The Economy

The Economy

CHILE'S ECONOMY ENJOYED a remarkable boom in the early 1990s, the result of a comprehensive transformation that began in 1974 with the adoption of free-market economic policies. Between the 1930s and the early 1970s, the Chilean economy was one of the most stateoriented economies in Latin America. For decades, it was dominated by the philosophy of import-substitution industrialization. Heavily subsidized by the government, a largely inefficient industrial sector had developed. The sector's main characteristics were a low rate of job creation, a virtual absence of nontraditional exports, and a general lack of growth and development. In the early 1970s, the ruling socialist-communist Popular Unity (Unidad Popular--UP) coalition of President Salvador Allende Gossens (1970-73) attempted to implement a socialist economic system. The Allende experiment came to an end with the military coup of September 11, 1973. From that point on, Chile's economic policies took a radical turn, as the military government undertook, first timidly and later more confidently, deep reforms aimed at creating a market economy.

In the early 1990s, politicians and analysts from around the world looked to the Chilean economy for lessons on how to open up international trade, create dynamic capital markets, and undertake an aggressive privatization process. In early 1994, Chile had the strongest economic structure in Latin America and, in large part because of the military government's reforms, was emerging as a modern economy enjoying vigorous growth. Moreover, there seemed to be a consensus among politicians of widely varying beliefs that the existing economic model should be maintained in the future.

Chile's income per capita, approximately US$2,800, placed the nation squarely in the middle of what the World Bank called "middle-income economies." Of the Latin American nations, Brazil, Uruguay, Venezuela, Mexico, and Argentina in 1990 each had a higher gross national product ( GNP) per capita than Chile; the rest had a lower level. In the 1991-93 period, the rate at which Chile's GDP grew exceeded 6.5 percent per year, making Chile's GDP during these years by far the fastest growing in Latin America. In 1992 GDP grew at a record 10.3 percent pace, year-end unemployment was down to 4.5 percent, real wages were up 5 percent, inflation was down to 12.7 percent, and the public-sector surplus was equivalent to 3 percent of GDP. When a longer period is considered, Chile still comes up ahead of the rest of the Latin American nations. For instance, according to the United Nations Economic Commission for Latin America (Comisión Económica para América Latina-- CEPAL or ECLA), Chile's GDP per capita increased by 32.2 percent between 1981 and 1993; Colombia was a distant second with an accumulated rate of growth during the period of 23.6 percent.

The success Chile enjoyed by the 1990s resulted largely from the boom in agricultural exports. In 1970 Chile exported US$33 million in agricultural, forestry, and fishing products; by 1991 the total had jumped to US$1.2 billion. This figure excluded those manufactured goods based on products of the agricultural, livestock, and forestry sectors. Much of the increased agricultural production in the country was the result of rapidly improving yields and higher productivity, spurred by an export-oriented policy.

There was little doubt that an exchange-rate policy aimed at encouraging exports lay behind the strong performance of the Chilean economy in the 1986-91 period. First, the liberalization of international trade substantially lowered the costs of imported agricultural inputs and capital goods, enabling the sector to become more competitive. In fact, the liberalization of international trade put an end to a long history of discrimination against agriculture. Tariffs and other forms of import restrictions throughout the 1950s and 1960s gave a relative advantage to those industries that produced importable goods, making them domestically competitive at production costs above international prices. The same policies, because they permitted an overvalued exchange rate, punished those economic activities, like agriculture, that could produce exportable goods. While those goods could be sold at international prices, the foreign-exchange earnings would be converted into domestic currency at an unfavorable exchange rate. Second, the exchange-rate policy, pursued aggressively since 1985, had provided incentives for the expansion of exports.

Third, an institutional framework that secured property rights to land and water, along with reformed labor laws, had increased the openness of factor markets and established clear signals for the allocation of resources. Potential profits in new business initiatives had by then become very much tied to international prices of goods and domestic costs of resources. The likelihood of government intervention in property rights allocation, prohibitions, special permits, and so forth had been significantly reduced. Related reforms in the transportation sector, particularly in air and marine transport, had further increased access to international trade.

A fourth fundamental policy-based explanation of the increase in agricultural exports was the pursuit of a stable macroeconomic policy whose purpose was to give entrepreneurs confidence in the system and enable them to plan their activities over the longer term. Many of the export-oriented agricultural activities required sizable investments that could only be undertaken in an environment of stability and policy continuity. What is most remarkable, perhaps, is that since 1989 poverty and inequality have have been reduced significantly.

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