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An Application of the Global Monetarist-Wedge model to post-1973 Chilean economic policies and the effects of these policies on macroeconomic, social and political variables

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An Application of the Global Monetarist-Wedge model to post-1973 Chilean economic policies and the effects of these policies on macroeconomic, social and political variables

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Content AN APPLICATION OF THE GLOBAL MONETARI ST-WEDGE
MODEL TO POST-1973 CHILEAN ECONOMIC
POLICIES AND THE EFFECTS OF THESE
POLICIES ON MACROECONOMIC,
SOCIAL AND POLITICAL
VAR IABLES
by
Carol V i r g i n i a L o p i l a t o
A D i s s e r t a t i o n P r e s e n t e d to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In P a r t i a l F u l f i l l m e n t o f th e
R e q u i r e m e n t s f o r t h e Degree
DOCTOR OF PHILOSOPHY
(B u s i n e s s Economics)
May 1980
UMI Number: DP23308
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This dissertation, written by
M s
CAROL3OPIIATO
under the direction of h..&X.. Dissertation Com
mittee, and approved by all its members, has
been presented to and accepted by The Graduate
School, in partial fulfillm ent of requirements of
the degree of
D O C T O R O F P H I L O S O P H Y
Dean
DISSERTATION COMMITTEE
TABLE OF CONTENTS
Page
LIST OF TABLES...................................... ±v
LIST OF FIGURES.......................... - vi
Chapter
I. INTRODUCTION.................... 1
Objectives............... 1
Methodology...................... 2
Organization ........................... 3
Importance of Topic.................... 4
Contribution to Knowledge............. 4
II. ECONOMIC HISTORY OF CHILE ................ 6
Foreign Trade.......................... 6
Fiscal Policy. . 14
Employment, Wages, and Income Policy . 21
Economic Growth................. 23
Financial Stability.................... 34
III. OVERVIEW OF PRE-1970 CHILEAN ECONOMIC
POLICIES................................. 54
Policies Which Affect Real Macro-.
economic Variables . . . ........... 55
Policies Which Affect Monetary
Macroeconomic Variables............. 63
A Concluding Note...................... 70
IV. THE GLOBAL MONETARIST-WEDGE MODEL .... 75
The Wedge Model....................... 76
Global Monetarism— The Effects of
Economic Policies on Monetary
Macroeconomic Variables............. 83
9
ii
Chapter Page
V. A DISCUSSION OF POST-1973 REAL AND
MONETARY CHILEAN MACROECONOMIC
VARIABLES....................................94
Economic Experimentation and
Collapse (1970-1973).................. 94
Economic Reform (1974-1975) 98
Economic Recorvery (1975-1980)......... 100
VI. A DISCUSSION OF THE BROADER EFFECTS OF
POST-1973 CHILEAN ECONOMIC POLICIES. . . 136
Background Prior: to.1973............... 136
Post-1973 Developments. . ............. 141
VII. SUMMARY AND CONCLUSION...................... 150
REFERENCE LIST............. 154
APPENDIXES
A. TAX BRACKETS, TAX RATES, TAX REVENUES
AND NUMBER OF TAXPAYERS................... 160
B. CALCULATION OF UNIDAD TRIBUTARIA (Tax
Unit)....................................... 172
C. SCHEDULE I ....................................174
D. SCHEDULE II.............. 176
E. SCHEDULE III AND TARIFF STRUCTURE ......... 178
F. DECREE iLAW 1748............................... 180
G. DEMOCRACY AND THE NEW CHILEAN CONSTITUTION 182
H. CHILE TODAY................................... 184
iii
LIST OF TABLES
Table Page
2.1 HISTORICAL DATA.......................... 9
2.2 EXPORTS, IMPORTS, AND THE TRADE BALANCE. . 13
2.3 GOVERNMENT REVENUES, EXPENDITURES, AND
DEFICIT................................ 16
2.4 WAGES, EMPLOYMENT, AND UNEMPLOYMENT. . . . 24
2.5 INDEX OF MANUFACTURING PRODUCTION...... 2 6
2.6 GROSS NATIONAL PRODUCT ..................... 27
2.7 SAVINGS (millions of pesos). .............. 30
2.8 INVESTMENT............................... 31
2.9 INDEX STOCK MARKET QUOTATIONS 1958 = 100 . 35
2.10 INFLATION. ........................... 37
2.11 MONETARY VARIABLES...................... 41
2.12 BALANCE OF PAYMENTS.......................... 4 3
2.13 EXCHANGE RATE (10-6 pesos/US $)......... 44
4.1 UNTITLED . . . ... ........ ............... 78
4.2 UNTITLED................................. 81
5.1 PROFESSIONAL INCOME TAX REVENUES .......... 102
5.2 PROFIT AND "GLOBAL COMPLEMENTARIO"
TAX REVENUES............... 103
5.2F SUELDO VITAL (Tax Unit Before 1975). . . . 134
iv
Table Page
5.3 TOTAL INCOME TAX REVENUES.....................105
5.4 PROPERTY TAX REVENUE ....................... 106
5.5 TOTAL DIRECT TAX REVENUES.....................107
5.6 SALES AND VALUE-ADDED TAX REVENUES .... 108
5.7 PRODUCTION TAXES ........................... 110
5.8 TARIFF REVENUES................................ Ill
5.9 INDIRECT TAX REVENUES................ 112
5.10 TOTAL TAX REVENUES............................114
5.11 EXCHANGE RATE AND INFLATION RATE
DIFFERENTIAL ............................. 129
A.1 FIRST CATEGORY (profit taxes).............. 162
A.2 SECOND CATEGORY (Professional Income). . . 163
A. 3 GLOBAL COMPLEMENTARIO......................... 164
v
LIST OF FIGURES
Figure Page
2.1 HISTORICAL DATA................................10
2.2 EXPORTS/GDP. . 12
2.3 IMPORTS/GDP.....................................12
2.4 TRADE BALANCE/GDP........................... 12
2.5 GOVERNMENT EXPENDITURES AS A PERCENTAGE
OF G D P ...................................... 19
2.6 GOVERNMENT REVENUES AS A PERCENTAGE OF GDP 19
2.7 DEFICIT AS A PERCENTAGE OF G D P .............. 19
2.8 GDP GROWTH.................................... 29
2.9 PERCENTAGE CHANGES IN CONSUMER PRICE
INDEX AND PERCENTAGE CHANGES IN
MONEY GROWTH.................... 38
2.10 MONEY GROWTH AND THE FISCAL DEFICIT. . . . 39
2.11 INFLATION AND DEVALUATIONS %'A IN CPI
AND % A IN EXCHANGE RATE. . 46
2.12 NET MONETARY CAPITAL AND GOLD MOVEMENTS
AND NET GOODS AND SERVICES................47
2.13 THE TRADE BALANCE AND PERCENTAGE
CHANGES IN EXCHANGE RATES 4 8
5.1 PERCENTAGE CHANGES IN Mj^ AND PERCENTAGE
CHANGES IN CONSUMER PRICE INDEX .... 121
5.2 PERCENTAGE CHANGES IN THE MONETARY BASE
AND PERCENTAGE CHANGES IN Mx.............122
vi
Figure Page
5.3 PERCENTAGE CHANGES IN DOMESTIC MONETARY
BASE AND PERCENTAGE CHANGES IN
MONEY MULTIPLIER...................... . 124
5.4 PERCENTAGE CHANGES IN THE RATIO OF THE
DOMESTIC MONETARY BASE TO THE MONE
TARY BASE AND PERCENTAGE CHANGES IN
Ml* • * ...............
5.5 MONTHLY INFLATION RATE AND PERCENTAGE
CHANGES IN THE RATIO OF THE DOMESTIC
MONETARY BASE TO THE MONETARY BASE. . . 126
5.6 PERCENTAGE CHANGES IN EXCHANGE RATE,
CHILEAN INFLATION AND DIFFERENTIAL
RATE OF INFLATION .................... . 130
i —1
«
V £ >
PERCENTAGES CHANGES IN THE CONSUMER
PRICE INDEX AND PERCENTAGE
CHANGES IN GROSS DOMESTIC PRODUCT
EXPENDITURES...........................
. 138
6.2 PERCENTAGE CHANGES IN CONSUMER PRICE
INDEX AND PERCENTAGE CHANGES IN
WORKERS' INCOME SHARE ............... . 139
A. 1 DISTRIBUTION OF TAXPAYERS BY BRACKET
(Profit Taxes). . . . ............... . 165
A. 2 DISTRIBUTION OF TAX REVENUES BY TAX
BRACKET (Profit Taxes). . . . . . . . . 166
A.3 DISTRIBUTION OF TAXPAYERS BY TAX
BRACKET (professional Salaries) . . . . 167
A. 4 DISTRIBUTION OF TAX REVENUES BY
TAX BRACKET (Professional Salaries) . . 168
A. 5 DISTRIBUTION OF TAXPAYERS BY TAX
BRACKET (Global Complementario) . . 169
A. 6 DISTRIBUTION OF TAX REVENUES BY TAX
BRACKET (Global Complementario) . . . . 170
A. 7 NUMBER OF TAXPAYERS PROFITS TAXES
(in thousands) 1970-1976............. , 171
A. 8 TAX REVENUES AS A PERCENTAGE OF GDP 197 6 . 172
vii
CHAPTER I
INTRODUCTION
Objectives
The objectives of this dissertation are, first to
assess, based on empirical data as evidence, the hypothe
sis that the: Global Monetarist-Wedge model best explains
the response of macro-economic variables to post-1973
Chilean economic policies; and, second, to examine the
effect of these policies on social and political vari
ables .
Chile makes an excellent subject for economic re
search for several reasons:
1. Historically, the country has experienced
extremely diverse forms of economic systems
ranging from colonial mercantilism to
classical laissez-faire to Marxist social
ism to Chicago-style monetarism to
classical global monetarism.
2. Many countries institute monetary, fiscal,
or foreign exchange policy reforms; but
there are few examples in modern economic
history of clear-cut total::systematic re
form. Chile is such an example. Their
economic policy changes during the last five
years constitute a complete turnaround from
1
a regulated, restrictive and interventionist,
economy to an unregulated liberal and free
market economy.
3. The best test of an hypothesis is when rele
vant variables have undergone great change.
The magnitude of the changes in Chile's
major economic variables has been dramatic.
4. There are characteristics unique to the
Chilean economy which make it an excellent
"acid test" of any theory. In fact, several
economists have concluded that Chile is a
difficult country in which to implement any
kind of economic policy.
Methodology
The research methodology is that of a discussion
and exposition of the selected model and a compilation of
empirical data with which te test the hypotheses suggested
by it. My choice of empirical data is post-1973 Chilean
economic data. The empirical data included in the chapter
were compiled by means of personal interviews with Chilean
experts in the United States from the University of
Chicago, Stanford University, Prochile (the Chilean Govern
ment Trade Bureau), CORFO (the Chilean Development Corpora
tion) , the International Monetary Fund, the World Bank,
the Inter-American Bank, the United Nations, the United
States Embassy, the Chilean Consulate, Wall Street Journal
Editors, New York and Los Angeles Bank Officers, the
2
Chilean Minister of Finance, and Chilean economists during
my visit to Santiago in Spring 1979, and analysis of
academic, international, government, and commercial publi
cations of Chilean economic statistics.
The model is tested heuristically. Formal statis
tical techniques are probably inappropriate because of the
enormous structural changes experienced by the Chilean
economy since 1973. Also, formal testing seems unnecessary
because the evidence in support of the hypothesis pre
sented is overwhelming.
Organization
Chapter II discusses the economic history of Chile
from the Spanish conquest to September 1973.
Chapter III compares various economic models which
have been used to explain the effect of economic policies
on Chilean real and monetary macroeconomic variables.
Chapter IV presents the Global Monetarist-Wedge
Model.
Chapter V analyzes the response of real and mone
tary Chilean macroeconomic variables to post-1973 economic
policies within the framework of the Global Monetarist-
Wedge Model.
Chapter VI discusses the effect of post-1973
economic policies on social and political variables.
3
Importance of Topic
The Chilean economic experience is of particular
importance for two reasons,' First, it has inspired some
of the most controversial theories of development: secu
lar deterioration in the terms of trade, overdependence on
the foreign sector, import substitution, structuralism
(cost-push inflation); and, monetarism. Second, it has
resulted in a wide range of macroeconomic objectives and
policies under various governments with radically different
political philosophies.
Objective analysis of the Chilean economic experi
ence is extremely difficult because of political and emo
tional complications. However, because Chile is a micro
cosm, of conflicting world political and economic pressures,
it is extremely important to examine the economic policies
which have been recently initiated and to evaluate their
results. The economic goals of production, price stabil
ity, full employment, and growth transcend political
differences, and appropriate economic policies can mean the
difference between starvation and survival in developing
countries.
Contribution to Knowledge
The contribution to knowledge of this dissertation
is threefold: (1) it contributes to knowledge of
4
important aspects of the Chilean economy; (2) it contri
butes to use of the Chilean economic experience to illus
trate problems, policies, and processes of interest to
scholars in the field of international economics, trade,
finance, and development; and, (3) it demonstrates the
applicability of the Global Monetarist-Wedge Model to the
Chilean economic experience and supports the validity of
its hypotheses within a general framework of economic
development.
CHAPTER II
ECONOMIC HISTORY OF CHILE
A study of the contemporary Chilean economy would
be incomplete without a look at the country's economic
history. Chile's economic past is best illustrated by
changes in key real and monetary macroeconomic variables:
foreign trade, fiscal policy, employment and wages, econom
ic growth, monetary growth, inflation, balance of payments,
t
and exchange rates. To put the present Chilean economy in
perspective, this section will describe the behavior of
these variables.
Foreign Trade
Between 15 36, when it was discovered by the
Spanish, until 1810, when it won its independence, Chile
exhibited all the characteristics of colonial mercantilism:
trade could be conducted only with Spain and Spanish
colonies; goods could be shipped only on Spanish vessels;
and, local manufacturing was discouraged. After winning
independence, Chile opened several previously closed ports
to all trading nations and government regulation of the
foreign sector was limited to taxation of imports and
6
exports. By 1849, they opened all ports to free trade.
Although import and export values continued to increase,
their rate of growth declined until 1860, when maximum tar
iff rates were reduced from 35 percent to 25 percent. Be
tween 1860 and 1865, the rate of growth of import value
rose from 2.8 percent to 8.9 percent and the rate of
growth of exports rose from 4.6 percent to 10.0 percent.
During Chile's war with Spain in 1865, trade value
fell, improving after the war until 1872 when the real
value of exports declined by 27 percent because of bad
harvests and depressed copper prices. Trade was sporadic
from 1870 to 1879 while the country was engaged in several
wars. In 1897, Chile increased the maximum tariff rate to
60 percent and, although trade volume increased toward the
end of the 19th century, the rate of growth of trade con
tinued to fall during the first 15 years of the 20th
century. Trade growth turned negative between 1910 and
1915, picked up dramatically during World War I (1915-20),
as the demand for copper and nitrates increased, and slowed
again after the war. In 1928, tariffs rose again and the
average import/GDP ratio fell from .54 to .44.
A review of the literature reveals that Chile
considered a positive trade blance a virtue. Since the
trade balance started out positive and export value usually
grew faster (or fell slower) than import value (see Table
7
2.1, columns I and II), it is probably safe to assume that
Chile's trade balance was positive during the first hundred
years of its existence.
The 19 30s were characterized by sharp economic de
cline in Chile. A League of Nations report described Chile
as the hardest hit of any country by the Great Depression.
Chilean per capita income fell 51 percent, domestic in
dustrial production fell 11 percent, and gold reserves fell
29 percent. In an attempt to recover, the country initiat
ed restrictive policies, especially in the foreign sector.
Specific tariffs which had been established in 1928, in
creased steadily during succeeding years. By 1931, tariff
rates had risen on average 71 percent. In 1932, the
tariff on luxuries rose 10 percent and import volume fell
to 18 percent of its 1929 level. In 1933, all duties rose-
50 percent and, in 1934, a gold surcharge, equal to 100
percent of the duty, replaced the 50 percent increase of
the previous year. In 1935, the gold surcharge increased
to 300 percent and, a year later, ad valorem duties were
added.
In 19 39, the country established the Chilean
Development Corporation (CORFO) to develop domestic in
dustry capable of replacing foreign imports.^ It was
anticipated that by developing domestic industry, "scarce"
foreign exchange could be conserved. However, by the end
8
TABLE 2.1
HISTORICAL DATA
Year
Average Annual
Rate of Grcwth-
Imports for
Past 5 Years
(Percent)
Average Annual
Rate of Growth-
Exports for
Past 5 Years
(Percent)
Average Annual
Rate of Growth-
Govemment
Income for
Past 5 Years
(Percent)
Foreign
Trade
Taxes/
Total
Govt.
Inoome
Exchange
Rate
Pesos
or 10-3
Excudos
Per US $
Percent A
Exchange
Rate
Average Annual
Rate of A of
GDP Deflator
(Percent)
1835 7.4 1.29 0
1840 4.8 1.29 0
1845 10.1 1.29 0
1850 9.1 13.8 10.6 1.06 (7.9)
1855 8.4 8.1 7.0 1.09 2.8
1860 2.8 4.6 4.6 1.14 4.6
1865 8.9 10.0 23.0 .23 .70 (38.6)
1870 (3.0) (7.7) (5.6) .33 1.08 54.3
1875 5.3 4.5 0.8 .37 1.13 4.6
1880 (11.8) 0.2 7.8 .24 1.61 42.5
1885 1.9 (4.4) (6.3) .60 1.95 21.1 5.0
1890 8.6 4.5 6.7 .65 2.08 6.7 5.0
1895 (6.4) (5.3) 8.5 .52 2.93 40.9 5.0
1900 12.2 16.2 2.1 .59 2.97 1.4 5.0
1905 9.1 10.8 10.3 .41 3.19 7.4 8.0
1910 9.3 2.8 3.0 .50 4.62 44.8 8.0
1915 (13.4) (0.1) (7.8) .52 6.07 31.4 6.0
1920 15.2 11.0 8.7 .40 5.73 (5.7) 6.0
1925 3.6 1.5 8.6 .36 8.55 1.5 3.0
1930 3.3 6.3 8.1 .29 8.26 (3.4) 3.0
1940 33.00
Source: Office of National Planning, Chile.
Central Bank, Chile.
VD
1845
1870
1895
1920
1855
1880
5 vQ
13 m.
1905
1930
FIGURE
of 1939, real per capita GDP was 66 percent of its 1929
level and export value was 29 percent of its 1920 level.
The trade balance remained positive as import value fell
along with export value.
During the 1940s, Chile continued to increase
foreign trade restrictions and, in 1941 and 1942, they
added ad valorem duties to the already high tariff struc
ture. The combination of various duties, surcharges and
ad valorem taxes resulted in an effective tariff rate on
certain goods of almost 300 percent. However, despite all
efforts to discourage imports, the import/GDP ratio remain
ed relatively stable during the entire decade (see Figure
2.2). Since the export/GDP ratio fell during the five-
year period after 1945 (see Figure 2.3), the trade balance/
GDP ratio fell (see Figure 2.4) and foreign trade remained
below its pre-depression level for three to four decades
(see Table 2.2).^
The early 1950s were characterized by increased
demand for copper because of the Korean War. After the
War, copper prices fell as demand decreased during the
world-wide recession of the late 1950s. At the recommenda
tion of the Klein-Saks economic consulting firm, the
Ibanez administration (1952-58) attempted to liberalize
foreign trade restrictions but the trade balance did not
improve significantly. After a temporary rise in the trade
11
FIGURE
l{j I ►•‘ t O H I - ' W h - ' H t O
o o o o o o u i o o c n o
1945
1950
1955
1960
1965
1970
1975
1980
t —1
K)
FIGURE
TABLE 2.2
EXPORTS, IMPORTS, AND THE
TRADE BALANCE
Exports Inport Trade Balance
(mill of (mill of esc (mill of (mill of esc (mill of (mill of esc
Year 1976 S) each year) % GDP 1976 S) each year) % GPD 1976 $ each year! % GDP
1940 4 18 3 14 1 4
41 5 19 3 11 2 7
42 6 19 4 13 2 6
43 7 18 5 13 2 5
44 7 15 5 11 2 4
45 7 13 6 11 1 2
46 8 12 7 10 1 1
47 10 13 10 13 0 0
48 14 13 11 10 3 3
49 12 9 13 10 (1) 0
1950 17 11 15 9 2 2
51 24 12 23 11 1 1
52 34 13 28 11 6 2
53 31 9 30 9 1 0
54 44 7 41 7 3 0
55 97 9 80 8 17 2
56 191 11 158 9 33 2
57 280 12 316 14 (36) (2)
58 297 10 333 11 (36) (1)
59 541 13 496 12 45 0
1960 1,063 574 14 1,275 697 17 (165) (123) (3)
61 1,027 568 12 1,406 773 16 (298) (205) (4)
62 1,095 665 12 1,313 746 13 (169) (81) (1)
63 1,128 1,091 13 1,251 1,306 16 (118) (217) (3)
64 1,303, 1,644 13 1,377 1,763 14 (38) (119) 0
65 1,467 2,515 14 1,354 2,369 13 129 146 1
66 1,789 3,894 16 1,626 3,594 14 166 300 2
67 1,798 4,931 15 1,609 4,464 14 191- 467 1
68 1,839 6,649 15 1,709 6,261 14 195 388 1
69 2,244 11,430 18 1,869 9,818 15 421 1,612 3
1970 2,079 14,771 — 16— --1,922 14,439 16 258 332 0
71 1,819 13,900 11 1,967 15,200 12 (29) (1,300) (1)
72 1,502 23,000 10 2,044 31,000 13 (394) (8,000) (3)
73 1,347 155,000 13 1,607 176,000 15 (260) (21,000) (2)
74 2,134 1,633,000 17 2,190 1,596,000 17 (57) 37,000 0
75 1,535 6,313,000 20 1,776 9,759,000 23 (240) (1,446,060) (3)
76 2,031 30,548,000 21 1,641 24,598,000 17 496 5,950,000
4
77 2,186 55,576,000 17 2,417 59,779,009 10 (232) (4,203,000) (1)
78 2,459 3,167 (708)
79 3,493 4,170 (677)
Source: IMP Financial Statistics
Central Bank of Chile
13
balance (measured in escudos) in 1956, it turned negative
in 1957 and 1958 (see Figure 2.4 and Table 2.2).
After a brief improvement in 1959, the current
account remained negative during the remainder of the
Alessandri administration (1958-64) despite the fact that
Alessandri did a complete turnaround in December 1961 after
world copper prices fell, and imposed a plethora of piece
meal import restrictions
In 1965, the demand for Chilean raw materials in
creased because of the Vietnam War and the trade balance
turned positive. It remained so throughout the entire Frei
Administration (1964-70).
In 1970, the trade balance started to fall, coin
ciding with the food shortages brought on by the Allende
Administration's (1970-73) establishment of price controls
on food products. Food imports soared and exports fell as
some export industries were nationalized and efficiency
and production declined.
fiscal Policy
Spending
Chile responded to the Great Depression by keeping
out foreign imports through a complex system of quotas,
foreign exchange controls, licenses and tariffs, replacing
them with subsidized domestic industry. As government
14
subsidization of the production of import substitutes
expanded, government expenditures increased and, as sub
sidized industries became less and less efficient, the cost
of subsidizing them increased. In addition, as more econ
omic activities were included in the public sector, a
floor was established below which government spending
could not be reduced.
After World War II, several attempts to cut govern
ment spending proved unsuccessful. Subsidies were a way of
life in Chile and it was politically impossible to intro
duce reform. In mid-1955, the Ibanez administration
attempted fiscal restraint. They were unsuccessful and
spending continued to rise (see Table 2.3).
The Alessandri administration (1958-64) also tried
to limit government spending but, after two years of hold
ing the line on spending, it increased dramatically in 19 60
due partially to government aid to victims of a devastat
ing earthquake, and remained high throughout the remainder
of the administration.
In 1964, Frei was elected President and the new
government's objectives included the "Chileanization" of
many of the major industrial companies and utilities and
income redistribution. The purchase of shares of private
firms and income redistribution was expensive and in
creases in government spending as a percentage of GDP
15
TABLE 2.3
GOVERNMENT REVENUES, EXPENDITURES AND DEFICIT
Deficit
. mill 76$
Deficit
, % Exp
Govt. Rev,
mill 76$
Govt. Exp
mill 76$ GDP GDP GDP Year
642
922
545
842
573
692
672
795
1,134
1,276
8.3
12.8
14.5
24.6
25.0
14.7
18.4
16.3
1940 700
817
638
676
716
811
824
949
1,105
(105)
(166)
143
119
152
154
(29)
(23)
45
21.1
12.8
25.7
30.0
26.4
26.2
17.8
25.7
25.0
38.3
1,241
1,547
2,171
1,634
1,184
2,259
1,036
837
842
720
332
240
753
701
423
803
224
289
281
447
1950 1,573
1,879
2,924
2,335
1,607
3.062
1,260
1,126
1,123
1,167
53
TABLE 2.3 - continued
Year
Govt. Rev.
mill 76$ % GDP
Govt. Exp.
mill 76$ % GDP
Deficit
mill 76$ % GDP
Deficit
% Exp
1960 1,029 18 1,295 23 266 4.6 20.5
61 1,094 18 1,370 23 276 4.5 20.1
62 1,133 18 1,496 23 363 5.7 24.2
63 1,161 17 1,492 22 331 5.0 22.2
64 1,203 17 1,474 21 271 3.9 18.4
65 1,461 20 1,758 24 297 4.0 16.9
66 1,714 22 1,907 24 193 2.5 10.1
67 1,707 21 1,807 22 100 1.2 5.5
68 1,748 21 1,873 23 125 1.5 6.7
69 2,046 24 2,081 24 35 0.4 1.7
1970 2,147 24 2,393 27 246 2.8 10.3
71 1,931 20 2,959 31 1,028 10.7 34.7
72 1,706 18 2,936 31 1,230 12.9 41.9
73 1,764 19 3,931 43 2,167 23.6 55.9
74 2,043 21 3,032 32 989 10.3 32.6
75 1,933 23 2,188 26 255 3.0 11.6
76 2,126 25 2,361 27 236 2.7 10.0
77 2,427 26 2,642 28 214 2.3 8.1
78 2,885 29 3,011 30 126 1.3 4.2
79 3,547 3,300 (247)
Source: Ministry of Finance, Office of the Budget.
H
started to accelerate.
In 1970, Allende extended and expanded the economic
policies of the previous government to their limits:
complete nationalization of Chile's major industries and
utilities and a comprehensive welfare system. Social
security pensions increased 7 8.5 percent and government
expenditures as a percentage of GDP soared (see Figure
2.5) .
Revenue
Since trade taxes were the major source of govern
ment revenue in Chile before the imposition of the income
tax in 1925, the ratio of foreign trade taxes to total
government income was extremely high (see Table 2.1,
Column III) and government income grew along with the
growth of trade (see Table 2.1, Column IV). After 19 25,
when income taxes were introduced, the relative impor
tance of trade taxes declined.
In 1934, the tax rate on profits rose from 12 per
cent to 18 percent and, in 1938, the special tax rate
applicable to copper companies rose to 33 percent. Total
tax revenues were very low during the Great Depression and
remained just over 10 percent of GDP during the Second
World War. After the War, tax revenues climbed slowly
upward (see Table 2.3 and Figure 2.6). Marginal tax rates
18
1945
FIGURE 2.6
40
Government Expenditures as a Percentage of (301 ’ 30
20
Government Revenues as a- Percentac e of -OOP
FIGURE'
10
Deficit as a Percentage of-GDP
0
FIGURE 2.8
19
on gross profits on copper production increased repeatedly
for three decades and, by 1955, the share of gross copper
profits claimed by the government reached 6 8 percent of
total tax revenue. However, because of the growth of in
come tax revenues, import tax revenues as a percentage of
total tax revenues fell and import tax revenues as a per
centage of GDP reached a record low, 1.2 percent.
In April 1959, Alessandri lowered marginal income
tax rates and tariff rates and economic activity and tax
revenues rose. In the mid-1960s, Frei enacted a wealth
tax as part of a policy of income redistribution and tax
revenues as a percentage of GDP rose to its highest level.
Allende continued this policy in the early 1970s and the
percentage rose to new heights.
Deficits
Government revenues did not keep up with expendi
tures and, by the 1950s, fiscal deficits were a way of life
in Chile. The annual rate of growth of government debt
rose from 9.0 percent (1940-46) to 19.0 percent (1947-51)
3
to 64.4 percent by 1953. In the late 1950s, the Ibanez
administration attempted fiscal restraint and the annual
rate of growth of government debt dropped temporarily to
46.7 percent, rising to 74.4 percent by 1961. Fiscal
deficits during the 1960s averaged 5 percent of GDP compar
ed with an average of 1.4 percent in the 1950s. Government
20
spending under Allende soared and the deficit as a percent
age of GDP increased almost six-fold between 1970 and
1973, rising from 10.3 percent in 1970 to 55.9 percent
in 1973 (see Table 2.3 and Figure 2.7).
Employment, Wages, and Income Policy
In response to the continuing decline in real wages
during the Depression, in 1937, Chile instituted a"sueldo
vital"— a minimum salary for civil employees, giving them
the distinction of being the only country in the world to
have had a minimum salary before they had a minimum wage.
In 1941, they established a commission to annually revise
the "sueldo vital" in accordance with changes in the cost
of living. Occasionally (1941-42 and 1949-50), salary in
creases exceeded cost of living increases and, in 1952,
Congress passed a law giving all civil service employees
automatic pay increases from 20 percent to 90 percent of
the cost of living increases of the previous year. In
1953, the minimum salary was 18 times the 1936-38
average compared with 12 times for the cost of living.
Wages in the copper mines were especially pro
tected from the effects of inflation. Between World War II
and 1955, wage rates in the copper industry rose faster
than inflation. Since the price of imported capital was
21
maintained artificially low by multiple exchange rates, the
capital-labor ratio rose and employment in the copper mines
fell by one-half during the ten-year period. The "sueldo
vital" was extended to agriculture in 1953 and to industry
and commerce in 1956.
In the 1930s, the country enacted a fully-funded
social security system, partially paid by employers,
4
employees, and government. By the 1960s, social security
costs were equal to 7 4.8 percent of tax revenues, 66.5
percent of fiscal expenditures, 50 percent of money wages,
and 15 percent of GDP.
In 1958, an increase in the unemployment rate
coincided with the trade liberalization policies of the
Alessandri administration and a 48.2 percent rise in real
wages of the same year. In 1960, they held wage and
salary increases to between 10 percent and 2 0 percent and
employment picked up.
In 1966, Frei raised the minimum salary by 21.9
percent. The rate of increase in employment fell from 5.1
percent to 1.8 percent and the rate of unemployment rose
from 5.5 percent to 6.1 percent. Wages lose their pur
chasing power in inflation and wages as a percentage of
GDP are inversely related to changes in the price level.
In the 1970s, Allende attempted to reduce un
employment by increasing labor in government-owned mines
22
but the rate of unemployment stayed pretty much the same
until 1972 when it briefly dipped down to 3.7 percent,
picking up again in 1973 (see Table 2.4).
Economic Growth
Prior to independence, Chile was considered to be
one of the more impoverished components of the Spanish
colonial empire. In contrast, at the time of the Great
Depression, Chile was one of the most prosperous countries
in Latin America. By implication, the republic's first
century was characterized by rapid economic growth.
During the Great Depression, per capita income fell 51 per
cent and domestic industrial production fell 11 percent.
After the economic decline of the 1930s, the economy
benefitted from the increased demand for copper and other
raw materials during World War II and the rate of growth
for the war years rose to 4.9 percent.
After the war, demand for Chile's exports fell and
the country's rate of growth fell with it. The Chilean
economy was characterized by a complex system of import
restrictions, an extensive system of social welfare,
fiscal deficits, high wages, and low savings. GDP growth
averaged 2.7 percent from 1945-52 while Latin American
growth averaged 6.3 percent.
23
TABLE 2.4
WAGES, EMPLOYMENT, AND UNEMPLOYMENT
Year
% A Money
Wage Index % A CPI % A Real Wage
i A
Employment
%
Unemployment
1940
__
- 1.4
41 23.4 14.4 9.0
42 30.0 26.2 3.8
43 11.3 16.1 (4.8)
44 18.9 11.9 7.0
45 11.3 8.9 2.4
46 15.1 15.8
( -7)
47 35.1 33.3 1.8
48 28.9 18.3 10.6
49 11.3 18.7 (7.4)
1950 16.3 16.6 ( -3)
51 10.6 22.3 (11.7)
52 28.6 21.6 7.0
53 13.3 26.2 (12.9)
54 27.8 57.1 (29.3)
55 72.5 77.3 (2.8)
56 58.9 56.4 2.5
57 33.7 32.8 .9
58 71.6 23.4 48.2
59 21.7 38.0 (16.3)
1960 15.1 11.6 3.5
..
7.4
61 15.1 7.7 17.4 2.1 6.7
62 13.9 13.9 0 6.1 5.3
63 36.3 44.3 (8.0) 2.3 5.1
64 33.3 46.0 (12.7) 2.1 5.3
65 54.0 28.8 25.2 5.9 5,4
66 36.0 22.9 13.1 5.1 5.5
67 42.2 18.1 24.1 1.8 6.1
68 30.8 26.1 4.7 5.9 6.0
69 39.2 29.3 9.9 4.9 6.2
1970 44.9 33.3 11.6 0.1 . 7.1
71 51.0 19.0 32.0 7.4 5.5
72 66.7 79.1 (12.4) 2.1 3.7
73 190.0 354.9 (164.9) 5.4 7.0
74 641.4 504.7 136.7 1.0 9.7
75 365.1 374.7 (9.6) (6.2) 18.7
76 253.8 211.9 41.9 8.7 13.6
77 157.9 63.5 94.4 9.3 13.2
78 55.7 30.0 22.7
Source: University of Chile
24
In the early 1950s, the Korean War spurred the
demand for copper, industrial production jumped 17.4 per
cent in 1951 and 13 percent in 1952 (see Table 2.5) and
GDP growth hit a record high of 12.4 percent in 1952 (see
Table 2.6 and Figure 2.8). After the end of the War,
growth tapered off during the world-wide recession of the
late 1950s.
Economic growth requires investment which requies
foreign loans or private savings. Chile's economic poli
cies often discouraged foreign lending and private savings
have been traditionally very low in Chile (see Table 2.7),
partially due to the "sueldo vital" and extensive social
security system and partially due to the relatively low
(sometimes negative) real rate of interest paid on time
deposits. Public savings have been non-existent or nega
tive due to consistent fiscal deficits.
Prior to 1952, manufacturing was considered the
dynamic sector of the Chilean economy. Investment stagnat
ed in the early and mid-1950s as gross fixed capital invest
ment fluctuated between 8 percent and 9 percent of GDP
(see Table 2.8) and Chile's growth rate remained under 4
percent.
In 196 0, trade liberalization was accompanied by
an initial fall in the industrial index. The index re
bounded in 1961 and GDP growth accelerated. Foreign
25
TABLE 2.5
INDEX OF MANUFACTURING PRODUCTION
Year
Index Manufacturing
Production
1975 = 100 Percentage Year
Index Manufacturing
Production
1975 =100 ..... Percentage A
1940 1960 85.0 (2.4)
41 61 90.0 5.9
42 62 99.0 9.6
43 63 106.0 6.6
44 64 111.0 4.8
45 65 116.0 4.8
46 66 124.0 7.0
47 67 124.0 (0.5)
48 57.5 — 68 123.0 (0.3)
49 60.0 4.4 69 128.0 4.3
1950 59.0 (2.2) 1970 128.0 (0.3)
51 69.0 17.4 71 147.0 14.7
52 78.0 13.0 72 151.0 2.7
53 68.0 (13.0) 73 145.0 (4.3)
54 69.0 1.6 74 139.0 (3.8)
55 69.0 .6 75 100.0 (28.1)
56 74.0 6.9 76 105.0 4.9
57 74.0 (.6) 77 116.0 10.5
58 76.0 2.7 78 123.0 10.3
59 87.0 14.2 79 138.8 8.8
^ Source: International Financial Statistics.
TABLE 2.6
GROSS NATIONAL PRODUCT
Year
'GDP
Expenditures Percent
Norn. GDP
(million of escudos
of each year)
1940 2,410
M l
22
41 2,651 10.0 27
42 2,399 (9.5) 32
43 2,638 9.9 40
44 2,748 4.2 47
45 3,021 10.0 54
46 3,183 5.8 68
47 2,879 (9.6) 79
48 3,337 15.9 108
49 3,292 (1.4) 128
1950 3,452 4.9 158
51 3,397 (1.6) 201
52 3,819 12.4 264
53 4,089 7.0 352
54 4,290 4.9 590
55 4,494 4.7 1,040
56 4,242 (5.6) 1,667
57 4,402 3.8 2,308
58 4,568 3.8 2,995
59 4,644 1.7 4,226
1960 27,997 2.9 4,160
61 29,711 6.1 4,707
62 31,044 4.6 5,677
63 32,568 5.1 8,410
64 34,092 4.3 12,742
65 35,806 5.1 17,956
66 38,282 7.0 25,042
67 39,234 2.4 32,880
68 40,377 3.0 44,283
69 41,710 3.5 64,551
27
TABLE 2.6 - continued
Nam. GDP
GDP (million of escudos
Year Expenditures Percent of each year)
1970 43,234 3.6 97,000
71 46,472 7.7 129,000
72 46,472 (0.1) 239,000
73 44,757 (3.6) 1,213,000
74 47,414 6.0 9,661,000
75 42,091 (11.2) 42,091,000
76 43,805 4.1 146,648,000
77 47,424 8.3 321,188,000
78 50,269 6.0 442,000,000
79 6.8
Source: 1940-48, Banco Central, Chile.
1948, IMF Financial Statistics.
Quentas Nacionales, ODEPLAN.
28
FIGURE 2.8
GDP GROWTH
+ 10
5
0
5
10
o o o
in m
c r i q\ m
29
1980
TABLE 2.7
SAVINGS
(millions of pesos)
Year
Gross
Savings Depreciation
Net
Saving % GDP
1958 .19 .26 (.07) (2.3)
59 .38 .35 .03 0.75
1960 .60 .68 (.08) (1.9)
61 .56 .41 .15 3.0
62 .64 .47 .17 2.8
63 1.10 .75 .35 4.3
64 1.90 1.20 .70 5.3
65 3.10 1.70 1.40 7.7
66 4.00 2.30 1.70 6.8
67 4.40 2.80 1.60 5.0
68 6.20 4.20 2.00 4.5
60 10.60 6.50 4.10 6.4
1970 14.00 8.60 5.40 5.6
71 15.00 11.70 3.30 2.6
72 21.00 19.00 2.00 0.8
73 138.00 129.00 9.00 0.7
74 1,157.00 851.00 306.00 3.1
75 (90) 4,036.00 (4,126.00) (9.8)
76 10,048.00 12,746.00 (2,698.00) (1.8)
77 18,259.00
Source: National Bureau of Statistics, Chile.
30
TABLE 2.8
INVESTMENT
Year
Gross Fixed Capital
Investment (mill of
esc. of each year) Percent of GDP
1940 2 9
41 2 7
42 1 3
43 3 7
44 4 10
45 7 13
46 12 17
47 4 5
48 13 12
49 15 12
1950 14 9
51 19 9
52 25 9
53 32 9
54 48 8
55 87 8
56 138 8
57 247 11
58 309 10
59 405 10
1960 641 15
61 793 17
62 873 15
63 1,441 17
64 2,111 17
65 2,895 16
66 3,793 15
67 4,761 14
68 6,711 15
69 9,655 15
31
TABLE 2.8 - continued
Year
Gross Fixed Capital
Investment (mill of
esc. of each year) Percent of GDP
1970 13,939 15
71 16,800 13
72 29,000 12
73 162,000 13
74 1,202,000 14
75 4,268,000 11
76 12,814,000 10
77 28,830,000 12
Source: National Bureau of Statistics, Chile
32
investment increased during the Alessandri administration,
coinciding with tax exemption guarantees and depreciation
allowances and the annual rate of growth of real investment
reached an all-time high of 15.1 percent in 1961. In 1962,
the price of copper soared and Chile's growth rate soared
with it, remaining high until the latter part of the
decade.
During the Frei administration, a combination of
domestic inflation, high wages, high tax levels, and
discriminatory exchange rate policies converted Chile from
a relatively low-cost copper producer into a relatively
high-cost one. Copper investment fell and capital forma
tion in the country was one of the lowest in the hemisphere.
By 1967, economic growth had slowed again.
In 1967, Chile joined the Andean pact. One of the
conditions for membership was restrictions on foreign in
vestment, causing average annual direct foreign investment
to fall from $43.7 million in 1959-61 to -$2.4 million
in 1962-64 to $1 million in 1965-70. Public investment
remained a more significant percentage of GDP in the late
1960s than it had been in the 1950s and, by the 197 0s,
it was virtually one-half of total investment.
In the early 1970s, Allende attempted to expand
and extend the economic policies of the previous adminis-
5
tration. At first, the economy responded well to the new
33
administration's policies and the annual rate of real
economic growth doubled from 3.6 percent to 7.4 percent
but it soon reversed and industrial production fell by 7.1
6
percent while GDP growth dropped by 7.8 percent. Stock
market prices fell to a record low— the index of stock
market quotations fell to 27 percent of its highest (1963)
value (see Table 2.9). Economic chaos set in and the
Allende government fell in September 1973.
Financial Stability
For several decades after winning its independence,
Chile enjoyed a reputation for financial stability.
Chileans favored a metallic currency and, from 1830 to
1860, the dollar value of the peso achieved more stability
than it would again for more than 100 years (see Table 2.1,
Columns VI and VII). A temporary suspension of converti
bility during the War of 1865 with Spain preceded a re
valuation of the peso and a return to the gold standard.
Chile remained on the gold standard until 1878 when they
suspended convertibility after a severe drop in export
value.
Attempts to return to the gold standard in 1887
and 1895 proved unsuccessful and, with, two exceptions,
devaluations continued until 1925. By 1925, the dollar
value of the peso had fallen to about 15 percent of its
34
TABLE 2.9
INDEX STOCK MARKET QUOTATIONS
1958 = 100
Year Current Prices Constant Prices
1950 10 136
51 10 107
52 12 109
53 16 119
54 31 147
55 65 175
56 71 115
57 78 98
58 100 100
59 169 122
1960 171 110
61 199 119
62 222 123
63 472 172
64 661 166
65 727 141
66 619 98
67 576 77
68 742 78
69 1,158 94
1970 834 49
71 817 46
Source: Banco Central, Chile.
35
187 8 value. By the end of the year, the country establish
ed a "gold exchange" standard— a modified fixed exchange
rate— and broadened its tax base by instituting its first
income tax.
Chile attempted to recover from the Depression by
deficit government spending. To do so, it went off the
gold standard in March 19 32. In addition, to discourage
imports and encourage import substitution, they switched
from a unified exchange rate to multiple rates. As soon as
the discipline of a.gold standard-fixed exchange rate was
removed, treasury borrowing increased and the money supply
doubled while the cost of living rose by 30 percent.
Chile was probably the only country in the western world
that had inflation in 1933. By 1939, the currency had
been devaluedi by 300 percent and inflation was 8.5 percent
a year.
Chile succeeded in maintaining single-digit infla
tion until Vorld War II when the inflation rate rose from
its previous high of 8.5 percent to 15.5 percent. It
continued to rise during the second half of the decade,
reaching an average annual rate of 21.5 percent (see Table
2.10 and Figure 2.9).
In the second half of the 20th Century, Chilean
monetary policy was a function of its fiscal deficit (see
Figure 2.10) because the country did not have an extensive
36
TABLE 2.10.
INFLATION
Year % A CPI Year % A CPI
1940 1.4 1960 11.6
41 14.4 61 7.7
42 26.2 62 13.9
43 16.1 63 44.3
44 11.9 64 46.0
45 8.9 65 28.8
46 15.8 66 22.9
47 33.3 67 18.1
48 18.3 68 26.1
49 18.7 69 29.3
1950 16.6 1970 33.3
51 22.3 71 19.0
52 21.6 72 79.1
53 26.2 73 354.9
54 57.1 74 504.7
55 77.3 75 374.7
56 56.4 76 211.9
57 32.8 77 63.5
58 23.4 78 30.0
59 38.0 79 38.0
Source: imf Financial Statistics.
37
FIGURE 2.9
PERCENTAGE CHANGES IN CONSUMER PRICE INDEX
AND PERCENTAGE CHANGES IN MONEY
GROWTH
500
PERCENTAGE
CHANGES I S I
CONSUMER
PRICE INDEX
400
300
200
-PERCENTAGE- CHANGES
I . MONEY .GROWTH
IS
100
20
10
,0861
FIGURE 2.10
MONEY GROV7TH AND THE FISCAL DEFICIT
40/400
30/300
20/200
10/100
FISCAL
. DBF 1C IT
100
1945 19 50
1960 1970
39
tax base or well-developed bond markets and the government
was not always able to borrow from foreign sources. Con
sequently, there were many times that their only feasible
method of financing the fiscal deficit was to print money
(see Table 2.11). When they financed the deficit internal
ly, money growth accelerated, the rate of inflation rose,
and outflows of excess money created balance of payments
deficits (see Table 2.12). Attempts to solve balance of
payments crises included currency devaluations which were
accompanied by increases in the rate of inflation (see
Table 2.13 and Figure 2.11).
Devaluation was seen as a method of improving the
balance of payments because it was assumed that there is a
direct relationship between the balance of payments and the
trade balance and, it was also assumed that devaluation
improves the trade balance. However, the Chilean data do
not indicate a direct relationship between the balance of
payments and the trade balance (see Figure 2.12) nor do the^
indicate that improvements in the trade balance are associ
ated with devaluations (see Figure 2.13).
When they financed the deficit externally, the
money supply and the rate of inflation was not affected
adversely and the balance of payments remained positive.
Currency devaluations were not necessary and the peso
remained stable.
40
TABLE 2.11
MONETARY VARIABLES
Money (mill
of esc)
EOY % A
Res. Mon.
(mill of
esc) EOY % A
Money/
Reserve
Money % A
Velocity
(GDP/M) % A
3.2 —
3.6 12.5
4.0 11.1
5 25.0
32
—
6 20.0 5.3
41 28 7.3 21.7 5.6 5.7 3.1 (08.8)
30 (27) 8.4 15.1 3.6 (35.7) 5.3 71.0
21 (30) 10.6 26.2 2.0 (44.5) 9.6 81.0)
29 38.1 15.3 44.3 1.9 (05.0) 9.1 (05.3)
40 37.9 33.3 117.6 1.2 (36.9) 8.8 (03.3)
55 37.5 32.7 (1.8) 1.7 41.7 10.7 21.6
92 67.3 51 56.0 1.8 05.9 11.3 05.6
129 40.2 73 43.1 1.77 (01.7) 12.9 14.2
165 27.9 93 27.4 1.77 00.1 14.0 08.5
222 34.5 125 34.4 1.78 00.5 13.5 (03.6)
294 32.4 182 45.6 1.62 (09.0) 14.4 06.7
■ £ »
M
TABLE 2.11— continued
Money (mill
of esc)
EOY % A
Res. Mon.
(mill of
esc) EOY % A'
Money/
Reserve
Money % A
Velocity
(GDP/M) % A
384 30.6 264 45.1 1.45 (10.5) 10.8 (25.0)
432 12.5 292 10.6 1.48 2.1 10.9 00.1
557 28.9 499 70.9 1.12 (24.4) 10.2 (06.4)
747 34.1 587 17.6 1.27 13.4 11.3 10.8
1,129 51.1 976 66.3 1.16 (08.7) 11.3 0
1,867 65.4 1,272 30.3 1.47 26.7 9.6 (15.1)
2,594 38.9 2,060 61.9 1.26 (14.3) 9.6 0
3,240 24.9 2,466 19.7 1.31 04.0 10.1 05.2
4,482 38.3 3,369 36.6 1.33 01.5 9.9 (02.0)
6,069 35.4 4,900 45.4 1.24 (06.8) 10.6 07.0
10,051 65.6 7,741 58.0 1.30 04.8 9.2 (13.3)
21,523 114.1 21,441 176.9 1.00 (23.1) 5.9 (36.0)
54,000 150.9 60,000 179.8 0.90 (10.0) 4.4 (25.0)
225,000 316.7 311,000 418.3 0.72 (20.0) 5.4 22.7
838,000 272.4 1,004,000 222.8 0.83 15.3 11.3 109.0
2,995,000 257.4 3,568,000 255.4 0.84 01.2 12.9 14.0
8,795,000 193.7 13,822,000 287.4 0.64 (23.9) 16.7 29.0
18,314,000 108.2 29,213,000 111.4 0.63 (01.6) 17.5 04.8
30,578,000 70.0 45,850,000 60.0 0.67 (06.3) 14.5 (17.2)
Source: Banco Central, Chile,
4 ^
to
TABLE 2.12
BALANCE OF PAYMENTS
Year
Balance of
Payments
(US mill)
Capital Flows
Autonomous
(US mill)
1947-
C
1951
O
1952 20
53 5
54 (29)
55 59
56 (7)
57 (81)
58 (23)
59 28
1960 (55) 147
61 (210) 362
62 (94) 262
63 (55) 204
64 46 286
65 88 88
66 219 317
67 (43) 192
68 210 505
69 300 378
1970 188 443
71 (481) (42)
72 (352) 503
73 (152) 329
74 (51) 261
75 (287) 312
76 455 318
77 (7) 482
78 617
79 930
Source: 1952-59 (1969 U.S. mill $), Ffrench Davis.
1960-78 (1976 U.S. mill $), Banco Central.
43
TAELE 2.13
Exchange Rate
(10-6 pesos/US $)
Year End of Year % A Average of Year % A
1940 33 0
41 32 (3)
42 32 0
43 32 0
44 32 0
45 32 0
46 34 6.3
47 47 38.2
48 66 40.4 59.81
49 99 50.0 77.74 30.0
1950 72 (27.3) 89.88 15.6
51 93 29.2 85.48 (5.0)
52 128 37.6 123.87 40.3
53 220 71.9 174 40.0
54 315 43.2 290 66.7
55 630 100.0 540 86.2
56 600 (4.8) 534 0
57 773 28.8 694 30.0
58 1,120 44.9 1,000 44.1
59 1,053 (6.0) 1,055 5.5
1960 1,050 0 1,051 0
61 1,050 0 1,051 0
62 1,640 56.2 1,142 8.7
63 2,150 31.1 1,875 64.2
64 2,700 25.6 2,372 26.5
65 3,470 28.5 3,128 31.8
66 4,370 25.9 3,955 26.4
67 5,790 32.5 5,031 27.2
68 7,670 32.5 6,787 34.9
69 9,980 30.1 8,974 32.2
44
TABLE 2.13— continued
Year End of Year % A Average of Year % A
1970 12,230 22.5 11,552 29.0
71 15,800 29.2 12,409 7.0
72 25,000 58.2 19,485 57.0
73 360,000 134.0 110,789 470.0
74 1,870,000 419.0 831,917 650.0
75 8,500,000 355.0 4,910,000 490.0
76 17,420,000 105.0 13,050,000 166.0
77 27,960,000 60.5 21,540,000 65.0
78 33,950,000 21.4 31,670,000 47.0
79 39,000,000 14.8
Source: IMF Financial Statistics
45
FIGURE 2.11
INFLATION AND DEVALUATION
PERCENTAGE CHANGE IN CPI AND PERCENTAGE
CHANGE IN EXCHANGE RATE
500
400
n Exchange
Rates
300
A in CPI
200
100
1945 1960 1970 1980
46
FIGURE 2.12
NET MONETARY CAPITAL AJKTD GOLD MOVEMENTS
NET GOODS AND SERVICES
200
150 Net MnnpH-ary r^pit-al
_L„ Gold Movements
and
100
50
50
•100
. Met Go ada ..and; Fiery .cea
•150
■200
.ls5
1947-51
3£2:
47
FIGURE 2.13
THE TRADE BALANCE AND PERCENTAGE
CHANGES IN EXCHANGE RATES
500
(+400)
- - I — )
400
(+200)
300
ge
Trade Balance
200
(-2 0 0)
100
(-100)
1970 1980 1945 960
48
During the first three years of the Ibanez admin
istration, internally-financed deficits continued to rise,
money growth accelerated, the balance of payments turned
negative and the currency was devalued by 71.9 percent
(1953), 43.2 percent (1954), and 100 percent (1955). By
1955, the inflation rate soared to a record 77 percent. As
inflation worsened and real wages fell, strikes and labor
conflicts intensified. A major strike in May 1954 preceded
a state of seige in September and in July 1955, workers
struck again. The administration attempted fiscal and
monetary restraint but harvests were poor and, in the
absence of a free import market, food prices soared.
During the first three years of his administra
tion, Alessandri tried a different approach. He attempted
to increase economic growth by liberalizing trade and
stimulating investment. He financed the deficit externally
and replaced continuous devaluation of multiple exchange
rates with a unified, fixed exchange rate. As income rose
relative to increases in the money supply, the inflation
rate fell rapidly despite massive increases in public
spending. By 1961, inflation had fallen to 7.9 percent—
its lowest level in more than 20 years. After a foreign
exchange crisis in December 1961 after world copper prices
fell, Alessandri switched to internal financing of the
continuing high deficits and money growth soared. He
49
abandoned the fixed exchange rate, devalued the currency by
56.2 percent and imposed a plethora of piecemeal import
restrictions. By 1962, the inflation rate rose to its
highest level since the mid-1950s.
Frei continued to finance fiscal deficits internal
ly and money growth remained high. He introduced a
"sliding peg" and devaluations continued at about 30 per
cent a year. Inflation remained about 30 percent during
his administration. Ffrench-Davis (197 3) remarks that the
Chilean exchange rate increased by 50 percent during the
period 1964-66 while consumer prices rose 46 percent over
their increase in the U.S.
Because Allende increased government spending
faster than revenue, the deficit rose 500 percent.
Allende's economic policies discouraged foreign lending
and he was forced to finance almost the entire deficit
internally. Money growth accelerated from 35 percent in
1969 to 354 percent in 1973 and inflation rose from 29.3
percent in 1969 to 316 percent in 1973. One of the
objectives of the Allende government was a reduction in
food costs, especially those of the working classes. To
reach its objective, they controlled food costs at less
than production costs, sometimes at 10 to 20 percent of
their value. Inflation fell to 19 percent in 1971 but
persistent shortages resulted in the introduction of
rationing in January 197 3, the creation of a flourishing
50
black market and an increase in the rate of inflation. In
197 3, the Wholesale Price Index— a good indicator of actual
inflation because of the existence of price controls and
black markets— increased by at least 800 percent.
51
CHAPTER II
FOOTNOTES
To facilitate industrial development, CORFO acted
as an engineering consultant, marketing agent, and pur
chasing agent and imported the machinery and equipment
needed for approved projects. It also assisted in obtain
ing foreign financing and, in its capacity as a government
bank, it made loans to private firms, mixed enterprises,
state agencies, and made equity investment in partnership
with private capital. In areas where there was insuf-.
ficient investment (according to the government), CORFO
actually established companies, subsequently operating then
as state enterprises or selling them in part or in whole tc
private investors.
2
Because World War II had the dual effect of in
creasing the demand for its exports, especially copper and
reducing the supply of its imports, Chile anticipated an
improvement in its trade balance. However, although the
volume of exports rose and the volume of imports fell, the
trade balance did not improve significantly because the
dollar price of exports remained relatively stable (due to
fixed copper prices) while the dollar price of imports
rose.
3
Jere R. Behrman, Chile: Foreign Trade Regimes and
Economic Development (New York: Columbia University Press,
1976).
4
Chile's social security system included medical,
disability and accident insurance, transportation costs,
old-age pensions, and family allowances for children under
18. Thousands of additions and extensions to the system
were made during the next two decades and, by the late
1950s, the system comprised 52 institutions, including 41
social security funds for different groups in the popula
tion and 11 percent health welfare organizations.
52
5
By 1972, Allende"s government had taken over at
least 27 0 large firms and was in total control of several
key sectors of the economy: banking, insurance, mining,
metals, textiles, consumer durables, food canning, and
foreign commerce. CORFO, which had been a development
agency, was turned into a giant state holding company with
the power to buy controlling interests in private firms
and, if the government wanted to take over a firm, it
could set the prices of its products unrealistically low.
The firms would then be unable to compete with other firms
and be driven into bankruptcy. Nationalized banks used
criteria other than profitability to arbitrarily refuse
credit to firms. The firms which were denied credit were
unable to meet production quotas and were taken over.
£
The Allende government nationalized the copper
mines, projecting an increase in employment and produc
tion. Overall copper production remained about the same
despite increases in the total work force of as much as
50 percent. In addition, skilled personnel left for
various political reasons, industrial "accidents" rose,
and the cost of production (which had only risen from 15
cents per pound to 29 cents per pound over the six year
period between 1964 and 1970) rose from 29 cents per
pound to 50 cents per pound during 1971.
53
CHAPTER III
OVERVIEW OF PRE-1970
CHILEAN ECONOMIC POLICIES
This chapter describes the economic policies employ
ed by various Chilean administrations before 1970 within
the context of models which attempt to explain the effects
of these policies on real and monetary macroeconomic vari
ables. For purposes of organization, the discussion of
economic policies and the literature review of economic
models make a distinction between policies which affect
real macroeconomic variables and those which affect mone
tary ones.
This distinction may seem arbitrary because it is
difficult to separate real and monetary phenomena com
pletely. Economic policies designed to influence real
macroeconomic variables such as trade, growth, and employ
ment may create short-run repercussions which affect
monetary macroeconomic variables such as inflation, ex
change rates, and the balance of payments. However,
separation of the variables simplifies the discussion with
out distorting the analysis.
54
Policies Which Affect Real
Macroeconomic Variables
The mercantilist model advocated the monopoliza
tion of production, the regulation of trade and the hoard
ing of raw materials. As a Spanish colony, Chile was an
example of colonial mercantilism. It has been said that,
"The Spanish conquest and colonization of America was
essentially an economic venture— a quest for precious
metals, raw materials and captive markets" (Kinsbruner,
1973). In Chile, trade could be conducted only with Spain
and Spanish colonies, goods could be carried only on
Spanish ships, and local manufacturing was discouraged.
The classical model of free trade asserts that the
opening of trade augments national wealth by widening the
scope of the division of labor and overcoming the technical
indivisibilities of production. After winning independence
in 1810, trade liberalization became a motto of the
Chilean revolutionary government, which in one of its first
decrees, stated, "inhabitants of the country will be able
to engage in free commerce in all parts of the world"
(Kinsbruner, 1973). Chileans lost little time in accom
plishing their objective: "In the 1840s, Chilean grain fed
• ^
Limenos, gold prospectors in California, and immigrants m
Australia" (Kinsbruner, 1973).
55
During the first fifty years of independence,
Chileans were forced to postpone the establishment of a
completely laissez-faire economy because of revolutions,
wars, and burgeoning attempts at nationalization. However,
by 1860, Chile’s conversion to laissez-faire and free
trade was virtually complete. The Chilean economy from
1860 to 1930 is best characterized by the classical model
of an open economy linked to the rest of the world by
international trade.
At the time of its war for independence, Chile was
one of the poorest nations in Latin America. By the Great
Depression, it was one of the richest. By implication,
Chile's growth rate during its free trade period from 1860
to 1930 was higher than that of its Latin American neigh
bors. In addition, the country experienced a higher rate
of growth during this period than it would again for forty
years.
Despite Chile's relatively rapid rate of growth,
advocates of government intervention in the foreign trade
sector blamed its free trade policies for a variety of
economic problems, including a deterioration in its terms
of trade, depletion of its natural resources, and excessive
dependence on the foreign trade sector for tax revenues.^
However, it appears that these problems may have been more
imaginary than real.
56
Critics of free trade argue that developing
nations' terms of trade— the price of exports relative to
the price of imports— deteriorates over time. This occurs
because developing nations usually export raw materials and
import manufactured goods and the world price of raw
materials has fallen relative to manufactured goods. Con
sequently, to continue importing even the same level of
manufactured goods, a developing nation must export more
of its raw materials. If, in the process of development,
the nation's demand for imports grows, the situation is
aggravated even further.
An empirical study by the United Nations Economic
Commission for Latin America (UNECLA-1950) purported to
find evidence of a long-term trend of deterioration in
Chile's terms of trade. The study found that the trend
was particularly strong during the period of relatively
free trade, 1870-1930, subsided during the period of
relatively restrictive trade, 1930-1952, and then resumed
during the period of relatively free trade in the 1950s.
Critiques of this study include Fink (1955),
Ellsworth (1956), and Rogge (1956), who argue that, because
the study neglected to include quality changes in Chile's
imports, the deterioration in its terms of trade may be
overestimated. Also, Corbo (1974) calculated Chile's terms
of trade from 1950 to 1970 and concluded that, "The data
57
do not support the Prebisch thesis that a deterioration in
the terms of foreign trade in developing countries is a
result of their pattern of trade" (see Table 3.IF).
natural resources are its wealth and should not be depleted
to pay for imports.
(1976), who states that the value of a country's natural
resources (or any other kind of wealth) depends on its
market value. Because the nature of most natural re
sources is such that the domestic market cannot begin to
absorb total production, countries should export their
natural resources. This is certainly true with Chilean
copper, nitrate, and iodine.
excessive dependence on the foreign trade sector led to
fluctuations in total tax revenue because foreign trade is
erratic and foreign trade taxes are a significant com
ponent of the total. If total tax revenues fluctuate be
cause of its erratic trade tax component and the government
is unable to borrow and does not want to engage in infla
tionary deficit financing, economic stability and growth
are jeopardized as government spending falls in response
to the fall in tax revenue. Consequently, to encourage
economic stability and growth, Chile should reduce its
Critics of free trade also argue that a country's
This argument has been criticized by Behrman
Another argument against free trade is that Chile's
58
reliance on foreign trade.
This argument is questionable on two counts:
firstly, the relative importance of trade taxes declined
after 1925 when income taxes were introduced; and, second
ly, the foreign trade sector as a proportion of Gross
Domestic Product was not significantly higher during peri
ods of relatively free trade than it was during relatively
restrictive periods. Therefore, with a given tax structure,
government revenue as a proportion of GDP does not vary
with the level of foreign trade or type of foreign trade
regime. Behrman (19 76) found no correlation between peri
ods of fluctuations in exports and imports and fluctuations
in government revenue.
The belief that free trade had an adverse effect on
Chile's economic development let to government interven
tion in the foreign trade sector in the form of protective
trade restrictions— tariffs and quotas--and import sub
stitution policies.
The tariff of 1897 was Chile's first protective
tariff. Specific import duties were added in 192 8. A few
years later, in response to the Great Depression of the
1930s, free trade policies were replaced by "Beggar Thy
Neighbor" protective trade restrictions in virtually every
country in the West. In 1930, the United States passed the
Smoot-Hawley Tariff, increasing already high tariffs on more
59
than 800 items. Chile followed by increasing specific im
port duties by 71 percent in 1931 and all tariffs by 50
percent in 1933. In 1934, the 50 percent increase of the
previous year was replaced by a 100 percent gold sur
charge, which was increased to 300 percent in 1935. A
year later, ad-valorem duties were added.
Protective tariff rates increased during the 1940s,
<
and by the 1950s, the combination of various duties, sur
charges, and ad valorem taxes resulted in an effective
tariff rate on certain goods of almost 300 percent.
Import substitution was first proposed during the
Balmaceda administration (1886-1891). Balmaceda initiated
a state-directed and state-administered program of economic
development and proposed to "Chileanize" the British-
owned nitrate industry. He eventually reversed his posi
tion.
Beginning with the election of Arturo Alessandri
in 1920, Chile's economic policies have been described as
"developmental interventionism" (Glade, 1969) ./ In the
1920s and 1930s, a series of tax incentive measures were
enacted to promote the domestic iron mining, construction,
and fishing industries.
In 1939, the government planning and investment
corporation, CORFO, was established. CORFO's purpose was
to develop a comprehensive plan for national development
and assist in the investment in and execution of
60
Also, according to Harberger (1963), relatively
low or stagnant productivities in the traditional import-
substitution sectors suggest that restrictive barriers may
have also created inefficiencies that the international
market would have eliminated.
Nor is there any evidence that interventionist
4
policies encouraged domestic capital investment. Behrman
(1977) found little empirical evidence of correlation be
tween real domestic investment and the degree of restric
tive trade policies (measured by the Ffrench-Davis restric
tions index). However, although he did not find that the
quantity of capital was a function of trade policies, he
did find that the quality of capital was lower during
restrictive periods because domestically-produced capital
5
import substitutes are usually inferior.
Restrictive policies are doubly detrimental to
capital because they not only constrain importation of new
machinery and equipment. They also restrict imports of
second-hand machinery, often considered unusual bargains.
Behrman (1977) also found that savings are
typically lower during restrictive periods. Therefore, to
the extent that savings are a constraint on investment,
restrictive policies will be a limiting factor on domestic
investment.
61
development projects. To help domestic producers, espe
cially producers of import substitutes, CORFO provided
financial assistance, obtaining foreign financing, pro
viding loans, and making equity investment and technical
expertise, acting as an engineering consultant and market
ing agent.
Advocates of interventionist policies argue that
protective trade restrictions and import substitution
policies stimulate economic growth by developing a country's
native labor skills and entrepreneurial ability and en
couraging domestic capital investment.
However, there is no evidence that internvention-
ist policies developed Chile's native labor skills or
entrepreneurial ability. On the contrary, according to
Mamalakis (197 6) protective trade barriers in Chile result
ed in the emigration of skilled professionals and tech
nicians because protected industries have no need for
ambitious employees. In addition, they result in labor
shifts from more productive to less productive activities.
Behrman (1976) states that import-substitution
policies favored government-subsidized imports of capital
goods and above-equilibrium wage rates in industry and
mining. This aggravated Chilean unemployment problems be
cause of the relatively high elasticity of substitution
between capital and labor in the industrial sector.
62
In addition, interventionist policies discourage
linkages bewteen the export sector and the rest of the
economy and encourage below-optimal scales of produc-
, . 6
tion.
There is also no evidence that productivity in
more-protected industries increased relative to that in
less-protected industries. Nor is there evidence that
economic growth was higher during restrictive periods than
it was during liberal periods. On the contrary, according
to de Castro and de la Cuadra (1971), Chile's average
rate of growth during its laissez-faire pre-depression
period was higher than it was during its restrictive
periods. Behrman (1977) concludes, that, "Restrictive
regimes have tended to lessen growth."
Consequently, contrary to the expectations of the
interventionist model, protective trade restrictions and
import subsitution policies did not stimulate economic
growth in Chile by developing the country's native labor
skills and entrepreneurial ability and encouraging domestic
capital investment.
Policies Which Affect Monetary
Macroeconomic Variables
During most of the nineteenth century, Chile was
63
on the gold standard and its foreign trade behavior can be
described by the Hume specie-flow mechanism: under a gold
standard, price arbitrage will equalize price levels across
national boundaries. The discipline of the classical
specie-flow mechanism evidently worked well from 1830 to
1878 because, despite extremely adverse political condi
tions, Chile's inflation rate during this fifty year period
was less than 5 percent, or roughly equivalent to the rest
of the world (see Chapter II). In 1878, Chile abandoned
the metallic standard and the country never again attained
such a high degree of monetary stability.
As discussed in Chapter II, after more than four
decades of relative monetary instability, Chile adopted a
gold-exchange standard in 1925. Monetary stability resumed
until 1932, when in an attempt to recover from the Great
Depression, they went off the gold-exchange standard,
devalued the peso, and switched from a unified exchange
rate to multiple exchange rates. By the 1950s, it took 75
times as many pesos as it did in 1933 to buy a U.S. dollar,
inflation was averaging 40 percent a year, and the balance
of payments had turned negative.
In an attempt to explain Chile's continuous de
valuations, high inflation rates, and chronic balance of
payments deficits, a group of economists in the 1950s--
many of them Chilean— developed the structuralist model of
64
inflation. The structuralist model was the first Latin
American model of inflation. It is a "cost-push" model of
inflation which incorporates many of the interventionist
arguments against free trade without distinguishing be
tween real and monetary variables. On the contrary,
structuralists hypothesize a relationship between changes
in real variables such as exports and imports and monetary
ones such as inflation, balance of payments deficits and
currency depreciation.
According to Wachter (1978), the structuralists
hypothesize a causal relationship between real structural
"bottlenecks" and a country's rate of inflation. The
theoretical foundation of the structuralist model is pri
marily the Prebisch thesis, named for the Argentinean
economist, Raul Prebisch, who was director of UNECLA in
the 1950s. The essence of the Prebisch thesis is that
Latin American countries are unable to maintain as high a
rate of growth of per capita income as advanced countries—
even if they are able to sustain adequate savings to in
come ratios— without chronic balance of payments deficits
and repeated devaluations because there is a downward
trend in their terms of trade due to relatively low price
and/or income elasticities of demand for primary products.
Foreign investment cannot be counted on to eliminate ex
change shortages because it is a function of the demand for
a country's primary exports. The country is left with a
65
Hobson's choice of import and exchange controls or repeated
devaluations, both of which are inherently inflationary.
The structuralist inflation model parallels Chenery's
(1963) "two-gap" development model, the two gaps being the
income-inelastic demand for primary exports of developing
countries and their limited capacity to borrow.
The first gap— income-inelastic demand for primary
exports— is the terms of trade argument in favor of inter
vention in the foreign trade sector. Structuralists argue
that, as world income increases, a developing country's
terms of trade deteriorate because the income elasticity
of demand for its exports is lower than the income
elasticity of demand for its imports.
This argument assumes that export and import demand
is price inelastic. Therefore, as the price of exports
falls relative to imports, quantities don't adjust pro
portionately and the trade balance also deteriorates. It
also assumes that capital flows are exogenous. Therefore,
a deterioration in the trade balance is accompanied by a
deterioration in the balance of payments (in the case of
fixed exchange rates) or a fall in the value of the
country's currency (in the case of flexible exchange
rates). Consequently, a country's terms of trade, trade
balance, and balance of payments problems can only be
solved by interventionist policies which alleviate the
foreign trade bottleneck, inelastic export demand.
66
However, the structuralist assumptions of price-
inelastic export and import demand and exogenous capital
flows may not be theoretically sound or empirically
supported.
Ffrench-Davis (1971) questions the theoretical
soundness of the assumption of inelastic export and import
demand. He states: "The mixing of valid analytical tools
and irrelevant or wrong assumptions has resulted in the
institution of highly centralized plans that completely
disregard the useful role of the price system." In the
case of Chile, the assumption of inelastic demand also is
not supported by empirical evidence. Behrman (1977) found
widespread response to market signals in Chile and con
cluded that markets play an allocative role in both the
short- and long-runs. Mamlakis (1976) states, "There is
ample evidence that Chilean farmers have been acutely
sensitive to market signals and incentives affecting pro
duction of individual products."
In addition, according to Laffer (1979), capital
flows are not exogenous. Since the capital account is the
difference between the balance of payments and the trade
balance, capital flows adjust to changes in either or both
accounts. Since the trade balance and balance of payments
often move in opposite directions, capital flows must
adjust more than either account. Therefore, capital flows
are not exogeneously determined. In the case of Chile,
67
when variations in the trade balance and balance of pay
ments are shown on the same graph (see Figure 2.12), it is
apparent that the assumption of exogenous capital flows is
not empirically supported.
The structuralists assert that the other foreign
trade bottleneck, limited borrowing capacity, can be al
leviated by "saving" scarce foreign reserves by producing
import substitutes domestically. However, the concept of
"saving" foreign reserves is unclear because all domestic
industries save foreign reserves by producing goods which
then do not have to be imported.
The question is: do import substitutes save more
foreign reserves than they spend? A study of automobile
costs by Johnson (19 67) showed that the cost of saving
foreign exchange by producing automobiles in Chile in 1964
amounted to about five times the dollar price of the auto
mobile.
The usual concept of import substitution is
measured by the difference between the potential total
supply (domestic output plus imports) and actual supply.
In his study of the Chilean economy, Mamalakis (1976)
argues that this concept of import substitution should be
redefined to include both commodity imports and other
financial payments abroad. If it is, import substitution
may not result in any net saving.
68
- ___
Monetarists do not agree with the structuralists
that the Chilean inflation is cost-push. They argue that
Chilean inflation is demand-pull— the result of expansion
of the money supply which comes about in two ways: expan
sionary monetary policy in the form of central bank loans
to the public and commercial banks; and, expansionary
fiscal policy resulting in government deficits. Because
Chilean bond markets are not sufficiently developed,
domestic financing of the deficit usually takes the form
of increases in the money supply. Thus, the monetarists
view inflation as an increase in the supply of money with a
corresponding increase in spending.
The classic test of the monetarist model was per
formed by Harberger (1963). In his analysis, Harberger
argues that monetary expansion is an absolutely essential
condition for continuing inflation. However, he does not
believe that the Chilean Central Bank is necessarily to
blame for inflation.
The central bank does create money.' But'in many
cases, it is legally required to finance the expansion of
credit by the government and the private sector. If the
government keeps borrowing from the central bank and the
banking system does not expand the money supply, private
credit will be cut back and output and employment will fall.
Therefore, according to Harberger, the solution to infla
tion does not lie in the contraction of the money supply,
69
but in the reduction of government spending.
Monetarists hypothesize that real economic growth
is stimulated by trade liberalization because market forces
shift resources from sectors of low or average productivity
to higher ones. However, in an economy such as Chile prior
to 1973, with wage, price, and interest controls, trade
liberalization may be accompanied by financial disinter
mediation. This results in capital shifts from high to
low-yield investment.
Therefore, trade liberalization may increase
suppressed inflation and could have a potentially negative
effect on economic growth in the short-run. An empirical
investigation of the effect of disintermediation on
suppressed inflation by Sjaastad (1971) finds evidence of
such a relationship.
However, the monetarist assumption that the rate of
inflation is a function of the rate of change of an exo
genously determined supply of money is questionable.
Laffer (19 79) argues that the money supply itself can be
endogenous to the model if currencies are substitutes in
supply or demand.
A Concluding Note
In his study of the Chilean economy, Behrman
(1977) questions the validity of partial equilibrium
to explain the effects of macroeconomic variables, For
7Q
example/ he questions the ability of partial-equilibrium
analysis to explain the effect of changes in taxes and
exchange rates on major macroeconomic variables because
this can lead to unexpected conclusions such as, "Tax in
creases and devaluation both seem to speed up inflation and
reduce the rate of growth."
General equilibrium models which have, at one time
or another, provided the framework for macroeconomic policy
analysis and recommendations for developing economies in
clude the Harrod-Domar aggregate growth models; the Lewis-
Fei-Ranis labor surplus model; the Leontief fixed co
efficient model; and various static and dynamic linear pro
gramming models.
However, according to Mamalakis (1976), these models
are often transplanted from developed countries with little
or no adjustment for what he considers "special" conditions
in developing nations and suggest economic policies which
alter relative prices and distort market response.
Behrman (1977) develops a complex general equi
librium macroeconomic model of the Chilean economy from
1945 to 1965 which includes 72 exogenous and 172 endo
genous variables. Behrman arrives at the interesting
conclusion that textbook macroeconomic models are poor
predictors of responses to economic policies because the
71
model may only apply to the particular country and period
for which it was fitted.
According to Sheahan (1978), Behrman's conclusion
(or lack of one) "comes close to the conclusion that each
historical context is unique, that the econometric results
have no claim to validity as a basis for policy judgment
in any general sense."
72
CHAPTER III
FOOTNOTES
By the time of the Chapultepec Conference in
February 1945, the Latin American delegates to the Con
ference insisted upon retaining the right to impose tariffs,
establish state enterprises, use import controls, and re
strict foreign capital.
2
Liol V. Corbo, Inflation m Developxng Countrxes,
New York, Elsevier North-Holland,. 1974.
TABLE 3.IF
Year
Export Prices
(1)
Import Prices
(2)
Terms
(3) =
of
(1)
Trade
: (2)
1950 75.6 94.0 80.4
1951 95.7 109.8 87.2
1952 110.4 115.2 95.8
1953 112.6 106.7 105. 5
1954 100.8 105.8 95.3
1955 109. 5 102.3 107.0
1956 125. 9 103.9 121.3
1957 98. 5 105.5 93.4
1958 87.0 104.9 82.9
1959 96.1 103.4 92.9
1960 100. 0 100.0 100.0
1961 96.3 98 . 5 97.8
1962 97.0 93.8 103. 4
1963 95.8 98.9 96.9
1964 101. 8 99.2 102.6
1965 109.4 96.1 113.8
1966 130.9 94.1 139.1
1967 122.9 95.7 128.4
1968 126.6 95.3 132.8
1969 150.9 98.5 153.2
1970 154.5 100.8 153.3
73
3
He uses as examples the utilization of skilled
labor by the government to maintain restrictive regimes
and by the private sector to attempt to circumvent them,
and shifts from mining (a sector with high marginal labor
productivity) to industry (a sector where marginal labor
productivity was low).
4
In 1967, 48.9 percent of the capital invested in
consumer durable manufacturing was foreign owned.
5
If they were not, import restrictions would be
unnecessary.
6
In the early 1960s, eleven different automobile
plants each produced less than 4,000 cars per year.
74
CHAPTER IV
THE GLOBAL MONETARIST-WEDGE MODEL
Since 1930, the Chilean government's share of GDP
has continuously risen (see Table 2.3). The increase in
government spending has been financed by various combina
tions of tax rate increases, deficit financing, and foreign
borrowing. In this chapter, an alternative framework for
the analysis of economic policies on real and monetary
economic variables will be developed. The effects of
economic policies on real macroeconomic variables is
analyzed within the framework of the Wedge Model. The
effects on monetary variables is analyzed within the frame
work of the Global Monetarist Model.
Simple Keynesian models assume underemployment, and
imply perfectly elastic supply of labor and goods and
services (horizontal supply curves). Simple monetarist
models assume full employment, implying perfectly in
elastic supply of labor and goods and services (vertical
supply curves). Because of the extreme aggregate supply
assumption assumed by these models, the potential substi
tution effects generated by changes in relative prices
75
resulting from changes in tax rates are traditionally
ignored. As a consequence, these models emphasize the
"income effect" of a tax rate change but ignore the "sub
stitution" effect.
The income effect of a tax rate change depends on
the use to which the government puts the resulting incre
mental tax revenues. If the government distributes the tax
revenues in a manner independent of how they are collected
(through a transfer payment) or, if the revenues are used
to produce public services which are exactly equal to the
lost private services, the income effect of the tax rate
change is zero. However, if the government uses the tax
revenues to produce public services either more or less
valuable than the lost private services, the income effect
is not zero.
If the income effect is zero, the only effect of a
tax rate change is the substitution effect. The substitu
tion effect reflects factors' ability to substitute non-
market (leisure) activities'for market activities and
suggests a non-zero supply elasticity of market goods (up
ward sloping supply curve).
The Wedge Model
An analysis of the substitution effect within the
framework of the Wedge Model by Canto, Joines, and Webb
76
(1979) follows. Assuming two indispensable factors of pro
duction, labor time which can be spent producing market
goods or leisure, and a given capital stock which can be
employed producing market goods, the economy's production
function is Q = F(K, LM). The production function exhibits
constant returns to scale. Feasible combinations of market
goods and leisure are represented by the Production Possi
bilities Frontier, PPF, in Figure 4.1. PPF is concave to
the origin, reflecting decreasing returns in market sector
production.
The economy's preference is characterized by
Community Indifference Curve I, CIC-I in Figure 4.1.
CIC-I is convex to the origin, reflecting diminishing
marginal rate of substitution and it is assumed that more
is preferred to less.
Optimal behavior is represented by Point D— the
point at which consumers' marginal rate of substitution
Qf leisure for market goods (the slope of CIC-I at that
point) is precisely equal to producers' marginal rate of
transformation of labor time into market goods (the slope
of PPF at that point).
A tax on market activities reduces factor returns
in the market sector relative to the non-market sector,
increasing the cost of market goods relative to leisure.
If the tax proceeds are returned to the economy in the form
77
3
D
to
H
W
MARKET GOODS
FIGURE 4.1
78
of a transfer payment, the economy moves along the Produc
tion Possibilities Frontier to Point D 1, away from market
goods relative to leisure. As the country moves along the
Production Possibility Frontier, producers' marginal rate
of transformation of labor time into market goods, MRT
falls to MRT' and no longer equal to consumers' marginal
rate of substitution of leisure for market goods, MRS.
The tax drives a "wedge" between the gross-of-tax
price of market output in terms of labor units (MRS) and
the net-of-tax relative price faced by producers (MRT).
If there is no income effect, the economy remains on the
same Production Possibilities Frontier but, since there is
a substitution effect, market production— output— declines.
A more detailed derivation of the Wedge Model is found in
Canto, Laffer, and Odogwu (1978).^
The Wedge Model illustrates that the substitution
effect generated by tax rate changes unambiguously reduces
output and employment in the production of market goods.
As shown in the top half of Figure 4.2, the higher the tax
rate, the lower is the equilibrium level of output and
given diminishing product of labor, the elasticity of out
put with respect to the tax rate (I) is negative. Con
sequently, revenue elasticity with respect to the tax rate
(n), which is equal to 1 + I, has an upper bound of unity
and is just as likely to be negative as positive on an
abstract conceptual basis.
79
Output is inversely related to tax rates. Tax
revenues depend on both output— the tax base— and tax
rates. Tax rate increases have a negative effect on out
put but result in more tax revenue per unit of output.
If output elasticity with respect to the tax rate
'(E) is less than unity, revenue elasticity with respect to
the tax rate (n) is positive. If tax rates rise, the
increase in tax revenue per unit of output dominates the
decrease in tax revenue due to the decrease in output. The
increase in tax rates leads to an increase in tax revenues.
Tax rates are said'to be in the normal range (see bottom
half of Figure 4.2).
If output elasticity with respect to the tax rate
(E) is greater than unity, revenue elasticity with respect
to the tax rate (ri) is negative. If tax rates rise, the
decrease in tax revenues due to the decrease in output
dominates the increase in tax revenue per unit of output.
T^e increase in tax rates leads to a decrease in tax
revenues. Tax rates are said to be in the prohibitive range
(see bottom half of Figure 4.2). This relationship be
tween tax rates and tax revenues is the foundation for the
well known Laffer Curve.
The Wedge Model can be extended to the world
economy (Canto and Miles, 1980). Within an open world
economy, two distinct types of equilibria are of interest.
80
1 = 0
Tax Rates
Normal Prohibitive
FIGURE 4.2
81
The first is country-specific equilibrium— within a given
country, the domestic demand and supply of goods (GNP) are
equal. The second is world equilibrium— within the world,
total demand and supply are equal.
If the domestic demand for and supply of goods
within a given country are not initially equal, country-
specific equilibrium may be achieved through the distri
bution of goods among countries— goods flow from areas of
excess supply to areas of excess demand. The trade
balance is a reflection of the net flow of goods among
countries. Consequently, the Wedge Model suggests an in
verse relationship between changes in economic growth and
changes in a country's trade balance.
Laffer (1975) found that the relationship between
changes in various regions' trade balances as a percentage
of GNP and changes in the regions' growth rate differential
were significantly different from zero. Laffer and Ranson
(1974) found that more than 80 percent of the variation in
the U.S. trade balance is associated with changes in the
growth rate differential. Miles (1976) also obtained a
high correlation between U.S. trade.balance shifts and
changes in the rate of growth of the United States relative
to the rest of the world.
However, for the world as a whole, total equili
brium cannot be achieved through quantity redistribution.
82
Prices must adjust to assure that total world demand equals
total world supply. By identifying supply and demand in
each country and summing across countries, the short-run
behavior of world prices in response to various shocks can
be determined.
Global Monetarism— The Effects of
Economic Policies on Monetary
Macroeconomic Variables
In an integrated world, commodities flow from
areas of excess supply to areas of excess demand. In the
absence of transactions costs, arbitrage will ensure that
prices are equalized and, under certain conditions, trade
will be sufficient to equalize world price. According to
the doctrine of purchasing power parity, if world prices
are equalized and one country is experiencing more infla
tion than another, its currency will be depreciating
2
relative to the second currency.
Balance of payments and capital flows can be ex
plained within this framework. However, they are affected
by foreign exchange regimes and the intervention mechanism
by which currency substitutes in supply and demand.
Currencies may be perfect or imperfect substitutes or non
substitutes in demand and/or supply.
8 3
Fixed Exchange Rates— Currencies
Are Perfect Substitutes in Supply
The concept of the balance of payments as a flow
of money from one area to another under fixed exchange
rates can be traced to the specie-flow mechanism and the
writings of Mundell (1968), Johnson (1972), and Laffer
(1969) .
Advocates of the Monetary Approach to the Balance
of Payments argue that, under a fixed exchange rate regime
(currencies are perfect substitutes in supply), the central
bank only controls the domestic component of the monetary
base— currencies and domestic reserves— by its explicit
decisions to sell bonds to the public or change the
domestic reserve requirements. The international component
of the monetary base— international reserves— is entirely
dependent upon net official intervention in the foreign
exchange market to maintain the fixed exchange rate.
It was stated earlier that country-specific
equilibrium in the goods market may be achieved through
the flow of goods among countries. Similarly, under a
fixed exchange regime, country-specific equilibrium in the
money market may be achieved by inter-country money flows.
The balance of payments is a reflection of the net flow of
money (or reserves of the banking system) among countries.
Domestic excess money demand depends partly on real income
and partly on domestic money creation. Given money supply
84
growth, an increase in real income growth will lead to an
excess demand for money and, given real income, an increase
in money creation will lead to a decrease in excess demand.
Any change in excess demand not satisfied by
domestic money creation will result in a quantity adjust
ment. That is, money will be imported from or exported to
the rest of the world. If currencies are not substitutes
in demand, money flows will occur through the central bank.
Holding money growth constant, countries that are growing
faster than the rest of the world will tend to have balance
of payments surpluses and, holding real income constant.
Countries whose money supply is growing faster than the
rest of the world will tend to have balance of payments
deficits. Consequently, global monetarism suggests a
positive relationship between increases in economic growth
and changes in a country's balance of payments and a nega
tive relationship between increases in money growth and
changes in its balance of payments.
As in the case of the goods market, for the
world as a whole, total equilibrium in the money market
cannot be achieved through quantity redistribution.
Worldwide equilibrium requires that the price level must
change to equilibrate the market. An increase
85
in real output— with everything else the same— will lead to
a fall in the price level. However, if countries decide to
satisfy excess demand for money by expanding domestic money
supplies, the price level need not change. Thus, changes
in world prices will be the result of worldwide excess
demand for money.
There has been a great deal of empirical investi
gation of balance of payments changes under fixed exchange
rate-type systems. These are cited in Laffer and Miles
(1977) and Frenkel and Johnson (1978). In general, these
studies found evidence in support of the Monetary Approach
to the Balance of Payments. Under fixed exchange rates,
Global Monetarism is indistinguishable from the Monetary
Approach to the Balance of Payments. A summary of the
Global Monetarist position can be found in Wanniski (1978)
and Whitman (1975).
The Wedge Model suggests a negative relationship
between increases in economic growth and changes in a
country's trade balance. Global monetarism suggests a
positive relationship between increases in economic growth
and changes in a country's balance of payments. Conse
quently, the trade balance and the balance of payments move
in opposite directions and the capital account must adjust
to maintain equilibrium.
86
Flexible Exchange Rates— Currencies
Are Perfect Non-Substitutes in Supply
Advocates of flexible exchange rates argue that
flexible rates allow a country to insulate itself from its
neighbors and pursue an independent monetary policy. This
argument implicitly assumes that currencies are completely
non-substitutable in both supply and demand.
If currencies are not substitutes in demand,
people hold their own currency and purchasing power parity
assures that changes in the foreign currency value of the
country's money supply will be fully offset by the country's
exchange rate. Consequently, we arrive at the local mone
tarist position that a country's rate of inflation is a
function of the relation between domestic money supply
growth and changes in domestic money demand. However,
although there is a positive relationship between money
supply and money demand, the inflation rate is not the
same across national boundaries.
If currencies are perfect non-substitutes in
supply, to the extent that they are substitutes in demand,
a country's monetary authorities do not control currency
flows and additional considerations must be taken into
account in the determination of exchange rates. Currency
flows occur, not through the central bank but through the
public and commercial banks. Another currency flow channel
87
is introduced and adjustment to excess money growth takes
place through international reserve movements. Inflation
rates are not necessarily the same in every country but
they are correlated.
Empirical evidence of currency substitution is
presented in the Laffer (1977) study of currency substitu
tion in demand in three Latin American countries and in
Miles (1978).
Managed Flexibility— Currencies are
Non-perfect Substitutes m Supply
In a managed flexibility regime, to the extent
that currencies are not perfect substitutes in supply, an
excess supply of money exerts "exchange market" pressure on
both foreign exchange reserves and the exchange rate. This
pressure can be relieved by a loss of foreign reserves
(balance of payments depreciation) or exchange rate
depreciation.
Connolly and da Silveria (19 79) studied the
Brazilian economy from 1955 to 1975 when financial dis
intermediation prevented internal capital flows. Most of
the adjustment was in the form of exchange rate deprecia
tion. They conclude that, "The monetary approach explains
exchange market pressure in postwar Brazil to a rather
remarkable extent." Barandiaran (1977) and Cortes and
Sjaastad (197 8) made studies of the Chilean economy and both
88
found an extremely strong relationship between changes in
the exchange rate and the rate of inflation.
Under either fixed, flexible, or,managed flexi
bility exchange rates, inflation is worldwide. Conse
quently, in addition to the positive association between
domestic inflation and the differential between domestic
money growth and domestic real income growth suggested by
local monetarism, global monetarism postulates that there
is a positive association between world inflation and the
differential between world money growth and world real in
come. Therefore, inflation is primarily a worldwide
phenomenon.
Laffer and Chico (1974) developed a data base for
analyzing inflation as a worldwide phenomenon and found
3
evidence of such a relationship.
89
^CHAPTER'
FOOTNOTES
The C-L-0 model is a static one-sector, two-factor
model which assumes perfect competition in the factor
market and variable factor supplies to the market sector.
Factor supply functions include both market and non-market
(leisure, barter or illegal) activities and assumes that
both activities are potential sources of utility. At any
given tax rate, time and capital will be allocated between
market and non-market activities in accordance with the
relative after-tax return. If the tax rate rises, the
after-tax return of market (taxable) activities falls rela
tive to the after-tax return of non-market (non-taxable)
activities. Non-market activities become relatively more
attractive and factors substitute non-market activities
for market activities. It also assumes profit maximizing
firms that employ two factors of production— capital and
labor--according to a Cobb-Douglas production function of
the form: Q = K»L, exhibiting constant returns to scale,
positive marginal products, and a diminishing marginal rate
of substitution. The C-L-0 model implies several theorems:
increases in taxes tend to reduce after-tax factor returns;
increases in taxes on either factor reduce each factor's
employment; and, increases in taxes reduce output.
2
Equilibrium requires that production of and demand
for non-traded goods be equal within each and every country.
However, since differences between the supply of and demand
for traded goods within a country can be satisfied by trade
surpluses or deficits, the sole requirement for equilibrium
in the traded goods market is that total world production
equals total world demand.
3
According to Canto, Joines, and Webb (1979), em
pirical evidence on the influence of tax rates on the
work-leisure decision may be found in the work of Evans
(1978), Feldstein (1974, 1978), Boskin (1978), Burkhauser
(1977), Laffer (1978), Burkhauser and Turner (1978), and
Quinn (1977) and evidence on the influence of tax rates on
90
economic activity via the consumption,-saving choice can he
found in Boskin (1978) and Joi.nes (19 79) , In their study
of social security, Burkhauser and Turner estimate that the
social security retirement test has raised the work week
(reduced leisure consumption) over two hours above what it
would otherwise be for a prime age male. Research by
Boskin, Quinn, and Burkhauser, however, indicates that con
straints on market work, such as the social security retire
ment test, reduce the labor supply of older men. More
recently, Feldstein has examined the effects of unemploy
ment insurance on temporary employment. He concludes that:
"An increase in the unemployment insurance benefit replace
ment ratio from 0.4 to 0.6 raises the predicted temporary
layoff unemployment rate by about 0.5 percentage points, or
one-third of the current average temporary layoff unemploy
ment rate of 1.6 percent." In a study which also takes a
broader view of taxation to include reductions in transfer
payments caused by increases in market income, Laffer finds
that inner-city residents sometimes face marginal tax rates
on market income in excess of 100 percent. Using data
covering the period 1931-1977, Evans estimates the rela
tionship between changes in employment on hours of work and
fiscal policy variables. He reports a strong negative
effect of taxes and interest rates on labor supply, the
estimated elasticities being 0.48 and 0.08 respectively.
The empirical literature on the influence of tax rates on
economic activity via the consumption—saving choice is more
limited. However, Boskin reports a non-negligible interest
rate rate elasticity of private saving. His estimates of
the elasticity range from just under 0.2 to around 0.6 and
cluster at about 0.3 to 0.4. In his study of impact of
government tax and spending policies on capital formation,
Joines estimates that the weighted-average marginal tax
rates on capital and labor in 1977 were 53.4 percent and
27.4 percent respectively. Further, he reports a strong
negative effect on capital formation of taxes on income
from capital.
4
According to Mundell (1968), if a country devalues,
it::experiences inflation inversely proportional to its
relative size in the world economy, Behrman (1977) states
that the inflationary impact of devaluation on the Chilean
economy may be quite substantial.
5
Laffer and Cnico (197 4) developed a data base for
analyzing inflation as a worldwide phenomenon. Converting
foreign monetary data to U.S. dollars (using current
market exchange rates and prices), the constructed series
91
for worldwide growth rates of monetary reserves, money
stocks, income, and price levels. Their work covered
fifteen of the largest developed countries, over the peri
od 1958-1973. International reserves for these fifteen
countries include gold reserves, IMF tranche positions,
Special Drawing Rights, and foreign exchange reserves. The
money supply data include demand deposits plus currency
(converted to dollars) plus eurodollar deposits. The
figure for worldwide inflation was a GNP-weighted index of
the rates of change of the various countries1 consumer
price indexes, each converted to dollars. Figure 4.IF
illustrates the relationship between world money growth and
world inflation. While the relationship is by no means
exact, it is strong. In the first part of the period,
annual money growth rates were in the 4 percent range while
inflation was about 2 percent. Thereafter, the money
growth rate rose to around 7 percent, and inflation to
around 3 percent. In the next few years, money growth went
up into the 9-10 percent range, and inflation increased to
the 5-6 percent range. In 1972 and 1973, money accelerated
to the high teens, and world inflation to the low teens.
Not only do the two variables move in concert, but both
have been consistently accelerating over the past sixteen
years. However, the chart does not necessarily indicate
that the rise in the world's monetary growth rate is the
cause of the rise in inflation, or vice versa.
92
FIGURE 4.IF
% CHANGE
*4 22
WORLD MONETARY GROWTH RATE VERSUS
THE WORLD INFLATION RATE
20
18
16
14
12
WORLD MONETARY
GROWTH RATE
10
WORLD
INFLATION RATE
1958 60 62 64 66 68 70
93
CHAPTER V
A DISCUSSION OF POST-1973 REAL AND
MONETARY CHILEAN MACROECONOMIC
VARIABLES
Economic Experimentation
and Collapse (1970-1973)
In the 1970 Chilean presidential election, the
Marxist candidate, Salvadore Allende, received a little
more than one-third of the total votes. Although Allende
failed to win a majority of the votes, he did receive
slightly more votes than either of his two opponents and
the election went to the Chilean Congress where Allende's
victory was confirmed.
Immediately after the election, Allende announced
an economic program of income redistribution, full employ
ment and price stabilization. To reach these goals, real
wages were increased 32 percent. Social security pensions
were increased 78.5 percent in real terms and social
security funds were made available for consumer loans.
Wealth taxes were eliminated for the lowest one-third of
the taxpayers. The income tax exemption was raised to two
times the minimum wage, exempting the lowest 20 percent of
Chilean taxpayers and property tax exemptions were also
raised. 94
Allende's policies were so popular that 50.9 per
cent of the voters supported him in a plebescite in April
1971. His policies appeared to be successful: in 1971,
industrial production rose 15 percent, economic growth rose
7.7 percent, and unemployment was cut in half by 1972.
The massive redistribution of income to the lower-
income classes was accompanied by an increase in demand.
However, the increase in demand was not reflected in the
country's manufacturing industries where protective import
restrictions kept prices artificially high and excess
-3r-
capacity was estimated at around 30 percent.^ It was
reflected in food products where price controls and pre
ferential exchange rates kept prices artificially low.
However, price controls discouraged domestic food produc
tion and total agricultural production dropped 22 percent
while wheat production dropped even more substantially.
The percentage of national consumption supplied by Chilean
agriculture in 1973 dropped dramatically from 1970 (see
2
Table 5.IF). Food imports doubled from $173 million in
1970 to $328 million in 1971 and the country's foreign
exchange reserves of $400 million were almost exhausted to
pay for them.
Allende considered himself a Marxist but, in
reality, he was a romantic social reformer with a "popu
list" desire to redistribute income.| In contrast to the
"Marxist" theories of Baran, Dobb and Sweezey discussed in
95
Elliott (1973), SAllende lacked a clearly defined concept of
the linkages between income distribution, productivity,
production, and growth. Fidel Castro pointed out, "Marxism
is a revolution of production: Allende's was a revolution
of consumption." With the increase in income workers con
sumed more but savings did not increase. Private and public:
investment both dropped in response to the profit squeeze
caused by the combination of price controls and wage in
creases. Total investment fell by 20 percent in real terms
ini1971 and, between 1971 and. 1973, new private investment
was at a standstill because funds were diverted into specu-
4
lation and hoarding activity or sent abroad. Capital
equipment was worn out and the spare parts and raw materi
als necessary for production disappeared.
Allende extended and expanded the "Chileanization"
policies initiated by the Frei administration. He expro
priated banks and copper mines, nationalized large indus
trial firms, took over privately-owned enterprises when
ever the government decided a strike or breakdown was
against the public interest and illegally, haphazardly, and
5
arbitrarily confiscated privately-owned farms. This
resulted in a decrease in supply as the, publicly-owned
g
firms were less efficient. In 197 2, copper production
dropped 3.9 percent, industrial production dropped 7.1 per
cent, and GDP growth dropped 7.8 percent.
96
By 1973, fiscal expenditures represented 43 percent
of GDP and the fiscal deficit had risen to 2 3 percent of
GDP. Food imports had quadrupled to $683 million. Foreign
reserves were exhausted and foreign debt had been increas
ing at a rate of $1.25 million a day for nearly three
years. To help finance the increase in spending, the
money supply was increased at an unprecedented rate of 10
percent a month from 1971 to 1972. By 1973, the money
supply was over 2,000 percent of its 1970 level and was
increasing by 50 percent a month. Chile held the world
record for the highest inflation rate in 1972 and 1973
and, by the summer of 1973, the annualized rate of infla
tion had accelerated to 350 percent or more (unofficial
estimates ranged as high as 1,000 percent).
Although wages were increased 100 percent in
October 1972 for all workers earning less than five times
the minimum wage or about $1,000 (95 percent of all blue
collar workers and 75 percent of all white collar workers),
wage increases fell far behind price increases. Real
wages fell 12.4 percent in 1972 and again by 165 percent
in 1973. Workers earned more money waiting in line six or
seven hours a day to get food to sell in the black market
than they could earn in any normal employment.
By August 1973, the Chilean economy was in total
collapse. On September 5th, hundreds of thousands of
women joined worker groups in anti-government
97
demonstrations. In an attempt to preserve his administra
tion, Allende suggested a plebiscite. It is estimated that,
if an election had been held at that time, at least 60 per
cent of the electorate would have voted for a new govern
ment.
During a military coup on September 11th, Allende
was either shot or committed suicide. A military junta
under the leadership of General Augusto Pinochet took con-
7
trol of the Chilean government.
Economic Reform (1974-197 5)
As discussed in Chapter II, the new government—' ---
initiated an economic program designed to eliminate-the----
fiscal deficit as a source of money supply growth-and—to---
reduce the size of the public sector. In 197-4-,--they-re— —
duced government spending by 20 percent by reducing federal
employment to one-half of its 1973 level and by freezing
public sector wages. Fiscal expenditures as a percentage
of GDP fell from 43 percent in 1973 to 32 percent in 1974
to 26 percent in 1975. They also increased the marginal
tax rates on wages and salaries. By 1975, the fiscal
deficit as a percentage of GDP dropped to 12 percent— one-
half of its 1973 level.
At first, the economy picked up slightly, reflect
ing the nation's confidence in the new government's
98
A
economic policies. GDP rose by 4 .percent in 1974 . How
ever, by 1975, the slight economic recovery was followed
by disaster. GDP fell by 11.2 percent, the largest drop in
modern Chilean history and unemployment reached 19.5 per
cent, the highest since the Great Depression. Construc
tion declined 40 percent, manufacturing decreased 23 per
cent, and commerce, mining, and services all fell sub
stantially. Progress against inflation was slower than
anticipated because forty years experience with double or
triple-digit inflation made Chileans reluctant to accept
the idea that prices were not going to continue to rise
indefinitely. The annual rate of inflation remained high
at 500 percent in 1974 and 3.75 percent in 1975.
A five-fold increase in the price of imported oil
combined with a sharp decline in copper prices resulted
in a trade deficit of over $200 million. The trade
deficit was accompanied by a drop in foreign loans during
the worldwide recession. Foreign exchange reserves had
been exhausted under Allende and the country faced a
balance of payments crisis. In an attempt to avoid a
crisis, the government devalued the peso.
Devaluation— combined with an 11.2 percent drop in
real GDP in 1975— was accompanied by a drop in imports.
The trade balance went from a deficit of $240 million in
1975 to a surplus of $496 million in 1976. The World Bank
99
started to provide a substantial inflow of financial aid
and credit and the balance of payments also turned posi- ,
tive. Inflation remained high at over 200 percent. #
Economic Recovery (1975-1980)
In 1975, the Pinochet administration tried a differ
ent approach. Instead of attempting to reduce the absolute
size of the public sector by cutting government spending,
they decided to reduce its relative size by stimulating
economic growth through tax cuts, liberalization of the
foreign trade sector, and elimination of restrictions on
foreign investment. They reasoned that the private
sector would expand with economic growth and, while the
public sector would not shrink, it would not expand as
rapidly as the private sector. Consequently, the relative
share of the public sector would diminish.
Taxes
Direct taxes account for approximately one-quarter
of total tax revenues in Chile and include, both income
and property taxes. Income taxes consist of taxes paid
by professionals (second category); profit taxes paid by
single entrepreneurs and corporations (first category) ;
and, a "global complementario" surtax paid on all earned
income above a specified minimum. Direct taxes are based
100
g
on tax units— the "sueldo vital" before 1975 and the
9
"unidad tributano" after 1975.
On December 31, 1974, the tax rate on the earnings
of ^2^:fre:s-s~i^aJ> corporations was lowered from 12 percent
to 7 percent (individuals were already paying 7 percent).
However, the potential benefits of the tax cut were offset
when a 10 percent surtax was imposed in June 1975. Pro
fessional tax revenues dropped 5.5 percent in 1975. In
1976, the surtax was abolished. This was followed by a
16.3 percent increase in professional income tax revenues
in 1976, a further increase of 8.5 percent in 1977, and
an additional increase of 7.9 percent in 1978.
The tax rate on profits was gradually lowered from
20 percent in 1975 and 1976 to 15 percent in 1977 and 10
percent in 1978 and 1979 and, in 1976, the capital gains
portion of the profit tax was eliminated. Marginal tax
rates on the "global complementario" were reduced in
December 197 4 (see Schedule I) and again in May 1977 (see
Schedule II). This was followed by a 1.3 increase
in profit and "global complementario" tax revenues (they
are combined) in 1976 and a further increase of 27.9 per
cent in 1978 (see Table 5.2)."^ In 1979, a balanced bud
get permitted a tax refund of $116.7 million to 113,587
taxpayers on 19 78 tax payments. This was the first
direct income tax refund in Chilean history.
101
102
TABLE 5.1
PROFESSIONAL INCOME TAX REVENUES
Year 1973 1974 1975 1976 1977 1978
P.I. -
Tax Revenue
(mill of 1976$)
135. 181. 172. 200. 217. 234.
% Change 64.6 34.5 -5.4 16.3 8.5 7.9
GDP
(mill of 1976$)
9,202. 9,579. 8,343. 8,677. 9,423. 9,989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
Tax Revenue
as a % of GDP
1.5 1.8 2.1 2.3 2.3 2.3
TABLE 5.2
PROFIT AND "GLOBAL COMPLEMENTARIO" TAX REVENUES
Year 1973 1974 1975 1976 - 1977 ' 1978
Profit and "Global
Complementario"
Tax Revenues *
(mill of 1976$)
201. 276. 270. 273. ' 264. 338.
% Change 33.2 37.3 -2. 1.3 -3.5 27.9
GDP
(mill of 1976$)
9,202. 9,579. 8,343. 8,677. 9,423. 9,989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
P and GC
Tax Revenues
as a % of GDP
2.0 2.9 3.2 3.1 2.8 3.4
&
Total does not add exactly because of "adicional" category.
^Detailed statistics on professional, profit, and
"global complementario" taxes for 1976 and 1979 and compa-
ative statistics for each year during the period, 1970-1976
were compiled and are shown in Appendix aT |
\ Property taxes are levied aqainst real property,
motor vehicles, and inheritances. As national income in
creased, it was accompanied by an increase in the value of
real property, and property tax revenues rose. From 197 3
to 197 8 , property tax revenues doubled both in absolute
terms and as a percentage of GDP (see Table 5.4). Total
direct taxes as a percentage of GDP increased from 4.4 per
cent in 1973 to 7.0 percent in 1978 (see Table 5.5).
Indirect taxes are the largest component of Chilean
tax revenues. They include sales and value-added taxes,
production taxes, and tariffs. Prior to 1975, the sales
tax was 17.5 percent on final sales and 8 percent on inter
mediate products, j Sales taxes on restaurant and bar ser
vice ranged from 10 percent to 50 percent and luxuries
such as imported furs and wines were taxed at similar rates.
In 1975, most sales taxes were replaced with a 20 percent
.across-the-board value added tax. Sales and value added
tax revenues more than doubled between 19 7 5 and 19 7 8 \(see
Table 5.6). ^The value added tax is now the largest single
source of tax revenue, representing more than 4 0 percent of
13
total tax revenues.
104
105
TABLE 5.3
TOTAL INCOME TAX REVENUES
Year 1973 1974 1975 1976 1977 1978
P.I. Tax Revenue
(from Table 5.1)
135. 181. 172. 200. 217. 234.
P & GC Tax Revenue
(from Table 5.2)
201. 276. 270. 273. 264. 338.
Total Income
Tax Revenue*
(mill of 1976$)
343. 00
-J
473. 480. 488. 580.
% Change 35.0 42.0 -2.9 1.5 1.7 18.9
GDP
9,202. 9,579. 8,343. 8,677. 9,423. 9,989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
Income Tax Revenue
as a % of GDP
3.7 5.1 5.7 5.5 5.2 5.8
* Includes misc. income taxes
106
TABLE 5.4
PROPERTY TAX REVENUE
Year 1973 1974 1975 1976 1977 1978
Property Taxes
(mill of 1976$)
58. 59. 73. 80. 107. 122.
Z Change 17.2 1.7 23.7 11.0 33.8 14.0
GDP
(mill of 1976$)
9202. 9579. 8343. 3677. 9423. 9989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
Property Taxes
as a % of GDP
.6 .6 .9 .9 1.1 1.2
TABLE 5.5
TOTAL DIRECT TAX REVENUES
Year______________ 1973 1974 1975 1976 1977 1978
Income Tax Revenue
(from Table 5.3)
343. 487. 473. 480. 488. 580.
Property Tax Revenue
(from Table 5.4)
58. 58. 73. 80. ""107.“ 122.
Total Direct Tax
Revenue (mill of
1976$)
401. 545. 546. 560. 595. 702.
% Change 33.8 35.9 0.2 2.6 6.2 18.0
GDP
(mill of 1976$)
3,202. 9,579. 8,343 8,677. 9,423. 9,989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
lirect Taxes as
i % of GDP
4.4 5.7 6.5 6.5 6.3 7.0
108
TABLE 5.6
SALES AND VALUE-ADDED. TAX REVENUES
Year____________ 1973 1974 1975 ^ 1976 1977 1978
Sales & Value W*
added-domestic
(mill of 1976$)
499. 605. 595. 583. 630. 749.
Value added-
imports
(mill of 1976$)
156 288 442
Foreign Exchange
(mill of 1976$)
10. 6. ] - - -
Real Property
(mill of 1976$)
5. 17. 11. 15. 3. 6.
Total Sales &
Value Added
Tax Revenues
(mill of 1976$)
514. 628. 607. 754. 926. 1197.
% Change 10.8 22.2 -3.3 24.2 22.8 29.3
GDP
(mill of 1976$)
9,202. 9,579. 8,343. 8,677. 9,423. 9,989.
7 o Change _ 3.7 4.3 -13.1 4.0 8.6 6.0
S & VA Tax Revenues
as a % of GDP
5.6 6.6 7.3 8.7 9.8 12.0
Production taxes are placed on the manufacture and
processing of domestic products, including petroleum pro
ducts, wine, liquor, beer, tobacco, and automobiles. Pro
duction tax revenues are relatively insignificant except
for tax revenues received from, petroleum products. These
increased almost five-fold since 1973, reflecting the in
creased value of these products (see Table 5.7).
A third indirect tax is import tariffs. Since
197 4, tariffs have been systematically reduced from multi
ple rates of sometimes more than 50 0 percent to an across-
the-board single rate of 10 percent^temporarily excepting
automobiles)} (see Schedule III) . ~ t The reduction in tariff
rates actually underestimates the real reduction in pro
tection because thousands of tariff variations according to
product, content, and national origin were abolished and
non-tariff import restrictions and costs such as quotas,
import licenses and pre-import deposits were eliminated.
Despite these extremely large reductions in tariff rates,
tariff revenues remained about the same in both absolute
terms and as a percentage of GDP because imports increased
as income rose^see Table 5.8)^^ Between 197 5 and 19 78,
consumption increased and total indirect tax revenues
alBost aouble^fsee Table -5.9^ bower taxes reduced the
wedge between before and after tax wages and the return on
capital. The country moved back along the Laffer curve and
109
Oil
TABLE 5.7
PRODUCTION TAXES
Year 1973 1974 1975 1976 1977 1978
Wines, liquors &
beer
63. 58. 21. 27. 28. 30.
Tobacco 40. 61. 64. 80. 97. 97.
Petroleum Products 50. 156. 204. 234. 236. 235.
Automobiles
(domestic)
19. 3.
- - - -
Total Production Tax
Revenues (mill 1976$)
172. 278, 289. 341. 361. 362.
% Change 24.1 61.6 3.9 18. 6. .03
GDP
{mill 1976$)
,202. 9,579. 8,343. 8,677. 9,423. 9,989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
Production tax
revenues as a %
of GDP
1.9 2.9 3.5 3.9 3,8 3.6
Ill
table 5.8
tariff revenues
Year____________ 1973_______1974_______1975_______1976_______1977 1978
Tariff Revenues
(mill 1976$)
215. 372. 249. 224. 272. 275.
% Change 20.8 73.0 -33.0 -10.0 21.4 1.3
GDP (mill 1976$) 9,202. 9 ,579. 8,343. 8,677. 9,423. 9,989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
Tariff Revenues
is a % of GDP
2.3 3.9 3.0 2.6 2.9 2.8
112
TABLE 5.9
INDIRECT TAX REVENUES
Year 1973 1974 1975 1976 1977 1978
Total Sales and
V/alue - fl dded tax
Revenues (from
Table 5.6)
514 628. 607. 754. 926. 1197.
Total Production
Tax Revenues
(from Table 5.7)
172. 278. 289. 341. 361. 362.
Total Tariff
Revenues (from
Table 5.8)
215. 372. 249. 224. 272. 275.
Total Indirect
Tax Revenue *
984. 1348. 1226. 1430. 1705. 2039.
% Change 13.1 37.0 -9.1 16.6 19.2 19.6
GDP
(mill of 1976 $) 9,202. 9,579. 8,343. 8,677. 9,423. 9,989.
%
Change -3.7 4.3 -13.1 4.0 8.6 6.0
Total Indirect
Tax Revenues
as % of GDP
10.7 14.1 14.7 16.5 18.1 20.4
total tax revenues increased by 50 percent ({see Table 5.10)
Public Sector Budgets
ing in real terms, increases in tax revenues have succeeded
in reversing the deficit in the consolidated public sector
and fiscal budgets.
budgets of the Central government (the fiscal budget),
decentralized government agencies, and public enterprises.
The fiscal deficit as a percentage of GTE. increased more
than five-fold from 10 percent in 1970 to 56 percent in
1973, when it accounted for 24 percent of total GDP.
In 19 76, a surplus in the domestic currency portion '
of the consolidated public sector budget was realized as
the government sold more than 400 publicly-owned enter
prises. However, the foreign currency portion continued
to show a deficit as the government found it necessary to
borrow7 foreign exchange from the Central Bank. Higher
jcopper prices eliminated this deficit in 1979 and now both
domestic and foreign currency budget show a surplus.
sector budget was balanced in 1976, the fiscal budget
continued to show a deficit until 1979. In 1979, domestic
tax revenues rose due to high income and consumption and
export tax revenues rose due to higher copper prices. The
Despite four years of increases in government spend-
The consolidated public sector budget combines the
In addition, although the consolidated public
113
TABLE 5.10
TOTAL TAX REVENUES
Year_____________________ 1973_______1974_______1975 1976 1977 1978
Direct Tax Revenues
(from Table 5.5)
401. 545. 546. 560. 595. 702.
Indirect Tax Revenues
(from Table 5.9)
984. 1,348. 1,226. 1,430. 1,705. 2,039.
Total Tax Revenues *
(mill of 1976$)
1,390. 1,931. 1,807. 2,009. 2,318. 2,763.
% Change 18.5 38.9 -6.4 11.2 15.4 19.2
GDP
(mill of 1976$)
9,202. 9,579. 8,343. 8,677. 9,423. 9,989.
% Change -3.7 4.3 -13.1 4.0 8.6 6.0
Tax Revenues as
a % of GDP
15.1 20.2 21.7 23.2 24.6 27.7
Employment (000)
Chile
(in G. Santiago
3,016. 2,945. 2,840. 2,939. 3,123. -
1,098. 1,109. 1,041. 1,138. 1,194. 1,363.
Change (Chile)
Santiago
0.6 -2.4 -3.6 3. S 6.3 -
1.0 -6.2 9.3 4.9 14.0
% Unemployment 4.8 9.2 14.5 13.7 10.5
—
(in G. Santiago) 7.0 9.7 18.7 13.6 13.2 13.7
* Includes misc. taxes
114
increase in tax revenues more than compensated for the in
crease in government spending and, for the first time in
30 years, the fiscal budget showed a surplus.
Foreign Investment
After withdrawing from the Andean Pact in October
1976, Chile enacted a foreign investment law in March 1977
that guarantees foreign investors the same treatment as
15
domestic ones. Chile puts no restrictions on remittances
of capital and earnings and does not have a preferential
tax system. The corporate profits tax rate is 49 percent
for everyone.
The number of approved foreign investment projects
has grown from 16, amounting to $23.8 million in 1974 to
346, amounting to $4.2 billion as of June 1979. More than
three quarters of the foreign investment comes from the
United States. Canada is second with 15 percent.
Japanese investment is growing as an investment choice,
and according to a New York Times supplement (1980), Chile
is ranked second among all Latin American nations by
Japanese firms.
Foreign investment is a major component of gross
fixed capital investment. In 1979, gross fixed capital
investment as a percentage of GDP rose to 14 percent, its
highest level since 1970.
115
Economic Growth
Chile has enjoyed four consecutive years of economic
growth. The average annual growth rate of real GDP was
more than 6 percent from 1975 to 1979, and by comparison,
this is twice Chile's post World War II average. Moreover,
it is high even by world standards.
Employment
In 1979, employment increased by approximately 5
percent, almost twice the historical rate. Since 1975,
employment in greater Santiago has grown by approximately
200,000 jobs or 2 0 percent. The growth in employment is
remarkable, considering the fact that, during the first
year of the Pinochet administration, public sector employ
ment was reduced by 20 percent, the number of federal
employees was reduced to one-half of its previous level,
and approximately 70,000 other Chileans lost their jobs as
a result of trade liberalization.
Trade Liberalization
Trate liberalization was accompanied by an increase
in imports relative to exports as income increased and
Chile's trade deficit quadrupled from $57 million in 1974
to $240 million in 1975. However, this is not unexpected
because, according to Laffer (1979), countries which
experience an increase in their rate of growth relative to
116
their trading partners experience trade deficits as their
import demand increases relative to the world's demand for
their exports.
As people's income rises, they buy more imports.
This was especially true in Chile because previously pro
tected domestically produced goods were no match for rela
tively cheap imported substitutes. The increase in imports
was entirely in manufactured consumer and capital goods.
From 1973 to 1976, manufactured consumer goods rose 252.6
16
percent and capital goods rose 4 5.9 percent. Food
imports did not rise. They fell from their average level
of 25 percent in the 1960s and a record high of almost 40
percent in 1973 to 15 percent in 1976.
Also, according to Luders (19 79), imports rose
rapidly in Chile when trade was first liberalized because
people were afraid that the tariff cuts were only temporary.
17
As confidence increased, the rate of import growth slowed.
In 19 78, the trade deficit reached a record high of
$708 million as imported oil prices rose and copper prices
remained below their average level. It declined to $6 77
million in 1979 despite an 80 percent increase in the
price of petroleum imports which added $257 million to
Chile's current account deficit and accounted for 28 per
cent of the trade deficit.
In 19 79, import value grew by 40 percent while
117
export value grew by 45 percent. Exports increased from 16
percent of GDP in 1978 to 18 percent in 1979. The increase
in export value is partially— but not wholly— attributable
to a 44 percent increase in world copper prices. Despite
the increase in copper prices, copper's share of total
exports only rose 3 percent from 49 percent in 19 7 8 to 52
percent in 1979, remaining significantly lower than the
historical average of 70 percent to 80 percent.
Non-traditional exports such as'lumber, fish,
fruits, wine, and industrial products grew by 49 percent.
Agricultural exports jumped from $22 million in 1973 to
$185 million in 1978 and Chile, which used to import two-
thirds of its food, now is more than able to feed itself.
Forestry exports rose from $125 million in 1975 to $228
million in 19 7 8 and now accounts for one-tenth of the
country's export earnings. In 19 79, industrial exports
alone were more than $800 million, compared with $60
million in 1973 and up 55 percent from January to October.
Non-traditional exports now account for 33 percent of
total exports.
Financial Stability
Although Chile has a deficit in its trade and
current account balances, its capital account is positive
because foreign reserves are flowing into the country.
The positive capital account balance of $1.84 billion in
118
197 9 more than compensated for the negative current account
balance of $.9 billion. Consequently, the balance of pay
ments is positive. Chile's positive balance of payments
reflects the country's decision to finance its imports by
foreign borrowing rather than by increasing its domestic
money supply. The private sector's share of foreign
borrowing increased from 22 percent in 1973 to 35 percent
in 1979
It is not surprising that foreign capital is flow
ing into a growing, open economy like Chile but there is
concern that the level of foreign debt--$8.58 billion— is
too high. Chile's foreign debt/GDP ratio— 42 percent— is
one of the highest in the world and 44 percent of its
export earnings go to service the debt.
In real terms, foreign debt decreased 3.5 percent
between 1973 and 1979. Net nominal foreign debt (total
foreign debt minus foreign exchange reserves) increased
less than 14 percent in 1979. This closely approximates
the increase in the U.S. consumer price index. As long as
the cost of servicing their net foreign debt does not
exceed the increase in GDP attributable to the increase in
foreign capital, Chile's foreign debt is not a problem.
In 1973, the consumer price index was increasing at
an annual rate in excess of 350 percent and, due to price
controls, the wholesale price index was increasing at an
119
annual rate in excess of 800 percent. Understandably, the
top priority of the new administration was to reduce the
rate of inflation. Domestic monetarist advisers suggested
stringent controls on money supply growth and a system of
flexible exchange rates which would isolate Chile from its
neighbors and allow it to pursue an independent monetary
policy.
In late 197 3 price controls were abolished and the
previously suppressed inflation exploded. The consumer
price index rose by over 500 percent in 197 4 and 37 5 per
cent in 1975. Not only was inflation extremely high but
monthly variations in the consumer price index were erratic
(see Figure 5.1). Consequently, the Central Bank had a
great deal of difficulty managing the flexible exchange
rate.
The Local Monetarist Model hypothesizes a stable
relationship between a country's money supply (M) and the
monetary base (MB), M = m*MB. If the relationship is
stable, the money multiplier (m) is a constant and the
monetary authorities can control the money supply by con
trolling the monetary base. However, the hypothesis of a
stable relationship between the money supply and the mone
tary base is not supported by the Chilean data (see Figure
5.2) .
120
FIGURE 3.1
PERCENTAGE CHANGES IN M, AND PERCENTAGE
CHANGES IN CONSUMER PRICE INDEX
100
90
80
70
Monthly Inflation Rc.te
60
50
in M.
30
20
10
1974 1975 1977 1978 1976
121
FIGURE 5.2
PERCENTAGE CHANGES IN THE MONETARY
BASE AND PERCENTAGE CHANGES IN
100
90
80
netary Base
70
60
50
40
30
20-
10-
1974 1975 1976 197.7 1978
122
Alternately, the Global Monetarist Model hypothe
sizes that, under a fixed exchange rate regime, the mone
tary authorities control only the currency and domestic
reserves segments of the monetary base. The international
reserves segment is under the control of the public and
commercial banks and international reserves adjust to un
desired changes in the domestic monetary base. According
to Berger (1979), "(Chilean) Monetary stability seemed to
TO
be generated by the foreign sector." Consequently, per
centage changes in the money multiplier are inversely re
lated to percentage changes in the domestic monetary base.
The Global Monetarist Model also hypothesizes that
both percentage changes in a country1s money supply and
its rate of inflation are positively related to percentage
changes in the ratio of the domestic segment of the mone
tary base to the entire base. The Chilean data supports
the global Monetarist hypothesis (see Figures 5.3, 5.4, and
5.5).
In 1976, Chile switched to a "managed flexibility"
exchange rate system whereby they "forward fix" the daily
exchange rate for the entire year at the beginning of the
year. The rate is set at a level equal to the desired
inflation rate minus the world (Chile’s trading partners)
rate of inflation. The relationship between percentage
changes in the exchange rate, percentage changes in
123
FIGURE 5.3
PERCENTAGE CHANGES IN DOMESTIC MONETARY
BASE AND PERCENTAGE CHANGES IN MONEY MULTIPLIER
60
% A Donestic Monetary I ase
-50
40
30
-20
10
-10
-2 0
Multiplier % A Money
-30
1974 1975 1976 1978 1977
124
FIGURE 5.4
PERCENGAGE CHANGES IN THE RATIO OF THE DOMESTIC MONETARY
BASE TO THE MONETARY BASE AND PERCENTAGE CHANGES IN Mx
1974 1977
125
FIGURE 5.5
MONTHLY INFLATION RATE AND PERCENTAGE CHANGES IN
THE RATIO OF THE DOMESTIC MONETARY BASE TO THE
MONETARY BASE
70
50
Monthly Inflation Rate
40
30
20
10
-10
-20
% A in Donestic Monetary
Monetary Base
3ase
-30
1978
1977
1976 1975 1974
126
rate which would mean zero devaluation.
Lower inflation rates, combined with sliding reserve
requirements (from a low of zero for long-term maturities
to a high of 25 percent on short-term maturities) from 37
19
months m January 1979 to 77 months in October 1979.
After legal requirements were lowered, the debt/equity
ratio of domestic banks doubled from 5.1 in 1976 to 10.6
in June 1979. Since the legal limit is 20 times equity,
the potential for credit expansion is good.
Unemployment
Chile's success in reducing its annual inflation
rate from in excess of 500 percent in 197 4 to under 40 per
cent in 197 8 and 197 9 is an example of sound economic
management but their success in the battle against infla
tion has created unemployment problems.
Traditionally, wage contracts in Chile have contain
ed "cost-of-living" escalator clauses based on the previous
year's inflation rate. Consequently, Chile's rapidly
falling inflation resulted in extremely high automatic
nominal wage increases. This, combined with a lower rate
of inflation in the following year, resulted in extremely
high real wage increases. Contrary to claims by critics
of the administration (Chossudovsky, 1975) to'the effect -
that there has been a fall in workers' real purchasing
power, real wages increased by 41.9 percent in 1976 and
94.4 percent in 1977.
127
Chilean inflation, and percentage changes in the world in
flation differential are shown in Table 5.11 and Figure
5.6.
The existence of a public sector surplus, the
availability of low-priced imports, and the willingness of
foreign lenders to extend credit has reduced the pressure
on the Chilean Central Bank to increase the money supply
and money supply growth has slowed from 187 percent in
1976 to 18 percent in 1979.
The reduction in money supply growth, coupled with
the existence of substantial foreign exchange reserves, has
enabled the government to maintain a forward-fixed exchange
rate. Currency devaluation has fallen from an annual rate
or approximately 100 percent in 1976 to 20 percent in 1978.
In 1978, the annual rate of Chilean world inflation— the
increase in the price level of Chile's traded goods— was
approximately 10 percent. Chilean inflation dropped to
approximately 30 percent— (20 + 10).
The monetary authorities had hoped to push Chilean
inflation down to 25 percent in 1979 by reducing the rate
of devaluation to 15 percent. However, the cost of oil
imports rose 80 percent and Chilean world inflation rose to
23 percent. With a devaluation of 15 percent, Chilean in
flation rebounded to 28 percent. Chile's long-run goal is
to stabilize domestic inflation in line with the world
128
TABLE 5.11
EXCHANGE RATE AND INFLATION RATE DIFFERENTIAL
% A
Exchange Inflation World % A
Q/A Rate Rate Inflation Differential
1/7 4 .50 .51 3.45 47.6
2 .50 .51 3.7 0 47.3
3 .41 .39 3. 92 35.1
4 .59 .39 4.00 35.0
1/7 5 .72 .61 3.60 57.4
2 . 64 . 68 3.45 64.6
3 .35 .30 3.30 26 .7
4 .33 .26 2.97 23.0
1/76 .30 . 38 2.93 35.1
2 . 26 .38 2.88 35.1
3 .06 .24 2.68 21.3
4 .19 .16 2.73 13 .3
1/77 .07 .19 2. 83 16 .2
2 .11 .12 2.93 9.1
3 .18 .11 2.98 8.0
4 .16 .10 2.78 7.2
1/78 .08 .07 2.43 4.6
2 .07 . 07 2.38 4.6
3 .04 .08 2.38 5.6
4 .02 .05 2.38 2.6
129
FIGURE 5.6
PERCENTAGE CHANGES'IN EXCHANGE RATE, CHILEAN
INFLATION AND DIFFERENTIAL RATE OF
INFLATION
80
70
A Exchange Rate
60
50
40
% A in Chilean Inflation
* A Differential Rate
------- of infiacton--- 30
20
10
0
1977 1976 1978 1974 1975;
130
A free market economy adjusts to increases in the
real wage through reductions in the quantity of labor de
manded. Not surprisingly, as real wages rose, unemploy
ment rose with it. The unemployment rate in Chile rose to
19.1 percent in June 1976. Partially because of demo
graphic reasons, it remains at 12.5 percent despite an
average growth in total employment of over 5 percent.
131
CHAPTER V
FOOTNOTES
In 1970r twenty-two automobile manufacturers and
seven refigerator manufacturers were producing for less
than 10 million inhabitants with a per capita GNP of less
than $1 /0 0 0.
2 TABLE 5.IF
PERCENTAGE OF NATIONAL CONSUMPTION
SUPPLIED
Product 1970 1973
Wheat 82 45
Rice 69 46
Corn 46 29
Potatoes 93 73
Refined Oil 57 22
Sugar 55 37
Beef 75 57
Mutton 93 57
Milk Products 83 55
Richard Logan Brimhall, "The Chilean Marxist Experiment:
A Warning to the Americas," Unpublished Manuscript, Brigham
Young University, August 1975, p. 31.
3
R. S. Echaus and P. Rosenstein-Rodan, Analysis of
Development Problems: Studies of the Chilean Economy,
Amsterdam, North Holland, 1973.
4. "Immediately on his election by the Assembly,
Allende began putting his nationalization program through.
Although some months were required to accomplish this,
nationalization became the law and the major copper com
panies (through their Chileanized subsidiaries) were taken
over by the government." "Politics, Economics and Mineral
132
BY—-CHILE AN„AQjRI CULTU RE
( 1970 and 197T'™^)
Exploitation Strategies Arising from the Chilean Example,"
CIM Bulletin, August 1978, pp. 68-70.
5
"According to the estimations made by the Univer
sity of Chile, the production of copper per person employed
dropped, in Chuquicamata, from thirty-nine tons, which was
the average during the period of 1966-70, to twenty-nine
tons in the two year period of 1971-72. During the same
period the drop was, in El Teniente, from twenty-one tons
to seventeen tons and, El Salvador, from nineteen tons to
eighteen tons." Brinhall, op. cit., p. 30.
g
At first this investment was a television, a radio,
a camera, or anything that could be kept sealed in the
original:package and then later sold as new for its pre
sent value. It reached the point, that this'type of
speculation was done on a massive scale, with such basic
items as canned meat, toilet paper, printing paper, wheat,
flouir, oil products, wool, textiles of all types, dried
milk— anything that would keep. Ibid., p. 34.
7
Hours after the overthrow of Allende, Christian
Democratic, and Nationalist Party leaders went to the
military and thanked them for overthrowing Allende and
indicated that they would take control and call for new
elections. The junta refused, blaming the politicians
for Allende's rise to power and the economic chaos that
followed.
8
In 1973, the monthly tax unit— SVM (sueldo vital
mensual) was the equivalent of 6,700 escudos. Since the
average exchange rate in 1973 was 305, the dollar equiva
lent of one SVM was $22. The annual tax unit— SVA (sueldo
vital annual) was the equivalent of 80,400 escudos and the
dollar equivalent of one SVA was $263. In 1974, one SVM
was the equivalent of 2 0,000 escudos or $20 and one SVA
was the equivalent of 240,000 escudos or $242. Although
the escudo value of the SVM and SVA increased dramatically
from 197 3 to 1974 due to inflation, the dollar value was
kept fairly constant.
133
TABLE 5.2F -
Sueldo Vital
(Tax Unit Before 1975)
Year
SVM
(in escudos)
SVA
(in escudos)
Average
Exchange
Rate
SVM
$ Value
SVA
$ Value
1973 6,700 80,000 305 $22 $263
1974 20,000 240,000 990 20 242
9
See Appendix B.
■^See Appendix C.
■^See Appendix D.
12 . .
An additional side benefit of tax rate reductions
is that lower taxes should lead to a more accurate report
ing of taxable income which should, in turn decrease the
illusion of negative savings. As Malmalkis points out,
"A downward bias in income estimates was introduced because
of tax evasion on high incomes and understatement of the
wage bill to evade the very high Chilean social and wel
fare taxes on wages."
13
The shift from a traditional sales tax to a value-
added tax has the serendipitious effect of reducing mono
poly power because it eliminates the tax advantage that
vertically-integrated..firms have over individual producers.
This is true because a sales tax is a function of the num
ber of intermediate transactions and the number of trans
actions associated with a good produced by a vertically-
integrated producer is lower than the number of transac
tions associated with a good produced by a series of indi
vidual producers. Since a value-added tax is a function
of marginal value, the total tax does not depend upon the
ownership of the means of production.
14
See Appendix E.
15
See Appendix F .
134
Growth was especially high in products with high
income elasticity, such as home appliances, clothing, and
processed foods. Sales of these products increased 49.6
percent, 32 percent, and 11.8 percent, respectively, during
the first six months of 197 9.
17
Rolf Luders, personal conversation in Santiago,
April 1979.
18
Fred Berger, personal conversation in Santiago,
April 1979.
19
Long is over 66 months. Short is 24 to 36 months.
135
CHAPTER VI
A DISCUSSION OF THE BROADER EFFECTS
OF POST-1973 CHILEAN ECONOMIC
POLICIES
Background Prior to 1973
In September 1970, Chile was the most politically
developed country in Latin America. The government was a
parliamentary democracy and voter participation was extra
ordinarily high.'*' The country enjoyed freedom of the press
and speech, its army was apolitical, and there were no
political prisoners.
Furthermore, Chile was one of the three most eco
nomically developed countries in Latin America. It ranked
thrid in per capita income, second in literacy, and first
in the scope of its social welfare programs. It had a
large middle class, a productive labor force, abundant
natural resources and fertile agricultural land.
However, beneath the facade of political democracy,
the workers and the poor, especially those in rural areas,
were not doing well. Per capita agricultural production
was less than it had been in 1930. The rural poor (one-
third of Chile's population) lived on 75£ a day while the
136
three major cities absorbed 95 percent of the investment in
manufacturing and processing and 75 percent of public health
expenditures. From 1930 to 1970, 40 years of endemic infla
tion destroyed the value of Chile's currency, wages, sala
ries, and social security benefits while it increased the
relative wealth of owners of durable assets and land.
It is widely believed that, while inflation may
stimulate short-run growth, it is detrimental in the long-
run. When the rate of growth of GDP expenditures in Chile
between 19 40 and 1975 is compared with percentage changes
in the consumer price index, the two variables appear to be
negatively correlated (see Figure 6.1).
According to development economist, Adelman (197 4),
as inflation rises, the percentage of GDP paid to wage-
earners falls. When the percentage of national income going
to wages, salaries, and social security contributions in
Chile between 1960 and 1969 is compared with percentage
changes in the consumer price index, it appears that
periods of relatively high inflation are associated with
relatively low growth of income share for workers (see
Figure 6.2).
If periods of relatively high inflation are associat
ed with relatively low growth and relatively low percentages
of GDP going to wage-earners, it would seem that workers
are both absolutely and relatively worse off during periods
of relatively high inflation.
137
FIGURE 6.1
PERCENTAGE CHANGES IN THE CONSUMER PRICE INDEX AND
PERCENTAGE CHANGES IN GROSS DOMESTIC PRODUCT
EXPENDITURES
80
70
As in CPI
60
50
40
30
20
10
in' GDP “ E: tpenditure
10
138
1975'
FIGURE 6,2
PERCENTAGE CHANGES IN CONSUMER PRICE INDEX AND
PERCENTAGE CHANGES IN WORKERS' INCOME SHARE
40
% A in CEI
30
20
10
As in to r k e r s ' Incxxw Share
0
LA
\ £ >
PO VD
\D
o\
\ £ >
139
Prior to 1970, Chilean annual per capita economic
growth had been around one percent in real terms for more
than 25 years. Adelman (1974) believes that real per capita
growth rates below 3.5 percent tend to be associated with
declines in the income share of the poor. In addition, she
states that,
"Greater political participation does not appear
to redistribute income to the poor. To the extent
that it is effective at all, it tends to redistri
bute income from', the upper toward the middle income
groups. Greater government ownership of productive
enterprise also does not appear to redistribute in
come to the poor. It tends to reduce growth relative
to the free enterprise rate, thus providing less to
distribute."
Chile is no exception: in the early 1950s, 10 percent of
the population received bne-half of the national income
and 3 percent of the landowners owned one-half of the arr-
able land.
In response to each administration's failure to solve
the dual problems of inflation and slow and inequitable in
come growth, a pattern evolved in Chilean politics: a
different party came to power every six years. Between 1952
and 1973, a populist colonel was followed by a moderately
conservative businessman who was succeeded by a Catholic
reformist. He was succeeded by a Marxist romantic who, in
turn, was followed by a military junta.
140
Post-197 3 Developments
%
The junta initiated a policy of economic liberalism,
implemented by U.S.-trained economists, principally from the
Catholic University in Chile, many of whom had done gradu
ate work at the University of Chicago.
economic liberalism, influenced by the U.S. and German ex
amples. It was combined with political conservatism and
was especially influenced by German Catholic social thought,
which defines the goal of the government as the promotion
of the common good in the interest of the human person and
Ludwig Erhard's post-World War II "soziale marktwirt-
2
schaft,"— a socially responsible free-market economy.
government's policies of economic liberalism emphasize
growth at the expense of equitable income distribution.
However, this criticism is not supported by empirical
evidence because real growth and equity appear to be com-
tribution in Chile between 1957 and 197 9 found that income
distribution, as measured on the Gini scale, improved tem
porarily in 1971 as Allende increased low-income wages and
the Lorenz curve flattened out. However, lower income
groups' gains evaporated during the hyperinflation of 1973
and 1974. By 1973, real wages were 52 percent of their
1970 level. 141
The philosophical foundation of the new regime was
Critics of the present administration argue that the
plementary rather than contradictory in post-Allende Chile . j ,
jw
A University of Chile (1979) analysis of income dis-
/
Lower income groups' share of total income did not
begin to recover until 1976. From 1976 to 1978, the income
of the poorest 2 0 percent of the population rose 61.5 per
cent compared with 40.4 percent for the upper 20 percent.
Consequently, the share of the poorest 20 percent rose 17
percent during this period and the Gini coefficient re
turned to its previous (1968) high level.
The study concluded that the government's economic
policies are rapidly increasing average personal income, and
that the rate of increase in 1976 to 1978 was greater for
lower income groups than for upper income groups. It
also concluded that the redistributional character of the
free market economic model is equal to, if not greater than,
that of previous models. These findings, coupled with the
t
increase in real growth experienced during the past four
years, indicates that workers and the poor are both rela
tively and absolutely economically better off under the
present regime than they were before.
In addition, in contrast to previous administrations
which emphasized social welfare programs designed to raise
the standard of living of the middle class while neglecting
the needs of the lower income classes, the present adminis
tration is emphasizing programs designed to alleviate the
economic problems of the country's lowest income groups.
Between 1975 and 1979, per capita spending on social wel
fare benefits increased every year in real terms.
__________________________________________142
The largest increase in social welfare expenditures
has been in unemployment benefits, which rose from $10
million in 1976 to $200 million in 1979, The increase in
unemployment benefits was necessary to soften the blow on
those segments of the population which were temporarily un
employed during the transition from a controlled to a free
market economy.
Farm reform is an area of high priority. On
December 31, 1978, the Agrarian Reform System which had been
in existence since 1962 was officially ended. Although 24.6
million acres of farmland (60 percent of the country's
choicest farmland) were expropriated by the Frei and Allende
administrations, neither government distributed any titles
to tenant-farmers. The Pinochet administration has distri
buted most of the expropriated land: 28 percent was return
ed to previous owners; 32 percent was sold at auction; and,
most of the remaining farms have been assigned for distri
bution to tenant-farmers--over five million acres have been
3
distributed to date.
Another area of special interest to the present
administration is the establishment of rural health centers.
From 1973 to 1979, the administration opened hundreds of
clinics and health centers, specializing in preventive health
care and nutritional programs. The success of these
programs is illustrated by a rise in life expectancy from
143
64 years in 1973 to 69 years in 1978, a drop in the mor
tality rate from 8.4 per thousand in 1973 to 6.6 per
thousand in 1978, a drop in infant mortality from 65 per
thousand in 1973 to 39 per thousand in 1978, and a 4 per
cent drop in the number of children suffering from malnu
trition . ^
Another area of concern is low-income housing.
From 1970 to 1973, the average number of residential units
constructed fell to one-half of what it was during the
decade before. By 1973, there was an acute housing short
age. In 1975, the housing market was completely devastated
when interest rate ceilings were removed. Nominal interest
rates rose as high as 400 percent. Real interest rates
were over 50 percent. As a substitute for public housing,
the government has proposed a matching grant program to
5
assist low-income families to buy their first house.
One of the government's top priorities in the 19 80s
is the reform of the social security system which is
effectively bankrupt with a deficit of $400 million.
To depoliticize the labor movement within Chile and
avoid a trade boycott by international labor organizations,
the administration initiated a new labor relations system
in July 1979. The new system was developed by Harvard-
trained economist, Jose Pinera. It establishes the consti
tutional rights of organized labor to elect leaders, to
g
meet freely, to bargain collectively, and to strike.
14.4
Automatic cost of living wage adjustments are guaranteed
by law and, for the first time, legally constituted unions
have almost complete control over their own finances.
Although the new system permits the development of
shop unions, it discourages the development of broad-
based, politically-powerful partisan labor organizations.
Chile's opposition to politicized labor organizations is
partially a reaction to its neighbor Argentina's disas
trous experience with politicized trade unions. In Feb
ruary 1980, Argentina followed Chile's lead and passed a
law restricting trade union participation in partisan
. . 7
political activities.
Chile's economic base has been eroded by govern
ment 's concessions to politically powerful partisan special
interest groups. As early as 1953, Argentina's populist
President Peron advised Chile's populist President Ibanez
to "give to the people, especially to the workers, all
that is possible. When it seems to you that already you
g
are giving them too much, give them more."
After Ibanez, Chilean governments continued to give
away more than they could afford. Chile's copper became
less competitive as unions raised production costs and
middle-class groups demanded higher copper export taxes to
finance their high standard of living. Fiscal deficits
rose to record highs to satisfy the demands of government
14 5
employees. Agricultural production shrunk as low tariffs
on food imports placated consumers and destroyed the
domestic market. Domestic savings evaporated as interest
rates were kept artificially low to accomodate borrowers.
Eventually, political concessions to advocates of deficit
spending and income redistribution resulted in total
economic collapse.
According to Kaufman (197 9),
"By Allende's time, if not before, most of the
'tools' available for dealing with political
economic immobilism within an open constitu
tional context were perceived as 'exhausted.'
.... (the) authoritarian rule which replaced
Allende appeared to be the only remaining
'rational' choice."9
To recover from the past and rebuild for the future, Chile
traded political freedom for economic prosperity.
Chile _is prosperous. Income tax reductions have
reduced the "wedge" and brought the economy back down the
Laffer Curve. Consumption rose and indirect tax revenues
almost doubled between 1973 and 1978. During the same
period, total tax revenues rose by 50 percent. In 197 9,
for the first time in 30 years, the fiscal budget showed a
surplus. Foreign investment grew dramatically and, in 1979,
total investment returned to its 1970 level. For the past
four years, Chile's economic growth has been double its
post-World War II average and is higher than the world
average. Since 197 5 employment has grown by 20 percent.
Imports are rising with rising income but exports are
146
rising even faster. In 1979, the trade deficit decreased.
The balance of payments is positive, as foreign borrowing
more than compensates for the trade deficit. The percent
age rate of devaluation of the managed flexible exchange
rate dropped from 100 percent in 197 6 to 15 percent in
1979. With a 23 percent rise in the price of its traded
goods, (the IMF proxy for world inflation), Chilean infla
tion approximates 38 percent.
Economic and political freedom are increasing in
Chile. Because economic freedom is diminished by state
controls on imports, exchange rates, wages, and prices,
economic liberalism, which abolishes these controls, in
creases economic freedom. And, there are signs that
political freedom is also increasing in Chile. Chileans
are proud of their democratic heritage and the present
government is extremely sensitive to both internal and
external criticism. Military control has decreased—
the "State of Siege" was lifted in April 1978.^ Labor
has been guaranteed the constitutional right to organize
and strike. Marxism is studied again in the classroom.
A new constitution, which guarantees the right to life,
the integrity of persons, and equality before the law
soon will be presented to the voters in a plebiscite.^
147
CHAPTER VI
FOOTNOTES
^Three million out of a total population of nine
million voted in the 1970 election.
^After World War II, Ludwig Erhard initiated a
policy of "capitalism with a conscience”— "turn the money
and the people loose and they will make the country strong."
3
David Belnap, "Chile's Farm Reform, Inspired by
Allieance for Progress in 1962, Will End December 31,"
Los Angeles Times, October 6 , 1979, Part I, p. 18.
4
U.S. Department of Commerce, Economic Trends
Report: Chile, Santiago, December 1979, p. 18.
^Ibid, p . 2 1.
g
The new system provides for worker cooperation and
participation in production decisions, including worker
representatives on corporate boards of directors and worker
advisory boards in all factories with over 100 workers on
farms of over 25 agricultural workers. The system is
similar to the one adopted in Germany in the early 1950s,
providing for a "Mubestimmungsrecht" for workers in
factories over a certain minimum size.
7
Argentina had a disasterous experience with the
trade unions which flourished under Peron. It is only
now beginning to recover from a bitter civil war between
members of the military in support of the union-backed
Pe.ronists and the. official anti-Peronist military govern
ment.
8
Albert O. Hirschman, "The Turn to Authoritarianism
in Latin America and the Search for its Economic Deter
minants," The New Authoritarianism in Latin America,
(Princeton: Princeton University Press, 1979), p. 65.
14:8
9
Robert R. Kaufman, "Industrial Change and Authori-
tarianian Rule in Latin America: A Concrete Review of
the Bureaucratic-Authoritarian Model," The New Authori
tarianism in Latin America, (Princeton: Princeton Univer-
sity Press, 1979), p. 226.
^ Chile Today, Embassy of Chile, Washington, D.C.,
Number 284,,April 1978. (See Appendix G.)
■^See Appendix H.
149
CHAPTER VII
SUMMARY AND CONCLUSION
In this paper, the economic policies of the present
Chilean government and their effects on real and monetary
macroeconomic variables are analyzed within the framework
of the Global Monetarist-Wedge Model. The research metho
dology used is a discussion and exposition of the model
and a compilation and presentation of empirical data with
which the hypotheses suggested by the model are tested.
To put the present Chilean economy in perspective,
the past behavior of key real and monetary macroeconomic
variables is described in Chapter II. In Chapter III,
the economic policies employed by various Chilean adminis
trations before 1970 are described within the context of
models which attempt to explain the effects of these
policies on real and monetary macroeconomic variables.
An alternative framework for the analysis of eco
nomic policies on real and monetary macroeconomic vari
ables— the Global Monetarist-Wedge Model— is developed
in Chapter IV. The effects of economic policies on real
macroeconomic variables are analyzed within the framework
of the Wedge Model. The effects on monetary variables are
analyzed within the framework of the Global Monetarist
150
Model.
The Wedge Model hypothesizes an inverse relationship
between output and tax rates. A corollary of the Wedge
Model— the Laffer Curve— hypothesizes that, if tax rates
rise when they are in the "normal"range, tax revenues rise
but, if tax rates rise when they are in the "prohibitive"
range, tax revenues fall. When the Wedge Model is extended
to an open world economy, it suggests a negative relation
ship between increases in a country's economic growth and
changes in its trade balance.
Global Monetarism suggests a positive relationship
between increases in economic growth and changes in a
country's balance of payments and a negative relationship
between increases in money growth and changes in its
balance of payments. Also, if exchange rates are managed,
there is an extremely strong relationship between changes
in a country's exchange rate and its rate of inflation:
its rate of inflation is equal to the sum of its rate of
devaluation and the rate of world inflation.
In Chapter V, post-1973 Chilean economic policies
and their effects on real and monetary macroeconomic
variables are discussed. In 1975, Chile cut marginal in
come tax rates and eliminated capital gains taxes. As
predicted by the Wedge Model, output and employment
increased. As illustrated by the Laffer Curve, income tax
151
revenues increased 30 percent between 1975 and 1978. As
consumption increased, indirect tax revenues also rose, and,
despite drastic reductions in tariff rates, imports in
creased and tariff revenues rose. Total tax revenues rose
50 percent in real terms from 197 4 to 1978. As tax
revenues rose, the fiscal budget was balanced for the
first time in thirty years, permitting the first direct
tax refund in Chilean history.
As the economy grew and imports increased, the
trade deficit worsened. However, the balance of payments
turned positive as the rate of domestic money creation
slowed and foreign loans flowed into the country. Under
a managed exchange rate, Chile's rate of inflation fell to
38 percent (15 percent devaluation and 23 percent "world"
inflation) in 1979.
Consequently, it appears that the post-1973
Chilean economic data support the hypotheses suggested by
the Global Monetarist-Wedge Model.
In Chapter VI, the broader effects of the post-
1973 Chilean economic policies are discussed. Economic
prosperity has been accompanied by rapidly increasing
personal income, relatively higher income growth among
lower-income groups, and a more equitable income distribu
tion. Also, per capita government spending on social
welfare has increased in real terms every year for the past
152
four years. Consequently, workers and the poor are both
absolutely and relatively better off than they were be
fore.
In addition, economic liberalism has been associated
with an increase in economic and political freedom and the
groundwork is being laid for a potential return to a
democratic form of government.
With the forecast of continuing prosperity and in
creasing economic and political freedom, Chile's future
looks brighter than has for decades.
153
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159
APPENDIX A
TAX BRACKETS, TAX RATES, TAX REVENUES,
AND NUMBER OF TAXPAYERS
160
TABLE A.1
FIRST CATEGORY
(Profit Taxes)
Marginal Taxes Number of
Tax Tax Tax Rate Paid (%) Taxpayers (%)
Bracket Bracket (%) (mill, p) Total (%) Total
(OTA) (1979$) 1976 1979 1976 1979 1976 1979 1976 1979 1976 1979
1 > 0- 1 >
0- 300 20 10 0.8 3.9 0.5 0.2 25.3 8.4 26.5 7.8
2 > 1-2 >
300- 600 20 10 2.5 31.8 1.5 1.2 21.0 25.5 22.0 23.9
3
>
2- 3
> 600- 900 20 10 1.7 27.7 1.0 1.0 10.0 15.3 10.5 14.3
4
> 3- 4 >
900-1,200 20 10 2.5 44.1 1.5 1.6 10.5 14.1 11.0 13.1
5
>
4- 5
>
1,200- 1,500 20 10 8.3 94.8 5.0 3.5 12.1 16.1 12.5 15.0
6
>
5- 8
> 1,500- 2,400 20 10 10.7 147.0 6.5 5.4 8.6 12.6 9.0 11.8
7
>
8-10 >
2,400- 3,000 20 10 18.2 270.5 11.0 9.9 5.3 9.1 5.5 8.5
8
> 10-15 > 3,000- 4,500 20 10 14.0 240.7 8.5 9.9 1.4 3.2 1.5 3.0
9
>
15-20
> 4,500- 6,000 20 10 16.5 283.0 10.0 10.3 0.9 1.8 1.0 1.6
10
> 20-25 > 6,000- 7,500 20 10 16.5 257.5 10.0 9.4 0.5 0.6 .5 0.6
11
> 25-30 > 7,500- 9,000 20 10 1.7 57.8 1.0 2.1 — 0.1
--
0.1
12
> 30-55 > 9,000-16,500 20 10 9.1 151.0 5.5 5.5
--
0.1
--
0.1
13
> 55-80 > 16,500-24,000 20 10 14.0 244.2 8.5 8.9
--
0.1
--
0.1
14
>
80
>
24,000 20 10 48.5 892.5 29.5 32.5
--
0.1
--
0.1
165.0 2,746.9 100.0 100.0 95.6 107.1 100.0 100.0
Source: 1979 Boletin de Estadistica Tributaria, Servicio de Impuestos Intemos, Chile.
162
TABLE A. 2
SECOND CATEOKY
(Professional Inccme)
Approximate Marginal Taxes Number of
Tax Tax Tax Rate Paid (%) Taxpayers (%)
Bracket
(OTA)
Bracket
(1979 $)
(%)
1976 1979
(mill.
1976
P)
1979
Total
1976 1979
(%)
1976 1979
Total
1976 1979
1 >
0-1
>
0- 300 12 7 .1 2.0 0.4 0.3 2.7 4.2 9.1 9.9
2 > 1-2 > 300- 600 12 7 .3 5.7 1.6 1.0 3.7 4.4 12.7 9.2
3 > 2-3 > 600- 900 12 7 .4 8.5 2.1 1.4 2.9 3.9 10.0 8.2
4 > 3-4 >
900- 1,200. 12 7 .5 11.1 2.4 1.9 2.4 3.6 8.2 7.6
5 > 4-5 > 1,200- 1,500 12 7 .5 12.3 2.5 2.1 2.0 3.1 6.7 6.6
6 > 5-8 > 1,500- 2,400 12 7 1.7 39.3 8.5 6.6 4.7 7.0 15.9 14.7
7 > 8-10 > 2,400- 3,000 12 7 1.1 26.7 5.5 4.5 2.1 3.4 7.3 7.1
8 > 10-15 > 3,000- 4,500 12 7 2.3 63.2 11.9 10.7 3.4 5.8 11.7 12.3
9 >
15-20 > 4,500- 6,000 12 7 1.7 51.5 8.8 8.7 1.8 3.4 6.1 7.1
10 > 20-25 > 6,000- 7,500 12 7 1.4 37.0 6.9 6.3 1.1 1.9 3.7 4.0
11 >
25-30 > 7,500- 9,000 12 7 1.0 33.9 5.4 5.7 .7 1.4 2.4 3.0
12 > 30-55 > 9,000-16,500 12 7 2.7 123.9 13.7 20.9 1.2 3.5 4.2 7.4
13 > 55-80 > 16,500-24,00 12 7 1.1 61.3 5.6 10.3 .3 1.1 1.0 2.3
14 >
80
>
24,000 12 7 4.8 116.1 24.7 19,6 .3 0.8 1.0 1.8
19.5 592.6 100.0 100.0 29.4 47.4 100.0 100.0
Source: 1979 Boletin de Estadistica Tributaria, Servicio de Impuestos Intemos, Chile.
163
TABLE A.3
GLOBAL CCMPIEMENTARIO
Tax Approximate Marginal Taxes Number of
Bracket Tax Tax Paid (%) Taxpayers (%)
(OTA) Bracket Rate (mill, p) Total (000) Total
1976 1979 (1979 $)
(%)
1976 1979 1976 1979 1976 1979 1976 1979
1
> 0- 5 > 0- 3 > 0- 1,000
0
7.5
0
0.8
0
20.2 16.7 21.9 11.3
2 > 5-10 > 3- 6 > 1,000- 2,000 3.5 24.6 1.8 2.4 .04 24.0 26.3 25.9 17.8
3 > 10-15
>
6-16 > 2,000- 4,800 10.0 32.7 154.5 3.2 3.6 14.3 50.6 15.4 34.3
4 >
15-20
> 16-30 > 4,800- 9,000 15.0 37.0 383.8 3.7 9.2 9.5 26.6 10.3 18.0
5 >
20-30
> 30-45 > 9,000-13,500 20.0 77.6 429.5 7.6 10.0 11.2 12.6 12.1 8.5
6 > 30-40 > 45-60 > 13,500-18,000 30.0 69.1 422.6 6.8 9.9 5.6 6.4 6.0 4.3
7 >
40-50
>
60-70 > 18,000-21,000 40.0 56.9 275.9 5.6 6.4 2.9 2.5 3.2 1.7
8 >
50-60
> 70-80 >
21,000-24,000 50.0 45.6 240.4 4.5 5.6 1.7 1.6 1.8 1.1
9 > 60-80 >
80
>
24,000 60.0 60.5 2,365.6 6.0 55.2 1.5 4.6 1.6 3.1
10 > 80 603.4
--
59.4
--
1.7
--
1.8
--
1,014.9 4,284.1 100.0 100.0 92.8 147.8 100.0 100.0
Source: 1979 Boletin de Estadistica Tributaria, Servicio de Impuestos Intemos, Chile.
FIGURE A.l
DISTRIBUTION CF TAXAPYERS
BY TAX BRACKET
(Profit Taxes)
40
30
20
10 .
1 2 3 4 5 6 7 8 9 10
1976
40
30
20
10
123456 789 10
1979
164
FIGURE A. 2
DISTRIBUTION OF TAX REVENUES
BY TAX BRACKET
(Profit Taxes)
40
30
20
,10
9 10 11 12 13 14 8 7
1976
1979
165
FIGURE A.3
DISTRIBUTION OF TAXPAYERS
BY TAX BRACKET
(Professional Salaries)
40
30
20
10
r r^L
1 2 3 4 5 6 7 8 9 10 11 12 13 14
1976
40
30
20
10.
1 2 3 4 5 6 7 8 9 10 11 12 13 14
1979
166
FIGURE A.4
DISTRIBUTION OF TAX REVENUES
BY TAX BRACKET
( P r o f e s s i o n a l S a l a r i e s )
□
1976
40
30
20
. 10
40
30
20
10
1 2 3 4 5
6 7 8 9 10 11 12 13 14
1979
167
FIGURE A. 5
DISTRIBUTION OF TAXPAYERS
BY TAX BRACKET
(G lo b a l C c trp le rn e n ta rio )
30
20
1 2 3 4 5 6 7 8 9 10
1976
40
30
20
10
1979
7 8 9
168-
FIGURE A.6
£1
DISTRIBUTION OF TAX REVENUES
BY TAX BRACKET
(G lo b a l C c tip le m e n ta rio ) 60
50
40
30
20
10
1 2 3 4 5 6 7 8 9 10
1976
50
40
30
20
10
1 2 3
5
1979
169
FIGURE A. 7
NUMBER OF TAXPAYERS
PROFITS TAXES
(in thousands)
1970-1976
100
I
90
{
70
60
i 50
40
30
I
20
10
1967 1968 1969 1970 1971 1972 1973 1974 1975 1976
170
FIGURE A.8
TAX REVENUES AS A PERCENTAGE OF GDP
1976
22
171
APPENDIX B
CALCULATION OF UNIDAD TRIBUTARIA
(Tax Unit)
122
Calculation of Unidad Trlbutarla (Tax Unit)
UTM(t+l) = UTM(t)'*ACPI(t-l); UTA = 12 UTM
UTM UTA UTM(t+l) Exchange
to/Tr (in pesos) (In pesos) *flCPI(t-l) (in pesos) Rate $UTM $UTA
' t -
1/75 37 444
__ _
37 1.9 19.5 234
2/75 37 444 21.3 49 2.2 16.8 202
3/75 49 588 16.5 57 2.8 17.5 210
V 7 5 57
684 21.2 69 3.5 16.3 195
5/75 69
828 20.6 83 4.0 17.3 207
6/75 83 996 16.0 96 4.6 18.0 217
7/75 96 . 1152 19.8 115 5.3 18.1
217
8/75 115 1380 9-3 126 5.8 19.8 238
9/75 126 1512 8.9 137 6.2 20.3 244
10/75 137 1644
9.2 150 6.8 20.1 242
11/75 150 1800 8.4
163 7.4 20.3
243
12/75 163 ■ 1956 8.2 176 8.3 19.6 236
1/76 176 2112 7.1 188 9.2 19.1 230
.2/76 188 2256 10.5 208 10.1 18,6 223
3/76 208 2496 10.1 229 10.8 19.3 231
*1/76 229 2748 13.5 260 11.5 19.9 239
5/76 260 3120 11.9 291 12.6 20.6 248
6/76 291 3492 9.8 320 13.5 21.6 259
7/76 320 3840 12.3 359 12.8 25.0 300
8/76 359 4308 8.9 391 13.5 26.6 319
9/76 391 4692 5.5 413 14.3 27.3 328
10/76 413 4956 7.6 444 15.2 27.2 326
1/76 444 5328 6.7
474 16.1 27.6 331
-*.2/76 474 5688 3.8 492 17.0 27.9 335
1/77 492 5904 5.1 517 18.0 27.3 328
2/77 517
6204
5.9
548 19.0 27.2 327
3/77 548 6576 5.8 580 18.3 29.9 359
4/77 580 6960 6.1 615 18.7 31.0 372
5/77 615 7380 4.7 644 19.4 31.7 380
6/77
644 7728 3.8 668 20.2 31.9 383
7/77 668 8016 3.3 690 21.0 31.8 382
8/77 690 8280 3.9 717
22.0 31.4 376
9/77 717
8604 3.4 741 24.0 29.9 359
10/77 741 8892 3-7 768 24.7 30.0 360
11/77 768 9216 4.2 800 25.7 29.9 359
12/77 800 9600 2.2 818 27.6 29.0 348
1/78 , 818 9816 3.1 843
28.4 28.8 346
2/78 843 10116 1.8 858 29.1 29.0 348
3/78 858 10296 2.4 879 29.9 28.7
344
4/78 879 10548 2.9
904 30.0 29.3 352
5/78 904 10848 2.6 928 30.6 29.5 355
6/78 928 11136 2.1 947 31.3 29.6 356
7/78 947 11364 2.0 966 31.8 29.8 357
8/78 966 11592 2.5 990 32.3 29.9 359
9/78 990 11880 2.8 1018 32.7 30.3 363
.0/78 1018 12216 2.9 1048 33-1
30.8 369
& 1/78 1048 12576 1.9
1068
33.3 31-5 378
- 12/78 1068 12816 1.3
1082 33.6 31.8 381
1/79 1082 12984 1.5 1098 33.8 32.0 384
2/79 1098 13176 2.2 1122 34.2 32.1 385
APPENDIX C
SCHEDULE I
174
175
Peso (OOOe)
Tax Unit Equivalent
(SVA) SVA=240,000e
1
- 2 240 - 480
2 -
"5
480 - 1,200
5
- 10 1,200 - 2,400
10 -
15
2,400 - 3,600
15
- 20 3,600 - 4,800
20 - 30 4,800 - 7,200
30 - 40 7,200 - 9,600
40 - 50
9,600 -12,000
50 - 60 12,000 -14,400
60 - 80 14,400 -19,200
80 &
higher
19,200 & higher
SCHEDULE I
Tax Rate
(Before
$ Equivalent j II Q
(Ave.x-rates990) j 1974
242 - 484
484 - 1,210
1,210 - 2,420
2,420 - 3,630
3,630 - 4,840
4,840 - 7,260
7,260 - 9,680
9,680 -12,100
12,100--14,520
14,520 -19,360
19,360 & higher
3.5
5
15
20
30
40
45
50
55
60
65
(?)
After
1974 12^31/74
3.5 3.5
5 10
5 15
0 20
;0 30
40
50
60
APPENDIX D
SCHEDULE II
176
Ill
SCHEDULE II
Tax
B^ate
)
I
— gjjsj—
Tax
Unit
Before 5/77
Peso 1
Equivalent
$ 2
Equivalent
Tax
Unit
After 5/77.
Peso
Equivalent
$
Equivalent
3.5 1- 2 7,380- 14,760 380- 760 3- 6
22,140- 44,280 1,140- 2,280
10 2- 5 14,760- 36,900 760-1;900 6-16 44,280-118,080 2,280- 6,080
15
5-10 36,960- 73,800
!
1,900-3,800 |
i
16-30 118,080-221,400 6,080-11,400
20 I10-15
73,800-110,700 3,800-5,700 |30-45
221,400-332,100 11,400-17,100
30 115—2 0 110,700-147,600 5,700-7,600 j45-60 332,100-442,800 17,100-22,800
j
40 ||20-40 147,600-295,200 7,600-15,200 60-70 442,800-516,600 22,800-26,600
50 j|40-80 295,200-590,400 15,200-30,400
i
70-80 516,600-588,800 26,600-30,400
60 |J80-&
jhigher
590,400 &
higher
30,400 & |
higher - •
80 &
higher
588,800 &
higher
30,400 &
higher
In May 1977, 1 UTA=7,38o pesos
2
In May 1977, exchange rate = 19.39
APPENDIX E
SCHEDULE III AND TARIFF STRUCTURE
178
Schedule III
Development of the Chilean Tariff Structure
PERIOD
Average
Nominal
Tariff
Rate
%
Maximum
Nominal
Tariff
Rate
% (*)
1973 2nd. half
94
over 500
1974 1st. half
80
160
2nd. half
67
140
1975 1st. half
52
120
2nd. half
44
90
1976 1st. half
38
70
2nd. half
33
60
1977 1st. half
24
50
2nd. half 20
35
1978 March
15
20
June
14
20
December 12 15
1979 June
10
10
(*) The automobile industry is an exception.
Tariff Structure
Source: Central Bank of Chile
N* of Items in the Tariff Structure
TARIFFS Mar 1978 Jun 1978 (*) Dec 1978 Jun 1979
0.
12. 12.
1.0.
1,324. 2,221.
15.
1,606. 1,131.
20.
1,350. 928.
75.
— —
80.
4. 4.
105.
— —
115.
5. 5.
12.
12.
2,930.
4,280.
1,350. —
z 4.
4.
—
___ 5.
5. —
( * ) F in a n c e M in i s t r y D e c re e N ® 172 ( 3 0 .3 .7 8 ).
179
APPENDIX F
DECREE LAW 1748
180.
■I — " I " >
What the law says
On March 18, 1977, Decree Law
1748 (New Decree Law No. 600)
altered the regulations affecting
foreign direct investments in Chile.
The new law governs all new foreign
investments in freely convertible
currency as well as in assets of
machinery and equipment, whether
new or used, technology in different
forms, investment-related credits and
capitalized earnings with a right to
transfer abroad.
The principal features of the
regulations are:
1. There is no limit on profit and
capital remittances, except that
capital must remain in Chile for
three years before it may be
remitted.
2. Foreign exchange for profit and
capital remittances will be available
under the same conditions as apply
to Chilean nationals purchasing
foreign exchange to cover general
imports.
3. There is no time limit on how long
a foreign investment may remain in
Chile.
4. There are no provisions requiring
foreign investors to sell part or all
of their investment to Chilean
nationals.
5. Foreign investors have the same
rights and obligations as Chileans,
except that access to domestic
credit facilities is limited.
6. Foreign investors may opt for “tax
invariability” in which case they
pay a total tax of 49.5% on taxable
income for a period of 10 years or
they may opt once only to become
subject to the same taxes which are
applicable to Chilean investors.
7. Import duty and value-added taxes
are to be “invariable” on imported
machinery not produced in Chile
for the period needed to implement
the investment.
8. Existing foreign investments may
become subject to the provisions of
Decree 1748 until March 18, 1978.
9. All foreign credits associated with
foreign investment, that is, their
terms, interest, commission, and
other charges, must be those
authorized by the Central Bank of
Chile.
As under previous legislation, the
Chilean Foreign Investment Com
mittee negotiates a separate contract
with each foreign investor. Contracts
normally stipulate the time limit before
which the investment must be
implemented.
The new law provides simpler rules
which make authorization almost
automatic; and stipulates that foreign
investments up to $5 million are
authorized by the executive secretary
with the sole approval of the president
of the committee.
In the case of mining investments,
the time limit is eight years, in others
three years. The Committee may,
however, extend the period, for in
stance if oil exploration activities must
first be completed.
181
APPENDIX G
DEMOCRACY AND THE NEW CHILEAN CONSTITUTION
182.
DEMOCRACY
And The New
Chilean
Constitution
By Enrique Orttizar Escobar
President of the Commission of
Constitutional Reform.
T
he new Constitutional structure of Chile will
be careful to safeguard end strengthen the
democratic system and state of law, which
are the essential pillars on which rest the fundam
ental rights of the human being and permit at the
same time the normal evolution of the country.
For this purpose:
a) It will favor the formation of a strong
sense of democratic awareness, principally through
education and the appropriate use of the social
communications media, in order to give perman
ent emphasis to our spiritual, historical, and cul
tural values.
bl It will give attention to a precept estab
lishing that the political parries must organize
and act according to the principles of democracy
and maintain in their ideological character and
the conduct of their members a wholehearted and
permanent loyalty to the democratic and repub
lican system of government and the principles
and values that constitute the essence of the
stats of law. Consequently, such parties as act
against the democratic system of government in
pursuit of their aims or because of the political
actions of their supporters will be Considered
to be in opposition to the Constitution.
Similarly, persons who engage in acts that
harm the democratic system or are directed toward
its change or destruction will be unable to hold
public office of any kind, whether it has to do
with popular representation or not. The same
will apply to those who defend crime or polit
ical violence.
cl The Constitution will give consideration
to general rules Intended to ensure that political
parties limit themselves to acting within the sphere
to which they belong, and that they are expressly
prohibited from intervening in public administrat
ion and such elections or disputes of a union
character as take place in the universities or ed
ucational establishments, trade unions or syndic
ates, and in professional associations or groups.
In failing to take account of the ideas ex
pressed above, the institutional system in effect
permitted the country to be the victim of secta
rianism and demagogy, which led to the po!(fixat
ion of all national activities, with serious harm to
our institutions, the peaceful coexistence of
Chileans, end the national economy.
In the same way, tire Constitution must give
consideration to rules that make it possible for the
organization at the base of society, such as profes
sional associations, trade unions or syndicates,
neighborhood boards, and so on, enjoy the particip
ation corresponding to them in the national pro
cess, without intervening in the area belonding to
the political parties.
d) Democracy is in its essence the government
of the majorities. It is therefore necessary to adjudge
the mean Mid appropriate electoral system io that
the governments that are elected will be the expre
ssion of e real majority.
Additionally, and as a general rule, the new
Constitution will establish the principle that the
political authority must, in fundamental matters,
shape its actions in accordance with the sentiment
of the great national majorities. And,
el Respect for the legal system is fundamental
for the malntainance of democracy.
The crisis through which the country has
lived hsi been due in great measure to the system
atic breakdown of the legal system, which makes it
advisable that the new Constitution adopt stricter
standards to watch over its integrity, in order to
prevent abuses and aberrations of authority.
5
183
APPENDIX H
CHILE TODAY
184
— --------------------------------------------------------------------------------------------------------------------—
Llr oassy of Chile
Washington, D. C. 20036 First Class Mail
U. S. Postage
PA K D
Permit No. 44838
Washington, 0. C.
Chile Today
<
Number 284 - April, 1978
REPORT ON HUMAN RIGHTS AND INSTITUTIONAL
NORMALCY IN CHILE
1.- The State of Siege in effect in accordance with Decree Law
N°1889 was lifted on March 10, 1978, and replaced by a six-month State
of Errergency for different areas of the country per Supreme Decree N°391
of the Ministry of Defense.
This action signifies:
a.- The termination of the authority granted by the Constitution
to the President of Chile for transferring persons fran one location to
another and holding them indefinitely as a precautionary measure during
the duration of the State of Siege. Currently, preventive detention can
be exercised only for a maximum period of five days, after which time
the detainee must be released or placed at the disposition of the courts.
It should be noted that on the date the State of Siege was
lifted, there
were no prisoners being held under the authority granted the President by
that emergency measure.
b.- The end of the authority permitting the Government to take away
a person's citizenship "for acting grievously fran abroad against the basic
185
- 2 -
interest of the State during emergency situations as outlined in Article
72, N° 17 of the Constitution."
c.- 'Hie withdrawal of the authority of wartime Military Tribunals.
Crimes committed in the country will be tried by regular Courts or peace
time Military Tribunals, in accordance with the procedures of jurisdiction
and competence previously established in our internal legislation. All
Courts and prosecutions are subject to the cognizance of and control by
the Suprane Court. Crimes committed by civilians against the internal
security of the State will be tried by the regular Courts.
d.- Full restoration of recourse to Habeas Corpus. 'Thus, any person
arrested, detained or imprisoned for violation of constitutional or legal
norms will, either on his own or through a representative, be able to
appeal to the respective Court of Appeals so that the latter can order
observance of the legal formalities and immediately adopt the protection
of the person involved. This same recourse can be invoked on behalf of
any person who illegally suffers any other privation, breach or threat
affecting his right to personal freedom and individual security (Art. 16
of the Constitution and Art. 3 of Constitutional Act N° 3).
2.- End of the curfew. The movement of motorized vehicles remains
restricted between 2 a.m. and 5:30 a.m., but pedestrians or bicycle riders
may move about freely.
3.- The President has ordered the commutation of the sentences of all
persons convicted by the Military Tribunals since September 11, 1973, to
that of exile.
4.- Steps have been taken to accelerate the institutionalization of
the country. The President of the Republic has announced that during the
186
- 3 -
coarse of this year the draft of the new Constitution will be caipleted
for submission to approval by popular vote. With the approval of this
Constitution, Chile will move into a transition period in which the
exercise of authority will be shared with civilians. The draft of the
Constitution which will be submitted to the Government's consideration
before May 21, 1978, contains the following principal basic concepts:
the President of the Republic would be elected by popular vote for an
8-year period and cannot be reelected? if none of the candidates obtains
an absolute majority, there would be a run-off vote; there would be a
clear delineation between the executive, legislative and judicial powers;
there will be a Chamber of Deputies and Senate with 150 and 45 members,
respectively; a Constitutional Tribunal would be established; members of
the Congress would be elected by popular vote; a third of the Senate would
consist of persons appointed by the President of the Republic on the basis
of their contributions to the nation as outstanding citizens; the President
would have the authority to dissolve the Chamber of Deputies once during
his term of office.
187

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Asset Metadata

Creator Lopilato, Carol Virginia (author)

Core Title An Application of the Global Monetarist-Wedge model to post-1973 Chilean economic policies and the effects of these policies on macroeconomic, social and political variables

Degree Doctor of Philosophy

Degree Program Business Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,OAI-PMH Harvest,Political Science, public administration,sociology, public and social welfare

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Laffer, Arthur Betz (committee chair), Canto, Victor A. (committee member), Elliott, John E. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-263425

Unique identifier UC11260247

Identifier DP23308.pdf (filename),usctheses-c20-263425 (legacy record id)

Legacy Identifier DP23308.pdf

Dmrecord 263425

Document Type Dissertation

Rights Lopilato, Carol Virginia

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA