When the current Chilean model began, Chile came from implementing an economic policy of import substitution for four decades (1930-1970), arising in response to the great crisis in which the country plunged into the Great Depression of the 1930s, which deepened at the end of this cycle in a socialist economic experiment (1970-1973).
The Great Depression hit Chile hard and the response was the import substitution model. The results obtained with this strategy, however, were mediocre, as can be seen in Figures I and II. Except for a few years, it generated lean growth rates in the country in any relevant comparison with the developed world, as well as in relation to the neighborhood. Indeed, Chile was a country of the medianity of the table when compared to Latin America and remained so throughout this period (see Figure III).
For its part, the experiment in a socialist model was a radical deepening of the previous scheme, extreme control of the economy by the state, increasing its price control and discretionary power over economic activity, driving an increase in public spending that improved employment and remuneration rates in the first year, to gradually deteriorate in the next two.
The socialist model
From 1970 on, Chile deepened the trajectory with a more extreme experience: a socialist model, in which the state went on to control virtually almost the entire economy. To the companies it owned, it added about 300 more through expropriation, becoming 80% of the industries [1]expropriating 40% of the country’s agricultural hectares and also setting the price of thousands of products in the economy [2]. In 1971, there was growth in GDP and real wages, stimulated by a sharp increase in public spending.
However, rising inflation rates led to a crisis of price rise and commodity desupply in 1973. Inflation deteriorated incomes across the country, reducing the purchasing power of the national currency such as real wages.
b>Creating the model
Meanies, between 1967 and 1968, a group of economists, primarily trained at the University of Chicago, prepared an economic program to offer to the right-wing candidate for the 1970 election; was called The Brick. This original program – updated to 1973 – contained the foundations for the development of a market economy, being adopted that same year gradually by a government that took power through a coup d’am, concentrating legislative and executive powers, accompanying them with strong control of political dissent, including the use of state force.
Implementation
Between 1973 and 1975 the model was not fully implemented; the emphasis was on a gradual approach to combating inflation which did not achieve the expected results; inflation rates but lower than over 600% in 1973, this indicator remained above 300% in 1974 and 1975 [3], a phenomenon that increased the deterioration of purchasing power. This gradual approach was discarded that last year, with another shock being applied with the full recipe book. The year 1975 is therefore the one that has been set as the starting point of the model.
This explanation serves to remember that the beginnings were very hard. It is difficult and expensive to turn an economy around in 180 degrees, totally changing its north.
In this case, the objective was to change economic policy in virtually all its dimensions. From a centrally state-controlled economy to a market-led one; from an import substitution policy to an openness to international trade that strongly affected sectors that had developed precisely under such protection and, gradually restricting state activity to a role focused on activities that could not be carried out by the private sector.
The installation of this new model brought with it significant costs. Between 1975 and 1980, real wages still did not reach the level they had had in 1964, largely due to the 1973 economic crisis caused globally by rising oil prices, which continued in the following years. In 1973 the unemployment rate er4.8 per cent; by 1976 it had reached 21.9%, larger than quadrupling. Inflation remained , though significantly lower than in hyperinflation – very high (more than 30% per annum). The fiscal balance sheet remained negative until 1979, having peaked at -6.84% in 1971 (all figures in this paragraph are [3]).
It is important to note that in those years the world faced a great recession in the price of oil, while Chile experienced the worst terms of trade (price of all exports divided by that of imports) in such a way that the country would have had a recession of external origin, apart from the application of the model, although the installation of the model had a significant responsibility.
On the other hand, syncharry with other reforms was not given harmonically; the capital market was full of imperfections that took years to resolve, with severe impacts on real interest rates as in the difficulty of creating a longer horizon for financing investment and development projects.
In short, its installation involved great sacrifices to the population in a cross-cutting way, but with greater force over the most vulnerable sectors. This, despite having a government that concentrated executive power, legislature and the use of state force. In democracy with power distributed in different bodies, these changes would have been very difficult to implement, if ever they could have been completed.
The value of reviewing history is that it allows you to learn from past mistakes to avoid making them as well as being able to delve into your successes; the great lesson of the origins of the model, apart from its virtues and flaws, is that a radical paradigm shift necessarily leads to a period of transition, which in this case involved dismantling one productive scheme and the emergence of another, an example of the process that Joseph Schumpeter called creative destruction, but which in the case of a radical transformation like this took seven years of tears and grinding of teeth before it began to improve.
Figures
Figure I: Real GDP per capita in Chile and average growth rate periods, 1880-
1973.
Source: own elaboration using data from [3]. The real GDP series was taken to 2020 dollars at the IIC nominal exchange rate by December 2003.Figure II: Real GDP per capita growth (%) Chile, the United States and Western Europe, 1900-1973.
Source: [4]. *Simple average Germany, France and Great Britain. **Simple average growth Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, Paraguay, Uruguay and Venezuela, added using Data from Maddison Project (2018). Paraguay, Bolivia and Mexico do not have data for the first period. Added period for this document using U.S. Federal Reserve series on real GDP per capita.Figure III: Real GDP per capita in Chile and a selection of Latin American countries, 1870-1973.
Source: own elaboration from [5].Figure IV: Economic figures for the period 1970-1973.
Sources:
[1] The government of the People’s Unit. http://www.memoriachilena.gob.cl/602/w3-printer-31433.html
[2] Felipe Larraín & Patricio Meller, 1990. “The Chilean Socialist-Populist Experience: The Popular Unity, 1970-1973,” Latin American Journal of Economics-formerly Economics Notebooks, Institute of Economics. Pontifical Catholic University of Chile., vol. 27(82), pages 317-356.
[3] Diaz, J.; Lüders. R. and Wagner, G. (2016) “Chile 1810 – 2010. The Republic in numbers. Historical statistics.” Santiago: Catholic University editions of Chile
[4] Eyzaguirre, N. (2019). Inequality. Debate.
[5] Maddison Project Database, version 2018. Bolt, Jutta, Robert Inklaar, Herman de Jong and Jan Luiten van Zanden (2018), “Rebasing ‘Maddison’: new income comparisons and the shape of long-run economic development”. Maddison Project Working Paper, nr. 10, available for download at www.ggdc.net/maddison .
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