Towards a free market economy

Journal of DeveIopment Economics

IO (1982) 3-29. North-Holland

Publishing

Company

TOWARDS A FREX MARKET ECONOMY* Chile 1974-1979

Alejandro FQXLEY CIEPLAN,

Santiago, Chik

tember 1980, final version ‘Chile is a

Imputed to

study of the

received

economic management’ ent of State.

The most important reforms undertaken+in the underdeveloped ICNWU&October 5, 1979, declarations by A. Harbetger.

April 1981

*Rue, January

14, 1980, quotation

world in recent history’, Wall Street

‘When Washington ends with its political sermons to Pinochet’s Government, perhaps, as a retrbutton fcx the restoration of the friendly relations, Chile should lend us their economic team. Econnmists who can simultaneousiy reduce inflation, ta.tSs, and unemployment arc welcome in Wash, qgton’, Wall Street Jarud, January 18, t980, editorial.

‘Would be imitators in other countries should have a tield-day watching how this pilot experiment in radical rqht wing social and economic policies works’, The Economist, February 2, 1980. ‘We are s/j monetarist, we have reached a position where the Central Rank is hardly in control of the money apply anymore. la controls itself’, The Economist, February 2.1980, declarations by the Vice Presidnt of the Central Bank of Ch;le. This kind of economic liberalism is incompatible with any type of political liberalism. They could not

impose an economy at this kind of social cost without resort to dictatorship’, May 5. 1979, a statement by E. Frei.

The New York Times,

‘The Chicago Boyssre very satisfied. Their critics afftrm tha* the situation evolves from bad to worse. E'Q doubt both are right. Because the contrast could hard], be greater between the got d trend of the indicators and the lilck of ‘spill over’ on the population of this happy juncture*, L4 Mode, April 7,

1979.

The economic ?Gcy of Chile”s military regime has attracted internationtil attention, stirrinkup controversy in financial anldacademic circles far beyond its borders. The iwernational press has dedicated long articles to analyzing what has arch project on Stabilization Policies being jointly undertaken k,~ ‘This rsper is part of a r C!EPL %il, Chile, CEDES in Argentina, and CEBRAP i: Brazil. Thanks are expressed to SAREC, the Ford Foundation, The Ebert Foundation, and CLACSO for their financial assistance. The

version will appear in a volume edited by M. Syrquin and S. Teitel. to be published by Academic Press.

0304--3878182

$02.75 0 1982 North-Holland

4

A. Foxley, Towards a _,+eemarket economy

come to be called the ‘Chicago experiment’. At times the amount of attention paid to Chile seems exorbitant considering C’hile’slimited importance in the world economy. Why all the interest? The reasons are many and varied. Some people see the ‘Chilean experiment’ as a test of the consistent and sustained application of a monetarist strategy to the problems of economic instability and chronic inflation which have scourged m;;myWestern economies during the past decade. For others, the ‘experiment‘ is one of the ‘most important reforms in the underdeve!oped world in recent history’,’ a viewpoint which implicitly validates the ‘Chilean model’ as a credible framework to substitute for the type of economic policies which have been followed in many developing countries in the post-war years. Given the authoritarian political system in which the Chilean ‘experiment’ has been carried out and the ‘experiment’s’ high social cost, a third factor which arouses interest is a more general question. Chile’s current economic and political situation concretely poses the much debated problem of the interrelation between economic liberalism and poiitical freedom in the context of developing economies. One thesis, favorable to the authoritarian formuia, maintains that establishing ecolzomic ‘freedom’ is a prerequisite to attaining true political freedom.2 An opposing :.heory claims that there is a fundamental contradiction in a developing economy between economic neoclassical liberalism and the true democratization of a society.3 The relevance of monetarism, the search for new models of develoDment and the allure of authoritarianism as a political pattern for the process of economic stabilization are all themes which occupy an important place in discussions on modern economic policy. The economic policies of Chile’s military government proGde a case study which is particularly appropriate for illuminating these t hernes. In this work we try to answer the most obvious questions raised by the Chilean case. Is the Chilean economic ‘experiment’ a success or a failure? Are the policies which have been followed merely short-term stabilization policies or are they designed to change the pattern of development in the long run? How have those policies affected the structure of production and the patterns of income distribution and holdings of capital assets? In the second section, we analyze some of the principal macroeconomic results of the policies, relating them to the various possible objectives of the model. In the third section, we discuss the u;lc?erlying character of the policies followed, delineating the interrelations between sho *t-run stabilization objectives and the long-run objectives of structural changl I, The fourth section describes the principal changes in the functioning of the Chilean economy during this period. ‘Harberger (1979). ‘Cauas and Saieh (1979). 3Prebisch (1978). ‘Evenif orthodox neoclassical print. iples are followed with intelligent virtuosism, the great objectives of economic ekacy. social effkier ‘y and respect for human rights cannot he resched simultaneously.’

This section is su into three parts: the first deals with changes in individual economic ors (the State. the private business sector. workrrs): ihe second with the transfer of r~~~urc~s towards newey important participants in the the new ~o~~ci~~~ and the third with the changes in the em. A fifth section outlines ns in the way the economy ctive structure and in patterns of distribution are st~~died~The sixth sxtion contains our ccnclusions. 2.

succ

ilurcs of an economic policy

curred in the Brazillan case, the cconomk policy of Chile in the period en the abject of a profound controversy. The economic m that period are interpreted as a resounding success by some and as e by others. As we will see, two different economic stories can be constructed depending on the indicators which are selected to evaluate the

economy‘s rformance. Indicators which usually are cited as the basis for arguing the success of Chilc*s economic policy are presented in table 1. These indicators show: ( 1) a reduction in the inflatiap rate from 6 percent in 1973 to 39 percent in 1979. (2) the achievement of relatively high rates of growth for the gross domestic product (GDP) from 19 9 following the deep recession provoked by the ‘4Ilock’ treatment administered in 1975, (3) a significant reduction in the fiscal dui!cit so that the deficit was eliminated in 1979. (4) the dynamic growth of non-tra&lonal exports which tripled between 1974 and 1979, (5) a growing surplus in the balance of payments by 1979 a?; a result of the accumulation of reserves after initial diff?culties in stabilizing the balance of payments. and (6) an accelerattllg net Table I Maercleconomic indicators.” _._----I__-----.

19-m l974 1975

GDP

3.5 4.2 - 16.6

1076

SC)

977 9-w 379 ---____ll_

8.h 6.0 72

Net

-_I_-----

n-‘iscal deficit

traditional

capital

Balance of Gro\s

prices

CXptS

(2’

01

(41

in-flows (.cI

payments (6)

Consumer

Year

Non-

__-_ ___”-_- ----

.-----_-- -

.. -

-

225.9 2 73.2 SOI.9

531 3 “75.0

342 3

2.9 25.9 2.9

lO-7.9

2 0

510

2510

84.2 37.2 .I%( 9

1.5

---___

3

226.! 532

32,r9

5X8.5

443.0

644.9 A97.5

I._-w4.6 1.47x.9 _.___-

rest’rveh

(7) __~___-- ._- _._- --

2w.5

---~

4x5.7 7.0 535.K X03.6

.-

017.! 3 17.7 311.1

732.7 6X5.5 I (197.h 2,170.6 __---

‘Column (I) ODEPLAM (n.d.),annual rates af variation. The figures for 1978 and 1979 correspond w ~~~~jsj~~~~ estimates for GDP. (2) CPI, b) Cortbar and Marshall ( P980). (3) Treasury Department .&)_ Percentages 0fGDP. (4) Centra Chtle. in !3rencMhis( 1979). Figures in millions of dollars of 977. (5) lid. (69 Ihi. (7) fhtd.

A. Foxley, Towards

6

a .frec market

economy

inflow of foreign capital
GDP Production of goods Production of services GDP per capita Rate of investment Total employment Rate of unemployment -~

4.5 4.5 4.4 2.3 15.3 2.1 6.5

1970-1979 2.6 1.6 8.1 0.7 11.7 0.6 9.8 ___I__

1974-1979 2.5 1.9 t?;: 11:2 0.2 13.4

aR~w (1) ODEPLAN op. cit. and estimates. Gemitres Report no. 2 1 for 1979. Annual variation rates. (2) Ibid. The production of goods includes qriculture,fishing, mining. industry, and construction. (3) Ibid. The production of services includes electricity, gas and water, transportation, trade and
The figures above are averages for the period. They do not reflect the annual trend of the indicators, particularly for the last years of the period. In fact the averages, which cover a period characterized by a strong recession which lasted until the middle of 1976, conceal a trend towards recuperation beginning in 1977 which, for some indicators such as GDP, is significant. A more precise image of these trends can be seen in table 3, which includes *Friedman ( 198 1).

8

.4. Fo.xle_~,Towards a free

market

economy

figures to fill in the picture presented by the positive and negative indicators shown in tables 1 and 2. In table 3 it is apparent that the trend towards recovery of GDPjust reached in 1978 the per capita level of 1970, and only in 1979 surpassed the per capita level of 1974? T,lble 3 also shows a very slow recovery of the rate of investment beginKing in 1977, as can be observed in the fourth column. This slow recovery suggests that the possibility of maintaining the high rate of growth of GDP observed in the last three years should be viewed very cautiously. On the other hand, the surplus in the balance of payments observed in table 1 has been accompanied by a marked trend towards a deficit in the current account (and aiso in the trade balance), which was compensated by an influx of financial assets from abroad. The debt service ratio rose over 40 percent of exports in 1975, and has stayed there until 1979. One of the most striking aspects of the Chilean economic experience in the p,ast six years has been the simultaneous deterioration of employment, wages, per capita consumption, and other social indicators which measure the popula;ion’s access to housing, education, and health as well as the skewing ofconsumption by income strata. These figures are also shown in table 3. The trend towards recovery reflected in the social welfare indicators is not very significant. The national unemployment rate has remained above 13 percent. Real wages and salaries in 1979 are still 18 percent below the 1970 lev&’ In brief, the economic results of the 1974-1979 period give mixed signs: the rate of inflation decreases, ;,fter a deep recession GDP reaches pre-recession levels, the fiscal deficit is eliminated, there is an accumulation of reserves and nontraditional exports expand rapidly. At the same time, a low investment rate, a significant deficit iri t!.le commercial balance, increasing external indebtedness, high unemployment, real wage reduction, and a deterioration in the distribution of consumption and basic social services are among the negative factors. Can this be considered a successful result‘?Obviously the information given up to now is relatively aggregated. On the other hand, as is obvious, the evaluation of any economic policy depends on the objectives chosen. Some of the objefctives in Chile 19X-1979 were related to economic stabilization. Others had to do with an attempt at transforming the basis of functioning of the economy radically altering the ownership of property, the structure of prcsduction, and the development strategy. Thus, we must go beyond macroeconomrc indicators to e\ Aate the degree of success in these other objectives. “It has to be noted that rhe National Accounts have been published until 1976 only. There are e’stimates for some global indicators prepared by ODEPLAN, which cover the years 1977 und 19%. and which have been repeatedly modified by ODEPLAN. These h bve to be considered as provisional figures. The estimation of the 1979 growth rate was made by GEMINES, :I private firm. It is noI an official estimate. ‘The Wages and Salaries Index in nominal terms has been deflated by the Consumer Prieu: Index as corrected by Cortrizar and Marshall (1980). The corrected CPI shows that actual price increases in 1978 were 52.8 percent over the official CPI published by the National Statistical Institute (INE) and 27.5 percent OVY the CPI corrected by the University of Chile, the latter being the most commonly used until the Cortkar-- Marshall study.

3. Nature of the economic policies in Chile, 19744979 The economic policies evaluated in this paper are an attempt to radicalI> apply an orthodox stabilization approach which, under very different political conditions and with little SWXSS, had been put into practice in several countries at the end of th y sixties in Latin America.’ st aim of the policies is to balance the external principal tools are monetary control and elimination of the ther with these key policy measures, the iminate subsidies and exchange controls, rate, and gradually readjust the exchange rate. It ttempts to eliminate restrictions on the flow of foreign capital and to g to public interprises. At the saml: time, it edtqme$ real wage&This policy package is oriented to the elimirlation of e inflationary process. 1973 are not L>nlyshort-term adjustment hese policies have a strong component of structural than .’ The diagnosis of inflation, aithl.lugh stressing its monetary sed generaKed malfunctioning of the economy. Key factors would be the excessive size of the State including public enterprises, the ineffrcient allocation of investment due to the lack of a private capital market and the misallocation of resources resulting from high tariff barnzrs. This is the rationale behind the structural changes proposed in Chile after 1973. The implementation of structural reforms along these lines is given as high a priority as theeconomic stabilization program itself. When there is a tradeoff between the two, it is the long-term objectives that often prevail.’ Therefore, it seems justified to define the character of the Chilean economic policy, as opposed to the monetarism of the fifties, as a new form of structuralism. ObviotJy the objectives and the instruments used differ radically from those proposed by the so-called Latin American structurahst school. Also the implications of the policies in terms of income distribution and changes in the power structure differ greatly. But in its reach and even its ‘revolutio ry’ fervor, it is not less ambitious nge from the left, as during the than the most radical attempts at structural Allende period in Chile. This new ty of economic orthodoxy is not only a Chilean phenomenon. Similar policies are being applied in Argentina and Uruguay? It is not necessarily a coincidence that these ‘orthodox-structuralist’ policies arc being applied in these three countries by authoritarian governments. We will examine in the next two sections the nature of the structural changes brought about as part of Chile’s orthodox-authoritarian experiment.

‘Same examples are given in Foxley ( 19801

A.

10

Foxley,

Towards

a free

market

economy

a

4. Changes in the functioning of the economy FJr clarity’s sake we shall divide the subject in three different, although related, aspects: (1) changes in the role of economic agents, (2) mechanisms of transference of resources to ‘new’ economic agents, (3) opening up of the economy to world trade. 4 1. Changes in the role of economic agents: The state and the privatization oft/w economy

One of the basic elements of the new economic policy consisted in a drastic change in the role assigned to economic agents in Chile. The State gradually decreased in importance. This was attained by means of a reduction in public expenditures, and a more limited presence of the State as a producer and as a developmental agent. As can be seen in table 4, fiscal expenditures as a proportion of GDP drops from 26 percent in 1974 to 19.7% in 1978. This was accompanied by a policy of privatiza-ion of public enterprises, which meant that out of 507 public enterprises in 1973, only 15 would remain in government’s hand by 1980, as can be seen in table 5. The State also diminishes its developmental role, an outstanding characteristic of its action since the creation of the ‘Corporation de Foments’. This developmental role had increased considerably during the governments of Frei and Allende, as can be seen from the figures of public employment by activity in table 6. The withdrawal of the State from development assistance affects mainly small producers in the agricultural, mining, and industrial sectors as well as the process of Agrarian Reform that not only comes ‘0 a stop but is in fact reversed, by returning a significant share of expropriated land to old owners, as will be seen later on. Another Geld from which the State withdraws to give w;I:~to the private sector is that of financial intermediation. Table 7 shows that financial resources deposited in public institutions decrease from 50 percent of the total in 1970 to 3 1.8 percent -LI1979. The share of the private sector increases from 11 percent in 1970 to 64,7 percent in 1979. Finally, the State di~minishesits role as regulator of external flows. The tax treatment for foreign investment is liberalized, Restrictions to the remittances of profits abroad are eliminated md the ceilin external borrowing by the private sector is gradually lifted.” 1 This withdrawal of the State frcbrn economic activity is accompanied by a substantial decrease in public tmployment, as can be seen in table 6. Public sector employment falls nearly 20 pe;::ent between 1974 and 1978.Thus previous expansionary trends we..edrastically reversed. ’ 2 The employment reductions are more important in development institutions (19 percent reduction r year) *’Herrera and Morales (1979). ’ 2With regard to 1973,public employment dropped 25 percent and represents a decrease of 100, persons.

11 Table 4 nditures and fiscal deficit (percentages

of GDP).”

Total expenditures Fiscal deficit 2.9 9.3 12.2 27.7 8.9 2.9 2.0 1.5 0.8 mrtment 0~. cit., and ODEPLAN op. ude our estimatiorr sf nominal GDP.

Table 5 Public enterprises (number of entii;rprises).8 Target 19x0

1970

46

45 4

zsc,

19 _--

15

259

4

-

--

17

-

46

507

70

1s --

CORFO (IS?SO),,. The figures correqy >nd to firms owned by CORFO.

Table 6 Employment in the public sectcv (thousands

of persons and annual

Administrative

Development

servi

institutions

32.3 4&l 46.2

28.5 44.3 69.5 34.4

6. I

7.6

52.8

‘3.5 - 3.3

- IO.1 l__p--

Social services

variation

rates).”

Pubhc

enterprises

Total --

94.5

49.6

209.9

133.8 178.3

55.8

280.0

li76.9

59.5 35.9

360.2 293.3

6.0

2.0

4.9

7.4

I.6

6.5

-0.2

- 11.9 _____--

- 5.0

12

A. Foxke~r,Towards a free market economy

and in public enterprises (10.5 percent reduction per year). These figures clearly reflect the priorities in the new economic policy. Where the State left the field, t ne private sector,either domestic or foreign, entered. Particularly important is the growth of private financial institutions as can be gathered from table 7. nixed labor is exclu from this picttzre. Not only wages are controlled d in rest terms, but no collective lyargaining is mechanism exists for the participation of IO79 is a “labor plan’ implemented which ination of workers to the employers, the unions and allows for a very restricted form of collective

nts which we have just described (less mit activit &es,modifications in labor s initially posed only as an eficien4.y requirement of the model. It was supposedly neutral as to its distributive effects. In practice this was not so. In fact, the economy% adjustment process to the desired conditions implied a

massive transfer of resources towards the private sector, particularly towards financial firms and large industrial enterprises. This transfer of resources was made possible because of the particular form taken by the processes of privatization, of market liberalization and of inflationary control. Thug privatization of State enterp!*ises occurred in extremely advantageous conditions for the new owners. In table 8 we have estimated the implicit subsidy for those who bought these public assets. The subsady turns out to be equivalent to 30 percent of the firms’ net worth and up to 40 percent and 50 percent of the purchase value. l3 The low sale price was influenced by the State’s urgency to sell Table 8 Subsidy in the ale of state enterprises(millions of dollars of i97Q5eb _-_I____*______-Discount rate ,~,j___1974-78 -IO 25

1979-82 -_1___ 10 15

Sale wlue

Value of assetsin 1978

496, I 533.0

731.11 731.8

Subsidy ~235.7 198.8 ._---

Subsidy as percen Pige of asset value -~ 32 2 2: .2

correspand to a sample of 41 enterprises and banks which represent went af the firms auctioned. The value of the sali: updated to 197% for rlrr firms and 8 quarters for banks. with w.I in+ztrial ..“.. 8 percent respectiveiy . in:e?rest IO %%wce: Dahse ( 1976) and CX JWO ( I 980). I‘The calculation was made based on the figures of Dahse ( 19791, for a sample of 41 enterprises,,“›;i:i explained in the note of table 8.

A. Foxley, Towards a free market economy

14

Table 9 Balance of t!le agrarian reform in Aprrl 1979. Situation (1) (2) (3) (4) (5)

Restitution to former owners Area assignedb Transfers to CORA’ In the hands of ODENA Total expropriated

Hectares

Percentage

2,945.640 3,521.141 l&39.772 L839.3 B5 9.965868

29.8 35.3 16.5 18.4 100.0 --

“Source: Presentation of the Government of Chile to the Conference on Agrarian Reform and Rural Development, 1979 in Taller de Coyuntura (1979). bFrom the tota 1crf the area assigned to the beneficiaries of the agrarian reform, to June 1978, almost 4Opercent had been sold or leased for its exploitation to third parties ‘Includes auction of lands and transfers to other public institutions (such as CCINAF) or to private ones.

and its doing so in a moment of deep recession and high interest rates, a point at which short-term profitability of the enterprises decreased. Given these circumstances, only those firms who had liquid resources or access to cheap foreign credit were in a position to buy the auctioned enterprises. Something similar occurred in the agricultural sector, in which the policy was to return a fraction of the lands expropriated during Agrarian Reform to their primitive owners. Another part was sub-divided into individual plots and han over to peasants, as indicated in table 9. In April 19’19, 30 percent of the expropriated land had been returned to the former owners and 35 percent had been assigned in individual plots to peasants and small farmers. Motxovor, already in June 19’78,nearly 40 percent of these lands had been sold or leased by peasants to third parties, as a consequence of the high cost of credit and reduced technical assistance. As can be seen, the privatization of manufacturing firms, as welt as that of the land reform sector, implied a transfer of assets, generally undervaiued either to former owners, in the agricultural case, or to business groups in the industrial and financial sectors. The foregoing tendency was reinforced by the particular form taken by the process of market liberalization. Thus, the liberalization of the foreign credit market was only partial. A ceiling was imposed on foreign borrowing, as a percentage of the Aue of assets. Given that on!y large enterprises and the better established banks and financial institutions had access to cheap, ratiD:led external credit, and that domestic interest rates were much higher, this constitute,d a source of large pr&its for banks and larger firms. Zahlcr has estimated the profit for the enterprises which bud access to external credit in the period 1976-19’79to be in the order of 8W miilion dollars, as illustrated in tab!c 10, in which we halve reproduced Zahler’s resuW4 These profits arise from the 14Zahler (1979)

Table 10 P

Ftna l&l profits of private enterprises I_ P,.-- P

with access to foreign zredlt (in miiliors of dollars).” Financial

L1M.x

~~~~~t~~

DilTeoence

profit

Art. 14

I?0 207 326

681 351 318 155

9.x!

32.4

131 169 251

11.21

i9.7

1;3

133

654 -------._--

836

P__

Stock foreign debt

Autonomous capitals

--

1.505

1. the interest rate in Chile and twice thti LABOR rate.

rential in interest rates, taking inro account expected devaluation between the foreign rates (from 6 percent to i I percent) and domestic interest rates in dollars (hztween 118 percent and 42 percent). On th,- other hand, the process of market liberalization did not fo’tlowuniform rules wlt)t regab=dto factor an& goods prices. Upon the drastic freeing up of prices followed by wage cor;tractiizri, a strong bias against labor sets in, as can be seen in table 11. The drastic fall of the relative price of Iahor with respect to wholesale pric;cs, export. and industrial prices IS obvious when inspecting table 11. The rS&tive reduction in wages reaches between 50 percent and 60 percent in 1976, and is still bt xen 30-4 percent during 1978.

TatPie I I ---

-_- -. Ic”“O 19”‘4 19”5 19”6 19’ 19^.‘8

_

-_~^s_l_cl_l-

-----_

Pri~u?s and wages I.I970 indexes = 100) a ” _- _I._-_ --_____-------____

(11 Remunera tiows wholesale prices i______ - l__l_ 1w.o 49.7 40.0 40.5 _97 _*_ ’ 57.9

ba Remuneratloi~s e&&XX~ fV-iClt~ _ __ ___----

--. (3) Industrial remunerations -industrial prices -_.-. ---

l!k(?.O

I Ml.0

50.3 34.3 d$Y; 60.7 57.9

57.5 46.7 53.5 67 2 73. I

E, Mice de Su&&x~ y Sa!arios (ISS) and ;YM, national products. (2) INE. ISS, Exchange rate anu ~fren~~-~~a~i~, lrrdcce tie Precios Extcrrtos J Wnr Real de1 Comercio Internacionul dc Chile, Notas Ttkniaxe no. 15. CIEPLAN, 1979. (3) INE. ISS. ndustrial Sector and Industrial IPM.

These sets of relative prices are extremely favorable to procluctive enterprises, particularly those in export ;rctiv;ties. Undoubtedly it allowed them to absorb a good part of the greater costs associated with the severe 19754976 recession and it has provided a cushion that facilitates adjustment to increased external competition resulting from lolwer tariffs. T.he effect of changes in relative prices is reinforced when considering the reduction in the employer’s contribution to social security. The accumulated effect of both factors on the cost of labor can be observed in column (2) of table 12. Given labor productivity increases, the incidence of labor costs for the industrial producer drops from 15.8 percent of the gross value of production in 1970 to 10.2 percent in 1978, as indicated in the last column of table 12. Table 12 Productivity

and labor costs in the industrial

Year

Wages (1)

Co.% o,L’Rr.ror (2) -_

1970 1974 1975 1976 1977 1978

100.0 57.5 46.7 53.5 67.2 73.1

100.0 59.9 47.6 54.5 67.6 70.5

II___--_

sector.*

Physica! productivity (3)

Cast of labor over GVP (41

100.0 99.6 77.1 94.9 103.7 109 l

15.8 9.5 9.s 9.1 10.3 10.2

‘Sources: (1) INE, ISS, Industrial sectcr and industrial /PM. (2) Column (I) plus the employer’s contribution to social security. The actual rate of contribution efkctivc for 1974 was considered, as calculated by ODEPLAN op. rit. and it was varied for the following years according to the rates of the Service of Social Security. (3) ODEPLAN op. cit. and employment by sectors figurp ; riom ODEPLAN. (4) For 1970 ODEPLAN op. cit., for the following years it is calculated using columns (2) and (3). GVP: Gross Value of Production.

Another important way in which resources were transferred to the economic ‘newcomers’ came about as a by product of the policy of economic stabilization. This policy was characterized by a strict monetarist, closed economy approach. The policy sought stabilization through partial’use of the instruments at its disposal: principally the reduction olb’money supply, real wages, and the fiscal deficit. The approach was successful in producing a sharp drop in effective demand and in reducing real wages. Prices increased without any relation to demand since the impact of expectations and costs w’asdificult to gauge in a situation which passed rapidly from ‘repressed’ inflation to open inflation. Consquently, high inflation continued far longer than expected. The economy entered a prolonged phase of recession with high inflation, a period characterized by generalized market disequilibrium. Market imbalances surfaced in the form of sharp and intermittent movements in relative prices.

17

Anyone with enough liquidity to react quickly to these fluctuations in relative prices benefited from those movements. So did, obviously, anyone xi.iLhspecial nomic info~~~io~ which would allow him to correctly predict those head of time of any corrective measures planned by the which controlled the country’s large firms and financial of these opportunities for speculation. Market on lasted over five yea ;, long enough for those emselves the speculative g ns available in different

in 1973, the operation of the Chilean economy not only because the economic roles assigned to different but also because the dynamic processes of adjustment to a new economic model made possible the real transfer of resources towards cyonomic industrial-financial groups. These groups took advantage of this resource transfer, using it to acquire a dominant position in the country’s productive apparatus, as wit1 be shown below.

the pnd of 1973, the average nominal tariff on imports to Chile was 94 percent. By June 1979, a gradual policy of tariff reductions brought nearly all tariffs down to a uniform 10 percent except for automotive: vehicles. The process of tariff reduction, which took a little over five qears, was part of a general liberalization of restrictions of foreign trade: elimination of non-tariff barriers; a reduction on limits to foreign investment, foreign credit, and foreign exchange transactions. At the same time, however, the government attempted to mamtain an exchange rate which would favor Chilean exports. The government also sought to encourage exports by exempting exported goods from the across-theboard value added tax on all products sold in Chile and from export custom duties. Policies designed to open the economy were resolutely put into effect from 1974 to 1978. By the end of six years, the Chilean economy was well on its way to becoming an ‘open’ economy ith few barriers to international trade. Below, we will briefly review the princip changes which have occurred as ;d result of the pen economy.’ ’ transition from a closed ralizing imports was to encourage the development One of the objectives o of an tixport sector. Lower tariffs reduced the cost to the Chilean producer of intermediate goods. An increase in the volume of imports would raise the equilibrium exchange rate for the dollar, creating an exchange rate more favorable to export growth. At

“What

follows is based on stwiies by Ffrerlch-Davis

( 1979) and Vergara ( 1980).

A. Foxfey, Towards a +free market economy

18

The policy ofexport stimulatil.>n was :ilso helped by the low wage rates which prevailed during that period, as was shown in table 3, and by the special tax exemptions c-n exports which were mentioned above. The policy was also aided by excess capacity in the industrial sector which resulted from the anti-inflation program. The growth of exports in the period was undoubtedly significant. Normalizing for the price of copper, total exports rise from 15 percent of GDP in 1970 to 18 percent in 1977. Nevertheless, the greater success was obtained in the growth of non-traditional exports, as shown in table 13. During the period 197&1979, nontraditional e:iports tripled. This was accompanied by export diversification. If copper is excluded from total exports to avoid the effect of excessive price fluctuations, industrial exports rise from 59 percent of total exports in 1974 (excluding copper), to 65 percent in 1978.’6 Table 13 Imports and exports (in millbns

of dollars of 1977).

1970

1974

1978

1979

Food consumption goods Non-food consumption goods Capital goods Intermediate goods Intermediate goods including oil, wheat and maize

1074 191.6 550.2 1,055.2

85.5 236.8 336.3 1,769.7

115.7 410.7 566.6 1,533.8

130.2 528.7 668.7 1.925.9

907.4

1.099.6

940.9

1.117.8

Total

I .904.4

2,428.J

2.626.8

3 I_. 753 F c .C

Traditiona! Semi-traditional Non-traditional

1,897.O 93.2 225.9

2,257.l 174.5 273.2

1,233.6 226.7 644.9

1,695.2 293.3 897.5

Total

2,216.1

2,704.a

2,105.2

2,886.0

Impnrts

Eixports

aSource: Ffrench-Davis

( 1980)

As regards imports, they grow rapidly after 1978, as seen in table 13. The expansion is particularly significant f\)r imports of non-food consumption goods, whose growth rate is over 100 per La between 1974and 1979. On the other hand, imports of capital goods fall during the recession and only In 1978 do they recuperate 1970 levels. A similar behavic(r is observed when looking at intermediate imports. I? What impact had the opening of the economy on the structure of production, “Only exports of goods are considered in these figures. “Excluding oi2, wheat and maize.

A. Forley,

Towards

a -free market

economy

19

particularly in the industrial sector? The manufacturing sector suffered the simultaneous impact of recession and tariff reduction, which negatively zBected production levels, as can be observed in table 14.’ a Both effects are not easy to separate. Yet, based on Vega&s study, we have in table 14 grouped sectoral data that will aliow us to dist among sectors depending on how they have been affected by the opening ade and by recession, respectively. ’ g In grclup (A) ose sectors that bvere simultaneously affected by falls in domestic demand and by tariff reduction. In these sectors production decreases, and imports increase,, giving way to a marked desubstitution of imports. Therefore_ this is a case of sectors which have been affected simultaneously by falls in Table 14

up to world markets:

ffects on the industrial

PP-P

sector (annual variation rates 1969/70-1978).”

I_ Production W Aflected hy opening and fall internal demand

Imports (2)

Exports (3)

Domestic Import demand substitution (4) (5)

of -

2.5

4.7

22.6

- 1.8

46.0

- 1.2

- 3.4

- 3.3 -- 0.6

- 22.2 -9.1

- II.2

Textiles, clothing and footwear (321, 322.323 and 324) industrial inputs (351, 354, 361 and 382) Others (342 and 385)

-0.6

6.1

- 5.9 - 2.2

4.8

24.2

2.8

- 7.4

Aflected

- I.1

8.7

-- 1.1 - 1.2

140 6.9

23.3 -- 15.4 46.5

2.0

Electronic equipment (3832) Transportation material 1384)

6.7 2.2

- 17.7 - 27.2 - 14.4

.4flected demand

- 1.6

- 70

5.X

_- 2.0

x.0

- 1.5

- 6.0

12.u

-- 2.9

6.7

- I .‘a

- 16.4

- 8.7

-- 3.6

13.2

2.9

Ii.4 15.4 10.0

-- 0.7 2.9 - 8.5

6.4 11.4 -- 2.0

17.1

I.7

- 1.4

by opening

to trade

hy the far1 in internal

Intermediate for construction (369. 371 and 381) Unvulcanized rubber and plastics (355 and 3S6)

Timber (331) Paper (341)

0.6

-9.z - 29.9 2.4

(311. 31%. 313, 314, 352, 362. 3833 and 390)

2.1

4.8

Tot al

0.2

I.6

Oriented

to exports

4.4

others

- 0.6 - 1.4 15.3 ________.__--.---_----_--~

“‘Source:Vcrgara (1980). Domestic demand is measured as a proxy by the difference between production plus imports, minus enporta. Column (5) indicates the variation in the import ccofkient over total supply.

“The customs duties reduction startecl to be an important factor only in P976. See Ffrench-Daw

( 1979). ‘“Table 14 IS the author’s elaboratiorl based on original

ata bj Vergark (1980).

A. Foxley,

20

Towards a .fiee market economy

demand and by import liberalization. This group includes textiles, shoes, and clothing, as well as some intermediate inputs for industry. Group (B) includes those activities in which, in spite of 2.n increase in domestic demrtnd, production has fallen. At the same time, imports increase significantly. These are sectors typically affected by the opening to trade. This group includes the electronic industry and transport, among others. Group (C) consists of intermediate inputs for construction and rubber and plastics. These sectors are mainly affected by recession rather than by tariff reduction. This may be verified by observing that in the face of contractions in demand, both imports and production decrease, but the former fall even more sharply. Group (D) represents export oriented activities that successfully adjusted to lower tariffs, like wood and paper. In group (E). whose principal component is ‘food, beverages and tobacco’, we include sectors where both production and imports grow. Table 15 shows the behavior of employment by branches of industry. The sectors most all&ted are textiles, clothing, footwear; metallic products, machinery, and equipment. These are activities in which the negative impact of recession and opening to trade are probably reinforced, as we saw before. Other sectors similarly affected are non-metallic minerals and basic metals, which typically depend on domestic intermediate demand, particularly of investment goods. Investment remained at low levels all throughout the period. It is interesting to note that for all industrial sectors, except wood and paper, an additional deterioration in employment is produced after the recession is over, that is, after 1976, which is a period when tariff reduction had the strongest impact. This indicates that the falls in industrial employment cannot only be explained as a transitionaty result of recession. The ongoing change in the Table 15 Industrial

production

and employment

(1970 indexes= 100). -

1970

1974

1976

Employment

100

I 10.4

Foods, drinks and tobacco Textiles, clothing and leather Timber Paper Chemicals Non-rr.etallic minerals Basic metallic MP~Pllic producls, machinery ard equipments

100 100 100 100 1cX lot I CM1

107.0 109.9 99.5 109.3 114.1 117.4 112.6

92.6 103.4 87.1 72.2 98.0 102 3 91.6 101.3

oz.0 99.1 87.6 99.3 94.5 98.5 86.0 88.9

LOO

117.8

92.0

84.3

100 100

108.6 107.3

81.9 92.2

96.3 110.9

Prridricliorz IFdE SOFOFA “Sources: SOFOFA, Industrial.

Indice de Produccih

y Octrpacio’n industrial

e INE, fndicc

1978

de Prodrrccioh

industrial structure seems to be generating a lower demand for labor. If this is only a transitory phenomenon typical of the adjustment proce!.s or a more permanent one is something that cannot be answered with avai In brief” empirical evidence indicates that trade liberalization significant export expansions (h) a than in the composition of imports, in which wth is observed i he imports of non-food consumption iated impact of tariff reduction on the vario;ls branches of tion in industrial employment, accompambd by a slow ustrial output levels. Undoubtedly this adjustment process was helped by the remarkable fall in w ges with respect to the exchange rate and to industrial prices, as was seen in ta 11. By this means, the industrial sector was ab!e to absorb part of the impact external competition. There is also some evidence that firms hedged against foreign competition by becoming importers ofcompetitive products? On the other hand, a greater specialization in production is evident in some industries, as a way of increasing production efftciency in order to meet the import challenge.21 Another factor which facilitated the adjustment was the access to foreign loans. The flow of foreign credits to the private sector increased sharply. as can be seen in tables 1 and 16. Table 16 Foreqgn debt.” -___1_--

___-__--_

Short-term Public sector

Private sc~tor

monetary sqstem

Millions

Millions of dollars

Millions of dollars

--wp_

of dollars p-p-

Percent

I970

2.574

1973

4.022

82.4 84.2

1978 1979

4.840 3.0-2

66.2 60.0

‘Y&wee: Central Bank, Foreign

-

__.__ _-Percent

__-____.I_--501 16.0 413 8.6 1.569 22.7 2.736 32.3 ---

- ._____..~_

4x

339 502 655 --

Total _ _---._LI~__

Percent -_____~ 1.5 7.1

7.2 7.7 _L_I_-Ipp.--

Debt of Chile 1970, from Ffrench-Davis

Million\ of dollars

Percenl

3. I23 4.774

100

6.91 I 8.463

la, loo

I00

and Arellano (1980).

It is perhaps too early to make a definite assessment of the impact of trade liberalization in Chile. Although the process of tariff reduction ended in 1979, the appreciation 0 domestic currency that results from a fixed exchange rate established in une 1979 (given that domestic inflation more than doubles external inflation) is further reducin effective protection in the industrial sector. A final evaluation must wait until these effects have sorted themselves out.

20Ffrerxh-Davis (1979). 2’ C’ergara ( 1980).

A. Foxlcy, Towards a free markel economy

22

5. Changes in the structure of the economy

Up to this point, we have analyzed the main changes in the economy’s operation which resuited from policy reforms begun in 1973. These changes, the new roles of participants in the economy, and greater degree of openness to foreign trade, no doubt have repercussions on the structure of production and on patterns of income and wealth distribution. But the effects are slow to take form. Given the short period of time which has passed, we can now only observe the merging outlines of some of the tendencies. 5.1. Changes

in the productive

structure

1~ table 17 we show the composition of production and employment for the principal productive sectors. The primary sectors increase their relative importance in production from 20 percent in 1970 to 22 percent in 1978. In spite of its greater importance in productiorl, the participation of the primary sectors in employment falls from 26 percent in 1970 to 22.7 percent in 1978. Table 17 Production

composition 1970

-. .---.

.-----_~-

____---

Agricui t ure MlGq lndustq Construction Energy and transporatio.3 Commerce (trade) Servicesd Total

_-__Ip

and employment 1974 _-~

_-

(percentages).” -___~_II__--

-

197X ----

-

Production

Employment

Production ---_

9.7 10.7 26.0 5.0

22.6 3.2 17.x 6.9

9.1 11.6 5.7 4.x

18.3 3.7 I8.S s.7

10.2 12.0 22.7 2.8

13.3 3.4 16.I 4.0

6.4 22.3 19.9

7.4 12.1 30.0

6.8 21.9 20.1

7.6 12.7 33.4

7. I 23.6 21.6

7.3 16.7 33.3

100.0

100.0

100.0

100.0

100.0

100.0

--w

EmployProducmenth tion ___

.-~

Employment’ --_ -

%‘o~rw.~:The production columns come from ODEPL.jN op. cit. and those af employment ODEPLAN, Antecedentes sohrc el Desarrollo Ecwno’micc~CMlerlo /960~ I’SW “Corres~ponds to the survey of 1975. ? here is no information for 1974. ‘Corresponk to the survey of 1977 ‘,lst information available, dEz:cludes b ousing property,

from

01~ the other hand, the manufacturing sector drops its relative importance in GDP as would be expected, since it was the most heavily protected sector before the tariff reforms and was at the same time affected by rectuctions in domestic demand. The industrial sector participation in GDP falls 3 percentage points between 1970 and 1978. In employment, the reduction is close to 2 percentage points. The reduction of industrial employment continues as a tendency even after 1976, when the industrial product begins to recuperate.

A. Fosle_r. Towards

a jiee

market

economy

23

The moct dynamic sectors in the period are commerce and services. Jointly considered their participation in production rises from 42 percent iAl1970 to 45 percent in 1978. One out of two jobs in the economy was generated in these sectors towards 1978? The inportance acquired by the service sectors is such that their participation in product and employment is higher than that of all productive sectors jointly considered (agricuhure, mining, and industry). On the other hand, infrastructure and construction activities decrease in importailce. The latter reduces its participation in the product by half. Summarizing, the changes in the structure of production and employment are meaningful in spite t>,fthe short time transcurred. A part of these changes do not reflect modifications in the productive capacity but only in the degree of utilization of that capacity.23 The direction of the changes is clear: the production of primary goods and that of commerce and services grow at a significant rate. Industry and the sectors of infrastructure at a very slow pace. These unbalances in sectoral growth, if persistent, will probably end up modifying permanently not only the productive structure. but also income distribution patterns. 5.2. Changes in patterns of distribution An economy whi n undergoes profound changes such as Chile experienced beginning in 1973 wili probably, in the long run, sustain changes not only in its production and trade structure, but also in its patterns of distribution. In the long run, some of *he important factors related to changes in income distribution are changes in patterns of property ownership, in the relative power of different participants in the economy, and in the importance of different productive sectors. What has happened to the first two of these factors in the period which *Neare studying? As we have described in a previous section, the roles of the economic participants changed as a result of the reduction of the role of the State and of the rapid privatization of economic activities. We observed that this process and the government’s general policy oreientation favored privileged participation ctnd access to resources by the business sector, particularly by large- and mediumsized firms and by the financial sector, These were the sectors which most benefited from the massive transfer of resources which accompanied the transition from high inflation and a closed economy to more moderate prices and an ‘open’ economy. A recent study identifies the groups that benefited from this process and 2fThis happens in sp ite of the fslct that employmen: in education and health are reduced. The employment in *other services’, instead increases by 21 percent between 1975 and 1977. ‘30f course, to the extent that idle capacity is maintained as such for an extended period in some sectors, it may become a signal for further expansions to be oriented towards other activities, those where the ‘new‘ demand is concentrated.

a jiee market economy A. Foxley, 7bw*atds .

24

describes the concentration of wealth which resulted from it By the end of 1978, five economic conglomerates controlled 53 percent of the total assets of Chile’s 2% largest private enterprises. Nine conglomerates, including those five, controlled 82 percent of the assets in the Chilean banking system. And the same nine groups also controlled 60 percent of total bank credits and 64 percent of loans made by financial institutions. The same study showed that in a sample of 100 enterprises, the assets of firms controlled by the five most important conglomerates seemed to grow 97 percent between 1969 and 1978,while assets of the remaining firms grew only 14 percent. This figure is indicative of the rapid expansion of conglomerates, a significative feature in the process of asset concentration, together with the privatizations, the reversion of Agrarian Reform, and the liberalization of prices accompanied by wage repression.24 In the short term, that is until 1978, the distributive changes observed are strongly influenced by the high unemployment rates and the fall of real wages. In table 18, employment and unemployment figures are given.25 Employment at a national level, which had grown 2 percent per year in the ‘6Os,shows a growth of only 0.3 percent per year between 1970 and 1979, and stagna:ion between 1974 and 1979. fable 18 Employment

and unemployment

(thousands

Labor force (1)

Employed (2)

Unemployed (3)

1970

2,950.l

2.770.1

1mo

6.1

1974 1975 1976 1977 1978 1979

3,189.6 3,169.g 3,139.8 3.197.3 3,307.2 3,385.6

I’J96.2 2,743.5 2,62&O 2,750.7 2,845.8 2,S, 8.4

293.4 426.3 511.8 446.6 461.4 467.2

9.2 13.4 16 3 14.0 13.9 13.8

aSonrces: Columns (1) to (4) Meller, Cortkar

of persons).”

Unemployment rate (4)

PEM” (5)

Unemployment plus PEM on labor force (6) 6.1

__60.6 157.8 187.7 145.5 133.9

9.2 15.4 21.3 19.8 18.4 17.8

and Marshall (1979); column (5) INE, Infiwmarivo

Estadfstico; column (6) is obtained from columns (I), (3) and (5).

bPEM: Minimum Employment

Program.

The slow growth of employment together with an expansion of population of working age of nearly 10 percent between 1974 ant unemployment rates observed, which are mDre than twice the historic rates. In 1979unemployment reached 13.8percent. Adding to this the so-called ‘Minimum 2”Dahse (1979). “5Employment figures rectify previous oficial estimates that showed a rapid expansion cmpioyment. New figures are from a studIt by Meller, Cortiizar and Marshall (1979).

in

Employmerit Program’, the ligure would rise to 17.8 percent. Unemployment rate for blue-coll;lr workers reaches 28.4 percent if one includes the minimum employment pT0gram.2a High unemployment is accompanied by a fall in real wages that reaches 40 percent at t e end of 1974 and early 1975.27 The simultaneous reduction in employment and wages generates a regressive distribution of income, a proxy for which we consider household consumption nditures by income brackets. The figures were given in table 2 and point to a concentration of consumption in the high income brackets.” 0n the other hand, empirical evidence shows a marked stratification in consumption. The consumption of non-essential imported consumption goods, rows about 300 percent between 1970 and 1978, is highly concent rated in the highest 20 percent of the families. These families consume nearly 60 percent of the total, as can be seen in table 19. The trickle-down in consumption to other roups is scarce, being almost negligr ble for the lower 20 percent of the families. Contrasting with the expansion of luxury consumption which concentrates in high income groups, essential food consumption per family for the poorer groups shows a reduction of 20 percent in real terms between 1969 and 1978, as can be appreciated in table 20. Instead, the consumption per family of the same basic food products for the high income groups grows r\lightly. This marked dualism in consumption seems to be an essential charac:eristic of the mode!. It is in agreement with the patrimonial changes and with the income distribution patterns previously discussed. 6. Conclusions The Chilean economy, in the period 1974- 1979, has simultaneously been subject to a process of economic stabilization and of transition towards a free market economy. In the first aspect a substantial decrease of the rate of inflation was attained; the Balance of Payments was adjusted, accumulating international reserves; and, after passing through a deep recession, the economy shows signs of recuperating the levels of production of 1970. ‘“This figure is for 1977, last year in which this information is available. See lnstituto National de Estadisticas (1977). “It mustbe noticed that the index of wages and salaries utilized underestimates the actual wage reduction in the economy as a whole. The index only represents ac;fequately the average wages anal salaries in industrial firms with more th;tn 20 cmployecs, and in mining and services sectors, in which wages and salaries arc lower. !See University of Chile, Department of Economics, Comcnt~ios SO~W la situacio’n ectmdmicu, 2nd semester 1978. ‘“This information, which is in accord with wages and employment data, contradicts official statements that theincome distribution in 1978 would not be significantly different than :hat of 1970. According to a study by Heskia, the distribution improved even in the worst recession years. For a criticism of the results of Heskia, see CortAzar (1979).

2.0 4.3 3.4

Musical and optical instruments

articles

4.6 19.0

(11) Radios (excluding portable radios)

(12) Cars and motorcycles

“Sources: Ffrench-Davis ( 1979), INE ( 1979).

75.6

0.7

(10) Black and white, and color TV sets (only color)

Total

0.1

(9) Cosmetics, Eau de cologne and perfumes

(7) (8) Toys, games and recreational

(6)

7.8

Footwear, hats, umbrellas and sunshades

24.1

products

(5) Photographic and cinematographic

carpets

(4) Clothing, textiles for the house and

7.7

0.6

(2) Imported alcoholic drinks (3 Imported tobacco, cigarettes and

cigars

1.3

manufactures

1970

Imports

consumption

and furriers

(1) hather

Imported nonessential -_- - ___ -__

Table 19

297.7

40.6

28.7

56.3

6.6

22.6

9.6

7.3

10.3

91.0

9.4

11.9

3.4

1978

293.8

113.7

523.9

7,942.9

6,500.O

564.7

123.3

265.0

32.1

277.6

22.1

1,883.O

161.5

Raie of growth

56.4

97.4

48.7 (54.9)

30.3 (100.0)

39.7 (44.5)

61.0

59.6

41.6

62.6

55.0

91.7

54.8

69.2

Hrgh mcomes V

C~nsumpiioii

19.1

2.6

21.5 (22.9)

18.3 (0.0)

24.9 (25.4)

223

20.3

24.2

14.8

21.1

4.5

5.0

16.9

IV ---

by ijuintilGS

12.6

0.0

14.6 (11.1)

23.5 (0.0)

16.8 (14.9)

8.9

13.5

17.3

22.0

12.5

3.6

0.0

8.6

III

(millions of dollars of 1977 and percentage of the total consumption). .._.

8.4

0.0

12.5 (11.0)

19.3 (0.0)

12.0 (10_1)

5.5

11.2

0.6

8.0

0.2

0.2

4.0

I1

3.5

1.1

5.7

0.0

3.0

0.0

0.0

1.3

Low incomes I

27 Tahte 20 ConsumpPhon of bask food products by households (pesos in June 1978).”

. -----__ Lower 20 pmmt Consumption 1969 (I)

Flours and starches

(3) Oils

Higher 20 percent I__-_

1978

Variation

Consumption __---_ 1969 aPI

1978 _pI-______

Variation

387.6

406.8

5.0

778.6

719.6

-- 7.6

357.9

219.1

- 38.8

1534.5

1di27.2

6.0

105.4

71.2

- 32.4

269.4

201 .o

- 25.4

618.3

641.5

3.x

(4) Diary and new ones

138.9

106.1

- 23.6

(5) Vegetables and legumes

144.0

97.5

- 32.3

257.9

197.3

- 3.5

97.0

73.4

- 24.3

191.8

154.:

- 19.6

227 3

181.8

- 20.a

SOi.

641.1

27.8

129.8

102.9

_- 20.7

277.8

284.5

2.4

1.587.Q

I.m.8 49.9

_---__

- 3. -?

J.~_?O.O 4.4663

---_._ -- I_

--_.

0.x

I8 .O

_ _____

aS~~~~~:INE (1969 and 1978).

Other indicators, however, show negative results: high unemployment persists in the seventh yc~t of application of the policy, distribution of income and household expel:ditures is regressive, investment levels are low, and the deficit in the current accc!.mt of the Balance of Payments is growing, as is external debt. These indicators last a shadow on the growth potential of the model, as has been applied in Chile, ~lnd in its capacity to absorb labor in productive activities. But macroecol omit indicators are only the more visible, but perhaps less important part, &he revolutionary process of change in the Chilean economy in this period. The process of transition to a free market economy implied that, simultaneously wrth the anti-inflationary policy, deep structural reforms were carried out: a drastic privatization of the economy; a quick opening of the economy to world markets; a massive transfer of resources to the modern sector of industry and finance. As a consequence of the latter, powerful conglomerates with ample economic and political influence emerge. This is one of the outstanding traits of the industrial organization scheme which a&s from the experiment. The conglomerates or ‘economic groups’ are in fact the new actors in the process of development. They increasingly control industrial assets, as well as that of banks and financial institutions. Besides, they are the dynamic agents in the process of industrial adjustment to face foreign competition. These

28

A. Foslr!), Towards a free marker econumy

conglomerates are the ones that relate to international private banks and control rhe larger proportion in the flow of external loans. The other basic modification in the functioning of the Chilean economy refers to the radical opening up to world markets. This process does not result in as deep a breakdown of the industrial sel:tor as could have occurred. Although several industrial branches suffer significant losses in markets and industrial employment goes down, other activities seem to adapt successfully. The financial opening, which goes together with the wmmercial opening, helps tn overcome the problems derived from the recession and the transition to the of,w ec:onomy. Nevertheless, it has distorting effects on other aspects. It prolongs th--: price stabilization period as it becomes the most important source of monetary expansion. At the same time, it reinforces the tendency towards asset ccllncentration as it gives differentiated access to cheap external credit (in cLj:nparison to domestic credit) mainly to large enterprises of the modern sector; a~:d makes it possible to keep an undervalued exchange rate that coexists with large deficits in trade flows. Prociucticin adjustment, as a result of the opening up of the economy, is just beginning to show. As expected, new production patterns are oriented towards expanding primary producing activities (mainly copper mining and agricultural and forestry products) and exports. However, the most dynamic sectors are commerce, financial activities, and qersona’lservices. The firsr two are stimulated by expanded foreign trade and by the development of the capital market. Demand for personal services grows as a conseq,uence of the rapid expansion in income for high income groups. At the salne time that the productive structure changes, a higher degree of asset and inc:ome concentration is observed. What type of economy emerges from the deep structural changes undertaken in Chile after i973? Certainly what we have is an open economy, with more specialization and potentially higher incentives for efficiency in domestic production. It is also an economy that is more vulnerable with respect to changes, shock, and fluctuations in the international economy. It is, on the other hand, hi,!;hlydependent on the availability of private external credit in order to balance the current account deficit. A salient feature of the model is the wide dispersion of income and ccnsulmption patterns between the rich and the rest of the population. With respect to consumption, a markcti stratification is produced. The ‘deprivation horizon’ is a reality for low income groups, as is ‘the opulent consumer society’ for t ix: higher income sectors. This is only one of the unsolved problems. Other persistent problems are extremely high unemployment and low investment. In the political sphere the ml:,&5 has not been able to solve the inherent contradiction between economic fr: I:dom, a basic objective of the model and of the Friedmanian ‘ideary’, and the pc4itical authoritarianism which accompanies it. After all, facing the dilemma, it

29

seems that thechilean &out freedom.

model has certainly chosen capitalism, but has forgotten all

and A. Suie’ . 1979. Polirica cconcjmwt 1973 1979, Boletin de1 Banco Central. no. 62 B,NOV. 1980. Gero Ylcia de normaliracitin. and El Mercurio. Feb. 27. Corlbr. R.. 1979. ‘.emuneraciones. empleo y distribucii>n ~Iel ingreso en Chile 1970 1978. hiimeo. (CIEPLAN. Saiillweo). CorGzar, R. and J. ‘$ &hall. 1980. Dahse, F., 1979. M I de la extrema riqueza (Editorial Aconcagua. Santiago). Departamento de !, Bnomia. I?. c.‘hile. 1978. Comentarios sobre la cituaciiw econi)mlca, 2nd semester. Diaz-Alejandro, C., IJ$l, Southern cone stahiliration plans, in: W C’iinc and S. Weintraab. eds., Economic stabili ation in developing countries (Brookings lnslitution. Washington, DC). I-Trench-Davis. R.. IY ‘9. Politicas de comercio exterior en Chile: I973 78. Mimeo.. Nov. (CIEPLAN, Cauas. J. CORFO,

Santiago). Ffrench-Davis.

R., 1980. Liberalizscirin

de importaciones:

La experiencia

Chilena

en 1973

1979.

Collecci6n Estudios CIEPLAN. no. 4. Dec. (CIEPLAN. Santiago). T-Trench-Davis. R. and J.P. Areliano, 3980. Apertura financiera externa, La exptnencia Chiiena. Mimeo. (CIEPLAN, Santiago). Foxley. A.. 1980. Stabilization policies and stagflation: The cases of Brazil dnd Chile. in: A. Foxleq and L. Whitehead. eds., World development. Special Issue, Economi.; stabilization in LAtin America: Political dimensions. Nov. (Uaford). f-oxley. A.. 1981. Stahrlization

policies awl their effects on emph’ment

and income distribution,

m:

W. Cline and S. Weintraub, eds.. Fcxomi.: stabilization in developing countries (Brookings lnstitutton, Washington. DCI. Fnedman. 1.. 1981. The role of private bank3 in stabilization programs. in: W. Cline and S. Weintraub. eds., Economic stabilization in developing countries (Brookings Institutiw. Washington, DC). Harberger. A.. 1979. Declarations, The Wall Street Journal, Oct. 5. Herrern. J.E. and J. Morales. 1979. La inversii>n tinanciera externa: El caw de Chile 1973 1978, Coleccion Estudios CIEPI.AN. nl.x I. INE, 1969, Encuesta de presuplrestos familiares. IKE. 1977. Encuesta national c*el empleo. INE, 1975, Encdesta de presupwstos familiares INE, 1979, Ill Yncuesta de presupuestos familiares, Vol. 111. May. INE, n.d., Compendio estadistico. Meller, P., R. CorGzar asld J. Marshall, 1979, La evoluci6n del empieo en Chile 1974 - 1978. Coieccibn Esludios CIEPLAN, no. 2. ODEPLAN, n.d., Cuentas Nacionales de Chile. Prebisch, R., X978, Fslructura sociocconcimica y crisis del sistema, Revista de la CEPAL. 2nd. semester. Schiefitlbein, E. and M.L. Grossi, 1978, Anjlisis de la matricula escolar en Chile (CIDE). ‘Taller de Coyunturu’,

1979, Comentarios

sobre la siluaciim

econi)mica

(Department

of ECO~OITIIC~.

of Chile, Santiago). firs1 semester. Treasury Department, 1978. Exposicicin sobre ei estado de la hacienda ptibiica. Jan. University

Vergara,

P., 1980, Apertura

externa y desarrollo

industrial

en C’hlie: 1974

197%. (‘oiec&n

CIEPLAN, no. 4, Dec. (CIEPLAN, Santiago). Zahlcr, R.. 1979, Repercusiones monetarias y rearcs de la apertura de la economia (‘hilena Revista de la CEPAL,

April

1980.

IS~IU~IO~~ 1975

19%.