CHILE: THE JUNTA'S SECOND YEAR

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900030065-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 6
• Document Creation Date: December 19, 2016
• Document Release Date: August 18, 2005
• Sequence Number: 65
• Publication Date: September 1, 1974
• Content Type: REPORT

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Chile: The Junta's Second Year
The impact on the junta's economic policies during
its first year in power has been mixed. Steps to eliminate
most price controls and end public ownership of many
industries caused, prices to rise sharply. High prices
f+~r food and petroleum imports and periodic devaluation
of the escudo to end its overvaluation have added to the
inflationary spiral. The government's timid stabilization
efforts involving tight controls over wages and reducing
the budget deficit and the growth in the money supply
failed to halt the debilitau.'ng inflation. Runaway
inflation thus became the junta's most pressing economic
problem.
In the first eight months of 1974, the cost of living
skyrocketed 204%. The rate of increase in July and August,
however, was somewhat below the average for the first half
of the year. If the lower rate is maintained, inflation
for the year will be "held" to 350%, sharply below the 710%
registered in 1973.
Other difficult domestic problems face the junta.
Inflation has reduced consumer demand, which, in turn, has
caused industrial output to stagnate. An expected 35%
increase in agricultural production will not materialize
because severe rains and floods in June disrupted plantings
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and d'stroyed 10% of the winter wheat crop. As a result,
Chile's import needs will reach about 1 million tons of
wheat in 1975 -- about as much as 1974 imports.
Although high copper prices and output and the roll-
over of Santiago's massive foreign debt is giving Chile
its best external payments position since 1970, the outlook
for 1975 is bleak. Economic slowdowns in industrial
countries have caused the international price of copper
to drop more than 50% from its April peak. Even with an
anticipated 6% increase in copper production next year,.
it is estimated that copper export earnings will be $250
million below the 1974 level. Other exports, comprising
less than 20% of Chile's total exports, are not expected
to rise enough to offset the fall in copper earnings.
Meanwhile, imports are expected to increase. Even
assuming a healthy agricultural recovery, Chile will still
need food imports estimated at about $500 million. As a
result, the trade deficit in 1975 will total $350-$450
million ..id the current account defict about $600 million.
Santiago can expect private capital inflows of about $50
million and credit drawings cf about $250 million to ease
the remaining payments gap, the junta will have to find
about $300 million in new credits and solicit another
round of debt relief.
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Despite the economic problems, the junta still
believes that its policies will produce the desired results.
The stabilization program is being tightened even at the
cost of further dampening economic activity and raising
unemployment. Government expenditures are to be sharply
reduced by cutting government payrolls. State enterprises,
particularly the Copper Corporation (CODELCO), the Pacific
Steel Company (CAP), and the National Petroleum Enterprise
(ENAP), are being required to become self-supporting.
New investment proposals by CAP and ENAP were recently
rejected as inflationary, despite the prospective: long-run
addition to productive capacity.
Government actions'will add to unemployment, at 10%
already the highest irate in 15 years. This does not include
a much larger figure for underemployment. The rate is ex-
pected to rise in 1975. Mc::eover, real wages are expected
to drop further, The resulting reduction in effective
demand will be the chief constraint on the growth of
industrial output.
The junta is attempting to attract foreign investment
as part of its program to stimulate the economy. A new
foreign investment statute introduced in July seeks to
assure foreign equity that it will receive equal treatment
with domestic investment and be free to repatriate capital
and projects. Response, however, has been limited.
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foreign investors are most interested in mineral exploita-
tion. The Japanese are participating in an iron ore mine
and pelletizing plant project and Canadian investors
reportedly are interested in the El Abra copper deposits.
However, the long lead time involved in such undertakings'
and their small employment reg7.lirements will limit the
stimulative impact in the short run.
The outlook for the Chilean economy during the junta's
second year in power is for a continuing battle against
inflation. The dampening effect of government policies
and lower world copper prices will constrain economic
growth. Large credit inflows and another debt rollover
will be required to prevent a. serious balance of payments
deficit. Continuing erosion of domestic purchasing power,
particularli hard on the poor and middle class, may provoke
unrest. The junta is determined to continue its policies
even in the face of these problems. Some advisors, par-
ticularly the Committee of Advisors to the Junta (COAJ),
have championed a less severe policy, but have been unable
to influence junta economic policies.
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D/OER
Attached is the information you re-
quested on 4 September 1974 on pros-
pects -for. the Chilean economy during
_.... second year in power. If
the
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eas ----
ou have any question, p
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i..
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FORM ND. 101 WHICH MAY BE USED.
I AUG 54
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