation. This article, which became a
severe constraint to downward real wage flexibility during the 1982-83
crisis, can be understood only in the context of a previously existing
policy of 100 percent indexation across the board. In 1982, at the onset
of the debt crisis, Article 26 was amended, eliminating the downward
inflexibility of real wages. This reformed law was in effect until April
1991, when some important changes proposed by the Aylwin administration
were approved by the National Congress (hereafter, Congress).
Chile - Public Employment Programs
Two public employment programs affected the labor market during the
period of economic reforms between 1975 and 1987. The Minimum Employment
Program (Programa de Empleo M�nimo--PEM) was created in 1975 at a time
when unemployment had reached record levels. The program, administered
by local governments, paid a small salary to unemployed workers, who,
for a few hours a week, performed menial public works. At first, the
government tightly restricted entry into the program. Gradually, most of
these restrictions were lifted, and a larger number of unemployed people
were allowed to participate. Thus, the proportion of the labor force
employed by the program remained virtually constant between 1977 and
1981, despite the economic recovery and a reduction in the real value of
PEM compensation.
When Chile entered a new and more severe recession, the number of
individuals employed by PEM in the Metropolitan Region of Santiago
increased from about 23,000 in May 1982 to 93,000 in May 1983. An
Employment Program for Heads of Households (Programa de Ocupaci�n para
Jefes de Hogar--POJH), created in October 1982, employed about 100,000
individuals in the greater Santiago area by May 1983. The two programs
combined absorbed more than 10 percent of the labor force of the greater
Santiago area in May 1983. These programs were also implemented in other
regions of the country. The PEM program was cut back drastically in
February 1984. Likewise, by December 1988, there were only about 5,000
individuals employed by the POJH in the entire country.
Chile - The Debt Crisis: Further Reforms and Recovery
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 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 Hern�n B�chi 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), 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", 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. L�ders 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.
Chile - The Return to Democracy, 1990
On March 11, 1990, General Pinochet handed the presidency of Chile to
Patricio Aylwin. When Aylwin's Coalition of Parties for Democracy
(Concertaci�n de Partidos por la Democracia--CPD) government took over,
Chile had the best performing economy in Latin America.
Continuity in Economic Policy
For years, opponents of the Pinochet government had argued that its
economic program was based on ideas alien to the Chilean tradition. In
early 1990, analysts, scholars, stockbrokers, and politicians throughout
the world wondered if the new democratic government of President Aylwin
would maintain some, or for that matter any, of the most important
aspects of the military government's market-oriented policies, or if the
CPD government would reform the system along the lines of the
decade-long criticisms of the opposition. What made this question
particularly interesting was that at the time of the restoration of
democracy, Chile was considered by many, including international
institutions such as the World Bank and the IMF, as a premier example of
the way the adjustment process after the debt crisis should be carried
out. A number of analysts asked themselves how the advent of democracy
would affect Chile's economic policy. In particular, analysts were
concerned about the new government's attitude toward the free price
system and Chile's new openness to international competition.
Regarding price competition, the Aylwin program's position was stated
as follows: "We affirm that within an efficient economic policy
there is no role for price controls." In discussing the role of the
market, the program noted: "The market cannot be replaced as a
mechanism for consumers to articulate their preferences." These
views were a far cry from those sustained by Frei's Christian Democratic
government of the 1960s and, especially, from those of Allende's UP
government of 1970-73. They were also substantially different from those
of the new market critics of the 1970s and mid-1980s. Indeed, the CPD
program conveyed that there had been a significant convergence of
domestic views on the role of markets in the economic process.
Addressing the opening of the economy to the rest of the world, the
CPD program stated: "The most important instruments of the external
sector policy are the maintenance of a stable high real exchange rate
and a reasonably low import tariff" [emphasis added]. This
statement suggests that from its onset the Aylwin government was not
prepared to implement major changes to one of the most fundamental
features of Chile's new economics.
Emphasis on Social Programs
In seeking funding for new social programs, the Aylwin government
made clear immediately that the only way of increasing social spending
without generating unsustainable macroeconomic pressures was by finding
secure sources of government revenue. Economists associated with
Alywin's CPD coalition calculated in 1989 that in order to implement
their antipoverty social programs, annual funds on the order of 4
percent of GDP would be required. They argued that these resources could
be obtained through a combination of expenditures, reallocation, foreign
aid, and increased tax revenues. In order to implement these programs
rapidly, in April 1990 President Aylwin submitted to the newly elected
Congress a legislative proposal aimed at reforming the tax system. The
main features of the package were the following: the corporate
income-tax rate was to be increased temporarily from 10 percent to 15
percent for 1991-93; and the tax base, which in 1985 had been defined as
distributed profits, was to be broadened to include total profits. The
progressiveness of the personal income tax was to be increased by
reducing the income level at which the maximum rate was applicable; and
the rate of the value-added tax ( VAT) would be increased to 18 percent
from 16 percent. During most of the Pinochet government, the VAT rate
had been 20 percent. It was only reduced to 16 percent prior to the
electoral contest before the plebiscite on Pinochet's continuation in
power. After intense and often frustrating negotiations between the
Aylwin administration and the opposition, the tax reform was approved in
late 1990.
Pinochet's labor reforms of 1978-79 had been, from the beginning,
strongly criticized by the opponents of the military regime. Although
the 1979 decrees had modernized labor relations in some areas, they had
also severely limited the activities of unions and, as initially
conceived, had made real wage rates unusually rigid. Reforming the labor
plan was an important priority of the new democratic government.
After the support of some opposition senators was obtained, a mild
labor reform was passed in 1991. An important characteristic of Chile's
constitution of 1980 is that it stipulates the seating of nine
nonelected senators in the legislature's upper house, as well as former
presidents and former justices of the Supreme Court. The CPD coalition
lacked a parliamentary majority because the nonelected senators had been
appointed by Pinochet. Consequently, in order to approve legislation it
had to obtain support from the opposition for some measures.
The new labor legislation restricted the causes for firing employees,
increased the compensation that firms had to pay to lay off employees,
and restricted employers' recourse to lockouts. Although there was
little doubt that these new regulations had increased the cost of labor,
it was too early to know the effect of the new legislation on job
creation. It was known, however, that the reform of labor laws by a
democratically elected government had greatly legitimated the
modernization of labor relations. In a way, the concept of labor-market
flexibility had ceased to be associated exclusively with the
authoritarian military regime and had become generally accepted by the
population at large.
Chile - THE STRUCTURE OF THE ECONOMY
A World Bank study shows that after the trade liberalization of the
1970s, Chile experienced a substantial increase in productivity. This
study also shows that in the 1987-91 period, Chile's productivity
increased much more than that of any other country in Latin America.
Chile's national accounts for 1989-91 show a number of interesting
features. First, the share of agriculture, livestock, and forestry in
GDP decreased during these three years from 8.1 percent to 7.9 percent.
This short-term trend, however, was somewhat misleading. In 1971 the
share of GDP generated by agriculture, livestock, and forestry had been
7.4 percent. From a historical perspective, the increase in the relative
importance of the primary sector in a twenty-year span--from 7.4 percent
to 7.9 percent of GDP--was somewhat of an anomaly. A well-documented
trend is that in the vast majority of countries, as income and output
expand and national economies become more developed, this sector
generates a smaller share of GDP. In the case of Chile, the absence of
this phenomenon can be explained by the drastic structural reforms
implemented in the second half of the 1970s and in the 1980s. An
important consequence of the market-oriented reforms of the Pinochet
government was the elimination of discrimination against export
agriculture that had characterized the Chilean economy during the
decades of importsubstitution industrialization. The level of
productivity of the agricultural sector (measured as crop yields) had
increased significantly by the early 1990s.
A second important feature of Chile's national accounts in 1989-91 is
that the manufacturing sector represented approximately 21 percent of
GDP for the period. This was significantly lower than this sector's
share of total output in 1969-70, when it was almost 25 percent. The
reduced participation of manufacturing also reflected the structural
reforms of the 1970s and 1980s. Those policies had eliminated the
protection walls that had artificially encouraged Chile's industrial
sector during the 1960s.
The share of mining in GDP remained roughly constant from 1967 to
1992. However, the composition of mining production changed
substantially; in particular, there was a drop in the importance of
copper mining. Also, construction's share of GDP shrank from 7.7 percent
of GDP in 1970 to 6.0 percent in 1992. During the same period, the share
of services increased from 26 percent to 29.1 percent. Within this
sector, a particularly significant increase occurred in the financial
area.
Chile - Industry and Manufacturing
The Chilean manufacturing sector experienced strong performance in
the 1985-91 period, and the Industrial Development Association (Sociedad
de Fomento Fabril--Sofofa) expected a 7 percent to 10 percent increase
in industrial output in 1992. (The sector actually grew 12.3 percent
during the first three quarters.) Between 1985 and 1991, the
manufacturing sector grew at an average annual rate of 6.2 percent, a
figure that compared favorably with the average rate for the 1960s of
5.1 percent per annum. However, in spite of the dynamic behavior of
manufacturing as a whole, the development of different industries within
the sector was uneven. Some industries were able to exploit Chile's
comparative advantages, expanding at a rapid pace. In many cases, this
expansion was the result of the development of new international markets
and of rapidly growing exports. Other industries, however, were victims
of drops in relative prices, caused either by trade liberalization or by
loss of international buyers, and were forced to reduce their scope of
operations.
The major industries of the Chilean economy in the late 1980s and
early 1990s were agriculture and food products, textiles and clothing,
nonelectrical machinery, transportation equipment, and industrial
chemicals. As noted previously, the performance of individual industries
was uneven. Although foodstuffs, furniture, and glass products
experienced strong expansion, other industries had a lower level of
output in 1991 than in 1979.
For decades, wine has been one of Chile's best-known products, and
wineries were expected to experience double-digit growth in the 1990s.
Exports of wine increased during the 1970s, primarily to the United
States, reaching US$31.9 million in 1989. Total wine exports in 1992
were estimated at US$127 million. By that year, Chile had become the
third largest exporter of wine to the United States, behind Italy and
France.
Not surprisingly, those sectors that had shrunk since the early
1980s, such as footwear and transportation equipment, were those that
had been hardest hit by increased foreign competition. However, the
firms that finally survived in these sectors did so by adapting to the
new external circumstances and by finding ways to rapidly increase
productivity. In 1992 the transportation equipment sector was the most
dynamic of all, increasing output at an annual rate of 46 percent.
Chile - Mining
Although copper's relative importance declined in the 1970s and
1980s, it was still the Chilean economy's most important product in
1992. The mining sector represented 6.7 percent of GDP in 1992, as
compared with 8.9 percent in 1985. In 1991 copper exports represented 30
percent of the total value of exports, a substantial decline with
respect to the 1960s, when it represented almost 80 percent of total
exports. Mining exports in general accounted for about 48 percent of
total exports in 1991.
Since the late 1970s, the production of gold and silver has increased
greatly. The lead, iron, and petroleum industries have shrunk
since the mid-1970s, the result of both adverse international market
conditions and declines in the availability of some of these resources.
With a combined total value of about US$4 billion, two of the largest
investments planned in Chile in the early 1990s were designated for
aluminum-smelter projects in the Puerto Ais�n and Strait of Magellan
areas.
Two developments in the copper sector were noteworthy. First, in the
1987-91 period there was a substantial increase in the output of refined
copper, as well as a relative decline in the production of blister
copper. Second, the state-owned Copper Corporation (Corporaci�n
del Cobre--Codelco), the world's largest copper producer, still had an
overwhelmingly dominant role (accounting for 60 percent of Chile's
copper output in 1991). The so-called Codelco Law of April 1992
authorized Codelco for the first time to form joint ventures with the
private sector to work unexploited deposits. Thus, in a major step for
Codelco, in 1992 it invited domestic and foreign mining firms to
participate in four joint explorations in northern Chile. Poreignowned
private firms were to become increasingly important as new investment
projects got underway. The heightened importance of these foreign
private firms in large-scale copper mining also resulted from the
international business community's improved perception of Chile and from
a mining law enacted during the Pinochet regime that clearly established
compensation rules in the case of nationalization and otherwise
encouraged investment in this sector. Given this more favorable context,
Phelps Dodge, a United States mining company, and the Sumitomo Metal
Mining Company, a Japanese firm, signed a US$1.5 billion contract in
1992 with the Chilean government to develop La Candelaria, a copper and
gold mine south of Copiap�. The mine's potential production of refined
copper was equivalent to about 10 percent of Codelco's entire
production.
Despite the decline in copper's importance, Chile continued to be
affected by the vagaries of the international copper market. The high
variability of copper prices affected the Chilean economy, particularly
the external accounts and the availability of foreign exchange, in
several ways. In the 1987-91 period, the international copper market was
very favorable; for example, copper prices in 1989 were 50 percent
higher than in 1980. By May 1992, however, the price of copper had
declined to about its 1980 level. The government decided to counteract
the effect of the variability of copper prices by creating the Copper
Stabilization Fund, which worked as follows: whenever the price of
copper increased, the government would direct a proportion of the
increased revenues into the fund; these resources would then be used
during those years when the price of copper fell below its
"normal" level. This institutional development helped Chile at
least partially free itself from the volatility of the copper market.
Chile - Agriculture
As a result of land appropriations from 1970 to 1973, extensive
disinvestment occurred in the agricultural sector. The Pinochet
government reversed this trend by returning lands to previous owners and
providing incentives for increased exports. Although Chile was basically
a net importer of agricultural goods from 1960 to 1970, by 1991
agricultural exports, as well as forestry and fishing exports, were
becoming increasingly important in the economy. Whereas in 1970 Chile
exported US$33 million in agriculture, forestry, and fishing products,
by 1991 the figure had jumped to US$1.2 billion. This figure excluded
those manufactured goods based on the products of the agriculture,
livestock, and forestry sectors.
In the 1989-91 period, exports of fresh fruits became increasingly
important. Data also indicate that production of grapes, pears, lemons,
and peaches was expanding rapidly. The country's virtual monopoly on
grape exports during the Northern Hemisphere's winter season was likely
to disappear as other potential giants, such as Argentina, began to
compete. The fruit-packing industry also expanded greatly, providing
seasonal employment to thousands of workers in its refrigerated plants.
Although fruit production takes place in small to medium-size
landholdings, fruit-packing plants are very large operations. Indeed,
six of the major fruit-packing plants generated more than half of all
the boxes exported.
Chile's success in export agriculture was not confined to fruits.
Also increasing significantly was production of more traditional crops,
many of which were devoted primarily to domestic consumption. Much of
the increased agricultural production in the country was the result of
rapidly improving yields and higher productivity. These figures are
particularly impressive if compared with historical data. For example,
in the 1969-70 agricultural year, wheat's yield was 12.5 quintals per
hectare, that of corn was 32.4 tons per hectare, and that of potatoes
was 95.4 tons per hectare. By 1990-91 these yields had increased to 34.1
quintals of wheat per hectare, 83.9 quintals of corn per hectare, and
142.2 quintals of potatoes per hectare.
Chile - Fishing and Forestry
Chile is well endowed in fish and forest resources. Since the 1980s,
output has increased rapidly in both sectors, and exports have boomed.
An increasing proportion of these sectors' output was being processed,
appearing in the economic statistics as manufactured products.
Fishing
The cold waters of South America's western coast are rich in fish and
contain a wide variety of shellfish. For instance, about 800 varieties
of mollusks are found there, including the largest abalones and edible
sea urchins in the world. Some species, such as the abalones, had been
depleted to the point that they could not be harvested legally. About
750 kilometers from the mainland, the waters surrounding the Islas Juan
Fern�ndez are much warmer and contain different types of fish and
shellfish, including lobster.
Fishing expanded rapidly starting in the late 1970s. By 1983 Chile
was ranked fifth in the world in catch tonnage and had become the
world's leading exporter of fish meal. Despite naturally caused
year-to-year variations, the volume of the total fish catch had
increased over the long term. For example, in 1970 the total catch was
1.2 million tons, but the figures increased to 2.9 million tons in 1980
and 6.3 million tons in 1989. The total catch was about 5.4 million tons
in 1990 according to Central Bank data. Total fish caught in 1991,
reached 6 million tons, and fishing exports totaled US$1.1 billion, up
21 percent from 1990 and 138 percent from 1985. Of the 1991 figure, fish
meal accounted for US$466 million. Fish exports rose to 6.5 million tons
in 1992.
Salmon production was expected to reach 46,000 tons in 1992, earning
about US$250 million and turning the country into the third largest
producer in the world (after Norway and Canada). Starting with
fifty-three tons in 1981, the explosive growth in salmon production and
exports reflected the combination of perfect natural conditions for its
cultivation in the south with the successful adaptation of modern
technology.
By the early 1990s, a lack of fishing regulations was threatening
some species and giving the large fishing fleets advantages over the
smaller-scale, traditional fishermen who use small boats. After long
debate, Congress approved the new General Fishing Law in July 1991. The
law's purpose was to encourage investment in commercial fishing by
ensuring the conservation of hydrobiological resources, by protecting
against overfishing, by reserving for traditional fishermen an exclusive
eight-kilometer strip of coastal waters, and by promoting fishing
research. The infrastructure plan also included providing resources for
developing large and small ports for industrial and traditional fishing.
Total output of industrialized fish products was expected to increase
significantly with new investments during the 1990s. Both the good
catches in the 1989-91 period and the openness of the regulations had
prompted Chilean companies to invest a total of US$100 million and to
build nearly twenty boats.
Forestry
Beginning in 1975, the planting and exploitation of forests was
subsidized heavily by the state, which remitted 70 percent of the cost
of planting new areas with trees, exempted such lands from taxes, and
permitted a 50 percent deduction for tax purposes from the profits
generated from cutting the forests. The forestry policy of the military
government was a major exception to its free-market approach and
stimulated a significant expansion of forested land.
Chile's forested land is highly concentrated in the hands of a few
major companies, principally those connected with the flourishing paper
industry and with the national oil company. About 90 percent of all the
wood harvested comes from plantations that were established, beginning
in the early 1960s, on land of poor quality that originally had been
cleared of forests for the growing of wheat and other crops.
Reforestation, mostly with pine but also increasingly with eucalyptus,
has continued at a faster pace than the cutting of the forests, thereby
ensuring ample supplies for the foreseeable future. It was thought that
the volume of production could double 1990 levels by the year 2000.
The public sector is playing a drastically smaller role in forestry.
This diminution of the public sector's role is the result of the general
tendency in the country toward reducing, and even eliminating, directly
productive government activities. In 1992 the forestry industry was
objecting strongly to the new powers that the Aylwin government was
proposing to confer on the National Forestry Corporation (Corporaci�n
Nacional Forestal--Conaf) to protect native forests.
Whereas exports of basic--that is, nonmanufactured--forestry products
had declined by the early 1990s, exports of manufactured wood products
had almost doubled. This doubling of manufactured wood exports meant
that instead of exporting raw logs, Chile was increasingly adding value
to its forest products and was producing such items as milled boards,
pulp, paper, and cardboard. The main market was Japan, which absorbed 25
percent of the value of exports, followed by the United States and
Germany, with 8 percent each. Chile's print industry was enjoying a boom
in the early 1990s, supplying books and magazines to neighboring
countries, especially to Argentina (which accounted for 75 percent of
overseas sales) and Brazil (12 percent). Exports of books and magazines
grew by 90 percent in 1992 to about US$70 million.
Under study in 1992 was a bill to regulate Chile's shrinking but
still large native old-growth forests, which totaled 7.62 million
hectares out of 8.86 million hectares of woodland (the remaining 1.24
million hectares are plantations). Chile's forestry industry has worked
mostly on plantations of radiata pine, the raw material used for making
pulp. But the country's native forests are in need of management to
avoid extinction or indiscriminate harvesting of slow-growing species
and the resultant erosions and loss of land for future plantations of
new species. During 1991, about 107,000 hectares were planted.
Chile - Energy
Chile derives its energy mainly from petroleum and natural gas (60
percent), hydroelectric power (25 percent), and coal (15 percent).
Unlike other countries in Latin America, Chile has been able to make
effective plans for the development of the electricity sector. No
bottlenecks are expected in this sector, and most analysts predict that
it will continue to expand at a healthy pace. The country is endowed
with ample hydroelectric resources and has an extensive electric net
formed primarily by hydroelectric plants. For example, the Tocopilla
station feeds electricity to the huge Chuquicamata and La Escondida
copper mines, as well as to cities in northern Chile. An interesting
feature of the system is that, although the central net is thoroughly
interconnected, there are many individual producers. Since the late
1980s, there has been a marked increase in the importance of small
("other") producers.
As part of the final stages in the Pinochet regime's privatization
process, beginning in 1985 the two large state-owned utilities, the
National Electric Company (Empresa Nacional de Electricidad--ENDESA) and
the Chilean Electric Company (Compa��a Chilena de
Electricidad--Chilectra), both Corfo subsidiaries, were privatized. Now
the entire electricity sector basically is run by private companies. The
government, however, established a supervisory system that ensures
electricity companies a fair return. This keeps prices under reasonable
control.
Domestic petroleum production has suffered a steady decline since
1982, from 2.48 million cubic meters to 1.38 million cubic meters in
1990, a reduction of 46 percent. In an environment of fast economic
growth and rising demand for energy, this decline in production has
translated into a much faster decline in the share of domestic
production in total consumption. Although domestic production satisfied
35 percent of domestic consumption in 1986, in 1992 it met only 13
percent of Chile's needs. Consequently, Chile's oil import bill more
than doubled between 1986 and 1990. The country's oil reserves,
declining at a rate of 10 percent a year, stood at 300 million barrels
in early 1992.
Petroleum exploration efforts have been unsuccessful since the 1970s.
The National Petroleum Enterprise (Empresa Nacional de Petr�leo--ENAP)
has diversified its activities outside Chile with production contracts
with Argentine, Brazilian, Colombian, and Ecuadorian companies.
Exploration activities have increased in the Atacama Desert and the
Strait of Magellan. In late 1992, ENAP began installing a US$18 million
oil-drilling platform in Punta Arenas, the first of four that the
company planned to operate in the Strait of Magellan in a joint venture
with Argentina's state-owned oil company. About two-thirds of the crude
oil produced in Chile came from offshore platforms in the Strait of
Magellan. In 1991 domestic consumption was averaging 138,527 barrels per
day (bpd) and was growing at a 5 percent annual rate.
Pipelines for crude oil products totaled about 775 kilometers in
length; for refined petroleum products, about 785 kilometers; and for
natural gas, about 320 kilometers. In mid-1992 Chile and Argentina
agreed to build a 459-kilometer trans-Andean pipeline, designed to carry
US$500 million in crude oil a year, or 94,000 bpd, from Neuqu�n,
Argentina, and to help meet Chile's need for refined oil. Both countries
also approved a US$1 billion project to build a 1,200-kilometer gas
pipeline to feed Argentine natural gas to Santiago and other Chilean
cities by 1997. In 1989 Chile's proven natural gas reserves totaled 46.1
billion cubic meters, of which 41.9 billion cubic meters were onshore
and 4.2 billion cubic meters were offshore.
Chile - Banking and Financial Services
By the end of the Allende period, commercial banks were little more
than cash vaults. The availability of credit was low, and lending
patterns were highly distorted. During 1975-90, however, Chile's
financial sector experienced a remarkable boom, and by 1992 it was
modern and dynamic. Banks performed a variety of operations, and the
stock exchange was gaining rapidly in importance. The development in the
1980s of several financial operations involved with servicing Chile's
external debt helped to increase the sophistication of the system.
The road to a modern financial sector was not easy. In the process, a
number of banks collapsed as a result of the credit crisis of the early
1980s, and interest rates were high. After a period of government
control, the failed banks were reprivatized in the mid-1980s, and the
banking sector went through an extensive consolidation process. Some
banks ceased to exist, and others sought mergers. In 1989 the government
made the Central Bank independent of government control by creating the
Central Bank Council, a five-member group consisting of two members
appointed by the government, two by the opposition, and a president
selected by consensus. Beginning in the late 1980s, the number of banks
became more stable: thirteen domestic banks and twenty-two foreign-owned
banks. Their level of operation had rapidly risen by the early 1990s.
Nevertheless, Chile's top seven banks, squeezed by growing competition
from consumer finance houses and in-store credit operations, suffered a
17 percent decline in profits in 1991. As a result, the banks were
looking to the mining sector for profits.
Since the economic crisis of 1982-83, a recurrent preoccupation of
policy makers has been the behavior of interest rates in Chile. Many
analysts argued that the near collapse of the Pinochet regime's
free-market experiment in those years was the consequence of extremely
high interest rates. In 1991 and the first few months of 1992, interest
rates experienced a major decline; this was the case for both nominal
and real interest rates. As the degree of openness in the capital
account increased, domestic interest rates seemed likely to converge
toward international levels.
Chile - Tourism
According to the 1992 census, the Chilean population totaled
13,348,401 million in that year. The average annual rate of population
growth in the 1982-92 period was 1.6 percent, a relatively low rate in
the context of Latin America. Chile and Argentina are the two countries
with the lowest rates of population growth in South America.
Chile is a highly urbanized country. According to estimates for 1991,
about 85 percent of the population resides in urban areas. A large
fraction of the population is in the metropolitan area, which includes
the capital city, Santiago. The population share of this region was
estimated at slightly more than 39 percent in 1992, which is one
percentage point higher than the 1982 share. These figures indicate that
the relative growth of the metropolitan area has slowed down compared
with the 1970-80 decade, when the ratio climbed to 38.1 percent in 1982
from 35.4 percent in 1970.
With a lower rate of population growth, Chile's
"working-age" population, which includes all those individuals
above fifteen and below sixty-five years of age, represented 64 percent
of the total population in 1992. The labor force participation rate, or
the ratio of those in the labor force over the "working-age"
population, was 52.6 percent in March 1992. Thus, 36.8 percent of the
total population was working or seeking a job. The rate of unemployment
has declined steadily throughout the period. The overall rate of growth
in employment for the 1987-91 period was about 3 percent per year. The
rate was substantially higher from 1987 to 1989 (5 percent), the period
of fast recovery after the debt crisis. It is possible that the
uncertainty regarding the final reforms on the labor legislation might
have delayed employment creation, but there were other important
factors, such as an increase in the interest rate. The most dynamic
sectors during the 1987-89 period were construction and industry, with
average rates of employment growth of 20 percent and 11 percent per
year, respectively.
After years of high unemployment, in the 1990s the trend began to
change. By late 1993 the rate of unemployment had plunged to 4.9
percent, a rate significantly lower that that of the rest of Latin
America, and one of the lowest in Chile's modern history. Interestingly,
this drastic reduction in unemployment has taken place at the same time
as real wages have increased significantly. The United Nations Economic
Commission for Latin America has estimated that average real wages
increased by 13.7 percent between 1990 and 1993. This change in
employment conditions has been the direct result of the emphasis that
Chile's economic model has placed on the development of
employment-intensive industries. The increase in employment has been so
impressive that a number of analysts have argued that Chile may be
running into a period of labor shortages.
Chile - Income Distribution and Social Programs
After reluctantly accepting the Labor Plan of 1979, unions became
active again in the early 1980s and were able to push for wage
concessions during the economic boom of that period. A minority
maintained a tough stance in opposition to the new system, but they
lacked significant influence, so opposition eventually disappeared.
The most radical change experienced by the union movement with the
return to democracy has been its reintegration into the national
discussion of labor reforms and social policies. The reforms of 1990-91,
which introduced some changes to the original Labor Plan, represented a
moderate increase in workers' bargaining power in each of the three
central areas of the labor law: dismissals; the right to collective
bargaining; and the right of employers to hire temporary replacements or
to impose lockouts during strikes.
Law 19,010, enacted in 1990, regulates individual contracts. In the
area of dismissals, it introduces two important differences relative to
the previous law--the size of the severance compensation and the right
of the worker to appeal. Whereas the Labor Plan had introduced the
practice of dismissals without cause and established a severance pay
equal to one month's salary per year of service up to a maximum of five
months' worth, this reform reinstates the principle of dismissal only
with cause, and it increases the severance-pay ceiling to eleven months.
The law considers two possible reasons for dismissal--the traditional
"just cause" (serious misconduct) and the new "economic
cause." If the employee appeals and the employer fails to prove
"just cause," the employer would have to pay a 50 percent
penalty in addition to the usual severance. Failure to prove
"economic cause" would result in a 20 percent penalty.
The previous law was also modified to provide an option to replace
the normal severance with a "payment in all separations." This
option is available to workers with more than seven years of service
with the same employer. If this option is exercised, the employer would
establish a fund in the worker's name, with monthly deposits of a
minimum of 4.1 percent and a maximum of 8.3 percent of the salary (the
salary base having a maximum) in a private financial institution. These
contributions and the corresponding accumulated interest would be
nontaxable income and would constitute a fund that would be withdrawn on
separation.
Law 19,069, enacted in 1991, regulates the rights of employers and
employees during collective bargaining. Under this law, enterprise-level
workers' organizations have the right to negotiate with employers, and
employers are obliged to negotiate with them. The law gives the employer
the right to limit to thirty-five days the period of bargaining with all
unions representing the enterprises' workers. Under Law 19,069,
collective agreements can establish pay scales, indexation formulas,
fringe benefits, and the like, but they cannot limit the sovereignty of
the employer over the organization and administration of the enterprise
(Article 82).
One of the important departures from the previous law is that trade
unions or workers' associations are given the right to bargain with more
than one employer. Yet this right can only be exercised under the
following circumstances: in the case of collective bargaining affecting
more than one enterprise, prior agreement of the parties is required
(Article 79); submission of collective agreement by other trade union
organizations (such as federations or confederations) requires approval
by secret ballot of the absolute majority of the member workers of the
enterprise (Article 110); and a given worker cannot be covered by more
than one collective agreement (Article 83).
A strike would suspend the individual contract, give employers a
conditional right to temporary replacement, and give employees a
conditional right to renounce union membership and return to work.
Employers can use temporary replacements from the first day of the
strike if their last offer, before the strike was declared, was
equivalent to the previous contract adjusted by the consumer price index
( CPI). If the last offer was lower, employers cannot use temporary
replacements within a minimum of thirty days after the strike is called.
Employees have the right to renounce union membership and go back to
work fifteen days after calling the strike, as long as the outstanding
offer of the employer is equivalent to the last contract adjusted by the
CPI. If the last offer is lower, employees must delay their walkout a
minimum of thirty days after the strike is called. The law does not
establish a maximum duration for strikes, but if more than half of the
workers return to work, the strike must end. At that point, all workers
must return to the job. In order to make use of the right to replace
workers temporarily, employers must make an offer that at least adjusts
wages by past inflation. If the employer also offers other fringe
benefits but workers still go on strike, the employer may hire temporary
replacements. However, the employer loses that right if the wage
adjustment for past inflation is given but some fringe benefits are cut.
That would not be a contract equivalent to the previous one adjusted by
inflation. If workers go on strike, the employer cannot use temporary
replacements within thirty days of the declaration of the strike.
It was unclear in 1992 what the final form would be for the new
legislation on labor-management relations, labor productivity,
investment, on-the-job training, and other aspects of labor markets'
performance. However, workers have almost doubled their participation in
labor unions since 1983, and by 1990 about 13 percent of those employed
were affiliated with unions. During 1990, 25,000 workers, out of 184,000
who participated in collective contracts, used strikes as a means of
pressing their demands. Most strikes during 1990 and 1991 were of short
duration.
Chile - Economic Results of the Pensions Privatization
Chile's pensions system, which started to operate in May 1981, is
based on individual capitalization of funds. This system determines a
minimum basic contribution equal to 10 percent of disposable income and
makes the benefit a function of an individual's contributions during his
or her active life. Benefits for incapacity and survival are financed by
complementary insurance with financial reserves. Decree Law 3,500 of
1981 institutes a social security system that make contributions
obligatory for dependent workers who joined the labor force after
December 31, 1982, and makes them voluntary for independent workers and
those who had already contributed to the traditional pension funds. The
old pay-as-you-go system, which was being phased out, covered all those
workers who had entered the labor force in 1982 or earlier and who chose
not to transfer to the new capitalization system. The reform responds to
a need that has been recognized before, when the old system had entered
a phase of serious financial difficulties.
In the reformed system, the state now plays a fundamental role in
regulating and monitoring operations and guaranteeing "solidarity
in the base" through a minimum pension. All workers, after
contributing a minimum amount (15 percent of their gross income
annually), have the right to a minimum pension of 85 percent of their
minimum salary, even if their life-time contributions to the system
result in a smaller benefit. The new system brought about an increase in
coverage, with the proportion of independent workers covered increasing
from 58 percent in 1985 to 79 percent in 1990. The proportion of
dependent workers covered increased from 79 percent in 1985 to 92
percent in 1990.
Article 28 of Decree Law 3,500 establishes that the numerous Pension
Fund Administrators (Administradoras de Fondos de Pensiones--AFPs) are
authorized to charge a fee to cover their administrative costs. The most
important restriction is that, with a few exceptions, fees have to be
the same for all affiliates in a given AFP. After a relative increase in
the fees between 1981 and 1983, competition resulted in a steady decline
in the cost to individuals. In 1990 the cost for an "average
contributor" was 33 percent lower in real terms than in December
1983. Commissions fell from 5 percent of taxable income in 1985 to about
3.2 percent in 1990. In 1992 the AFPs were charging about 0.9 percent of
salary in insurance premiums and 1.8 percent in commissions, for a total
of 2.7 percent.
Strict norms regulate the investment of pension funds. Only certain
instruments may be used, and there are clear limits on the distribution
of investments by type of instrument. The dynamism of the Chilean
capital market since the early 1980s has forced constant revisions of
these norms. Pension funds are the largest institutional investors in
the capital market, representing 26.5 percent of GDP in 1990 (compared
with 0.9 percent in 1981). The average real return to investment of
Chilean pension funds between 1981 and 1990 was 13 percent. In 1992 AFPs
were authorized to invest up to 3 percent of their portfolios abroad,
double the previous maximum.
Chile - The Central Bank and Monetary Policy
One of the key lessons of the Chilean reforms is the importance of
macroeconomic equilibrium in providing the "right" environment
conducive to economic growth and stability. For all practical purposes,
by 1988-89 macroeconomic equilibrium had been achieved in Chile.
One of the problems that occupied many scholars and politicians in
the late 1980s was how to guarantee the continuity of macroeconomic
policy after the military regime. The key issue was how to ensure that
macroeconomic decisions, and in particular monetary and exchange-rate
policies, would not be determined by partisan politicians with a
short-term mentality. In short, a crucial point in the transition's
debate was how to remove Central Bank decisions from the day-to-day
urgencies of politics. This issue was seen as particularly important by
those economists who argued that the politically inspired management of
monetary policy was at the root of Chile's long history of inflation.
After much debate, the Pinochet government decided, in 1989, to
implement a new law that would greatly enhance the independence of the
Central Bank. The law made the bank autonomous and legally removed it
from the area of influence of the minister of finance. According to the
new legislation, the bank was to be governed by a five-member board, the
Central Bank Council. Each member was to serve for ten years and could
only be removed under a strict set of circumstances. The president of
the republic was required to obtain Senate approval to name new members
of the board.
When the new legislative project on Central Bank reform was announced
in mid-1989, the members of the opposition denounced it as an attempt by
the Pinochet regime to perpetuate itself in power. However, after some
internal debate within the CPD coalition, the opposition forces decided
to support the project, as long as the members of the initial board were
considered unbiased technocrats. After a long process of negotiation at
the highest level, it was decided that the first five members would
serve for two, four, six, eight, and ten years, respectively; two of
them were chosen by the opposition, two were chosen by the departing
Pinochet government, and the chairperson of the board was chosen by
consensus. It was also decided that the chairperson would serve for two
years. In 1992 the chairperson's two years were up, and a new member of
the board was chosen as chairperson, this time for ten years. On that
occasion, the idea of an independent Central Bank was put into effect.
In 1991-92 the Central Bank focused on two issues: the desire to
reduce the rate of inflation from double digits to single digits; and
the exchange-rate policy of trying to balance the need for continuous
promotion of exports with the reduction of inflation. To address these
issues, the Central Bank used a number of means, including the
auctioning of Central Bank bills and the acquisition of international
securities. Also, the bank introduced a series of amendments to
exchange-rate policy.
