Macroeconomic stabilization as the ground of structural reforms in Chile

This essay wants to stretch out various measures carried out by Chilean governments to reform the country`s economic system from the past to the present. I will explain this chronologically divided in two parts: The time of the military regime (starting in 1973) and the following era of democratic rule (beginning in 1990 and lasting till today). The first part is divided into four phases (Slow Opening, Shock-programme, the Boom, the Recession, Neoliberalism of the Second Generation). In every part and every phase, I will show the various macroeconomic measures focusing the dimensions of antiinflation- strategies, budget austerities and handling the problem of debts, followed by the different structural reforms undergone in addition to these steps and finally the socioeconomic reactions of the country. At the end, I outline the current tasks facing Chile in respect of the Asian Crisis.

1. The Time of the military regime.

In 1973 a coup against the ruling president Salvador Allende allowed the military rulers, led by General Pinochet, to take over the power.

1973 to 1974: Slow Oppening

The first year of the military rule was characterized by a careful opening of the economy to the world market, attempts to increase production and to reduce inflation. Up to 1975, these measures were not successful.

1975: Economic shock-programme and the rise of the Chicago-Boys

This year radical liberal reformers influenced by their economic "gurus" Friedman and Hayek came to power in Chile. The so called "Chicago Boys" used outrageous monetarian measures to reduce budget deficit and inflation and they also tried a revolutionary restructuring of the economy. The pronounced goal was an efficient allocation of each resource on the market and a huge reduction of "discriminate" public spending.

Macroeconomic measures: In the first step tariffs were dropped and prices liberalized. The expenditures of the state were cut to 25%, the apparatus of state officials was reduced to about 10-20%, securities were cut and so were state`s subsidies. Income tax rose up to 10%, and a control over loans was established. The exchange rate was adjusted to increase exports.

Structural reforms: First of all, the new rulers privatized a vast amount of state owned companies. They also took back an agricultural reform instituted by the old government. They restructured the financial and the banking system and allowed private financial companies. In addition, they introduced an expansive export policy and an opening of the economy to the global market. In social policy the outputs by the state were lowered. The ideal state was considered to be only concerned with defense, law and order, and the central bank.

Socioeconomic reactions: As a first reaction, the GDP fell and unemployment increased as well as poverty. Huge amounts of capital left the country, and there was a great loss of capital in the country. Investment decreased.
 
1977-1981: The Boom

Within two years, the Chilean economy showed very positive reactions to these measures, then known as "the Chilean miracle". The "work of destruction" of the neoliberal reformers left only very efficient production based on strong competition. During this time vast structural reforms took place in the realm of social policy.

Structural reforms: Introduction of the Plano Laboral. On the one hand, the Plano Laboral made it easier to form unions, but on the other hand, laws were introduced to cut unions' power in wage negotiations so they were unable to improve the situation of the workers.
  In the same year, the National Health Service (SNS) was abandoned and replaced by the National Health Services (SNSS). In 1980 the Health Sector was privatised by decree. The end of this rebuilding of the health sector brought two different systems: One modern, private health system for the rich and one state based health system for worst cases (which insured most of the Chileans).
  1980 the social insurance system was also reformed. Instead of the old redistributive system (based on the idea of solidarity among the generations), the new system was based on the system of "individualized capitalisation" (the amount of the benefit as based on the individual effort). The pension system was privatized (so called AFPs - there will be papers on this later).
  Education was privatized, decentralized and depolitized.

Socioeconomic reactions: The GDP increased by this time fantastically. This "miracle" was achieved largely by a huge influx of external resources. Due to this there were a lot of foreign debts and even the balance of payments went down. Inflation could be reduced only partially, despite the fixing of the Peso to the Dollar. The outrageous import of mainly luxury goods had a negative effect on the internal industry, and foreign goods displaced local products. Unemployment rates rose and wages fell, poverty increased, and the social gap between rich and poor widened.

1982: The Recession

Due to external changes, increasing international interest rates, the fall of commodity prices and the holding back of credits the miracle changed into a nightmare.

Macroeconomic measures: The government's reactions were once more very restrictive. Budget spending was reduced, and wages were cut.

Structural reforms: The private banks were rehabilitated by the state.

Socioeconomic reactions: Unemployment continued to rise, and wages went down. The GDP fell to a record low, and many companies went bankrupt.

1985: Neoliberalism of the second generation

Because of events since the beginning of the eighties, a shift in economic policy took place. The new strategies even contained some forms of state intervention. The sword of Damocles was the gigantic foreign debts and all measures aimed to reduce them.

Macroeconomic measures: The fixed exchange rate with the dollar was abandoned, but the government continued to maintain a good exchange rate for the export sector. Moderate tariffs were put in place to protect the own industry.

Structural reforms: The export sector was once again supported, also by special credits of the Interamerican Development Bank and the Worldbank. Once more the finance sector was privatized, as well as many state owned companies.

Socioeconomic reactions: Although the GDP increased and there was an export boom and increasing investment, the high foreign debts remained. Poverty grew and the per capita income went down. Unemployment rose and the social spendings of the state went down.

2. Economic policies under the democratic government

The dictator Pinochet lost a plebiscit in 1988 and was forced to step down. A coalition of democratic parties took over in 1990. Furthermore a rethinking of neoliberal positions, influenced by the CEPAL, took place in all of Latin-America.

Macroeconomic measures: The new government started with very unpopular measures in order to seek the trust of foreign investors. The Central Bank (in coordination with the government) lifted interest rates. A tax reform was introduced (there is also a paper about this). 

Structural reforms: The opening to the world market was maintained. With this opening the government hoped for a diversification of exports. Furthermore they aimed to achieve the exportation of high-quality products in the nearer future. The announced goal was an improved qualifications of the workers, modernisation, and technological renewal. In addition they aimed for a better integration of the different sectors of the economy in order to raise the differences between the internal and external market. Since July 1998, Chile is associated with the Mercosur.

Socioeconomic reactions: The average growth of the GDP between 1990 and 1997 was 7,2% (compared to only 4.1% from 1980 to 1990). The export of goods and services also increased (8,6% compared to 7,0%; source: Worldbank). From 1990 to 1996 the GDP per head increased, unemployment decreased and so did the minimum wage (source:CEPAL). The total external debts increased between 1988 to 1997 (source:Inter-American Development Bank).

 3. Today`s situation and current tasks

According to the "1998 Index of Economic Freedom", Chile is ranked 17^th (!) among world economies.
The International Liquidity and amount of foreign direct investment are the highest since years (see Inter-American Development Bank). But still Chile is suffering from a high poverty rate and unequal distribution of wealth (see CEPAL).
  Due to the so-called "Asia-Crisis", Chile is looking gloomily ahead -through no fault of its own- at the prospect of little, maybe no economic expansion. The world demand for Copper (which accounts for about two-fifths of Chile`s world export) dropped and the prices slumped, Chile`s current account deficit has widened threatening to reach 7% of the GDP this year. The GDP growth for next year is considered to be between 4% or even zero. 

Macroeconomic measures: The Central Bank imposed a high interest rate (14%) to rapidly cool the economy. The government presented an austere budget for 1999.

Socioeconomic reactions: Workers who invested in their firm`s shares had to see them drop by a fifth over the past months, eating away their savings. Chile`s main share index is a third lower, than it was in January.
Companies battle with high interest charges and paralysed investment products. National rate of unemployment is still a tolerable 6.4%, but as growth slows, many economists expect it to climb to 10%.  
(see: "The cold wind blows", in:The Economist 3rd October 1998).

 Johannes Widmann