Chile

on the World Today

IN CHILE earthquakes are an almost daily occurrence. Usually they are so slight as to be imperceptible. But the country is perched astride a geologic fault, and Chileans are constantly aware that the ground under their feet is unstable. It was something like an earthquake that hit Chile during the first days of April, when Valparaiso, Santiago, and Concepción threatened to come tumbling down in a wave of riots, pillage, and death.

Although the government has openly accused the Communists of instigating the riots, no one appears to take the accusation seriously. The Communist Party is an active minority in Chile, but it is officially outlawed and walks warily. The riots themselves were unorganized and sporadic. Shopwindows were smashed and sacked, but no radio station, telephone exchange, or other government, nerve center was attacked. No strikes supported the rioters’ act ion.

Protest, not revolution, appears to have been the moving force — an almost spontaneous explosion of popular exasperation with Chile’s chronic economic dilemma. For the past decade, Chile has been afflicted with inflation. In 1945 the peso was quoted at about 31 to the dollar. Today it is over 700 (and has been as high as 840), Internal prices have naturally risen on a similar scale.

The reasons — and the remedies — for inflation are discussed on even street corner and in every café, on every editorial page and by every news analyst in radio. Even taxi drivers talk knowingly about the wage-price spiral and the gross national product. Economics has become a more lively subject of conversation than politics — and that, in a Latin-American country, is extraordinary.

The causes of inflation

Chile no longer produces the food she needs, as she did until twenty years ago. She must import ever-increasing quantities of agricultural produce: wheat, beef, vegetable oils, coffee, tea, yerba maté (the South American green tea), and above all sugar. This shift is due not only to an increase in population; agricultural production itself has decreased. Practically no investment capital has gone into agriculture. In an inflationary spiral the first prices to be frozen by government decree are food prices, often at unrealistic levels. Concomitantly, there has been a shifting of population from the country to the towns, and shanty towns stretch like an eczema beyond the paved streets and bright lights of Chile’s modern towns. The shopwindows, the cinemas, the pretty pictures in the magazines, show the cam pesino from the hills, the fields, or the nitrate fields what modern life can offer. His wants and needs have increased enormously beyond mere food and shelter, but the means of satisfying them are simply not there.

Capital investment since the war has been one of the lowest in Latin America — barely exceeding 10 per cent of the gross national product (and three fourths of this was merely replacement capital). Furthermore such investment as has been made has gone into fields where large speculative profits could be expected in a hurry: real estate, construction of office buildings or luxury homes, the stock market, or foreign exchange.

In an inflation — and Chile’s, it must be emphasized, has been chronic—the incentive to save is, of course, lacking. But it must also be said that Chileans have a deeply ingrained habit of living up to and beyond their means. The upper classes live on a scale that would stagger most American millionaires. A visiting British economist recently remarked that if these wealthy Chileans would simply reduce their scale of living to that generally accepted by their peers in the United States or England, the resulting savings could double the present investment level.

There has been clearly insufficient investment in the basic productive sectors of the economy: railways, roads, ports, gas, electricity, and other municipal services. Industries such as fishing, cellulose, and paper, which could have diversified the country’s exports, have also been neglected. There has been some industrial development, of course, particularly a steel industry and a state-owned oil industry, as well as metallurgical, textile, and plastics industries which supply principally the domestic market. However, the gross national product has increased only 75 per cent since 1940. (That of the United States has nearly doubled in the same period, while starling, of course, from an immeasurably higher level.)

The result of these two factors, a highly urban population and a low rale of industrial development, has been a channeling of labor into unproductive sectors. The bureaucracy has increased out of all proportion during the past years — and the budget along with it. Government services have increased by 72 per cent during the period 19401953, employment in commerce by 48 per cent and in personal services by 73 per cent; whereas employment in agriculture, industry, mining, and public utilities grew by only 18 per cent.

This picture of a country whose economy is developing too slowly and in the wrong direction is further complicated by the fact that Chile depends so largely on the export of a single commodity — copper. Seventy-five per cent of her dollar income comes from copper, and a drop of three cents a pound in the world price means a drop of 5 per cent In the revenues of the Chilean government.

Chile’s other exports — iron, coal, wood, and such food products as fish and fruit — are also primary products and therefore much more sensitive to the ups and downs in world prices than the industrial goods she must import. In general, except for the period of the Korean War, the prices of primary products have had a downward tendency while industrial products have gone up. For this added factor of imbalance, Chile cannot be held responsible, except insofar as she failed to lay the foundations for a more diversified economy.

Slowing down the spiral

In the latter part of 1955 the firm of Klein & Sacks in New York was called in to analyze the situation and suggest a remedy. This firm of financial and economic consultants had, some years before, been spectacularly successful in getting Peruvian finances back on an even keel.

The Klein & Sacks mission made a thorough study and came up with a whole complex of economic proposals. To implement them, it was necessary to get several new laws through Congress. President Ibañez, although elected largely by parties of the left, and accustomed to govern in an extremely personal way, asked for and got the support of the parties of the right. The program was a drastic one, and a certain amount of civic courage was necessary on both sides.

The objectives of the “economic plan” were voluntarily limited at the outset. Although free trade, free enterprise, and collective bargaining were long-term goals in view of the highly inflationary circumstances and the tremendous incidence of government interference in ev ery sector of the economy, a gradual whittling down of government controls was all that was recommended. Furthermore, it was not proposed to stop inflation in its tracks. All that was hoped for was a slowing down of the inflationary process to a more manageable speed.

Chile’s economic program

The proposals themselves were naturally very complicated in their mechanism, but they boiled down to the following main points:

1. Break the wage-price spiral by granting wage increases considerably less than the increase in the cost of living. In 1956 this was fixed by law at 50 per cent of the rise in the cost of living, although an increase in family allowances took up some of the slack.

2. Force hoarded stocks out of hiding and stop speculation by reducing the rate of expansion of bank credit.

3. Reform the tax structure and reduce government spending in order to balance the budget.

4. Simplify and free the exchange system so that the prices would find their natural levels. This also meant that Chile moved from a bilateral system of trade agreements to a multilateral one. It was hoped that this would prepare the ground for a diversification of Chile’s exports.

It is now over a year since most of the measures have been in effect. The program was not adopted in its entirety, but most of the main points were implemented. What have been the results of the plan?

The rise in the cost of living has been slowed down impressively. From 93 per cent in 1955 it fell to 38 per cent in 1956. The dollar quotation has been relatively stable, and although it rose above 700 in May, it is well below the high of 840 in August, 1955. American capital has once again been coming into the country, through loans of the Export-Import Bank and the International Bank.

The copper companies are investing heavily in new development and modernization. In 1955 the Chilean government negotiated new agreements with them which greatly simplified tax procedures and provided an incentive to production. Nevertheless Chile’s tax on copper is still the highest in the world — 75 per cent on basic tonnage, diminishing to 50 per cent if the basic tonnage be doubled. This compares with 47 per cent in the United States.

This new capital is only a small proportion of what Chile needs, and furthermore has not yet had time to revivify the basic aspects of Chilean economy. And since spec ulat i ve building was stopped short, there has been a certain increase in unemployment — on the order of 5 per cent — particularly in the building and metallurgical trades connected with it. Half-finished office buildings stand in the center of Santiago; in the residential suburbs, beyond acres and acres of luxury mansions, street lights twinkle along miles of newly paved streets bordering vacant lots — realestate developments nipped in the bud.

How free is enterprise?

This is the most dramatic evidence of the effect of the plan, but there are other issues involved. Some Chilean economists are wondering whether the basic principles of free trade are the proper ones for an underdeveloped country like Chile whose economy is at present so thoroughly state-controlled. In any case, the stresses and strains inherent in the transition from one ty pe of economy to another are tremendous. Now that the first wave of enthusiasm is over, proponents of a managed economy are beginning to speak up again.

In defense of the plan, it must also be said that one important factor has not been realized: the budget has not been balanced. This is not only an inflationary factor in itself, but it has meant that the government has not been able to finance the housing program for low-income groups which was designed to take up the slack in speculative building.

Furthermore, the plan has run into extraordinary bad luck. Chile’s main export is copper, and this has gone down on world markets. One of her main imports is sugar, and this has nearly doubled in price since October, largely as a result of heavy Russian purchases. The worst drought in living memory has afflicted several agricultural provinces. Finally, the increase in freight rates subsequent to the Suez crisis has been particularly hard on Chile, situated at the far end of the world’s trade routes.

It was said at the inception of the plan that it would require at least two years to show its beneficial effects and that meanwhile everyone would suffer somewhat. Great efforts were made to distribute the sacrifices as equitably as possible. However, the fixed-income groups are, as always, the hardest hit. The reduction in their buying power appears to be between 1 and 2 per cent. This would not be very large unless one were on the thin edge of misery, and this is undoubtedly the case for a large sector of Chile’s working classes. Within the fixed-income groups, it appears that the white-collar class has suffered relatively more than the wage earners—the reverse of the situation before the plan was adopted.

It is not surprising, therefore, that there is a mounting clamor to relax the deflationary pressures. On the other hand, it is significant that Chile, which was plagued by lengthy strikes during the acute inflationary period, has been relatively free of labor troubles during the past year.

In the first four months of this year the price index is estimated to have risen by about 7 per cent. This would indicate that the slowing down process is still continuing satisfactorily. (The quixotic character of many Chilean statistics is illustrated by the fact that the rise in April of 5 per cent would have been a mere 1.5 per cent but for a phenomenal rise in the price of onions due to local conditions.)

Thus the first objective, a relative stabilization of salaries and prices, is well on the way to being reached. The second, that of stimulating and developing Chilean economy, is further away. Some economists are of the opinion that the gross national product has even decreased slightly during the past year. So much depends, however, on the price of copper that even if this were true, it could not be taken as proof that the plan has had an unfavorable effect. The hope is that once a relative stability has been reached, Chileans will themselves invest in their country, and that foreign capital will again be encouraged to come in.