Chile's political and economic evolution

Chile was a relatively wealthy supply region to the industrial countries early in the 20th century. From the 1930's onwards it started to industrialise based on the import substitution model. Due to the limited size of the internal market the limits of this model were reached quite early causing the economy in the 1960’s to stagnate.

In 1970 the Unidad Popular under Salvador Allende was elected on a socialist platform quite different from any Government that had gone before. This Government instituted a series of nationalisations and spending programs to boost the economy. The first two years of these new policies produced growth but in 1973 in the absence of new revenue streams to pay for this spending the State started to print money leading to hyperinflation.

In September 1973 the Military, backed essentially by a middle class and former monied class fearing for the future, intervened in the infamous Pinochet coup. The Military Government reversed the Allende policies and attempted free market reforms based on the ideas of the Chicago School of economists.

The new policies brought inflation under control and order to the public finances. The years following the Pinochet takeover were years where international finance was available to Latin American countries due to the recycling of the OPEC petrodollars by the international banks. Thus Chile was able to avail of this international credit and the economy grew for several years. Most of the borrowing which took place was by the financial sector.

When the Latin America debt crisis broke in 1982 there was a moratorium on new lending and borrowers were doubly penalised by the rise in US interest rates the same year. The overborrowed financial sector was renationalised in 1983 and Chile suffered the largest downturn in all of Latin America due to the crisis.

It was only in 1985 with the appointment of Hernan Buchi Duc as Finance Minister that the right mix of policies was found and the reforms began to bear fruit. This involved a large initial devaluation of the Peso followed by shorter periodic adjustments. The lower exchange rate allowed exports to boom and there was emphasis on adding value in the export supply chain rather than exporting unprocessed raw materials. There was a vastly increased number of companies engaged in exporting and considerable diversification by product and destination. Sectors in which Chile did not have a compartive advantage were open to imports.

There was also a new regulatory regime for the financial sector, tax reform and privatised pensions. From 1984 onwards the Chilean economy has grown consistently, in what has become known as the Chilean miracle, and it is now a model economy in Latin America.

In 1990 the transition from the Military Government back to constitutionalism was completed and Chile has had stable constitutional governments ever since. In recent years growth has slowed as demand for Chile’s exports has peaked. In order to continue to grow Chile must find a competitive niche in new knowledge based industries and continue to integrate with it’s Latin American neighbours, though this is hampered by erratic policies in Brazil and Argentina.

Chile has more free trade agreements than any other country and it’s largest trading partner is China. Chile doesn’t wish to become a full member of Mercosur as this would mean adopting a common external tariff which would be in conflict with it’s free trade agreements. Chile is considered a well run economy and has low levels of inflation, debt and deficits.

In the last 12 months there has been political unrest in Chile at a level not seen since the end of the dictatorship with quite a number of protesters killed. However that the Chilean State was unable to channel grievances peacefully does not mean that the political system is in trouble. Compared with the period before and during the Allende Government or the Pinochet period the political system has broad support and this is rooted in competent economic management.

Thus while regrettable the violent protests do not signal a new period of instability in Chile but rather are more akin to the 1968 student protests in Paris.