CHILE'S CURRENT ECONOMIC SITUATION AND INVESTMENT CLIMATE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900010047-6
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 6
• Document Creation Date: December 19, 2016
• Document Release Date: May 16, 2006
• Sequence Number: 47
• Publication Date: December 5, 1973
• Content Type: MF

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Approved For Release 06/09/26: CIA- DP85T00875RO01900010047-6
1A/oi- 2 - 05717- 73
ATTEN'T'ION
5 December 1973
SUBJECT : Chile's Current Economic Situation
and Xnvestmcnt Climat
Attached is the material in respo;ise to your request
of 28 November for support of source maintenance. If
STAT we can be of further assistance, please contact
Chief ,
Latin A,-nerica Branch, OER
T ttachment :
As stated
Distribution: (S-5717)
Orig. & 1 - Addressee
1 - D/OER
1 - D/D
1 - SA/ER
1 - St/P
1 D/LA
OER/D/LA
(5 Dec 73 )
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 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010047-6
Chile's Current Economic Situat'ion' 'and
'Investment Climate
1. The ruling junta in Chile is moving aggressively
to rebuild the economy by adopting a harsh austerity program
and instituting policies designed to return Chile to a
market economy.
2. Santiago moved quickly after the coup to remove
price controls on all but 30 basic commodities, while the
Central Bank effectively devalued the escudo by some 60%
in an effort to curb import demand and ease pressures on
Santiago's: meager foreign exchange reserves. As a result,
Chile's cost of living jumped 88% in October, bringing
inflation to nearly 450% for the first ten months of the
year. Anticipated price rises during the rest of 1973 is
expected to push inflation to some 750% for the year.
3. The elimination of price controls and adjustment of
exchange rates has practically elim3.nated the once flourishing
black markets in commodities and foreign exchange. While
exchange rates changed and prices rose, the growth in the
money supply has been sharply curtailed,.causing a relative
scarcity of local currency and a liquidity crunch for
businessmen. " .
The Austerity Pinch
4. The burden on consumers has been heavy. Despite
a healthy increase in the minimum wage, working class
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consumers are finding it increasingly difficult to afford
the barest necessities. Austerity has been exacerbated in
many cases by dismissals of relatively unproductive and
.politically suspect employees hired under the Allende regime.
An unemployment compensation program has been announced'and
an extensive public works program is under consideration.
5. The junta is attempting to enlist public support for
the austerity program and business is showing renewed
confidence. Consumers and labor,, however, are taking a wait-
and-see attitude. No organized resistance to the junta or its
programs has materialized, even though some political factions
are grumbling and predicting failure for the junta.
External Economic Relations
6. Chile still faces large balance-of-payments deficits
in both 1973 and 1974 even if debt repayments are rescheduled
in both years. With a massive $4 billion foreign debt
-hanging over Santiago's head, it will at least be several
years before Chile's balance-of-payments position improves
significantly.
7. However, copper production has already increased
more than 50% above last year's level as a result of a 9%
lengthening of the work week and improved mine management.
Production will probably reach a record 750,000 tons next
year despite continuing shortages of spare parts and
serviceable vehicles.
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Je'1.i i oJ ,J1 LLL
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8. Agricultural imports continue to be the largest
drain on foreign exchange and the recovery of domestic
production is a priority objective of the junta. Farm
output, however, is not expected to fully recover until the
1974/75 harvest since most crops already are planted and
are well into their growing seasons. Thus, Chile will
continue to import grain in large quantities during 1974.
9. Although the problems of adequate short run supplies
of raw materials and spare parts must be solved to boost
production quickly, long run growth will depend heavily on
Chile's ability to attract adequate foreign investment.
Attraction of substantial new investment will depend on the
junta's ability to demonstrate good faith in the treatment
of foreign equity as well as their ability to instill confidence
in Chile's prospects for stable recovery and growth. A
critical first step is timely settlement of outstanding
?compensation claims emanating from the Allende nationalizations.
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.The junta has stated that it will either return intervened
firms to ti;e private sector or,,' as in the case of the large
copper mines, adequately compensate the previous owners.
Some 90 firms are already in the process of reversion.
19. Thus far the junta has succeeded in lining up
sufficient-foreign credits to enable it to purchase essential
capital goods and finance the current payments gap. In addition,
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there are strong indications of renewed investor confidence,
and private foreign-investment in Chile is expected to grow
dramatically during the next 12 months.
Prospects
11. The economic outlook for Chile is cautiously
optimistic as the junta takes steps to correct the excesses
of nearly three years of decapitalization under state
socialism. The programs, though austere, are economically
sound ai 3 offer a firm foundation for recovery and growth of
the Chilean economy. The major policy conflicts within the
government appear to be over the degree and timing of specific
measures rather than problems of basic policy orientation.
12. The emerging dominance of?Raul Saez as senior
economic advisor is probably for the best since the junta's
austerity program must be tempered if political as well as
.economic recovery and stability is to be achieved. Meanwhile,
.Chile is preparing to settle outstanding compensation issues
and complete bilateral negotiations on 1971/72 debt service
in accord with the 1972 Paris Club agreements. Timely
resolution of these issues will go far in improving investor
and creditor confidence in Chile.
-~CIA/OER
4 December 1973
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