Economy of Chile

The economy of Chile has shifted substantially over time from the heterogeneous economies
of the diverse indigenous peoples to an early husbandry-oriented economy and finally to one
of raw material export and a large service sector. Chile's recent economic history (1973) has
been the focus of an extensive debate from which "neoliberalism" acquired its modern
meaning. The democratic governments that succeeded the dictatorship since 1990 have
largely continued its economic policies, but increased social spending and reduced poverty.

Neoliberal reforms (197390)

. Chile is now the fifth largest exporter of wines in the world, and the ninth largest producer.

From an economic point of view, the era can be divided into two periods. The first, from 1973 to
the Crisis of 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 that first period, an economic policy that
emphasized export expansion was implemented. Some economists argue that the economic
recovery of the second period, from 1982 to 1990, was due to an about-face turn around of
Pinochet's free market policy and the fact that, in 1982, he nationalized many of the same
industries that were nationalized under Allende.[105]

Monetarist shock therapy and seven modernisations (1973

82)[edit]

Chilean (orange) and average Latin American (blue) rates of growth of GDP (19712007).

After the military took over the government in 1973, a period of dramatic economic changes
began. The military junta appointed a group of Chilean economists who had been educated in
the United States at the University of Chicago. The Chicago Boys advocated laissez-faire, freemarket, neoliberal, and fiscally conservative policies, in stark contrast to the
extensive nationalization and centrally-planned economic programs supported by Allende,

[106]

and the Import substitution industrialization and Structuralist economics supported by

Chilean governments since the Great Depression. In a shock therapy Chile was drastically
transformed from an economy with a protected market, with strong government intervention,
into a liberalized, world-integrated economy, where market forces were left free to guide most
of the economy's decisions.[106] Before 1973 the role of the state was to promote investment and
industrialization. The Chicago Boys restricted government intervention and public enterprise
activities. Businesses and lands expropriated during the presidency of Allende were reprivatized (with the exception of the copper mines). Price controls were abolished, import
liberalized, the financial market and capital flows were deregulated. Labor unions were
suppressed. Direct taxes and progressive taxes were reduced or abolished while indirect taxes
were raised.[107] The central bank raised interest rates from 49.9% to 178%. Thereby inflation
could be lowered[108] at the expected price of a sharp recession.[109] When unemployment
doubled some public work programmes were installed. [110]

Year

Inflatio
n (%)

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

508.1

376.0

340.0

174.0

63.5

30.3

38.9

31.2

9.5

20.7

While there were serious macroeconomic imbalances to address they were not sufficient to
explain the radicality of the market reforms. Inflation-fighting can be and usually is carried out
without wholesale privatization and liberaliziation with the aim to reverse the previous 50 years
of Chilean development. Initial support by the business community dried out when
contractionary monetary policies and hasty liberalizations caused a drop in manufacturing
output of 26% in 1975.[111] The first period advocating a Monetarist shock therapy and seven
Modernisations is marked by a high rate of business bankruptcies and a significant loss of
manufacturing share of GDP. The Chicago Boys argued that this was due to a lack of
competitiveness caused by the development strategy supported before 1973. Chilean
economist Ricardo Ffrench-Davis counters that the cause for those bankruptcies cannot
necessarily be addressed to outright inefficiencies since the severe recessions (around 1973,
1975 and 1981), real interest rates at an average of 38%, hasty import liberalization and an
artificially high exchange rate revaluation were the decisive factors of business mortality.[112]
After the recession of 1975 the economy expanded from 1977 to 1980 with high growth rates.
It made Chile a showcase for Monetarists and economic liberals. Milton Friedman called it in
his Newsweek column from January 25, 1982 a Miracle of Chile. Nevertheless, the economic
growth rate of the whole 1975-1980 period was below the potential Chilean growth rate. [113]

The boom ended in the economic crises of 1982. The Latin American debt crisis had a
devastating impact on every Latin American country but Chile was hit hardest with a GDP
declined by 14%, more than in every other Latin American country.[114] Besides the Petrodollar
recycling and the 1979 energy crisis there were some specific Chilean reasons for the crises
too. The Chicago Boys had expected that since the government had achieved a fiscal surplus
and the decision for external borrowing was left to private agents a foreign exchange crises
would not occur. But in an effort to fight inflation Dollarization was introduced which lead to a
Peso revaluation that caused high current account deficits which led to an increase in foreign
lending. Additionally capital controls were abandoned and the financial market deregulated
which led to an undamped increase in private foreign borrowing. [115] The debt crises led to
a bank runwhich led to an economic crises.
With the economic crisis of 1982, the "monetarist experiment" came to be widely regarded as a
failure.[116][117][118][119]

Pragmatic Neoliberalism (198290)[edit]

Finance minister Sergio de Castro rejected a competitive devaluation of the Peso even in 1982
despite a quickly growing rate of business bankruptcies. He argued that only the strongest and
fittest should survive. But with a deepening financial and economic crises that position became
unbearable. He had to resign.[120] One by one the economic crises of 1981 led to the
replacement of all the Chicago Boys.[121] Pragmatic economists had to socialize the two biggest
Chilean banks in 1982 and another seven collapsing banks in 1983. The Central Bank of Chile
socialized much of the foreign debt.[122] The public expenditure quota rose above 34%, even
higher than during the presidency of socialist Salvador Allende. Critics mocked the situation as
the "Chicago way to socialism".[123]
The pragmatic Chicago Boy Hernn Bchi was appointed as finance minister in 1985. He
revived Bank regulation by founding the Superintendencia de Bancos e Instituciones
Financieras (SBIF) and established capital controls to avoid another financial crises. He also
established ProChile, a Chilean government agency specialized in the promotion of exports.
[124]

A further promotion of exports were fostered by cheap government credit and subsidies.

Some tariffs were raised up to 35%. The socialized banks and some profitable public
companies were (re-)privatized.[124]
The pragmatic economic policy after the crises of 1982 is appreciated for bringing constant
economic growth.[125] It is questionable whether the radical reforms of the Chicago boys
contributed to the past 1983 growth.[126]