CHILE

• Document Type: CREST
• Collection: NGA Records (Formerly NIMA)
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T01137A000300070001-0
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 28, 2016
• Document Release Date: April 26, 2010
• Sequence Number: 1
• Publication Date: January 28, 1969
• Content Type: NIE

0
SECRET 0 NIE 94-69
Chile
DIRECTOR OF CENTRAL INTELLIGENCE
Concurred in by the
UNITED STATES INTELLIGENCE BOARD
As indicated overleaf
28 January 1969
SECRET
CONTROLLED DISSEM
28 January 1969
11? 446
 0
The following intelligence organizations participated in the preparation of
this estimate:
The Central Intelligence Agency and the intelligence organizations of the Depart-
ments of State and Defense, and the NSA.
Concurring:
Vice Adm. Rufus Taylor, Deputy Director, Central Intelligence
Mr. Thomas L. Hughes, the Director of Intelligence and Research, Department
of State
Vice Adm. Vernon L. Lowrance, for the Director, Defense Intelligence Agency
It. Gen. Marshall S. Carter, the Director, National Security Agency
Abstaining:
Dr. Charles H. Reichardt, for the Assistant General Manager, Atomic Energy Com-
mission and Mr. William 0. Cregar, for the Assistant Director, Federal
Bureau of Investigation, the subject being outside of their jurisdiction.
This material contains information affecting the National Defense of the United States
within the meaning of the espionage laws, Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner to an unauthorized person is prohibited.
GROUP 1
Excluded from automatic
downgrading and
declassification
 Page
THE PROBLEM ................................................... 1
CONCLUSIONS ..................................................... 1
DISCUSSION ............................ ..................... 4
1. INTRODUCTION ................................................ 4
II. THE ADMINISTRATION'S RECORD 5
A. Economic and Social Program ................................... 5
Government Role in the Economy ...... ..................... .. 10
B. Political Developments ...................... ....... ... 11
A. Economic ..................................................... 12
B. Political: Outlook for the Congressional Election .. ............... 13
C. The Presidential Election ....................................... 15
D. Future Relations with Other Countries 18
 ISLA SAN
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Railroad
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8 O L I V
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 THE PROBLEM
To examine the likely political and economic developments in Chile
over the next year or so, with particular reference to the congressional
election of March 1969, and to the general outlook for the presidential
election in September 1970.
CONCLUSIONS'
A. Over the past four years the administration of Eduardo Frei
has been endeavoring to carry out a social, economic, and political
revolution by peaceful, constitutional means. He has made considerable
progress in some important fields, but in others has fallen far short
of his goals. An important faction of his Christian Democratic Party
(PDC) is insisting that the scope of reform be widened and its tempo
quickened.
B. Economic prospects for the short run are bleak, and we see
little chance for much further progress on basic problems over the
next year or so. There are a few favorable aspects, notably the new
US investments under the copper expansion agreement and the likely
continuation of substantial foreign assistance over the next year. But
the Frei administration is already caught in a quandary of economic
stagnation with rapid inflation. As the elections approach, pressures
for government spending on wages and welfare will almost certainly
intensify, and business confidence will probably reach a new low:
C. The outcome of the congressional elections of March 1969
will have an important bearing on the selection of candidates and the
formation of political coalitions for the presidential election in 1970.
The PDC has some chance of winning a majority in the Senate and
See footnote of dissent on page 3 following these Conclusions.
 Approved For Release 2010/04/26 CIA-RDP80TO1137A000300070001-0
is likely to retain a sizable plurality in the lower house. Nonetheless,
factionalism within the PDC, the maneuvering of other parties for
political advantage in the 1970 election, and Frei's lameduck status
will weaken his influence over the new Congress.
D. Until the final choice of candidates and of political party align-
ments is made, it is not feasible to attempt to estimate the outcome of
the presidential election in more than the most general terms. Among
many possible outcomes, the current odds are that there will be three
major candidates for the presidency in 1970, that no one of them will
secure a majority, and that the Congress will select as president the
candidate with the largest vote. If the Communist, Socialist, and Radi-
cal parties could set aside their differences to agree on a candidate,
he would be a strong contender, especially in a three-man race.
E. Even if a Communist-supported candidate won in 1970 we do
not believe that the Chilean Armed Forces would intervene to pre-
vent his inauguration. They would maintain a constant surveillance
over the new administration, but would plan to move against it only
if Chilean institutions, particularly their own, were threatened.
F. The relations of any new Chilean administration with the US
are likely to be under repeated strains. Whoever succeeds Frei in
the presidency is likely to continue to stress Chilean independence;
to be less cooperative with the US on many issues than Frei has been;
and to explore somewhat broader relationships with Communist
countries. An administration elected with Communist support almost
certainly would take steps aimed at moving Chile away from the US
and closer to the Communist countries. We believe, however, that for
a variety of reasons, including fear of a reaction from the military,
such an administration would be deterred from precipitate or drastic
action.
G. Because Frei himself has gone on record as opposing outright
expropriation of the US copper companies, we see it as unlikely while
he is still in power. In our judgment, however, further steps toward
greater government participation in or even outright nationalization
of these holdings are inevitable. The manner, the terms, and the time-
table of such steps will depend heavily on the makeup of the next
administration. Even under a rightist administration, or one of the
 center left such as Frei's has been, some additional "Chileanization,"
at least, is likely. Chile might assume high economic costs in the process,
especially in case of abrupt nationalization; but in the long run na-
tionalistic, political grounds-rather than economic-will almost cer-
tainly be the crucial factors in deciding this question.
` Mr. Thomas L. Hughes, the Director of Intelligence and Research, Department of State,
believes that the Estimate overstates the criticality of the Chilean economic situation and the
Frei government's responsibility for it, as well as the Christian Democratic Party's predicament
in the forthcoming elections. He believes:
a) That copper prices and production are likely to be better and pressures for wage in-
creases less disruptive than indicated;
b) That the agricultural difficulties are of a longstanding nature and, therefore, less at-
tributable to President Frei and his policies than the Estimate leads one to believe;
c) That the Christian Democratic Party, especially its reformist but moderate elements,
is stronger than the Estimate suggests; and
d) That whatever the short-run trends may be, the long-run direction is toward reform,
even radicalism from the conventional point of view, and that the dissatisfaction of some
important elements, which inevitably accompanies moves toward change, is counterbalanced,
more than is shown, by favorable political reactions of elements that have benefited.
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1. INTRODUCTION
1. Chile is entering upon a period likely to be decisive both for the future
of Eduardo Frei's reform programs and for the political direction which the
nation itself will take. With two years remaining of his six-year presidential term,
Frei is sore beset. While his administration can point to a record of considerable
accomplishment in some important fields, it has had almost no success in others;
steps taken in its social programs have conflicted with the attainment of some
economic goals and the government's inability to please everyone has entailed
important political costs. Chile's chronic problem of inflation has again taken a
turn for the worse, and its broader economic prospects-already troubled-have
been adversely affected by this year's severe drought, the worst in 40 years.
2. Frei's Christian Democratic Party (PDC) cannot hope to match its previous
sweeping victories as it looks ahead to a congressional election in March 1969
and a presidential election in September 1970. The party is suffering from fac-
tionalism. Since Frei cannot legally succeed himself as president, his own leverage
is impaired, and no new leader of anything like his stature has emerged. At the
same time, there are signs of growing momentum on the part of the opposition
parties to the right and the left of Frei's PDC. The opposition, which in the 1964
elections existed for practical purposes only on the left, has become two-sided
during the Frei administration. The Radical Party, which opposed him from the
right as a splinter in 1964, has since acquired leftist leadership. The rightist
Liberal and Conservative Parties, which did not even run a candidate in 1964,
have merged to form the National Party, which under this banner has recovered
somewhat, while remaining a minor party. There is now considerable backstage
maneuvering among conservatives in favor of former President Alessandri, while
leftist elements talk of putting together a new and stronger coalition of far-left
forces. Nevertheless, the PDC is less divided at present than its leftist opposition,
is larger than the conservative forces, and has some advantage from being the
incumbent and the primary focus for the non-Marxist reform vote.
3. All this marks deterioration from the atmosphere which prevailed when Frei
began his term in November 1964 after a campaign in which both leading candi-
dates pledged basic reforms? Frei had received some 56 percent of the total
vote (as against his opponent's 39 percent) and a popular mandate to carry out
far-reaching social, economic, and political changes. Conditions were favorable
for the use of fiscal and monetary policies to achieve both price stability and
economic growth. Prices for copper exports-which provide the bulk of export
'Although there was a third candidate, the race was essentially between Frei, who promised
"Revolution under Liberty," and Salvador Allende, candidate of the far-left coalition Frente
de Acci6n Popular (FRAP), who plumped for Revolution in the Castro style. Both drew
many votes from the normal strength of the Radical Party, whose candidate consequently
received only some five percent of the total vote.
 income and an important though variable element of tax receipts-rose almost
50 percent during Frei's first two years in office and have remained high. His
administration has received net authorizations of some $630 million in economic
assistance from the US and another $200 million from international financial
organizations. As has been the case for decades,. Chile under Frei has received
more total US economic assistance per capita than any other Latin American
country and is second only to Brazil in total amount.
4. When, in sharp contrast to usual Chilean political practice, Frei attempted
to carry out the reform program on which he campaigned, he alienated many
of the upper and middle class Chileans who had voted for him simply to keep
the Socialist-Communist coalition from attaining power. Although the PDC won
a large majority of the seats in the Chamber of Deputies in 1965, the party
secured only a minority in the Senate, where about half the seats have been
holdovers from 1961. Frei has had to bargain for congressional support case by
case and most of his legislative proposals have been blocked, delayed, or sub-
stantially modified.
5. Much of Frei 's difficulty in getting his programs through Congress is due
to his rejection of the Chilean pattern of coalition government. While its politics
are bitterly partisan and the concept of a loyal opposition is virtually nonexistent,
Chile has a lengthy tradition of maintaining representative government. This
record has depended to a considerable degree upon the willingness of the "ins"
to arrange coalition governments under which the needs of the "outs" were
accommodated in return for their .support in the Congress. Frei, however, has
chosen to go it alone. The obstruction he has faced in Congress has also been
due, in part at least, to the fact that earlier, as a PDC senator, Frei had attacked
many of the legislative proposals and programs of the previous administration
coalition (Liberals, Conservatives, and Radicals). Nonetheless, some of the
essential elements of his legislative program have now been enacted. The out-
come of the elections of March 1969 will, of course, affect the prospects for
further reform proposals as well as the environment for implementing reforms
already enacted.
A. Economic and Social Program
6. The Frei administration has had very mixed results in its efforts to improve
Chile's economic conditions. Tax reforms and rising copper prices brought a
sharp increase in government revenues and in public investment during Frei's
first two years. The administration's inability to restrain the rise in current ex-
penditures, particularly for wages, however, resulted in increasing budgetary
difficulties and a slowdown in investment growth during 1967-1968. During
Frei's first two years, Chile's balance of payments also improved markedly as a
result of the sharp rise in copper prices and the continuation of a high level of
foreign aid, coupled with the administration's adoption of a more flexible ex-
change rate policy and improved management of the foreign debt. Despite
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continued high copper prices, the deficit on goods and services climbed to $181
million in 1967, however, and Chile suffered a small loss in foreign exchange
reserves. Although this deficit grew by another $100 million in 1968, a record
inflow of foreign aid and the expansion of investments by US copper companies
were more than sufficient to offset the imbalance.
7. Chile's rate of economic growth during the past four years has been less
than the average for Latin America. Per capita output grew at a moderately high
rate during 1965-1966 but declined during 1967-1968 as manufacturing and con-
struction activities slowed. Agricultural production has continued to lag behind
the growth in population. The rate of inflation slowed during the first two years
of the Frei administration but then speeded up and reached about 28 percent
in 1968. Thus, four years after Frei's inauguration, budgetary difficulties and the
rate of inflation have not been significantly reduced, the trade deficit continues
to grow, and overall economic growth is now at best sluggish.
8. Redistribution of Income. Many of Frei's serious economic problems can be
attributed to the rapidity of redistribution of income in favor of lower-income
groups that has occurred during his administration. Wages and salaries have
increased much faster than prices and the overall rate of economic growth. In
addition, social services have expanded and a large share of government invest-
ment has gone into social improvement programs. Whereas previous Chilean
administrations had been attentive to the demands of urban middle class groups
and of more highly skilled, organized labor, Frei is the first Chilean president to
strive for substantial improvement in the living conditions of agricultural workers
and unskilled urban laborers. An even more radical change has been Frei's effort
to improve the political position of previously submerged groups through estab-
lishment of a minimum agricultural wage, attempts to unionize the campesinos,
and expansion of educational and other programs. The poorest workers have
benefited from his income policy but organized workers probably have gained
proportionately more, since they had the power to secure even larger raises.
By and large both the political and the economic gains of labor have been made
at the expense of others-such as owners of large and middle-sized farms, private
businessmen, and the wealthy class in general-numbers of whom had supported
the PDC in 1964.
9. Foreign Copper Investment. The administration's major economic success
has been in securing agreements for substantial new foreign investments in
copper mining. Under Frei's program of "Chileanization" the government is
participating with US companies in the ownership and management of the
country's copper industry.' Political opposition to this plan, particularly from
a Of Chile's total output of 626,000 metric tons of primary copper in 1966, 61 percent was
produced by wholly-owned subsidiaries of the Anaconda Company, 23 percent by a Kennecott
subsidiary in which the Chilean Government has acquired a 51 percent interest, and the
remainder by numerous smaller, Chilean-owned companies. The Chilean Government also
has interests of 25 and 30 percent, respectively, in two mines being developed by Anaconda
and Cerro Corporation; these mines are scheduled to produce 170,000 metric tons of copper
annually by the early 1970's.
6 SECRET
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S 0
the Communist and Socialist parties which advocated outright nationalization,
stalled the program in Congress for some time. The US companies are scheduled
to invest some $480 million in production facilities to raise capacity from 620,000
metric tons of primary copper in 1964 to nearly 900,000 metric tons in the early
1970's. These new investments are insured by the US investment guaranty pro-
gram, under which the copper companies would receive indemnification from
the US Government in the event of expropriation without compensation.
10. Agriculture. Despite Frei's concern with Chile's complex and enduring agri-
cultural problems, he has made little progress in resolving them. Promised im-
provements in farm prices were short-lived, and solutions have not been found
for deep-seated problems such as inadequate credit, storage, and marketing
mechanisms. In addition, the insecurities associated with Frei's agrarian reform
programs have served further to discourage long-needed private investments.
As a result, the country continues to be increasingly dependent on imports of
foodstuffs. Food shortages have been intensified b the severe drought which 71 y be an in the "e, centra area o t ~e count during 1968. ee igu or 7He
area invo ve ad its importance to the economy.) Until World War II Chile
was a net exporter of foodstuffs, but net imports of foodstuffs now amount to
about $120 million annually. Perhaps three-quarters of these imports consist
of items that could be produced domestically if the agricultural sector were
more efficient.
11. Although Frei's agrarian reform bill was held up in Congress until 1967,
laws passed in the previous administration enabled some moves toward resettle-
ment and land distribution. Between the end of 1964 and mid-1968, the govern-
ment's agrarian reform agency acquired about four percent of the total area in
farms-including about 15 percent of Chile's irrigated land. Although less than
one-half of the land acquired so far has been obtained through expropriation,
political involvement of radical members of the PDC has made the reform more
damaging economically and more abrasive socially than it needed to be. About
four-fifths of the land acquired has been organized into some 270 government-
managed cooperative settlements. The program embraced about 9,000 families
(some 70,000 persons) by mid-1968 and was expected to include 14,000 families
by the end of 1968, representing perhaps four percent of the rural population.
After 3 to 5 years of government tutelage, the cooperative members are to decide
whether to continue the cooperative or divide the land up into individually
owned small farms. More than $100 million has now been spent on resettlement,
and some of the social objectives of the agrarian reform are being realized.
But these outlays, and other large government expenditures on fertilizers, seeds,
breeding stock, machinery, and agricultural credit have not accelerated the rate
of growth of total agi icultural output. Growing government spending on agri-
culture has been largely offset by the failure to maintain profitable agricultural
prices-a key plank in Frei's original agrarian reform program-and by the
continuing fear of expropriation which has undermined the incentives of the
remaining private landowners. These factors and the drought have combined
to depress production severely in late 1968 and early 1969. In the longer run, new
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CHILE: Drought ,,,a and Population Distribution
,AZ
ISLAS, lU EZ o 1
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San Miguel
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Puesto M1i
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POPULATION DENSITY
Persons per square mile
PAC'F'C
0CEA ti
0 100 200 300 400 Miles
0 100 2D0 300 400 Kilometers
Area severely damaged by
1968 drought
ACCOUNTED FOR;
45% of cultivated and fallow land
54% of sown area
86% of irrigated area
31% of improved pasture
76% of orchards and vineyards
34% of cattle
25% of sheep
44% of hogs
AND PRODUCED;
More than 50% of vegetables
More than 75% of fruit
39% of dairy products
Rje c?jeut
v ESTADOS I
(Claimed by Argentine
and Chile)
ATLANTIC
OCEAN
FALKLAND ISLANDS
(U.KL)
(Claimed by Argil
srrvir ++ Y ~,
Ma9e
CAPE "ORN
72
V
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a a
foreign assistance for irrigation works, agrarian reform activities, and agricul-
tural credit may help to mitigate some of the adverse effects of Chile's longstand-
ing farm problems.
12. Education, Housing, and Public Health. Frei has given a high priority to
reforms in the system of public education and has made substantial progress in
this field, particularly in expanding school facilities and in improving the quality
of instruction for low-income groups. He was less successful in his housing pro-
gram, which during its first three years fulfilled only about a third of the ad-
ministration's six-year goal of 360,000 new housing starts. The program has now
been revised to set a new target for low-income housing and to stress self-help
projects. It will probably benefit from recent legislation which authorizes the
Housing Ministry to expropriate urban land at a fraction of its market value.
Similarly, Frei is committed to expansion of public health facilities, but any
substantial improvement requires basic reforms in the country's chaotic social
security system-reforms he has so far been unable to accomplish.
13. Inflation. During its first two years in office, the administration's stabiliza-
tion program succeeded in cutting back the rate of inflation. This promising
beginning was undermined mainly by the administration's inability to maintain
its wage policy in the face of intense opposition from within the PDC as well
as from the far left. The Congress ignored the administration's guidelines and
granted increases that allowed real wages in the public sector to rise by some
42 percent during 1965-1967. These large increases made it impossible to balance
the budget. They also made it increasingly difficult for the private sector to
observe the administration's guidelines, and real wages in private employment
rose at an even faster rate. The government's financial problems limited public
investment and required borrowing from the banks, which in turn resulted in
the restriction of credit available to business. Large wage gains and tax increases
boosted costs in the private sector, stepping up inflationary pressures and putting
a cost-price squeeze on some firms that discouraged private investment and con-
tributed to unemployment and a slowdown in economic growth.
14. Despite worsening inflationary pressures from accelerated government
spending, rapidly rising real wages, and a large expansion in the money supply,
the rise in prices was kept to 26 percent in 1965 and 17 percent in 1966.4 This
achievement, however, relied heavily upon the use of price controls and emer-
gency measures. By 1967, the combination of growing demand, rising real costs,
and stagnating output were too strong for price controls to be effective, and the
cost of living rose by 22 percent, as compared with a goal of only 10 percent.
The original goal for 1968 was relative price stability, but the rise in the cost
of living reached about 28 percent. In an attempt to limit the ability of Congress
to inflate greatly its wage recommendations for 1969, the Frei administration
'This almost met the programmed goals of 25 and 15 percent increases for those years.
Prices had risen by 38 percent in 1964. Official government data probably understate the
actual rise in the price level, and thus overstate the increases in real wages indicated in
paragraph 13.
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included its wage readjustment legislation in the 1969 budget bill. As submitted,
the legislation provides for a general increase of 22 percent in public sector
wages, yet special raises authorized but not paid fully last year to certain public
employees-teachers, judges, the military and the police-bring the overall
rise in the public sector wage bill to 38 percent. Pressures for wage raises are
likely to be even greater in the private sector. Thus we think it almost certain
that the Frei government's foundering stabilization program will be put in fur-
ther jeopardy.
Government Role in the Economy
15. The Chilean Government has played an important role in the economy
since the 1930's, and has been particularly instrumental in developing the indus-
trial sector, which now contributes about 25 percent of gross national product
(GNP). Government influence on the economy takes a variety of forms: outright
ownership and equity participation in joint companies, financing of private in-
vestments in manufacturing and mining and commerce, large transfer and
subsidy payments, plus tax concessions, price controls, and trade restrictions
aimed at influencing production. Despite the many advantages granted to the
industrial sector over the past three decades, however, manufacturing has focused
on import substitution and its products are high-cost and noncompetitive out-
side the protected domestic market.
16. Under Frei, the public sector has expanded substantially, and its ex-
penditures in 1968 were equivalent to nearly half of Chile's GNP-the highest
ratio in South America. Moreover, while the total share of output allocated to
investment is gradually declining, the public sector has become far more im-
portant than the private sector in capital formation, in part because foreign
financing has gone chiefly to support government investment. Public investment
expenditures, which include government loans for private investment in petro-
chemicals, paper, cellulose, and steel, now represent more than 70 percent of total
gross domestic investment. In the early 1960's they usually were less than 50
percent of the total. Public investment under Frei has continued to be concen-
trated on transportation and electric power facilities, and on housing, education,
and other social welfare projects. Government spending has only partly offset
the depressing effect the administration's economic policies have had on private
investment in manufacturing and agriculture.
17. Within the private sector of the economy, and particularly among the
larger landowners, the traditional distrust of government programs has intensified
under the PDC administration. While Frei and the more conservative leaders of
the party have reiterated the continued importance of private enterprise, legisla-
tive and administrative actions have done little to lend credence to their state-
ments. Private interests understandably resent the squeezing of their profits
between price controls on the one hand and ever-rising taxes and wages on the
other. This squeeze has been exacerbated by a severe tightening of credit, except
for the projects being promoted by the government in certain industries. In-
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 vestor confidence has been further eroded by uncertainties concerning land
reform policy and by repeated threats against private industry (including na-
tionalization) that have emanated from the more leftist elements within the
PDC as well as from Marxist parties. The present environment for private enter-
prise also appears to have dampened the interest of potential foreign investors,
except for the US copper companies (whose new expenditures are insured) and
the foreign partners in a few major investment projects arranged some time ago.
B. Political Developments
18. While Frei's efforts to carry out his reform program have antagonized the
more conservative elements in Chile, he has, at the same time, successfully
resisted leftist demands for more rapid and extreme actions. A leftist faction
within his own party, which has grown in influence, has joined with other leftists
to insist that the scope of reform be widened and its tempo quickened. By pushing
ahead with reforms while attempting to minimize their inevitable disruptive
effects, he has met with opposition from both sides.
19. Within the party, supporters of the President (called Oficialistas) and their
opponents are now playing down their differences in the interest of unity, but
that effort is likely to break down once the congressional election is over and each
faction begins to vie for the nomination. Frei's most determined opponents in the
PDC, the far-left Rebeldes, urge nationalization of mining, steel, and electric
power industries, and the telephone companies, and a sharp rise in expropriation
and distribution of land holdings. This faction is particularly critical of the meager
results of Frei's agrarian policies (under which land may be redistributed to
perhaps 35,000 families during 1965-1970 instead of the announced goal of
100,000 families), and his failure to nationalize the privately owned elements of
the banking system. Another group, the Terceristas, also criticizes the slow pace
of Frei's reform program, but tries to bridge the gap between the rebels and
the Oficialistas.
20. Radomiro Tomic, at present the leading contender for the party's nomina-
tion to succeed Frei, has agreed with the party rebels on the desirability of
forging a vaguely defined wide leftist front with the Communists and other
groups seeking sweeping economic, social, and political reforms. He has also,
while not openly breaking with Frei, advocated a further reduction of the
role of private enterprise in Chile. But Tomic's development of a campaign plat-
form, with specific proposals which would win such wide support, remains
vague and in a state of flux.
21. The fact that the Frei administration has initiated and brought forward
some basic reforms and improvements should constitute a political asset for the
PDC, however difficult to measure. Through social action and other programs
of varied effectiveness both in the cities and in the countryside, large numbers of
people throughout the nation, including practically everyone on salary, have seen
 Approved For Release 2010/04/26 CIA-RDP80TO1137A000300070001-0
significant improvement in their condition since Frei took office. In recent years,
however, the opposition has usually gained ground in the congressional election
preceding the Chilean presidential election.
A. Economic
22. The outlook for the Chilean economy over the next year or so is bleak.
Although a few aspects of the situation are favorable, such as the foreign invest-
ment to expand copper production and the likely continuation of foreign assist-
ance, circumstances generally are distinctly unfavorable. Already caught in a
quandary of economic stagnation with rapid inflation, the Frei administration
faces increasing economic difficulties and reduced capabilities to deal with them.
The chances of positive government action to cope with the country's problems
appear slim because Frei, as a lameduck president, probably will have even
greater difficulty in securing congressional support than in the past. As the elec-
tions approach, pressures for government spending on wages and welfare almost
certainly will intensify, and business confidence will reach a new low, thus
further slowing investment. Even with normal climatic conditions, per capita
output probably would not have grown in 1969. With the added blow from
the drought, the administration faces the likelihood of a decline in production
in 1969 and perhaps only a partial recovery in 1970.
23. Although prices for Chile's copper exports have remained abnormally high
throughout the past four years, some decline probably will occur in 1969 and
1970. Even the scheduled expansion in production probably will not keep copper
earnings from dropping in 1969, and it might merely restore them to 1967-1968
levels in 1970. Inasmuch as the drought is reducing supplies of hydroelectric
power and of water, needed by the copper industry, production gains may be
lower than projected. The drought will also increase the need for food imports
while reducing agricultural exports. Chile's deficit on goods and services may
increase by about $150 million in 1969 to a record high of more than $425
million-or about one-half of total commodity export earnings. Nonetheless,
large-scale drawings on official credits (already in the pipeline or being ne-
gotiated with the US Government and international financial organizations) and
the inflow of investment capital (chiefly from US copper companies) may be
sufficient to cover most or all of such a deficit as well as to finance scheduled
debt repayments. The Frei administration, however, may find it more difficult
to avoid serious balance of payments difficulties and a return to import restric-
tions in 1970. Its ability to do so again will depend largely on the willingness
of foreign lenders to be fully responsive to Chile's financial needs.
24. Frei's prospects for averting further setbacks in his stabilization program
are also unfavorable. In the past the administration has fared poorly in its efforts
to hold down wage increases in the public sector, and it will have even less
influence with a Congress looking to the elections of 1969 and 1970. There is
little chance that expenditures for public investment will be cut, because of the
 Approved For Release 2010/04/26 : CIA-RDP80TO1137A000300070001-0
? I
negative impact of such a cut on politically important welfare projects and on
employment levels. It will be difficult to secure new tax revenues to keep the
budget deficit manageable. Yet failure to hold budget deficits within certain
limits will not only feed the inflation but may also endanger continued receipt
of budget support aid from the US and drawings on standby credits from the
International Monetary Fund.
25. We conclude that the Frei administration will have few, if any, attractive
options in determining its economic policies. Rather, the choice is likely to be
among several unpalatable alternatives, and as problems mount, both Frei and
his opposition will be increasingly tempted to seek solutions that are politically
expedient. Thus pressure is likely to be exerted on the government to tax the
foreign-owned copper mines at a higher rate than that agreed upon under the
copper expansion program, to demand a larger equity in the mines, or even to
nationalize the properties outright. Because Frei himself has gone on record as
opposing outright expropriation, we see it as unlikely while he is still in power.
Members of his party may, however, declare in favor of partial or complete
nationalization during his last year in office, in an attempt to undercut their
political opponents. Even those members of the National Party who have been
friendly to the US may come to share the growing Chilean sentiment for early
nationalization. Expropriation would be more profitable politically than eco-
nomically, however, since the payment of compensation would be a major drain
on income, adding perhaps $1 billion to an already burdensome foreign debt.
If it did not compensate for such an expropriation, Chile would probably lose
more in US. economic aid and private capital investment than it secured from
taking over the copper companies.
26. In sum, the economic problems confronting the Frei administration are
unsolvable in the short run and intractable in the long run. They will be par-
ticularly difficult to come to grips with during the next year or so, when the
effect of the drought and the distraction of national elections will be most ap-
parent. Over the longer run, unless the management of the country's resources
improves, the pressure from population growth, particularly from its concen-
tration in the Santiago area (see Figure 1 "Chile: Drought Area and Population
Distribution"), will increase."
B. Political: Outlook for the Congressional Election
27. Despite the deterioration in economic prospects the effect on the outcome
of the congressional election in March 1969 may not he particularly severe,
owing to continued foreign assistance and good copper prices. This election
can have an important hearing on the selection of candidates and the formation
of political coalitions for 1970, although voting patterns in local congressional
elections are not necessarily repeated in presidential contests where mass voter
attention tends to focus on large national issues and personalities. The results
'We estimate that Chile's population is about 9.2 million, about 66 percent urban, and
about 40 percent under 15 years of age. If the population continues to increase at its present
rate, which we estimate at 2.4 percent per annum, it will double by the year 2000.
Approved For Release 2010/04/26 : CIA-RDP80TO1137A000300070001-0
 are particularly important to the moderates in the PDC whose chances of main-
taining control of the party organization will be critically affected by the PDC's
showing in the congressional election. The party, which has 10 of the 20 hold-
over seats in the Senate, should approach a majority there and may even attain
it. (See Figure 2: "Chilean Political Parties.") The present PDC majority in
the Chamber of Deputies was won, in the election of March 1965, when the
other parties were in considerable disarray in the aftermath of Frei's triumph
in September 1964. Recovery of the other parties will probably keep the PDC
from holding its majority in the Chamber, but it is likely at least to retain a
sizable plurality there, and it could attract enough support from independents and
smaller parties to form temporary majorities. But a poor showing by the party's
congressional slate-which was approved by Frei-would intensify existing
problems of party discipline and further weaken its chances in the presidential
election.
28. The congressional election is also important to the chances of the parties
of the right and extreme left in 1970. If, as seems likely, there is a further come-
back by the small conservative National Party, this would enhance the chances
that Jorge Alessandri, a popular former president, would run strongly, as an
"independent" presidential candidate. The Nationals were badly damaged in
the Christian Democratic triumphs of 1964 and 1965 and lack a popular base,
but they will probably continue, on a modest scale, the recovery they made in
the municipal elections of 1967. They may win some additional seats in the
Chamber of Deputies, but are likely to suffer some losses in the Senate.
29. The Chilean Communist Party (PCCh), which probably has about 35,000
active members, has gained status as a legitimate party which consistently stresses
the via pacifica and eschews violent revolution as the means for attaining power
in Chile.? Its prospects for the election in 1969 probably have not been greatly
damaged by the party's defense of the recent Soviet occupation of Czechoslovakia.
The PCCh is adept at diverting attention from its close hewing to the Mos-
cow line. Unless new actions by the USSR further antagonize the Chilean
public, by March 1969 the effect of the invasion of August 1968 is likely to be
minimal. Thus the PCCh will probably lose little, if any, of the electoral follow-
ing which causes other leftist parties to bid for its support in presidential elections.
30. The showing made by the Socialist and Radical Parties in 1969 will
determine, in large part, the candidate the PCCh will support in 1970. The
Socialist movement has been split by personal rivalries, but the orthodox So-
cialists may attract some voters who normally support Communist candidates
but were alienated by the Soviet occupation of Czechoslovakia. Socialist criti-
cism of the occupation has caused new strains in the already shaky Socialist-
Communist electoral coalition (the FRAP), but the coalition has survived other
serious strains in the decade it has been in existence. Furthermore, the Socialist
'When the PCCh was outlawed, between 1948 and 1958, the party suffered a serious
setback. Since regaining its legal status the PCCh has been careful to avoid any action which
might result in its being outlawed again. In 1958 and 1964 the PCCh supported Salvador
Allende as the FRAP candidate for the presidency.
 Party recognizes that it needs Communist support for its leader, Salvador Allende,
if he is to be a major candidate again in 1970.
31. The Radical Party, which has recovered from a very poor showing in the
presidential election of 1964 (five percent of the vote), also suffers from fac-
tionalism. It has traditionally found its main support in the middle class. The
rightwing of the party leans towards Alessandri while its present leftist leader-
ship is seeking an electoral coalition with the Communists and, if possible, with
the Socialists. The Radicals are united only in their desire to regain power and
in their bitter hostility towards Frei and the Christian Democrats. The Radical
Party is likely to gain some additional seats in the lower house and to do no
better than hold the 10 seats it now has in the Senate. Once the congressional
election is over, some moderates and many of the more conservative Radicals
are likely to increase their opposition to the efforts of the party's leaders to
align it with the PCCh in 1970.
C. The Presidential Election
32. Until the final choice of candidates and of political party alignments is
made, it is not feasible to attempt an estimate of the outcome of the presidential
election in more than the most general terms. A two-man race is possible, but
among many possibilities we believe that the most likely will be a closely con-
tested three-man race.
33. The problem for the left will be to unite competing elements of the Socialist
and Radical Parties, with Communist support, behind a single candidate. The
prospects for such a coalition are affected by ideological as well as tactical differ-
ences among all three parties. While the Communists publicly stress the primacy
of the FRAP, they seem disposed to join any coalition which they think they can
influence. The Socialists, on the other hand, have repeatedly rejected the idea of
cooperation with non-Marxist parties, and continue to cling to their intention of
presenting a presidential candidate in 1970. However, the Communists, and even
more so the Radicals, have not committed themselves and may have serious mis-
givings about backing a Socialist candidate. Finally, only a portion of the Radical
Party favors an alignment with the far left.
34. Despite these differences, an effective coalition of these three parties is a
possibility. If they can coalesce, their candidate would be a strong contender,
especially in a three-man race.' Many members of these parties would not support
a coalition candidate from another party or from an "alien" faction of their own
party. On the other hand, we believe that the candidate of any far-left coalition
would benefit from the likely continuation of the general trend to the left that
has marked Chilean politics in recent decades. Thus he would be likely to receive
considerable support from the large bloc of nonaligned, independent voters and
to gain some adherents from former PDC voters, unless that party chose a
standard bearer satisfactory to its radical wing.
' The Socialist, Radical, and Communist Parties, running separately, received a total of 44.5
percent of the vote in the municipal elections of 1987. See Figure 2.
 FIGURE 2
CHILEAN POLITICAL PARTIES
PERCENTAGE OF VOTE IN
ELECTIONS SINCE 1964 PRESENT REPRESENTATION IN CONGRESS
1965 1967 Chamber of Senate Seats to be
PARTY AND BRIEF DESCRIPTION (Congressional) (Municipal) Deputies Senate Contested in 1969
Christian Democrat (PDC) ............................ 42.3 35.6 82 b 12 2
Has preempted the center in Chilean politics.
Radical Party (PR) .................................. 13.2 16.1 19 10 7
Opportunist, principal following in government bu-
reaucracy and middle class.
Communist Party (PCCh) ............................ 12.2 14.6 18 5 3
Ably-led, well-organized and disciplined, has labor F
support. It
Socialist Party (PS) .................................. A 10.3 13.8 9 4 3
More activist than the PCCh, suffers from personal P
rivalries among its leaders and disputes over tactics.
National Party (PN) ................................. 13.1 14.6 8 7 7
Conservative, represents large landholders, industrial
and commercial interests. Formed in 1966 by the old
Liberal and Conservative Parties.
Minor Parties and Independents 0. . I .............. ..... 8.9 5.3 11 7 3
100.0 100.0 147 45 25
3 new seats 5 new seats
? The entire membership of the Chamber will be renewed for four-year terms. The senators serve eight-year terms, about half of them are
elected every four years. The number of senators is being increased to 50 and the number of deputies is being increased to 150.
e One PDC deputy died and has not been replaced.
Includes two senators and six deputies of Popular Socialist Union Party (USP) which split off from the PS after the 1967 election.
 Approved For Release 2010/04/26 : CIA-RDP80T01137A000300070001-0
? ?
35. No matter who wins the PDC nomination, there is likely to be some
splitting off of party members and followers. The party has no potential candi-
date as broadly appealing as Frei. Nor is it likely to form an electoral alliance
with one of the other large political parties, on either the left or right. At this
point there seems to be very little chance that Radomiro Tomic will be success-
ful in forging a broad coalition of leftist forces behind his candidacy or that the
party is likely again to receive any substantial support from the Chilean right.
Most likely, the PDC will run as a centrist force, with its candidate appealing
either for leftist or rightist support, depending on which faction of the party he
represents, in the hope of securing a plurality of the total vote. The PDC has
strong advantages as the incumbent party, the largest single party, and a focus for
the non-Marxist reform vote. But at this point its chances depend heavily upon
a variety of circumstances which are beyond its control and at present un-
foreseeable.
36. The opposition of the National Party and other Chilean conservatives to
Frei's attempts to carry out basic reforms by constitutional means has not made
conservatism more popular in the country, but rather has increased the sentiment
for radical change. The conservative forces might regain some ground if the
aging Alessandri (born 1896) were to campaign vigorously. His remarkable
appeal cuts across class and party lines and also reaches a considerable number
of independent voters. The conservatives have no other candidate of comparable
stature, and without Alessandri in the race they would be likely to suffer another
decline in strength and influence in 1970.
37. In sum, the current odds are that there will be a three-man race, in 1970,
in which no candidate will win a clear majority, and the final choice will be made
by the Chilean Congress. The necessity for such a decision has arisen several
times in the last 50 years. On each occasion the Congress has chosen the candidate
with the largest number of votes. We believe that the Congress probably would
do so again, particularly if there is a clear margin between the two leading
candidates.
38. Whoever is elected in 1970 will have considerable difficulty in getting
any program through the Congress, let alone a controversial one. Frei has said
that his fundamental mistake was in not pushing hard, early in his term, for an
amendment of the Constitution that would enable the president (once during his
term in office) to dissolve the Congress and, in effect, to request a plebiscite on his
program. If Frei's four years in power have demonstrated anything, it is that even
a president with the unusual advantage of a majority, both in the popular vote
and in the lower chamber, finds it very rough going indeed when he attempts
to change the status quo in Chile.
39. The well trained security forces of Chile have always been essentially
antagonistic to the Communists and Socialists; this is particularly true of the
paramilitary national police force, the Carabineros, who have had a long history of
clashes with extreme leftists. Even so, the security forces have maintained an
apolitical position towards national politics for 30 years; on the two occasions
 (1938 and 1946) when a president was elected with Communist support, the
military did not intervene to keep him from taking office. Rather than intervene
at once to keep a Communist-supported administration from taking office in
1970, the security forces would probably maintain a constant surveillance over
it, particularly if it were led by Salvador Allende, and would plan to move
against it only if they were convinced that Chilean institutions, especially their
own, were threatened.
40. For their part, the Communists and Socialists have vied with the other
political parties in praising the armed forces and in supporting appropriations
for military equipment, and have repeatedly professed approval of the role of
the military as the protectors of constitutional government. We believe that any
Communist-supported administration would be careful, at least initially, to avoid
any action likely to cause the military to intervene.'
D. Future Relations with Other Countries
41. If the FRAP were to win the election of 1970, and particularly if the
winning candidate were Allende or Alberto Baltra, the pro-Communist senator
of the Radical Party, the new administration would almost certainly take steps
aimed at moving Chile away from the US and towards closer ties with Com-
munist countries. Allende himself has frequently demonstrated his admiration
for Castro and the Cuban Revolution, and an Allende or Baltra cabinet would
probably include members of the PCCh. But we believe that even these
leaders would be deterred from precipitate or drastic action by several im-
portant considerations:
a. An awareness of the strength of nationalist sentiment in the population
generally, in the Congress, and in their own parties-a nationalism likely to be
as strongly against subordinating Chile to the tutelage of Moscow (or Havana)
as it has been against anything it considers subordination to Washington;
b. A realization that they must have and retain the support of political
elements other than those that elected them if their administration is to be
at all effective-especially since counsels would probably be divided in their
own ranks on some aspects of both foreign and domestic policy;
c. A concern that if their administration tried to move too far and too fast,
the Chilean security forces would unseat it;
d. An apprehension (and one which Moscow would probably share) that
anything approaching a full embrace of communism in Chile would precipitate
action on the part of Argentina, Peru, the US, and other countries-perhaps
action in support of a takeover by the Chilean military, perhaps even direct
military intervention.
'The security forces consist of an army of 23,100, a navy of 13,200, an air force of 7,700,
and the Carabineros of 24,000. In emergencies, the Carabineros are placed under army
command.
 42. All these factors are likely to inhibit a new president, even if he represents
the extreme left, from bringing about the adherence of Chile to one or another
segment of the Communist camp. These considerations do not, however, argue
against a radical shift in internal programs or against an intensification of the
effort to be independent of the US. In our view, whoever succeeds to the
presidency will be less cooperative with the US than Frei has been. We think
that there will be pressures in almost all political parties, including the PDC,
for the new Chilean Government to stake out a more independent line; in some
of them, demands for a clearly anti-US posture will be strong. Thus Chilean
relations with the US are likely to be under repeated strain over the foreseeable
future. Any new administration will probably explore somewhat closer ties with
Communist countries. And the skillful low key way in which the Soviet Embassy
in Santiago has conducted its relations with the Chilean Government and public
might begin to bring an expansion of trade and cultural relations between the
two countries. Thus far, however, little progress has been made in implementing
the economic agreements with the USSR signed in January 1967.?
43. We think that the next Chilean administration, regardless of who heads
it, will continue Chile's traditional policies supporting nonintervention, the
protection of national sovereignty, and the sanctity of treaties. The policies of
a new administration will continue to be strongly influenced by the recurrent
border disputes with Argentina, by Bolivia's efforts to regain the outlet to the
sea it had lost to Chile in the last century, and by concern that Peru will renew
its claim to territory it too lost to Chile. The next administration is likely to
push even harder than Frei did to stress the independent nature of Chile's role
in both the Organization of American States and the United Nations.
44. Perhaps the touchiest issue of all in relations with the US will be that of
ownership or control of the US share in the copper companies. Further steps
toward greater government participation in or even outright nationalization of
these holdings are, in our judgment, inevitable. The manner, the terms, and the
timetable of such steps will depend heavily on the makeup of the next admin-
istration. An extreme leftist government would very likely opt for complete and
rapid nationalization. Even under a rightist administration, or one of the center
left such as Frei's has been, some additional "Chileanization," at least, is likely.
Chile might assume high economic costs in the process, especially in case of
abrupt nationalization; but in the long run nationalistic, political grounds-
rather than economic will almost certainly be the crucial factors in deciding
this question.
'Total Chilean exports to the Communist countries amounted to $2.7 million in 1967 com-
pared to $5.3 million in 1966, while imports were $4.1 million in 1967 and $4.2 million in
1966. Although imports from the Communist countries may be up slightly for 1968, no sub-
stantial increase in exports is expected.
 0 ?
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