ALLENDE'S CHILE: THE WIDENING SUPPLY-DEMAND GAP

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040058-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 20, 2016
• Document Release Date: March 30, 2006
• Sequence Number: 58
• Publication Date: December 1, 1972
• Content Type: IM

 Approved g mom : CIA-RDP85Y,0' S R* 0058.&'
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Allendef Chile: The Widening Supply-Demand Gap
P. IA
---
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...7 1~ ?1 ~ ... 11 .1 V
Secret
ER IM 72-175
December 1972
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SECRET
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1972
ALLENDE'S CHILE:
THE WIDENING SUPPLY-DEMAND GAP
1. To many observers, Chile under Allende has seemed like a
profligate who frittered away an inheritance on a two-year binge. This
consumption spree has cost the country some $550 million in foreign
reserves, a large part of its material inventories, a serious deterioration in
productive capacity, and a drying up of most foreign credits. In the process,
Allende has used economic levers to radically alter Chile's power structure
in an attempt to make his socialist revolution irreversible. Although his
policies have created massive government deficits and excess consumer
demand, they also have markedly increased the state's economic power and
have redistributed income, thereby eroding the opposition's economic base.
2. Some sobering realities, however, recently have become apparent,
foreshadowing the lean days to come. Although the government can
justifiably claim that per capita gross domestic product (GDP) and
consumption are higher in 1972 than in 1970, by most other measures
the economy already is far worse off than when Allende launched his
revolution of "meat pies and red wine." Output in most sectors is now
stagnating or declining, foreign reserves are heavily in the red and copper
earnings down, food stocks and manufacturers' inventories are virtually
exhausted, and distribution snarls are chronic. Demand, however, continues
to rise sharply, fueled by wage increases, ever-larger government deficits,
and a mind-boggling rise in money supply. As a result, even
government-controlled prices have jumped almost 75% in the last three
months, while shortages abound and the black market has become far more
a way of life than ever before.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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3. This does not necessarily mean that Allende will get his
comeuppance in the March 1973 congressional elections. Economists may
wring their hands and the foreign press may view with alarm, but the fact
remains that many Chileans are better off than before. Furthermore, many
people are delighted with the leveling of incomes at the elite's expense.
The shortages common in recent months have affected Allende's low-income
constituency, but the living standards of the upper and middle classes have
been hit much harder. Moreover, people with extra money in their pockets
for the first time probably have not yet begun to worry much about the
lack of things to buy. In fact, Allende's actions have encountered little
effective resistance except when they have threatened to cut deeply into
middle-class interests. The month-long strike that nearly paralyzed the
economy in October was triggered by independent truckers and small retail
merchants, who were later joined by professionals and larger entrepreneurs.
Although violence flared intermittently (see the photograph), Allende was
supported by the military in his efforts to get the economy moving again.
The subsequent entry of the military into key cabinet posts - while opposed
by Allende's more radical coalition partners - promises to lessen turmoil
in the crucial months ahead.
Violence Chilean Style
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4. During the three months preceding the elections, Allende should
be able to stave off belt-tightening measures. He has already gone much
farther than many expected in liquidating Chile's assets to satisfy consumers
and almost certainly will continue to give their demands priority. He can
keep imports high by running Chile's net foreign reserves further into the
red and by increasing commercial arrears. Also, some emergency
hard-currency assistance may be forthcoming from Communist countries,
although it probably will fall far short of the requests currently being made
of Moscow. Allende will be helped by the election's opportune timing.
Although agricultural output in crop year 1972/731 probably will be down
about 10% from the preceding year's dismal performance, February-March
is the harvest season's peak and food supplies will therefore be at their
most plentiful. Moreover, the summer vacation doldrums between now and
March will give Allende time to ease industrial supply problems that were
substantially worsened by the recent strike.
5. Although Allende can postpone the impact of plummeting
investment, stagnating output, and spiraling demand until March, Chile will
face grave economic problems later. Foreign reserves will be exhausted and
borrowing capabilities limited; thus, only sharply increased copper prices
or a bail-out do cision by Moscow will keep import capacity from falling.
If import constraints are necessary, some impact on supplies of foodstuffs
and industrial inputs seems unavoidable because imports of capital goods
(other than those financed by foreign credits)and of manufactured consumer
items already are small. Even though Allende's long-heralded year of sacrifice
will begin in 1973, investment will remain depressed and output is likely
to stagnate or decline. If the regime continues its reckless budget and wage
policies in the face of contracting resources, Chile's market system will move
further along the road to destruction. Runaway inflation, rationing, or some
combination of the two may not be far off.
An Abundance of Production and Distribution Problems
6. Chile's supply-demand gap increasingly is the result of deep-rooted
production constraints and a faltering marketing system, as well as a more
and more bloated money supply. Allende's policies began to disrupt farming
and mining soon after the new government took office; in more recent
months they also have started to hurt manufacturing and distribution.
Output is now stagnating or declining in virtually every sector, mainly
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because of sharply reduced investment or actual disinvestment in many
enterprises; shortages of raw materials, parts, and other inputs; worsening
labor discipline; snarls in the distribution system; and - perhaps most
important - the government's inability to manage effectively the many
activities taken over (see Table 1). Government ownership and control,
already widespread even by Latin American standards in the pre-Allende
period, has about doubled in the last two years and now encompasses at
least one-half of GDP. In some spheres - notably mining, large-scale
manufacturing, electric power, communications, and banking - state control
is virtually complete.
Chile: Increase in State Control Since 1970
Percent of Gross
Domestic Product
Percent of Output
Under State Control
1970
1970
1972?
Total
100.0
27
50-60
Agriculture
6.9
20b
50b
Mining
11.1
45
97
Manufacturing
27.7
25
45
Construction
4.1
51C
90C
Wholesale and retail trade
20.4
1
26
Transport, storage, and
communications
4.7
37
69
Banking
1.5
67
96
Electricity, gas, and water
1.8
60
95
Public administration
5.8
100
100
Other services
14.3
12
42
Ownership of private dwellings
1.7
0
0
a. Estimated.
b. Share of agricultural productive capacity in agrarian reform settlements and other state-owned
farms.
c. Estimated share of construction proj.:cts financed by the state.
Down on the Farm
7. Agricultural performance has been even worse than some of the
regime's critics predicted. Although good crop conditions and excessive
cattle slaughtering pushed farm output to a record level in 1970/71, it has
4
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since slipped badly (see Figure 1). Output fell by an estimated 20% in
1971/72, and increased turmoil in the countryside presages a further drop
Figure 1
Chile: Estimated Agricultural Output Indexes
Crop Year 1963/64=100
Per Capita Agricultural Output
1963/&1-100
110
Livestock
100
Products
m
80 -
70 " III'
0.3/61 68/60 72173
Total
Agricultural
%J U up UT,
Crops
?
V
in 1972/73. Accelerated official expropriations and widespread illegal
seizures of farmland by Allende's far leftist supporters have created fear
and frustration throughout the shrinking private sector. The resulting
reduction in private farm activity has not been offset by production
advances on state-controlled land. On the contrary, the administration has
largely failed so far to organize recently expropriated land into new
production units
5
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Because
these state-controlled farmlands now account for about half of Chile's
agricultural capacity, the lack of competent technicians and managers has
seriously hurt output.
8. The problems of poor production incentives for private farmers
and of badly managed state lands are much more serious now than in the
1960s because of the increasing) indiscriminate land reform. The Frei
administration's program did not disrupt output seriously until late in the
term, when highly productive farms began to he expropriated. Few poorly
managed estates remained in private hands by the time Allende took office,
and Chile's most productive large and medium-sized farms thus have been
the main victims of the subsequent expropriation campaign. Moreover, the
pace of expropriation speeded up markedly, as shown in Table 2. Because
the farms taken over had provided much of Chile's marketed output,
foodstuff deliveries to urban areas have dropped sharply.
Chile: Expropriation of Lands
Administration
Number
of Farms
Million
Acres
Percent
of Total
Farmland
Percent of
Total
Irrigated Land
Total
4,689
21.8
44
59
Frei (5 November
1964 - 4 November
1970)
1,408
8.8
19
25
Allende (5 November
1970 - 30 September
1972)
3,281
13.0
25
34
9. The magnitude of production losses resulting from Allende's
agrarian policies became apparent in 1971/72. Wheat, which accounts for
about 15% of farm output and almost 10% of the caloric intake, suffered
a 35% production decline. Because it can be grown relatively quickly and
cheaply, wheat often has served as a "hedge" crop for nervous private
farmers, and 1 c 10/71's record crop stemmed in part from the uncertain
political climate during the presidential rice. Last year's poor crop - the
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smallest since the early 1950s - reflects both increased idle land on
state-controlled farms and extreme pessimism among many remaining private
farmers, who failed even to plant wheat. Other crops requiring larger cash
outlays naturally were harder hit. Output of such items as garlic and onions
failed to meet domestic requirements, much less provide the traditional
surplus for export.
10. Livestock output dropped even more sharply than crop output
in 1971/72. Chile's cattle population had declined from 3 million head
when Allende was elected to only about 2.5 million by mid-1971, as cattle
producers liquidated herds in anticipation of expropriation and as peasants
on newly expropriated farms started eating more beef. Numerous breeding
animals and under-sized beef cattle were slaughtered
As a result,
estimated beef output in 1971/72 fell to little more than half the
extraordinary 1970/71 level and to about three-fourths the late-1960s'
average.
11. Most indicators point to a further substantial decline in
agricultural output in the current crop year. Poor weather and shortages
of seed, fertilizer, and credit have compounded continuing problems
stemming from government incompetence and private farmers' insecurity.
The area sown to winter wheat - normally planted by the end of May -
fell by nearly 50% from the previous year's depressed level, and plantings
of spring wheat and other crops were three to four weeks behind schedule
when the month-long strike began in early October. The strike further
disrupted farm operations, produce deliveries, and receipt of agricultural
Jnputs. These factors more than offset the improved profit incentives
deriving from a sharp increase in farm product prices announced in August
and September. Although post-strike plantings on irrigated land were
feasible, insufficient moisture severely depresses yields from non-irrigated
plantings made after 1 November. Output of such permanent crops as grapes
and other fruits is expected to decline moderately because of fertilizer
shortages and failure to perform routine off-season maintenance on many
vineyards and orchards. Beef output has remained depressed and can be
improved only by sacrificing the rebuilding of Chile's herds - a temptation
Allende thus far has resisted. Moreover, feed grain shortages are limiting
pork and poultry output.
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12. Allende has encountered difficulties in running the properties
expropriated from US copper companies. Output from the long-established
large copper mines - Chuquicamata, El Salvador, and El Teniente - has
declined despite near-completion of major expansion programs in 1971 (see
Figure 2). These mines, formerly owned by Anaconda and Kennecott,
provided almost four-fifths of Chile's copper production before the takeover.
Total large-mine output has risen slightly, to an estimated 585,000 metric
tons in 1972, only because of the two new mines brought into production
at the end of 1970. These mines, too, are producing well below capacity.
13. Allende's problems in the copper mines are mainly managerial
and technical. With nationalizaton, the industry lost most of its skilled
personnel, both foreign and domestic. Experienced Chilean supervisors, who
could have run the mines reasonably well, left because they feared loss
of their accumulated pensions (payable in dollars) and doubted that the
new political appointees running the mines would respect their positions.
Employment at the mines has expanded considerably, as the administration
rewarded the faithful with jobs. In addition to inept management,
featherbedding, and poor labor discipline, the industry has been increasingly
afflicted in recent months with machinery breakdowns and supply
bottlenecks.
14. As might be expected, production costs have skyrocketed since
1970. Traditionally the world's lowest-cost major producer, Chile now is
barely breaking even - despite reneging on debt servicing. Because of
reduced world copper prices and the artificially low exchange rate
maintained for exports in the face of soaring production costs, government
tax and profit revenues from the large copper mines (as distinct from foreign
exchange receipts) fell from some $260 million in 1970 to $40 million
in 1971 and only about $15 million in the first half of 1972. Since the
profits of small and medium-size mines are also being squeezed, their output
in 1972 is likely to fall somewhat below the previous year's 136,000 tons.
15. The massive consumer demand generated by Allende's policies
paced a 12% rise in manufacturing output in 1971, despite strikes and plant
takeovers by the government and by workers. This increase was possible
because of excess capacity and large inventories of raw materials and spare
parts. Output peaked in late 1971, however, and 1972 production is unlikely
to be much, if any, above last year's (see Figure 3).
8
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Figure 2
Chile: Planned and Actual Copper Output
from the Large Copper Mines
Thousand Metric Tone
Chuquicamata
1998 Actual
69
70
71 X051?
72 a 57Nkj
71 SaW
72K:f
DL
Total Large Mines
I ow
71 07,11,
72
EIL
*Lato 1970 company eetimatoa.
614067 17.77
9
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Chile: Trends in Manufacturing Output
1968 Average=100
/1971
? 1972
00~
p
00,
1969
1970
16. Output almost certainly would have been considerably lower
during the second half of 1972 than a year earlier even without the
disruptive October strike in transport and trade. Because little new
investment has taken place since the late 1960s, capacity limitations have
been cramping output in a growing number of industries. In addition, by
mid-year, raw material inventories were severely depleted and new supplies
increasingly difficult to obtain because of transport bottlenecks and foreign
exchange shortages. Labor discipline has deteriorated badly because workers
feel free to defy management, particularly in the remaining private firms.
Equipment breakdowns due to poor maintenance have been on the rise,
and - because spare parts inventories were also depleted - prolonged
stoppages have become increasingly common.
17. Managerial incompetence, which has crippled mining and
agricultural output, has, however, been apparently less pronounced in
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manufacturing. The state already owned plants encompassing about
one-fourth of manufacturing output before Allende took office, and the
transition to state ownership in many plants taken over by Allende was
eased by retaining key middle-level personnel. Perhaps most important,
Allende considerably slowed the expropriation pace after his first year in
power - probably in tacit recognition of the managerial problems involved.
Much of Chile's manufacturing still occurs in small shops, not tagged for
state takeover.
In Domestic Trade and Transport
18. The distribution system -- never very efficient - has been severely
strained by sharply rising demand and shifting supply sources. Bottlenecks
created by inadequate transport and storage facilities had become chro;uic
even before the October strike idled most trucks for four weeks. Record
imports of foodstuffs and other bulk cargo caused severe port congestion,
long ship delays, and demurrage charges at Valparaiso, San Antonio, and
Concepcion. Inadequate rolling stock and railworkers' strikes exacerbated
the port problem, further delaying deiiveries of needed inputs to farms and
industries. Still mostly in the hands of small entrepreneurs, trucking has
suffered from shortages of spare parts - especially tires and batteries.
19. The government has increased its control over distribution but
nevertheless failed to prevent confusion and growing shortages. Government
control is in fact widely blamed for the scanty supplies of perishable foods
at the peak of the harvest season. As one Chilean put it, "How many
government workers do you know who are going to unload vegetables at two
in the morning or on Sundays to keep them from spoiling?" Most wholesale
distribution facilities are now run by government enterprises or agencies.
They handle almost all imports as well as most agricultural output that
does not go into the black market. Retail distribution remains largely in
private hands, but the government is rapidly expanding its control over
food marketing, particularly in low-income neighborhoods. In these areas,
"Neighborhood Supply Committees" have been set up to oversee small
private merchants and distribute foodstuffs supplied by government
wholesale entities.
20. Supply and distribution problems have been compounded by
widespread hoarding as the people reacted to intermittent shortages.
Consumers increasingly have been hoarding foodstuffs and other household
goods, while business managers have tried to stockpile raw materials and
spare parts. Within hours of reopening their doors after the October strike
retailers found their shelves bared by consumers.
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Imports - An Important Crutch So Far
21. Rising imports thus far have enabled Chile significantly to increase
consumer supplies. Imports increased by almost 13% in 1971 and are rising
an estimated 15% in 1972, despite a two-year drop in export earnings of
about 20%. Partly filling the gap between declining output and spiraling
demand, foodstuffs imports jumped by more than 70% in 1971 and have
been boosted by another 35% or so in 1972. Net food purchases are
approaching $401) million this year, compared with $150 million in 1970
(sue Figure 4). Imports of industrial raw materials ind fuel have risen by
perhaps 40% since 1970, while machinery purchases have dropped to a
Chile: Net Imports of Foodstr?.ffs
Million US $
400,
Imports
Net Imports
~} rf
Exports
01 1 1 I I I 1 I I 1-7
1962 63 64 65 66 67 68 69 70 71 72
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similar extent. The only capital goods purchases that have increased since
1970 are vehicles and transport equipment financed under supplier credits,
mainly from France, Brazil, and Argentina.
22. Allende has been able to postpone import restrictions only by
using tip Chile's large foreign reserves and damaging the country's
international credit rating. Chile incurred a record balance-of-payments
deficit of some $300 million in 1971 and probably will go about
$250 million into the red in 1972 (see Table 3). By year's end, its net
foreign reserves will stand at an estimated negative $210 million, compared
with a positive $343 million at the end of 1970. Balance-of-payments
deterioration would have been even more severe had Ctiile not stopped
payments on most of its long-term foreign debt and on its short-icrm debts
to US banks in late 1971. Because of non-payment on debt,3 plus dray; ings
on Western long-term credits still in the pipeline, on Communist project
loans, and on short-term commercial credits from new Western suppliers
intent on replacing the United States in the Chilean market, Santiago
actually had a substantial net capital inflow in 1972.
The Demand Side: A Consumption Spree
23. Two main factors have fueled the sharp increase in demand since
Allende's election: massive public sector deficits and a major income
redistribution favoring the lower classes, who have spent as never before.
In 1971, overall consumption of goods and services (government and
ttrsonal consumption) expanded by 15%-20% in real teims (see Figure 5).
This sharp jump w^ possible because of an 8% increase in GDP, rising
.imports, a sharp drop in fixed investment, and a rapid drawdown of business
inventories. Even the official data show that private fixed investment
plummeted by 55%-60% in 1971. Although government expenditures on
low-income housing, agrarian reform projects, and other investments
increased markedly, total fixed capital formation declined - perhaps by
as much as 15% instead of the 5%-10% officially estimated. At only 9%-10%
of gross national product in 1971, Chile's investment rate probably was
Latin America's lowest. Stock drawdowns, on which no official figures are
available, were probably sufficient to cause a drop in overall investment
on the order of 35%-45%. Because economic expansion slowed and business
inventories and foreign exchange reserves already had been largely depleted,
3. Following Chile's unilateral debt moratorium in November 1971, debt renegotiation meetings
were held in Paris, culminating in the April 1972 agreement. Chile's creditors agreed to provide
debt relief equal to 70% of the principal and interest payments falling due through the end of
1972, to be implemented through bilateral agreements with each creditor. Because Santiago has
taken the position that no payments have to be made until those agreements are signed and bilateral
negotiations have not yet been completed with the United States, Canada, and West Germany, Chile
thus far has made few payments even on the 30% of debt not rescheduled.
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1971
1972
1969
1970
Eslinwted
Projected
Exports (f.o.b.)
1,174
1,129
1,000
900
Of which:
Copper
(926)
(863)
(710)
(680)a
Imports(c.i.f.)
-928
-1,021
.1,150
-1,325
Trade balance
246
108
-150
-425
Investment income
-234
-185
-80
-40b
Other services
-23
-35
-20
-20
Balance on ct;.rent account
-11
-112
-250
-485
Direct investment
108
163
20
0
Long-term capital
108
76
0
150
Drawings
278
237
200
190C
Amortizat m
-170
-161
-200
40d
Short-term capital (including
errors and omissions)
9
-57
-91
690
Balance on capital account
225
182
-71
219
Total balance of payments
214
70
-321
-266
SDR allocation
0
21
17
17
Changes in net foreign reserves
(a minus sign indicates
a decrease)
214
91
-304
-249
Total net foreign reserves
(end of year)
252
343
39
-210
Financing of reserve changes
Increase In current liabilities
of the monetary authorities
(a minus sign indicates a
decrease)
-62
129
115
Borrowing from the IMF'
-46
38
50
Borrowing on swap agreements
-7
20
2
Soviet hard currency loans
0
0
609
Chilean commercial bank borrowing
-2
60
0
Other borrowing
.7
11
3
Drawdown on disposable reserve assets
(a minus sign indicates an addition)
-29
175
134
Remaining disposable assets
388
214
80
Gold
47
47
51
Foreign exchange
320
121
29
Other
21
46
0
a. Assuming no change In export volume but a slightly lower price because of increased shipments
of concentrates.
b. Assuming interest payments to international agencies, on commercial credits, and to some
creditor nations where bilateral debt renegotiation agreements have been signed.
c. Assuming continued drawings on Western credits in the pipeline and initial drawings on credits
from Communist countries.
d. Assuming amortization payments to international agencies and to some Western creditors where
bilateral agreements have been signed.
e. Not Increase in outstanding commercial credits; In part this reflects an Increase in payments
arrears.
f. International Monetary Fund.
g. Represents a $SO million line of credit granted by Soviet-owned West European banks. At
present Chile has overdrawn this credit by an estimated $10 million.
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real consumption growth ta-
pered off substantially in 1972
even though investment al-
most certainly declined fur-
ther.
Government Finances
A Workout for the
Printing Presses
24. The Allende admin-
istration has both taken over
Figure 5
Chile: Use of
Available Resources*
Billion 1968 Esc"".dos
an increasing ? share of eco- 15
nomic activities and expanded ~ -.__
Privato consumption
normal government expendi-
tures. As a result, current ex ? is
penditures increased by 74%
in nominal terms and about
45% in real terms in 1971. 5
Largely because of the busi-
ness profit squeeze and plung-
ing copper receipts, central 1967 68 69 70 71
government revenues increased 6AVailablo resourcos equals production
by only 25% in nominal terms Plus not imports of goods and services.
and not at all in real terms 011000 17.74
despite new taxes and rapid
economic growth. The deficit
on current operations alone totaled 3 billion escudos in 1971, and capital
expenditures and transfers brought thy; central government deficit to 12
billion escudos - equal to 32% of government expenditures and l0?Jo of GDP.
State enterprise deficit. r, )t covered by transfers raised the public sector
deficit to 14 billion escudos -,)r 12% of GDP, compared with 1% in the late
1960s. The Central Bank financed the bulk of this deficit by creating money.
25. During 1972 the budget situation has worsened. Because of state
enterprises' soaring operating deficits, the public sector deficit appears i'kt y
to approach 45 billion to 50 billion escudos, or almost 20% of GDP,
Artificially low prices for public services, inefficient management by
unqualified political appointees, and the rapidly expandng number of
money-losing state enterprises all have contributed to the problem. Even
traditionally profitable state enterprises such as the electric power and
petroleum companies are incurring large deficits. The recent price hikes
granted state enterprises are unlikely tj improve their profitability for very
long because wages and other costs are rising rapidly.
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26. Although the Allende administration has kept the private sector
on a relatively tight financial rein, the wage-price spiral and the public
sector's deficits have inflated the money supply remarkably. During 1971,
total money supply increased by 114%, compared with an average increase
of 42% annually during 1965-70. A similar expansion rate was evident during
the first six months of 1972, and money supply growth has accelerated
in more recent months owing to massive deficit financing.
27. Only in recent months have Chile's financial gyrations apparently
provoked a rising velocity of money circulation, which - if it persists, and
especially if it accelerates - raises the specter of runaway inflation and
market breakdown. Because output growth and official price rises lagged
far behind monetary expansion in 1971, money supply jumped to 20%
of the officially calculated GDP, compared with about 12% in the late 1960s
(see Figure 6). Even with a GDP value reflecting increased recourse to the
black market and other sales at uncontrolled prices, a rising percentage
would be obtained - indicating that money velocity slowed considerably.
The situation changed markedly in 1972, however, b,;cause fewer people
were willing to hold cash balances, official price rises accelerated, and more
and more goods were being sold through the black market. We estimate
that money velocity changed little during the first six months and then
speeded up substantially in the latter half of the year.
Price Controls - An Increasingly Leaky Sieve
28. Despite highly expansionary budget and wage policies, Allende's
attempt to hold down inflation through strict price controls initially was
fairly successful. During 1971 the official cost-of-living index rose by only
22%, compared with 35% in 1970. Shortages became common, however,
and waiting lists for consumer durables and other goods lengthened. Chile's
black market, long a factor whenever imports and other scarce goods are
concerned, was increasingly resorted to for essential items such as food
and clothing. By mid-1972, Allende apparently decided that price increases
were preferable to growing shortages, and official prices were boosted
substantially. After rising by an average of 4% monthly through: July, .wse
prices jumped 73% in the next three months (see Figure 7). By the
beginning of November the official consumer price index had risen 130%
since the first of the year.
29. Accustomed to high inflation rates, the populace nevertheless has
been disturbed by the recent huge price jumps. Especially shocking were
the changes in August and September, when the price of one staple foodstuff
after another - including bread, rice, meat, and fish - virtually doubled
overnight. These increases accelerated the flight from money into goods,
~..spixe Allende's promise to shortly clamp the lid on prices. Large wage
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Chile: Trends in Money Supply and
Gross Domestic Product
1960=100
100
61 62 63 64 65 66 67 68 69 70 71
1960 514961 1272
Money Supply as a Percent
of GDP at Current Pricos
20
1o
1000 05 70
GDP
(Current Prices)
Money Supply
hikes soon intensified the pressure on official prices, which goods shortages
and rampant black marketeering had already robbed of meaning.
Real Wages on a Roller Coaster
30. Allende's first move upon taking office was to redeem his pledge
to improve the working classes' !ot. This he accomplished by granting an
average 45% wage raise to public employees, fostering even larger hikes
in private enterprise, and holding down other income by controlling prices.
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Chile: Official Consumer Price Index
December of Preceding wear=100
250
Between October 1970 and October 1971 nominal wages increased by an
average of 52% while official prices rose by only 16%. By this measure,
the average Chilean enjoyed a real income rise of some 30% during the
period (see Figure 8). Because official price rises began to accelerate in
the last quarter, real wages declined somewhat, but at the end of 1971
they were still perhaps 25% higher than when Allende took office.
31. Real wages for most workers peaked in January 1972, when
Allende granted a general 22% wage increase to compensate for the past
year's inflation. An annual wage readjustment is a tradition in Chile, but
prices .formally erode nearly all the gain before the year is over. Unlike
1971, this year has been no exception. Real wages declined gradually during
the first half of the year and by July were about 10% below their January
peak. The sudden jump in official prices in August wiped out essentially
all of the workers' remaining gain in real incomes since Allende took office.
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Chile: Official Real Wage Index
End of Month Data
January 1970=100 1 Oct,
130
_v1 1
120
[ -------
100 I I I I I I I
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
1970 1971 1972
*The real wage index cannot be calculated for September when special bonuses were granted to partly offset
a rapid rise in official prices. Effective 1 October, a 100% wage increase was granted to restore real wages
to their January level; by the end of the month, the official price rise had eroded real wages by some 1596.
515113 1272
32. Because these price increases were concentrated on, food items,
erosion in the lower-paid workers' real incomes was even more severe.
Moreover, as many families probably perceived, real wages actually were
substantially lower at the end of August than in late 1970 because the
true inflation rate clearly exceeded the official calculation. For obvious
political reasons, Allende moved quickly to restore workers' incomes by
granting large bonuses in September and decreeing that the annual wage
readjustment advance three months, to 1 October. Wages were boosted
by the full amount of the nine-month rise in official prices, about 100% -
thus returning the official real wage index to its January peak. Inflation
continued to rocket during October, however, and real wages quickly
declined by 15% at official prices and considerably more at black market
prices.
The Pre-Election Period -- A Time for Expedients
33. Belt tightening eventually must come in Chile, but Allende will
make every effort to delay consumption cutbacks until after the
congressional elections in early March 1973. For obvious reasons, Allende
is intent on maximizing his show of popular support in what is viewed
by many as a plebiscite on his administration. The election's outcome,
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however, will have little impact on the direction of Allende's future actions
except in the unlikely event that his coalition falls below the 36% of the
popular vote he received in the 1970 presidential race. Such a major defeat
might convince top Chilean military leaders to assume a greater, possibly
a decisive, role in determining the pciicies of the Allende government.
Moreover, it also would seriously impair Allende's influence over legislation
34. The economic crunch probably can be postponed until after the
election, partly because their timing is opportune for Allende. Although
agricultural production probably will be down about 10% in 1972/73, the
election will occur at the harvest season's peak, when most foodstuffs
supplies will be at the year's highest level. Furthermore, December through
February are the summer vacation months, when people traditionally flock
to the seashore and sales of many things slump. During this breathing spell,
the administration can concentrate its efforts on undoing supply snarls
affecting important consumer goods.
35. Allende should be able to keep import levels reasonably high until
after the election. On 30 September, Chile still had an estimated $100
million in disposable assets, about equally divided between gold and foreign
exchange holdings. Although foreign exchange assets by no v/ probably are
down nearly to the minimum level needed for trade transactions, Allende
could raise some cash by borrowing against the gold reserves held in French
banks. In addition, Chile is scheduled to receive a $43 million loan from
the IMF in December4 and could borrow $11 million against its fund quota
before the election if it agreed to certain conditions. Chile may also receive
emergency assistance from Communist countries during this period.
Although it is doubtful that Allende's December trip to Moscow will yield
the massive aid being sought, the Soviets may be willing to match the $50
million in hard currency extended in 1972.
Chile's Long-Term Economic Prospects
36. Regardless of the election's outcome and subsequent political
events, Chile faces grave economic problems during the next several years.
The economy is a shambles in most respects and probably will deteriorate
further before remedial action is taken. An effectively functioning socialist
state appears unlikely unless the country becomes highly oriented toward
authority - and perhaps not even then. Consumers face long-continued
austerity, whether they like it or not. The USSR can be expected to provide
help, but only to the extent of lessening the economic shambles.
4. This is the last drawing on 'a loan granted to compensate for declining copper prices in recent
years. After loan eligibility has been determined, disbursements are nearly automatic.
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37. Because foreign reserves will be exhausted and borrowing
capabilities limited, import capacity probably will fall substantially. Import
constraints, in turn, will seriously impede production and squeeze
con-imption. Only increased world copper prices or massive foreign
assistance - neither of which seems likely - will allow the present import
level to be maintained. For 1973, we estimate that, even if Santiago
continues to renege on debt payr is and is able to handle an additional
net-reserve loss of $130 million or so (see Table 4), imports will fail by
roughly 20%. If imports remain high until after the March elections, Chile
probably will have to cut imports about 30% for the remainder of the
year. In the unlikely event that Chile resumes debt service payments to
its major creditors, imports would have to be cut even more sharply.
38. Such an import cutback will require difficult allocation decisions.
In the likely event that agricultural output continues to decline, large food
imports will be needed to maintain a politically acceptable diet. Although
Allende's advisers recently estimated that food imports in 1973 would have
to be more than $50 million higher than in 1972, it is doubtful that the
current level can even be maintained. If total imports must indeed be
reduced in 1973, as we expect, most of the adjustment burden necessarily
will fall on purchases of foodstuffs and of raw materials, intermediate goods,
and spare parts. There is little room for import cutbacks elsewhere, because
purchases of capital goods (other than those financed by foreign aid) and
manufactured consumer goods already are very small.
39. Import limitation Could be fairly disruptive to Chilean industry,
which has traditionally depended heavily on imported inputs and is
particularly vulnerable now that inventories have been severely depleted.
To help maintain the flow of industrial supplies and replacement parts,
Allende may decide to ration gasoline for private vehicles in 1973 - a step
that could save perhaps $20 million to $30 million - and might even
ration household fuels.
40. It is impossible to say whether the Allende regime will carry its
reckless financial policies to the point that the market system breaks down.
By reining in monetary expansion before long, the government perhaps
could reduce inflation to a rate which, though still very high, could be
sustained indefinitely, as in Uruguay for more than a decade. To avert the
danger of a market breakdown - or begin picking up the pieces following
one - there is a good chance that the government will eventually opt for
some form of rationing, a currency reform (such as was carried out in Cuba
in the early 1960s), or both. Chile already has the institutional framework
for a rationing system and thus could take the step fairly easily. Rationing
would be highly unpopular and politically risky for any government, but
low-income groups would fare at least as well with it as in a continuing
scramble to find things to buy.
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.U JL
Chile: Balance-of-Payments Projections
Million US $
1972?
1973
Exports (f.o.b.)
Of which:
900
850
Copper
680
680b
Imports (c.i.f.)
-1,325
-1,040c
Trade balance
-425
-190
Investment income
-40
. 0d
Other services
-20
-20
Balance on current account
-485
-250
Direct investment
0
0
Long-term capital
Shot!-term capital (including errors
150
100e
and omissions)
69
Of
Balance on capital account
219
100
Total balance of payments
-266
-150
SDR allocation
17
17
Changes in net reserves
Financing of reserve losses
-249
-133
Increase in current liabilities
115
93
IMF loans
50
43g
Soviet hard-currency credits
60
50h
Other
5
U
Drawdown on assets
134
40
Total net reserves (end of year)
-210
-343
Assets
80
40
Gold
51
Ili
Foreign exchange
29
29
Other
0
0
Liabilities
-290
-383
IMF
-86
-129
USSR
-60
-110
Foreign government
-70i
-701
Commercial banks
SO
-50
Other liabilities
-24
-24
a. For explanatory footnotes, see Table 3, above.
b. Assuming no change in copper prices or output during 1973.
c, Calculated as a residual
d. Assuming resumption of interest payments to some non-Us creditors,
e. Assuming repayments to selected creditors.
f. Assuming roll-over of outstanding short-term credits, but no net increase,
g. Assuming receipt of fun credit tranche,
h. Assuming an additional $50 million in hard currency credits from the USSR in
early 1973.
i, Assuming that some gold is pledged as collateral for loans or sold.
J. From past debt refinancing.
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41. Whatever happens now, Allende probably has succeeded in making
his revolution largely irreversible. It is highly unlikely that the old elite
will ever again dominate Chilean economic and political life. For better
or worse, the structure of Chilean agriculture has been permanently changed
and most industry will probably remain under state control. Even if the
Christian Democrats returned to power, Chile probably would remain
strongly nationalist; thus foreign investors are unlikely soon, if ever again,
to have more than a minor stake in Chile. Despite the potentially disastrous
impact of Allende's economic policies, no political group now on the scene
appears likely to reverse very many of the steps he has taken.
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