Chile

FOR nearly four years, from January 27, 1959, to October 10, 1962, the Chilean escudo (the new name for 1000 pesos) remained pegged at 1.053 to the dollar — the longest period of stability in living memory. The abandonment of the pegged rate, with its sequence of rising prices, speculation, and social agitation, is the biggest issue in Chile today and somewhat obscures both the progress achieved during stabilization and the fundamental economic and social problems yet to be faced.

The stabilization program instituted by President Alessandri on taking office was the classic one propounded by the International Monetary Fund, and it was quite remarkably successful at the domestic level. Chile in the fifties had one of the highest rates of inflation in the world, after Bolivia. During the first year of the program, the cost of living rose 38 percent as the price structure adapted to the new conditions. In 1960, however, it rose 12 percent, and in 1961 only 8 percent. What was more important still, the per-capita growth rate in real terms, which had been stationary or even negative, rose in 1961 to 2.4 percent, nearly as high as the goal of 2.5 percent set by the Alliance for Progress.

This was perhaps not prosperity, but after the lean uncertain years it looked very good. There was, too, a new honesty and seriousness in government under President Jorge Alessandri which gave Chileans confidence in themselves and in their country. Savings accounts, which had been understandably low in an inflationary country, began to rise rapidly; in their first year of existence, savings and loan societies received an average of $625 from some 20,000 members, a good record in a country of million inhabitants with an average per-capita income of less than $400.

Dollar crisis

It was a tremendous shock, therefore, when in the last days of 1961 the country was informed that the dollar reserves were exhausted and that henceforth only the most essential imports would be allowed in at the pegged rate; everything else would be bought at a free rate.

The country was stunned, and recriminations began to fly. How had it happened that as competent an administrator as President Alessandri and his cabinet of managers had allowed matters to get so much out of hand? One of the first scapegoats was the United States. Many dollars had been promised, it was said — $100 million for the reconstruction of the earthquake zone alone — but very few had actually arrived in Chile. The United States replied that the money had been granted to finance specific projects and that until proper accounts had been presented and approved, no money could be forthcoming.

Another target for criticism was the. I.M.F. It was supposed to be riding herd on the Chilean economy; why had it not sounded the alarm? The I.M.F. is very sparing of public remarks, particularly in controversial matters, but it does seem to have been rather late in scenting the danger.

Drains on the economy

Now that some of the dust has settled, it is possible to see more clearly what happened. According to many experts, the escudo was overvalued in the first place; 1.053 was a political figure, not a financial reality. As a reduced inflation gnawed away at the escudo’s buying power, the dollar became “the cheapest commodity in Chile.” Manufacturers found it advantageous to use foreign sources of supply, and to import high-cost automated machinery rather than use local labor.

Another drain on the currency was the free ports in the far north at Arica and in the far south at Punta Arenas — one in the hot, dusty desert, the other a frigid, windy outpost on the Straits. They had been established primarily to fix a remote frontier that might eventually be coveted by Peru and Argentina and to bring some sort of prosperity to a depressed region. In Arica, assembly plants, particularly of Citroën cars, did spring up and provide employment, but chiefly the town became an emporium for imported luxuries.

Furthermore, Chilean exports became overpriced on world markets. The deficit in the balance of trade went from bad to worse, in spite of notable efforts to create new export industries — fish meal, pulp and paper, iron ore, and steel, which now exports 30 percent of its production.

On the domestic front, another deficit weighed heavily on the economy. President Alessandri, a former Minister of Finance who had once balanced the budget, campaigned on the promise to do so again. However, he has been obliged to limit this to balancing the administrative budget alone, and to resort to credit of various sorts for the investment budget. But even the administrative budget now shows a deficit. The investment budget received a terrible blow with the earthquakes of 1960, which devastated the south.

In such a situation, what is surprising is not that the escudo weakened but that it could be maintained so long. After the first dramatic indication of trouble at the end of 1961, it was ten months before the official decision to devalue was reached. The blessings of stabilization had become so apparent that no one wished to sanction devaluation.

The President acts

Finally, President Alessandri on October 10 courageously, if belatedly, announced that the escudo would no longer be supported. There are now two exchange rates: one, the bank rate, for all visible imports and exports; the other, obtainable through money changers, for what are known as invisible transactions (tourism and other private transfers). Both fluctuate freely; for the first time in thirty years, Chile has a completely free exchange rate. The financiers do not intend to be caught napping again.

The government promptly took several measures to mitigate the social impact of what was, in fact, an admission of defeat. It immediately requested Congress for a 15 percent increase in wages and salaries, with a further raise promised at the end of the year. It announced, in an unprecedented move, that all savings accounts would be readjusted. Severe measures were promised against speculators; banks are required to reveal all large exchange transactions previous to devaluation, but importers with legitimate dollar debts will be compensated. There is thus a determined effort to regain as much as possible of the confidence so carefully nurtured during the years of stability.

Aside from the financial disaster, however, there are many things to the credit of this administration. Industrial production is some 45 percent higher than in 1958. Unemployment, which in greater Santiago had reached 9.5 percent in 1959, has been reduced to 5.7 percent. Real wages have risen significantly in the last three years, indicating a better distribution of the national income.

For the first time in several decades, the housing deficit is being reduced; the housing consultant for the Agency for International Development firmly predicts that Chile will build 50,000 dwellings in 1963, a tremendous effort for a small country. In the last two years, 878 kilometers of paved roads have been built, compared with an average of 89 a year during the previous administration. In the last three years, more than twice the number of schools have been built as during the previous three years.

Land and tax reform

In the two areas on which the Alliance for Progress places most emphasis, tax reform and agrarian reform. Chile has already done more than most other countries. The new land-reform law, written by the present conservative government, is not, of course, a revolutionary one. It breaks up the big estates only insofar as it can be proved that they are not being farmed efficiently. But with the help of much more stringent taxation and one of the most complete surveys ever undertaken in Latin America, it should at least eliminate abuses. It also makes an effort to regroup the minifundia, which in Chile are as much an evil as the large estates. Above all, it sets up machinery to provide credit and technical advice.

The productivity of Chilean agriculture is notably low. The country, which once exported foodstuffs, must now import something like $100 million of goods a year — one of the important reasons for the balance-of-payments difficulties and for the close relationship between the exchange value of the escudo and the cost of living.

Tax reform has been in the planning stage for a number of years and was presented to Congress as a rider to the 1963 budget. The simplification of tax schedules, more realistic rates, expert collection techniques, coupled with prison terms for evaders — an unheard-of phenomenon in Latin America — will, it is confidently hoped, make it possible to recuperate enough lost taxes to balance the budget by next year.

This sort of progress has been made possible, to a great extent, because of Chile’s political stability. Chile is one of the few functioning democracies on the continent; the courts are honest, and so are the police. The armed forces stay out of politics, although they are making an increasing effort to carve out a social role for themselves. They advisedly recruit illiterates, for instance, in order to educate them; trade schools figure largely in their training; they engage in road building and other public works.

Marxist but not Communist

Many people are worried because Chile has the best-organized Marxist party on the continent, a popular front of Socialists and Communists known as FRAP. It came within a hairbreadth of winning the 1958 presidential elections and shows no sign of losing strength.

Faced with this threat, the two rightist parties, the Conservatives and the Liberals, have formed a democratic front with the center radicals and promise to present a union candidate in the 1964 elections. The coalition had a successful trial run in a by-election in Santiago in September and is an unusual phenomenon in Latin America, where personal rivalries and small doctrinal divergencies lend to split normal political groupings.

Another new and encouraging factor on the Chilean political scene is the growing strength of the young Christian Democrats. This party is definitely leftist but non-Communist and is threatening the Marxist left in its own field; it now controls nearly a third of the trade unions and all of the student federations. While the Christian Democrats firmly maintain that theirs is not a “confessional" movement, since there are Protestants and atheists among them, their hand has undoubtedly been strengthened by the recent activities of the Catholic Church.

The Church’s stand

The government may be proceeding prudently in the matter of agrarian reform, but the Church’s program is radical; it has purely and simply handed over all its lands to the people working on them, setting up cooperatives and providing technical assistance and even credit.

A pastoral letter issued on September 18 and signed by all the bishops protests against a situation where the minority owns the majority of arable land; where one tenth of the population receives half of the national income; where, particularly in the countryside, there is hunger, a lack of decent housing, and, above all, a lack of opportunity for education and self-betterment.

Charity is not enough, say the bishops. Christians should support real institutional reform, an authentic land-reform program, tax reform, administrative reform. But a redistribution of the national wealth is not enough either, they say: “it is the duty of a Christian to increase his productive capacity, be he laborer, employee, technician or employer.” Capital should not be left idle, or employed in the satisfaction of frivolous desires. After a long and careful study of why Communism and Christianity are incompatible, the bishops also condemn the “abuses of capitalist liberalism.”

This letter, with its combination of economic, political, and moral instructions, is almost a revolution in itself. It thoroughly disconcerted Chile’s well-to-do, who had hitherto regarded the Church as a bulwark against social revolution, and it reinforced the directives of the Alliance for Progress. In Chile there is the cheering spectacle of a conservative government honestly trying to carry out the directives. Without these brave beginnings, the bishops might not have been moved to speak out so strongly.