From Trade to Autarky and Back Again! Economic Review of Chile Between 1945 – 2000

Introduction

Over the past 55 years, Chile has adopted extreme trade policies from a relatively closed economy to a largely open economy. These extreme policy changes can be divided into two-time frames:  a) 1945-1973 “import-substitution era”, and b) 1973-2000 “trade expansion”. The major change in 1973 was due to a military coup, led by General Augusto Pinochet Ugarte, which overthrew the Popular Unity government led by Salvador Allende. 

During the period of 1945-1973, the Chilean governments adopted policies that pursued a reduction of the reliance on imported goods from foreign countries, due to large shortages of import products that occurred during World War II. The strategy the 1945 government and following governments, during this period, adopted was import-substitution industrialization. This strategy is an economic development strategy and a form of protectionism that emphasizes the growth of domestic industries by restricting the importation of specific manufactured goods, often by using tariff and non-tariff measures, such as import quotas.1

These forms of protectionism reached their peak between 1970 to 1973. Under the Allende government, extremely large tariffs were placed on imports. The import tariffs were highly dispersed ranging from 0% to 300%; the average import tariff was 105%. Equally dispersed were import quotas ranging from outright prohibition to prior import deposits of up to 10000%.2

However, these policies were drastically changed after September 11, 1973, the day General Pinochet overthrew the Allende government. The fundamental economic objective of Pinochet’s regime was to liberalize Chilean trade. Following the recommendations of the “Chicago Boy3, the Pinochet regime implemented low tariffs, nonchalance trade controls, and minimized restrictions on capital movements. In 1990, Pinochet sets down as dictator and democracy was restored under Patricio Alwin Azoca. Azoca government and subsequent governments continue to follow a liberal trade agenda. The liberalized trade strategy over the last 27 years have placed the Chilean economy as the most stabilized and strongest in Latin America, thus drastically increasing the country’s production capacity and welfare over the last 55 years. 

Chile’s Performance Record 1945 to 2000

Over the last 5 ½ decades, the population of Chile has had steady growth of approximately 3 to 4 % per year, growing from 5.62 million (1952) to 14.97 million (1999). Traditionally, Chileans have had a large percentage of their population living or earning below the poverty line. Although, since 1945 this percentage has been reducing. For example, the percentage of the population living or earning below poverty has decreased from 45% (1987) to 28% (1994) to 24% (1996).

The unemployment rate averaged 6.4% during the 1960s and then decreased to an average of 3.4% under Allende’s government. After the military coup in 1973, unemployment rates sharply rose from 5% (1973) to 9.5% (1974). Unemployment rates fluctuated between 14% and 11% during the next 6 years and reached a peak of 19.6% in 1982, the highest unemployment rate between World War II and today. After 1982, unemployment rates declined relatively constant and reach the 1960’s levels of 6.4% (1998).

In the past the labour force distribution in Chile has been concentrated in primary resource-oriented production (ie. agriculture, mining, fishing). However, between 1987 and 1998, the percentage of the population working in the agriculture sector declined from 21.7% to 19.2%. The manufacturing sector has increased during this time from 15.4% to 33.8%. In addition, there has been growth in the service sector. The service sector has increased from 15.4% (1987) to 26% (1992).

As with the distribution of the labour force, each of these sectors has changed in their contribution amounts to Chile’s GDP.  Between 1950 and 1997, the agricultural sector decreased in percentage of GDP from 13.98% to 6%. However, the manufacturing percentage of GDP increased from 17.24% (1950) to 33% (1997). The service sector as a percentage has risen sharply from 29.7% (1987) to 61% (1997).

Although there have been changes in the distribution of the labour force and production sectors, the GDP per capita has continued to grow, especially in the last 10 years. Between 1952 and 1970 the GDP per capita grew marginally from $371 (US) to approximately $700 (US). However, after United Popular came into power in 1970 the GDP per capita decreased from $713 (US) to $638 (US) in 1973. After Pinochet took control of the government, the GDP per capita began to rise again and continued to grow exponentially over the next 23 years and reached a level of $5100 (US). However, the largest change has taken place within the last 4 years from $5100 (1996) to $12,500 by 1998.

Chile’s GDP growth has fluctuated since 1970 between 5 – 10%, with the exception of few large negative growth periods: i) 1972-1973 (-1.2%, -5.6%), ii) 1974 (-13.3%), and iii) 1982-1983 (-13.4%, -3.5%). Despite these negative growth periods during the latter part of the 1970s growth averaged 6.7% and 8.3% (1989) However, between 1986 and 1992 Chile had the highest GDP growth rate in Latin America (as known as the “Chilean miracle”),4 with an annual increase in GDP of 11% (1992). 

The Chilean miracle was largely a result of the boom in exports and the growth in exports of fresh fruits and manufactured products during this time. Exports and imports have grown almost three times, in terms of percentage of GDP, over the last 30 years, with exports increasing from 7.3% (1972) to over 21.4% (1996) and imports from 8.0% (1972) to 23% (1996). 

Traditionally, Chilean exports were largely based on natural resources. In 1970, the export composition accounted for 75.5% being copper, 9.9% being non-copper mining, and 14.6% other categories of which were mainly agricultural products. However, over the last 30 years as the sector composition has changed so has the mixture of exports. In 1990, copper exports reduced from 75.5% (1970) to 45.6%.  Non-copper exports diminished slightly from 9.9% (1970) to 9.7%. However, forestry products and agricultural products increased substantially, respectively from 1% (1970) to 10% (1990) and 2.7% (1970) to 11.2% (1990).

By 1996, Chile’s primary exports included copper, other metals, fish, forestry products, fresh fruit, and wine. Even though forestry products and fish exports are growing expediently, copper still accounts for nearly half of the total Chilean export value. Chile’s primary imports consist of chemicals, machinery, transport equipment (ie. aircraft and vehicles), and various other manufactured goods.5

Throughout the 1970s the import tariffs decreased substantially from 105% (1973) to a uniform average of 11% (1992-98). Prior to the Allende government, between 1945 and 1970 import tariffs averaged around 35%. The current government, led by Ricardo Lagos, is going to continue with the low uniform import tariffs. 

After the coup in 1973, the Chilean government has become a member of a number of different trade organizations. The first trade organization was entered in January 1980, the Latin American Integration Association (LAIA).6 Subsequently, trade agreements under LAIA were entered into with the following countries: i) 1992 Mexico bilateral free trade agreement (BFTA), ii) 1993 Bolivia bilateral preferential trade agreement, iii) 1993 Venezuela BFTA, iv) 1994 Colombia BFTA, v) 1995 Ecuador BFTA. 

Not until the mid-1990s did Chile start to become increasingly involved in membership in other international trade organizations. During the last five years Chile has become a member of the following organizations: i) 1994 Asia Pacific Economic Cooperation (APEC), ii) 1995 General Agreement on Tariffs and Trade (GATT), iii) 1995 a founding member of the World Trade Organization (WTO), iv) 1996 Mercado Comun del Sur (MERCOSUR)7, v) 1996 European Union (EU)8, vi) 1997 Canada BFTA. As of 1998, Chile is in the negotiation stages of entering into BFTA with Peru, Panama, and the Central American Common Market countries9, and becoming a member of the North American Free Trade Agreement (NAFTA).

Along with the pursuance of increasing international trade, Chile has finally gained control of its debt and inflation rate. Both of these areas have been a continuous battle for Chile since the late 1800s. Between 1950 and 1970 inflation averaged approximately 36% per annum. In 1955, inflation reached a peak of 84%.

However, after Allende came to power in 1970 the inflation rate became out of control, in 1973 the inflation reached 508.1%. Once Pinochet took control, the inflation rate began to drastically reduce over the next seven years as follows:  375% (1974), 174.3% (1976), 30.3% (1978), and 31.2% (1980). During the 1980s the inflation rate averaged 19.5% and then began to drop in the early part of the 1990s to 12.2%. By late 1998, the inflation rate reduced down to 4.7%. 

While between 1988 and 1993, the Chilean debt averaged approximately 18.58 billion (US), the debt increased to 31.5 billion (US) in 1998. Under General Pinochet’s rule, approximately half of the debt was paid off and the subsequent governments have also adopted strict fiscal restraint policies. 

Over the last 55 years, the Chilean exchange rate has diminished significantly in the face of the U.S. dollar. In fact, in 1953 the exchange rate of a Chilean escudo10 was 0.142:1 US dollar. By 1958 the exchange rate had diminished to 0.952, then by 1962 the escudo exchange was 2.4.11 Over the course of the next 20 years the escudo/peso (see footnote 10), continued to devalue reaching 245.1 in 1987. Between 1988 and 1999, the Chilean Peso continued to devalue from 267.2 to 475.7.12

Explanation of Performance 

Chile’s economic performance between 1945 and 2000 has always been closely linked to its political pendulum, moving drastically from the left to the right. The major shift occurs in the 1970s when a military dictator (Pinochet) overthrew the socialist government (Allende). Up until 1970 the government became increasingly socialistic and gradually closed the borders to international trade. In 1945, Gabriel Gonzalez Videla, leader of the Radical Party, was elected president, with the assistance of the Communist Party of the Former Soviet. Videla was supposed to diminish the traditional copper exportation by the U.S. and being to socialize Chile.  However, Videla did not follow this pre-election strategy, as agreed with the Soviets, and allowed the US to continue to exploit Chilean copper reserves, thus Videla became known as “The Great Traitor” to the Soviets. 

In the following 25 years, the country did not grow substantially in economic terms. The governments, which followed Videla (1945-1952), began a strategy of import-substitution industrialization. The policies included an increase in import tariffs and subsidization of local industries to spur local production of imported products, attempting the reduce the dependency of the country on imports from foreign countries. As a result, we see a change in the labour force distribution out of primary sectors (ie. agriculture) into the service sector and manufacturing. 

During this time the GDP grew by about 200%, and unemployment was relatively constant. Despite the import-substitution industrialization program, imports and exports as a percentage of GDP continued to grow, but at very slow rates. The battle of inflation raged on as a number of government policies attempted to gain control of it, which caused a decrease in the exchange rate of the Chilean escudo. 

In 1970, Salvador Allende, leader of the Popular Unity Party13, won the presidency with almost 58% of the vote. Allende’s platform called for a democratic “Chilean road to socialism”. The Popular Unity had a number of short-run economic objectives: initiate structural economic transformations, increase real wages, reduce inflation, increase economic growth, increase consumption, and reduce the economy’s dependence on the rest of the world.14 After one year in office the policies, instituted by Popular Unity, seem to be working. 

In 1971, GDP grew by 9% largely due to major expenditure. Inflation decreased to 22.1%, unemployment reduced to an all-time low of 3.3%, exports reduced to 9.4% of GDP and imports decreased to 12.22% from 14.32% (1969) of GDP. The government policies seem to be working, so what happened? Many economists indicated that Allende’s government policy of closed borders and radical government expenditure with weak fiscal policy caused the enormous economic problems of the following two years, which eventually came to an end with the military coup of Pinochet and the subsequent suicide of Allende. However, recent CIA documents released by the US shed a different light on the problems in Chile during the Allende government. 

Allende’s nationalization program was to be achieved by a combination of new legislation, requisitions, and stock purchased from small companies. Essentially take control of large foreign-owned enterprises. The government assumed that the production of the country was operating in an underutilized capacity, specifically the manufacturing sector. One of the areas, which Allende intended to take control of, was the copper mining sector. 

By 1968, U.S. corporate holdings in Chile amounted to $964 million. Copper companies accounted for 28% of U.S. holdings, but ITT had the largest holding of any single corporation with an investment of $200 million. Chilean copper accounts for 21% of the world’s proven copper reserves and over a 42-year period copper companies earned $420 billion from an original investment of $35 million.15

It turns out, that the US government and CIA began covert operations within Chile to disrupt the democratic process and prevent Allende from getting into government in an effort to protect their copper interests. The CIA and the US government spent millions of dollars in Chile in an attempt to destabilize the economy and remove Allende from power.16 The CIA sponsored media organizations, political parties and the private sector.  The economic interference is best summed up by US President Nixon instructing DCI Helms in September 1970 to “make the [Chilean] economy scream!”.17 There were three parts to the CIA’s intervention in Chile, two were covert and the third was economic pressure to hurt Chile’s economy. The US cut off economic aid, denied credits, and enlisted the cooperation of international financial institutions and private firms. 

After Pinochet seized power, and Allende’s murder (determined by the Tribunal on U.S. Government Involvement in Central America & the Caribbean). Pinochet restored economic relations with foreign countries and the country’s economy began to turn around. Over the course of the next 18 years, Pinochet promoted a liberal trade policy, increasing Chile’s economic performance substantially. 

Conclusion

In conclusion, Chile has seen the effects of closed trade borders and is currently experiencing the positive effects of open trade borders. Reviewing the economic performance of Chile, on the surface, traditional trade models can explain the different changes that occurred in Chile over the past 55 years. Some of the models that are very prevalent in the Chile case are Heckscher-Ohlin, Specific Factor Model, Monopolistic Competition Model, Tariffs and Subsidies, and Trade and Growth Theory. 

However, the underlying elements which change the assumptions of these models are not only the home government’s trade policies but can be contributed by the interaction or intervention of a foreign country. Unfortunately, in the case of Chile, the move toward autarky was too short of a term to see the economic effects Chile would have experienced. Although there is no doubt that Chile has gained greatly, economically, over the past 30 years with their liberal trade objectives. The only question unanswered is whether or not the social cost was worth the economic gains. 

Endnotes

  1. Federal Research Division Library of Congress, Chile: a country study, 1994, p.423
  2. Federal Research Division Library of Congress, Chile: a country study, 1994, p.150
  3. “Chicago Boys” – refer to those University of Chicago-trained or affiliated economists, including Milton Friedman and Arnold Harerger, who recommended and implemented the liberalization and stabilization policies of the military government. 
  4. Federal Research Division Library of Congress, Chile: a country study, 1994, p.151
  5. Hornbeck, J.F., Congressional Research Service Report:Chilean trade and Economic Reform: Implications for NAFTA Accession”, http://natlaw.com/pubs/spchcu1.htm, National LawCentre for Inter-American Free Trade, 1998, pp.11-12.
  6. See footnote 5 p.9 – “The LAIA is often referred to as an “umbrella organization” because it is not a free trade agreement in and of itself, but serves as an association that promotes the formation of free trade agreements by its members. Members are encouraged to join multilateral trade agreements, adopted preferential trade agreements advocated by the LAIA, and form bilateral preferential tariff agreements, provided all members may be allowed to join and that the agreements are designed to recognize basic LAIA rules such as observing the most-favoured-nation principle.”
  7. See footnote 5, pp.9-11, MERCOSUR operates as both an FTA and a customs union with a common external tariff. Four other members include Brazil, Paraguay and Uruguay) enforcing a common external tariff averaging about 12% on products imported from outside the union, and is applicable to 88% of imports. 
  8. See footnote 7, EU framework agreement for economic cooperation. 
  9. See footnote 8, Central American Common Market countries including Costa Rica, Guatemala, Honduras, El Salvador, and Nicaragua. 
  10. Chile’s currency until September 29, 1975 when it was replaced by the Chilean Peso at a rate of 1000 escudo per peso. 
  11. Department of Economic and Social Affairs, Yearbook of National Accounts Statistics 1964 Vol III, United Nations, 1965, p.390.
  12. CIA – The World Factbook, Chile: 1999, http://www.odci.gov/cia/publications/factbook/ei.html, 1999, p.8.
  13. Popular Unity was a coalition of left and center-left parties dominated by the Socialist Party and the Communist Party of Chile, both of which sought to implement deep institutional, political, and economic reforms. 
  14. See footnote 4 p. 145.
  15. http://www.lakota.clara.net/myths.usdstab.html.
  16. http://members.tripod.com/~CIABASE/chile-ops.html.
  17. See footnote 15.