CHILE: EMBARKING ON TRADE-LED ECONOMIC EXPANSION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00768R000300380001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: December 22, 2016
• Document Release Date: April 7, 2011
• Sequence Number: 1
• Publication Date: September 1, 1986
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Iq
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Directorate of
Intelligence
Secret
Economic Expansion
Chile:
Embarking on Trade-Led
Secret
ALA 86-10039
September 1986
Copy 3 4 3
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Directorate of Secret
Intelligence
Chile:
Embarking on Trade-Led
Economic Expansion
This paper was prepared by
Office of African and Latin American Analysis. It
was coordinated with the Directorate of
Operations.
Comments and queries are welcome and may be
directed to the Chief, South America Division, ALA,
Reverse Blank Secret
ALA 86-10039
September 1986
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Economic Expansion
Summary
Information available
as of 1 August 1986
was used in this report.
Chile:
Embarking on Trade-Led
Chile has developed a trade promotion program that, in our view, has
promising prospects to spur economic growth and earn foreign exchange to
service Santiago's debts. The program is realistic, well thought out, and
comprehensive in scope. It is also being competently implemented by one of
the most skillful and least corrupt bureaucracies in South America.
Moreover, while the plan makes ample use of government subsidies and
production incentives, it has avoided a rigidly statist or nationalistic
approach that would stifle private-sector initiative and work against
foreign participation.
The program focuses on expanding Chile's present line of exports. Santiago
plans to:
? Boost copper output at state-owned. mines, provide incentives for private
interests to open new mines, and improve sales to Europe and Asia.
? Develop lumber exports by working with the private sector to improve
forestry techniques and develop infrastructure, and by cultivating the
Chinese and South American markets.
? Expand fruit production and either process or cold store some of the
increase for delayed shipment to the US market and Pacific Rim
countries.
? Shift fishing toward more lucrative edible fish and improve marketing in
Europe, the United States, and the Pacific Rim.
? Increase arms sales by licensing and adapting foreign-produced weapons
for domestic use and marketing the mature product to other Third World
countries.
Despite its many promising aspects, we doubt Chile's program will achieve
its objective of generating a 13-percent annual rate of growth in export
revenues. Meeting this goal depends on an ambitious investment program.
The government will have to resist pressure from big business to keep
interest rates low-already there is some evidence of backsliding-in order
to generate savings necessary to spur capital investment in the export
sector. Santiago also needs to maintain current foreign investment flows-
$112 million in 1985-which will require good relations with international
financial institutions and a modicum of political stability. Although Chile
continues to diversify exports to reduce the vulnerability of its export
earnings to copper price fluctuations, the program still depends on
7-percent annual growth in copper prices-which we think is unlikely.
Secret
ALA 86-10039
September 1986
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Nevertheless, we believe that the momentum generated in the export
program to date-coupled with modest levels of domestic investment and
stabilizing commodity prices-should be sufficient, in the absence of
adverse political developments, to allow growth in the export sector to
average a robust 7 percent a year through 1989. Under these circum-
stances, Santiago will continue to require commercial bank lending into the
1990s but probably at a level that will avoid serious confrontations with
creditors.
The export sector probably will help the Chilean economy expand by an
average annual rate of 2 to 4 percent, but this will not alleviate President
Pinochet's political headaches. Export-led growth will not significantly
reduce unemployment in the manufacturing sector in the urban shanty-
towns-important centers of anti-Pinochet activity. We believe that only a
highly unlikely economic boom-with overall annual growth rates of 6
percent-would significantly boost Pinochet's popular support and reduce
agitation for a speedy return to democratic rule.
Although Chile's exports would falter if commodity prices plunged, we see
a greater threat to the program from competing policy goals within Chile
itself. Pinochet could be tempted to curry domestic favor prior to the
presidential plebiscite slated for 1989 by adopting quick-growth policies
that emphasize consumption over savings, thereby crippling Chile's invest-
ment rate and hamstringing the export expansion program. Also, the
refusal by the regime to liberalize or reduce human rights violations has al-
ready caused creditor countries to consider voting against or delaying
multilateral bank loans to Chile-developments that would jeopardize
Santiago's access to commercial credit. The export program, in our view,
could be severely damaged if external funds were delayed for as little as six
months.
We anticipate that Chile's promising export promotion program will have a
mixed impact on US interests. In our view, the marginal GDP growth
likely to be generated by the program will not significantly improve
President Pinochet's political standing or otherwise weaken forces encour-
aging a transition to civilian rule. Export growth will help US banks-
which own half of Chile's commercial debt-by reducing Santiago's need
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
for new loans and debt reschedulings. A jump in Chilean copper produc-
tion, however, could blunt the recovery of world prices, making the
reopening of US mines unprofitable. Chilean fruit producers could clash
with US growers if they begin to export to the United States during the
regular US selling season. Moreover, we believe Santiago will continue to
ignore US objections to its arms sales to countries such as Iran because of
its need for foreign exchange and its already contentious relations with
Washington.
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
The Export Expansion Program
Metal and Mineral Development
2
Copper
2
Expanding Chile's Other Major Exports
3
Agriculture
4
Fishing
4
Military Sales
6
Export Promotion and Incentives
7
Stumblingblocks
9
Outlook
11
Implications for the United States
12
Appendixes
A. Export Projections by Product Group and Subproducts, 1984-89
15
B. Wharton Country Monitor Financing Gap Forecast
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Figure 1
Boundary representation is
not necessarily authoritative.
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
Chile:
Embarking on Trade-Led
Economic Expansion
When Chile's economy crashed in 1982, commercial
bankers pressed Santiago to impose austerity mea-
sures to rectify its external accounts and reduce new
loan requests. Since then, Santiago has searched for a
solution to its balance-of-payments disequilibrium
that would enable it to maintain economic growth
while still servicing its foreign debt. Chile balanced its
external accounts in 1982 and 1983 at the cost of a
16-percent slide in GDP and an unemployment rate of
more than 30 percent.
In 1984, President Pinochet responded to rising politi-
cal unrest-which he
ascribed to the languishing economy-by stimulating
economic growth through looser fiscal and monetary
policies and a sharp increase in short-term financing.
Although these moves raised GDP by more than 6
percent and created jobs, commercial creditors-
worried that the buildup of short-term loans might
precipitate a financial crisis-threatened to deny fu-
ture financial relief unless the government returned to
tighter policies. Pinochet responded in 1985 by adopt-
ing a trade expansion program that he hoped would
help Chile meet creditor demands without sacrifices
that would aggravate political discontent. This paper
reviews Santiago's export plans and related economic
policies; projects likely prospects for Chile's major
export products over the next several years; and
assesses the impact on Chile's balance-of-payments
situation, political stability, and US economic inter-
ests.
The Export Expansion Program
Basic Strategy
While Chile is encouraging import substitution and
increased efficiency through the privatization of state
industries, the main thrust of Santiago's effort to
International Financial Support
for Chile's Export Program
Chile concluded a three-year foreign financing pack-
age last year to support an export expansion program
designed to encourage economic growth and provide
foreign exchange to service its debt. The main fea-
tures of this program include:
? An IMF Extended Fund Facility providing
$750 million over three years for balance-of-
payments support. Repayment, however, of past
IMF drawings will reduce the net benefit of these
funds.
? A World Bank structural adjustment lending pro-
gram that provides for three consecutive loan years
of $250 million each with disbursement each year
contingent on successful completion of the previous
year's program and formal approval by the execu-
tive board for the next year's loan.
? A World Bank cofinanced loan of $300 million with
commercial banks.
? A collection of project loans from the World Bank
and the Inter-American Development Bank-some
already approved and others yet to be requested-
to cover Chile's remaining financial gaps.
? A commercial bank rescheduling of more than
$6 billion in 1985-87 loan maturities and $700
million in loans to be disbursed in 1985 and 1986.
25X1
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
stimulate the economy is its export expansion pro-
gram. In our view, Santiago's budgetary constraints
will force the government to concentrate in the short
run on expanding the volume of the country's present
exports, which, though still dominated by metals and
minerals, increasingly consist of wood products, fruits
and vegetables, fish, and arms. Additionally, the
government wants to increase export value by helping
producers process their commodities in-country and
spurring demand for these goods by actively promot-
ing them abroad. Santiago has stated that it hopes
Chilean entrepreneurs will respond over the longer
run to its new export subsidies and services by
developing new export goods and markets.
Metal and Mineral Development
Copper. Although a rapid rise in nonmining exports
over the last decade has decreased the relative weight
of copper as a percentage of overall Chilean exports-
from 58 percent in 1976 to 48 percent last year-
Santiago has, in fact, increased production. The US
Embassy reports that Chile is making progress toward
the goal it set in 1983 of doubling copper exports by
1994. The high grade of its ore and efficient produc-
tion techniques have permitted Chile to take advan-
tage of low world copper prices to drive out competi-
tors and grab a larger market share. Over the next
several years, we expect CODELCO-Chile's state
copper company-to lead the expansion by using
multilateral bank loans and retained earnings to
enlarge and modernize its present facilities. Chile's
copper production infrastructure is already so well
developed, and its natural endowment so extensive,
that we believe CODELCO will be able to substan-
tially boost output during the remainder of the
decade.
Chilean trade officials appear to hope that falling
world inventories and lower interest rates will spur
demand and raise prices. Nevertheless, over the past
several years, Chile's own expansion of copper ex-
ports, the rise of copper substitutes, and surplus
production capacity elsewhere have suppressed world
market prices and kept Chilean copper revenues
stagnant. Even if prices remain depressed, however,
and Chile's other ambitious copper-related projects do
not bear fruit, we believe Santiago will press on
toward meeting its production goals.
Determinants of Copper Demand
Copper accounts for nearly 50 percent of Chile's
export revenues. Although Chilean copper production
continues to rise, revenues over the past few years
have lagged. Several forces have slowed the growth in
world copper demand:
? Exchange rates. A strong dollar has hurt Chilean
copper sales to Europe. World copper prices are set
in dollars, which means that, although copper
prices in recent years have been near historical lows
in dollar terms, they were prohibitively high in
terms of English pounds and German marks. Fur-
thermore, Chile has tried to reduce copper exports
to the US market-where it has its best competitive
price-to avoid provoking US trade retaliation.
Nevertheless, if the dollar continues to weaken
against European currencies, Santiago's sales to
Europe could recover quickly.
? Interest rates. High interest rates have suppressed
the demand for copper by discouraging housing
starts and raising the cost of holding inventories.
Although interest rates have begun to decline, we
doubt that this will rapidly translate into increased
demand. Copper manufacturers have learned
tighter inventory management techniques that they
are not likely to abandon. Also, the recent price
volatility of the copper market has made buyers
wary of purchasing in advance of their needs and of
being suddenly caught with a large inventory of
high-priced copper.
? Substitutes. Other materials are now competing
with mined copper in several markets. Fiber optics,
for example, are beginning to replace copper in
telecommunications networks, and housebuilders
are shifting to cheaper plastic water piping. In
addition, recycling of old copper wire and other
scrap copper has further reduced the demand for
newly mined copper.
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Santiago is trying to lure foreign investors into open-
ing new mines through new incentives and reforms in
the mining laws, according to US Embassy reports.
The government has also offered to share foreign
investor risk by forming joint ventures, but even this
has failed to elicit much response, according to the
US Embassy. Some potential backers probably fear
that a post-Pinochet government would change the
investment laws, while other investors-such as Fin-
land, which recently pulled out of a major copper
mining project-are withdrawing to protest Pino-
chet's political inflexibility and his government's hu-
man rights violations. Still others are delaying new
investment until international copper prices start
showing signs of a rebound, according to Chilean
trade journals. Foreign net direct investment has
dropped so low that the total for the last four years
will probably be less than it was in 1982 alone.
Santiago is responding to US pressures to restrict
copper imports by redirecting sales to other parts of
the world. Chile started reducing copper sales to the
United States in 1983; fresh fruit has now replaced
copper as the country's main export to the United
States. Santiago plans to expand its copper sales in
Europe and Japan, and to further develop its promis-
ing new markets in South Korea and China, accord-
ing to press reports.
The press also reports that the government hopes to
increase earnings by exporting manufactured copper
products, but CODELCO does not appear to be
positioned for such a development. The US Embassy
reports that CODELCO may be selling copper to
domestic manufacturers at prices that exceed its
foreign sales price. This practice, if true, places
domestic manufacturing of copper tubing and wire at
a competitive disadvantage in world markets. The US
Embassy notes that CODELCO already owns several
manufacturing plants in Europe, is discussing a joint
production plant with China, and may not be interest-
ed in helping potential domestic competitors.
Other Metals and Gas. We believe that government
promotion of molybdenum and lithium could make
Chile a major producer in these markets. The volume
of exportable molybdenum-a byproduct from the
processing of high-grade copper ore-will rise natu-
rally with copper production. Chile already has be-
come the third-largest exporter of this metal in the
world-behind the United States and Canada-with
annual sales of roughly $100 million. An erratic
market for molybdenum, however-such as has pre-
vailed over the past few years-may prevent the metal
from becoming a major export earner.
Chile has only recently begun developing lithium-it
holds an estimated 40 percent of the world's re-
serves-through a joint project between Chile's state
development corporation and Foote Mineral Corpora-
tion, a US firm. The press reports that the group plans
to market in Canada, Europe, the United States,
Argentina, and Japan. Although the project could
capture as much as 15 percent of the world market
within a few years, this is not likely to produce a
windfall for the government; we expect the new
production, added to an already growing surplus
market, will merely flatten world prices.
Natural-gas-related projects could be more of a boon
to Chile. Santiago is currently developing two projects
to produce methanol products for export. ENAP-
Chile's national petroleum company-and Combus-
tion-a US concern-plan to construct jointly a plant
capable of producing 1,700 tons of urea and 350 tons
of ammonia. In addition, Signal Methanol company,
the International Finance Corporation, and two Chil-
ean firms expect to complete construction next year
on a methanol plant. Press reporting suggests that the
Signal project alone could generate $6 billion over a
20-year period; ENAP will most likely receive $1.8
billion of these revenues, with the government garner-
ing another $875 million in taxes. Methanol is used as
a gasoline additive and in the manufacture of prod-
ucts ranging from wood adhesives to plastics.
Expanding Chile's Other Major Exports
Over the last decade, Chile has diversified its export
base by invigorating the forestry, fish, and fruit and
vegetable sectors. While past investments are now
beginning to pay off in strong production, generally
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Figure 2
Chile: Exports by Product
Group, 1983-89
Billion US $
10
Marine
Forestry
I I I I I I I
0.1 1983 84 85 86 87 88 89
Projected
Estimated
low commodity prices have suppressed earnings. Even
so, Santiago appears to be gambling on improved
markets, using World Bank and Inter-American De-
velopment Bank loans to support continued growth.
Nevertheless, we believe that strong export growth
into the 1990s-particularly for wood products and
fish-will depend heavily on sharp increases in both
domestic and foreign investment.
Agriculture. Agricultural exports, led by grapes and
apples, have expanded fourfold since 1975 and now
comprise 13.5 percent of Chile's foreign sales. The US
Embassy and reliable press sources report that this
phenomenal rise has been due, in large part, to
benefits Santiago has lavished on the agricultural
sector in the form of extensive subsidies, tariff protec-
tion, and concessionary financing. Santiago plans to
continue these policies for the near future, and we
believe they will help to consolidate recent gains. We
also judge that continued plantings of apple orchards
and vineyards, along with the replacement of wine
grapes with the more lucrative table variety, promise
a robust future for Chilean agriculture.
Chile exports agricultural products mainly to the
United States, Europe, and the Middle East. Chile's
earnings in this sector, however, have suffered from
the poor prices it receives in the European Communi-
ty, and the US Embassy reports that the government
plans to market aggressively in the United States and
Pacific Rim countries. According to press reporting,
US fruit growers do not object to Chilean fruit
exports because they do not compete directly in their
product season. Chile's Southern Hemisphere growing
season has helped it sell nearly half of its total fruit
exports to the United States. Nevertheless, Santiago
is beginning to export processed fruits-such as apple
juice concentrate and dried fruits-and is construct-
ing cold storage facilities, portending possible efforts
to penetrate the US market during the Northern
Hemisphere growing season.
Fishing. Over the last decade, Chile has become the
world's fourth-largest exporter of fish and the largest
exporter of fish meal, and the government hopes to
almost triple revenues by the end of the century. The
US Embassy reports that future catches, however,
may be reduced by a three-year moratorium on fleet
expansion imposed by the government to prevent the
depletion of the northern fishing beds. Expansion of
the fishing industry will depend on exploitation of the
less-fished southern regions, as well as on more
catches of edible fish (as opposed to the fish meal
catch) and the development of aquaculture. Because
the fishing industry is capital intensive, growth will
also hinge on new investment to upgrade the fleet and
develop canning and freezing facilities.
Chile plans to cultivate new markets for its fish
products. Currently, the bulk of Santiago's revenues
come from fish meal sales to Germany, China, the
United States, and East Germany. The press reports
that Santiago intends to increase sales of edible fish to
these countries, while penetrating markets in Japan,
Malaysia, Singapore, Spain, and South Africa.
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
A methanol plant similar to the facility currently
under construction by Signal Methanol company
Chile is encouraging the processing of edible fish
to help increase the value of its fish industry
Government and private interests are joining
hands to improve the quantity and quality of
25X1
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
This strategy will hinge on adequate investment flows.
Because of their dearth of loanable funds and inexpe-
rience in this area, domestic banks will probably
remain small players in the fishing industry, with the
result that Chilean fishing will remain heavily depen-
dent on support from CORFO-Santiago's industrial
promotion agency-and the Inter-American Develop-
ment Bank. The government, however, may try to
reduce the industry's dependence on foreign invest-
ment by encouraging domestic boat manufacturing.
Additionally, the industry could be assisted by joint
fishing ventures similar to those presently under way
with Japan, Korea, and Spain.
Wood Products. A major expansion of tree acreage in
the late 1970s has boosted forestry-related exports,
although Chilean sales still comprise less than 1
percent of the world total. Santiago intends to triple
exports by the end of the century, according to press
reports. Although the government subsidized plant-
ings in the past and will continue to do so, the
expansion plan calls for an additional $3.1 billion in
foreign and domestic investment over the next 15
years. These funds will go to the development of
processing plants, plantations, transportion networks,
and energy sources. A forestry investment committee
composed of government and private companies will
establish investment priorities. Santiago is using
World Bank and Inter-American Development Bank
loans to help implement the program, but we believe it
will be hard pressed to obtain the additional foreign
and domestic investment required for continued rapid
growth. Chile's uncertain political future will make it
unattractive to private entrepreneurs, in our view,
because investments in forestry can take decades to
pay off.
Chile's main wood export is pulp, but it is pushing
sales of sawn lumber, plywood, and paper. Poor
forestry techniques have resulted in low-quality pine,
and it will take several years before methods now used
will produce higher quality lumber. The Pacific Rim
countries absorb over a quarter of Chile's wood
exports, while nearly 20 percent goes to other South
American nations. Chile's small share of the overall
world market will continue to shape its strategy; it
will market future production in areas it knows best,
such as South America and China.
Military Sales. Over the past decade, Chile's arms
industry has risen from obscurity to become the fifth
largest-and probably the fastest growing-of San-
tiago's export sectors. The Chilean military has devel-
oped its domestic arms industry by negotiating li-
censes to produce Western-designed equipment of
intermediate technological sophistication. These arms
are initially produced, tested, and refined by the
Chilean military. The finished product is then mar-
keted to Third World consumers, who have found
them easy to use and maintain, according to press
reports. both military-
owned companies and private firms-some of which
receive government subsidies and technical support
from the armed forces-manufacture and export
arms.
Santiago's biggest money earner so far has been the
cluster bomb-produced and sold by two private
companies with technical assistance from the military;
Chile sold over $120 million in cluster bombs to Iraq
in 1985, according to press reporting. Arms sales to
Iran, Egypt, Pakistan, and Thailand may have added
Santiago, according to press reports, is trying to
develop markets for other domestically produced mili-
tary items such as a trainer aircraft, armored person-
nel carriers, antiaircraft guns, conventional bombs,
landmines, and small munitions. Production of heli-
copters and gunboats is scheduled to begin soon, and
these are also likely to be marketed abroad. Moreover,
Chilean engineers have made advances in the field of
military electronics. One company-ASMAR-man-
ufactures radars and recently designed a computer-
assisted VHF jamming system, and another is devel-
oping heat-seeking missiles.
25X1
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
Major Chilean Arms Manufacturers
ASMAR LSTS, patrol craft, search and rescue craft, SAAR-class missile attack craft, radars, shipboard
electronics.
Cluster bombs, fragmentation bombs, general purpose bombs, VTP- I "Orca" multipurpose vehicle,
VTP-2 "Escarabajo" multipurpose troop transport, BMS-1 "Alacran" half-truck, Piranha multi-
purpose armored vehicle (under license from Swiss firm Mowag), helicopter gun mounts, 70-mm
rockets, grenades.
Chilean Military Industry and Aerial bombs.
Engineering Complex (CQIE)
Pillan T-35 basic trainer, Aucan turboprop trainer, Halcon T-36 jet trainer (under license from
Spanish firm CASA), BO-105 helicopter (under license from West German firm MBB), F-5 spares,
onboard electronics.
Army Materials and Arsenals Small caliber weapons and ammunition, infantry support weapons, grenades, mines, aerial bombs,
Factory (FAMAE) mortars, 105-mm ammunition.
s See following page for photo examples.
In our view, Chile is in a good position to expand its
arms exports by offering countertrade, service, and
coproduction agreements. Cardoen Industries-
Chile's largest private arms manufacturer-has built
or is building cluster bomb factories in Iraq and
Spain, and is assembling Spanish-supplied aircraft
parts for reexport, according to the press
Military journals report that Chile is also
planning to modify and produce West German BO-
105 helicopters under license for civil and military
uses and to begin assembling and eventually produc-
ing German SIG-540 rifles.
Although private companies such as Cardoen have
successfully marketed their own goods, several firms
have decided to use the Spanish firm Spanco and
Export Promotion and Incentives
Santiago plans to expand its present line of exports in
the short run, while working to develop new product
lines over the long term, according to US Embassy
reporting. The government, while continuing to help
major exporters, will soon begin providing smaller
exporters with marketing assistance and loans from
multilateral bank programs. In the past, small Chil-
ean manufacturers have lacked both the resources and
the expertise to reach distant markets. The govern-
ment is rectifying this problem through new laws
allowing small producers to form marketing consor-
tiums and by granting rebates and tax refunds on
imported goods used in producing exported products.
Additionally, the Chilean business press reports that
25X1
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
(Left) 500 pound
cluster bombF
(Right) One of 240 bomblets
packed into the cluster
Cohete 70-mm unidirectional
rocket F--]
amphibious
(in water view)
(Below) Piranha 6x6-
(on land view) F
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
the government export promotion agency intends to
contribute by providing insurance and regulatory
information on foreign markets, and arranging for
new exporters to exhibit at trade fairs.
Chile's export promotion program, in our view, is
realistic, well thought out, and comprehensive in
scope. It is being competently implemented by one of
the most skillful and least corrupt bureaucracies in
South America. Moreover, while the plan makes
ample use of government subsidies and production
incentives, it has avoided a rigidly statist or national-
ist approach that would stifle private-sector initiatives
and work against foreign participation. Nevertheless,
Santiago must overcome several obstacles-notably a
low savings rate, unpredictable access to foreign
funds, and volatile world markets-if exports are to
keep growing over the next several years.
The main precondition for a successful export drive,
in our view, is Santiago's adherence to policies that
will increase savings-needed to raise domestic in-
vestment capability-and foreign investor participa-
tion. The commitment to facilitate investment, howev-
er, may falter under the weight of competing interests
and pressures. For example, according to Embassy
reporting, the government has already tried to assure
continued political support from major domestic car-
tels by lowering interest rates-a move we believe
undermines the generation of new savings. Politically
influential bankers-fearing dilution of their owner-
ship and control of the financial system-will proba-
bly also fight to derail the measures that Santiago has
taken to recapitalize Chile's largely insolvent banks
and bolster the domestic financial sector. Moreover,
in our view, the government will find it increasingly
difficult to continue restricting domestic consumption
in favor of new investment over the next two years as
the middle and lower classes begin complaining about
a decline in government services and a shortage of
consumer credit.
Santiago, however, can probably increase savings by
reducing the growth of its debt servicing burden. Its
debt-to-equity conversion program begun in 1985-
converting foreign debt to shares in domestic enter-
prises-could reduce the growth of its overall debt
burden by nearly $1 billion by 1987, by our calcula-
tion. Santiago also hopes to shift its borrowing from
commercial banks to multilateral banks charging
lower interest rates. We believe this strategy will slow
the growth in Chile's debt service and help its balance
of payments, giving some counterweight against other
policies that discourage the generation of investment
funds.
According to the US Embassy, Santiago is counting
on foreign sources for over half of the investment
required by the export program. Foreign commercial
lending and investing, however, may be hurt by
creditor concern that Santiago's human rights record
and its failure to move forward on a transition to
civilian rule could sour its relations with international
financial institutions and possibly provoke economic
sanctions, according to the press
Although we believe that the chances for South
African-style sanctions are slim, a vote by industrial-
ized nations against Chilean World Bank and Inter-
American Development Bank loans could seriously
jeopardize many aspects of the export promotion
program. In our view, uncertainties about Chile's
future will cause investors to hold back for the next
several years unless commodity prices rise enough to
cover the immediate risks associated with political
instability or sanctions against the Pinochet regime
and the longer term threat that a post-Pinochet
government could change investment laws.'
Chile's program is also predicated on commodity
prices either stabilizing or rising. This will require
increased demand in the industrialized countries and
easing interest rates to encourage inventory restock-
ing. Otherwise, commodity prices could decline to the
' Currently, Chile is not facing a capital flight problem. Strong
economic management and high real interest rates paid by the
Central Bank on dollar accounts have helped stabilize Chile's
capital flows. However, capital flight could be triggered by increas-
ing political instability or a veto of Chile's pending development
25X1
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Figure 5
Chile: Outstanding External
Debt, 1981-858
Figure 6
Chile: Debt Service After
Completing Rescheduling Agreements,
1981-85
Percent of export goods and non factor services
100
Amortization
I Interest
Short term
Medium and long term
0 1981 82 83 84 85
point where no attainable increase in export volume
by Chile would compensate for lost revenues. Chile
will also face the danger that small price increases for
some of its exports could encourage competing pro-
ducers to enter the market-creating excess supply
and precipitating another drop in prices.
Finally, even if Chile can expand production of its
exports, it must quickly carve out a niche for them in
the world market. While we believe that Santiago is,
on the whole, effectively targeting new customers,
increasing protectionism and fluctuating exchange
rates in the EC and the United States may serve to
impede growth in several areas:
? EC agricultural tariffs will hamper the expansion of
fruit exports, but a falling dollar against European
currencies could increase the continent's demand for
Chilean copper.
? Santiago's self-imposed restrictions on copper ex-
ports to the United States will reduce the growth
potential of this market.
? Chile's fruit sales to the Middle East probably will
not expand as long as oil prices remain depressed.
? Chile will need several years to fully develop the Far
East market, which we see as containing its best
potential customers for fruit, fish, and wood
products.
? Arms sales, however, are poised to take off, as
Santiago has several quality products ready for
export and is targeting a Third World market eager
for the mid-technology, low-priced items it pro-
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Figure 7
Chile: Export Shares by Region,
1975 and 1985
Percent
Total 1975 Exports, 1.6 Billion
European Community, 40.7
Germany, 14.4
United Kingdom, 8.2
France, 4.2
Italy, 4.8
Other, 1l
Asia, 15.6
Japan, 11.3
China, 0.7
United States, 8.8
European Community, 31.6
Germany, 9.6
United Kingdom, 6.5
France, 3.7
Italy, 5.2
Other, 12.2
Asia, 18.4
Japan, 10.1
China, 3.3
South Korea, 2.3
Taiwan, I
Prospects for Chile's export program depend to a
considerable extent on the way political events play
out, and we see several possible eventualities that
could undo the program. A move by Pinochet, for
example, to spur consumption to curry political sup-
port before the 1989 presidential plebiscite might
Figure 8
Chile: Comparative Projections
of Exports, 1986-89
Government
projection
Chase
econometrics
CIA projection
Wharton
projection
I I I
0 1986 87 88 89
generate a brief economic surge, but it would proba-
bly gut domestic investment-and with it the chances
for sustained, export-led growth. Likewise, continued
refusal by the regime to advance toward civilian rule
or to curtail human rights abuses could reduce Chile's
access to foreign funds, with equally adverse effects
for the export program. We believe that commercial
banks, for instance, will defer rescheduling talks on
Chile's debt until they are reassured that multilateral
financial institutions will not try to apply political
pressure on Pinochet by lowering commitments to
Santiago. The program, in our view, could be jeopar-
dized if external credits were delayed for as little as
six months.
On economic grounds alone, we doubt that the trade
expansion program will meet the government's target
of roughly 13-percent annual growth in exports during
1986-89. Rather than rising sharply-as Santiago
25X1
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
expects-prices for Chile's export commodities will
probably increase only modestly at best, dashing both
investor enthusiasm in the export sector and the
government's hopes for a sustained investment boom
over the next several years. In addition to their direct
effect in reducing momentum of the export program,
sluggish investment and limited commodity price rises
would force Chile to ask bankers to reschedule its
maturities and supply new loans through 1989 to
cover its balance-of-payments shortfall. We believe
bankers would acquiesce in such requests-albeit not
without some foot-dragging-but, having done so,
they would not then be likely to extend loans for
projects directly related to the export expansion pro-
gram.
Nevertheless, we believe that the momentum generat-
ed in the export program to date-coupled with
modest levels of domestic investment and stabilizing
commodity prices (see appendix A for export revenue
projections by commodity)-should be sufficient, in
the absence of adverse political developments, to allow
growth in the export sector to average roughly 7
percent a year through 1989. Such growth in exports
would help keep the overall economy expanding at an
annual rate of between 2 and 4 percent and would
generate enough foreign exchange to keep Chile's new
money needs at a level that would avoid serious
confrontations with creditors. Moreover, even the
relatively modest growth that we project would bene-
fit the domestic economy by giving small businesses a
stake in the export program and promoting the growth
of a more aggressive entrepreneurial class. Such a
strengthening of the private sector would lessen the
likelihood that Chile would revert to its traditionally
statist and inward-oriented economic policies when
the country returned to civilian government.
We doubt that modest success of this sort in the
export program will alleviate any of Pinochet's politi-
cal headaches over the short term. Only a highly
unlikely economic boom-similar to that of
1978-81-would, in our view, significantly boost Pin-
ochet's popular support and reduce the public's desire
for a speedy return to civilian rule. Moreover, while
annual growth in the export sector above 7 percent
will create jobs in primary-product sectors, employ-
ment in areas such as services and manufacturing-
the locus of many politically active unionized work-
ers-may languish or decline. The generally conserva-
tive rural areas should benefit from the strong push
for agricultural exports, but unemployment could
actually rise in the strongly anti-Pinochet shanty-
towns that ring Santiago and other major cities. We
believe that under these circumstances popular dis-
content with Pinochet will grow, fueled primarily by a
general desire for a transition to democracy. A unified
call by moderate political parties last year for such a
transition and significant mass participation in an
antiregime protest strike this year have helped, among
other factors, to create a political momentum in the
anti-Pinochet movement that, we believe, is largely
impervious to modest improvements in the country's
economic situation.
Even moderate success by Santiago in spurring
export-led growth will, in our view, provide US bank-
ers and other foreign creditors with a more sound
backdrop for lending and investment. Although
Chile's greater capacity to service its debt will benefit
US bankers-who hold one-half of the commercial
loans to Santiago-the export program may hurt
other US economic interests. Increases in copper
production in Chile, for example, probably will keep
international prices too low to make the reopening of
US copper mines profitable. We expect that the
emphasis by Chilean growers on cold storing and
processing their fruit will put them into direct compe-
tition with US producers, creating the potential for
trade disputes similar to those in which Santiago is
already embroiled with the EEC.
Chile's growing arms exports may also run counter to
US foreign policy interests. Chile is willing-and
increasingly able-to export basic arms to virtually
any country that can pay cash. Recently, demarches
by Washington and Iraq failed to dissuade Santiago
25X1
25X1
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
from selling cluster bombs to Iran. We anticipate
more such sales and doubt that Santiago-given its
need to export and its already strained relations with
Washington-will respond readily to US pressure in
this area.
Marginal growth over the next several years will help
Pinochet only in a limited way; the economy at least
will not become still another issue compounding his
already formidable political problems. Nevertheless,
we doubt that export-led growth will significantly
bolster Pinochet's political standing or work against
US encouragement of a transition to civilian rule. Nor
will it, in our view, dampen the political unrest fueled
by popular support for Pinochet's departure from
office when his term expires in 1989. Should the
President remain unyielding on a transition formula,
however, there is a danger that domestic unrest, a
reduction in investment flows by nervous foreign
creditors, or even external sanctions could derail the
export program, thereby aggravating both political
and economic instability.
Reverse Blank 13
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
Appendix A
Export Projections
by Product Group
and Subproducts, 1984-89
Table A-1
Major Minerals and Basic Mineral Products
2,227
2,361
2,443
2,553
2,699
2,820
-13.7
6.0
3.5
4.5
5.7
4.5
Table A-2
Major Agricultural Products
294
368
452
556
667
801
33.2
25.2
22.8
23.0
20.0
20.0
165
219
284
369
462
577
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Table A-3
Marine Products
Table A-4
Forestry Products
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
Appendix B
Wharton Country Monitor
Financing Gap Forecasta
Exports
6 Projection
-1.6
Financing Gap
Projection
0
Note: "Improved conditions" means that
copper prices rise 10 percent faster
and interest rates fall by 1 percent
more than anticipated.
a The sensitivity analysis above was conducted
against projections made by the Wharton model.
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
 Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2
Secret
Secret
Sanitized Copy Approved for Release 2011/04/07: CIA-RDP88T00768R000300380001-2