CHILE: ECONOMIC VULNERABILITY OF THE PINOCHET REGIME

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• Collection: General CIA Records
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• Original Classification: S
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: March 23, 2012
• Sequence Number: 1
• Publication Date: July 1, 1987
• Content Type: REPORT

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Directorate of
Intelligence
of the -Pinochet Regime
Chile: Economic Vulnerability
An Intelligence Assessment
Secret
ALA 87-10028
July 1987
Copy 19 9
25X1
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Directorate of
Intelligence
of the Pinochet Regime
Chile: Economic Vulnerability
An Intelligence Assessment
This paper was prepared byl
25X1
Office of African and Latin American Analysis, with
contributions from L
25X1
A
LA. It was coordinated with the
--
25X1
Directorate of Operations.F
~
25X1
Comments and queries are welcome a
directed to the Chief, South America
nd may be
Division
ALA
,
,
Secret
ALA 87-10028
July 1987
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Chile: Economic Vulnerability
of the Pinochet Regime
Key Judgments The relative health of Chile's economy over the past several years-it grew
Information available 2.4 percent in 1984 and 5.7 percent in 1986-has been a crucial factor in
as of 13 May 1987 preventing opposition to the Pinochet regime from reaching critical mass.
was used in this report.
The economy, however, is vulnerable to pressure on several fronts:
? We believe that Chile's need for external financial support, especially
from the international institutions, to underwrite its economic program
represents a particularly sensitive pressure point. Governments of coun-
tries in the Organization of Economic Cooperation and Development
(OECD) are under substantial domestic pressure to deny Santiago access
to international financial resources unless Pinochet takes concrete steps
to liberalize the political system. Loss of such funds would almost
certainly jeopardize crucial foreign direct investment, short-term credit
lines, and further debt relief from commercial bankers. This would slow
Chile's economic growth, increase unemployment, and generate inflation-
ary pressures, thus creating new political headaches for Pinochet.
? Chile's economic program, in our view, is also vulnerable to OECD trade
restrictions. The country needs OECD capital equipment to maintain its
export expansion, and, although Santiago could turn to Brazil, China, or
South Korea as alternate suppliers, this would probably involve poorer
credit terms and lower quality equipment. Santiago's "engine of
growth"-exports-relies on OECD countries, which buy more than
two-thirds of Chile's goods. Pinochet has little economic leverage with
OECD nations because Chilean exports have no strategic importance and
can be obtained from numerous other sources.
? Chile is also susceptible to internal economic threats-chiefly leftist
sabotage to its economic infrastructure, mass violence, and work stop-
pages by unions and professional groups. Far left groups in recent years
have bombed Chile's powerlines, occasionally blacking out major parts of
the country. If leftists chose to attack a few key points on Chile's major
roads and rail lines, they could disrupt shipping of needed goods and fuel
from the coast to the nation's capital and main agricultural regions. The
moderate opposition could-as the scheduled political transition nears,
and the government legalizes some political activity-begin encouraging
professional groups and unions to engage in work stoppages to protest
against the government.
Secret
ALA 87-10028
July 1987
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Santiago apparently anticipates an OECD threat to veto the third stage of
its World Bank structural adjustment loan later this year and to impose
some minor trade sanctions over the next two years. We expect Pinochet to
try to contain such pressures-as he has in the past-with deft political
lobbying. We believe the government calculates it can forestall adverse
actions by maintaining solid free market policies and by:
? Claiming that Chile is moving at a deliberate pace toward civilian rule.
? Publicizing its model debtor status.
? Hinting that Chile would have no recourse but debt repudiation if it were
cut off from foreign funds.
Even if Chile is hit by minor trade sanctions such as EC restrictions on
fruit imports or consumer boycotts, such measures, in our view, would not
derail the 3- to 5-percent annual economic growth that Santiago now
forecasts. Moreover, such measures probably would not cause Pinochet to
speed up moves toward democracy.
In the case of tough OECD sanctions, however, such as blocking Santiago's
access to development bank lending and imposing a virtual trade embargo,
we believe Pinochet's room for maneuver would narrow. He would try to
avoid an economic downturn that could threaten his tenure, probably by
stimulating domestic industry. In our view, Chile under these conditions
could boost growth for nearly a year, but, unprepared to go it alone like
South Africa, would then experience increasing dislocations and slumping
growth. We believe that many of Pinochet's crucial upper-class and rural
supporters would become disillusioned as they began suffering economic
reverses; declines in middle- and lower-class income would encourage
protests and work stoppages. We gauge that at this point the armed forces
would perceive Pinochet as having lost control-with economic chaos akin
to that of the Allende period-and that they would probably move to
replace him with an army general or a civilian leader who would set a more
definitive timetable for a transition to democracy.
We believe Chile's security services, which have weakened the main
Communist-affiliated terrorist group over the last nine months, will be able
to contain most internal economic subversion in the next several years. The
far left is concentrating on expanding its influence with organized labor
and within Santiago's slums, although it 25X1
lacks sufficient support to harness anger within the unions and among the
poor.
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There is an outside chance, however, that deteriorating economic condi-
tions of the sort that would result from tough OECD sanctions could give
the far left an opening to launch a campaign of violence and terrorism. In
this case, Pinochet would almost certainly regain strong middle-class,
upper-class, and military support and could probably contain the immedi-
ate threat. A crackdown would entail massive human rights violations, no
transition to democracy, and sharpened political conflict-fertile ground
for the far left's long-term plans to develop a full-scale insurgency.
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Key Judgments
Internal Economic Dislocations
9
Economic Sabotage
9
Outlook and Implications for the United States
14
Impact of Tougher Measures
15
Political Repercussions
16
Sanctions Amid Internal Disruptions
17
Statistical Appendix
19
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Figure 1
Chile: Selected Economic Activities
Mining
Cu Copper P Petroleum
tag Silver C Coal
RfJo Molybdenum S Salt
Fe Iron M Nitrates
Au Gold Nn Manganese
Industry
`( Fish/fishmeal Wood/paper
n processing products
i copper smelting /-1 Textiles
Wine Q Chemicals
Agriculture
Q Sheep W Wheat
V Cattle P Potatoes
G Grapes
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Chile: Economic Vulnerability
of the Pinochet Regime
The relative health of Chile's economy over the past
several years-it grew 2.4 percent in 1985 and 5.7
percent in 1986-has been a crucial factor, in our
view, in preventing opposition to the Pinochet regime
from reaching critical mass. In addition to the general
effect it has had in lessening economically motivated
political discontent throughout the country, the regi-
me's success in engineering a recovery from the
economic crisis of 1982-83 has:
? Deprived the highly fractionalized moderate opposi-
tion of a unifying issue to rally the public against
Pinochet.
? Increased the radical left's difficulty in recruiting
lower- and middle-class cadres.
? Reassured the military that Pinochet is still the best
man to ensure Chile's economic and political
stability.
? Restored support for Pinochet among rightist politi-
cal parties and from key business and rural inter-
ests.
Although Chile's carefully crafted economic program,
having survived the recent shocks of record low
commodity prices, can weather future volatility in
world markets, the economy remains vulnerable on
several fronts. Continuing export expansion-Chile's
"engine of economic growth"-requires open world
trade and a smooth flow of investment funds from
abroad to build new factories at home. Internally, the
country's economic infrastructure-roads, rail lines,
and powerlines-lie exposed along narrow mountain
terrain to terrorist sabotage, and massive work disrup-
tions organized by key interest groups could put a
stranglehold on Chile's economy. This assessment
evaluates the vulnerability of Chile's economy to
internal as well as external pressures and assesses the
likely effect the application of such pressures would
have on the country's political evolution.
Chile's economic performance is linked to an ambi-
tious export program, the benefits of which have
extended to the economy as a whole. Robust export
growth in 1986 stimulated activity in other economic
sectors, generating a 5.7-percent increase in GDP and
helping inflation and unemployment to drop dramati-
cally
The export program depends heavily on the coopera-
tion of its creditors and trade partners. The Interna-
tional Monetary Fund (IMF)-under an extended
fund facility-has helped Chile implement fiscal and
monetary policies to support the export sector. Simi-
larly, the World and Inter-American Development 25X1
Banks provide Santiago with loans and technical
assistance to expand, diversify, and improve market-
ing. The success of the program to date has helped
Santiago persuade commercial bankers to reschedule
its debt at lower interest rates and to keep open $1.7
billion in short-term trade credits
Although the export program has generated consider-
able momentum of its own-Chile, for example, has
boosted its savings rate, historically one of the lowest
in South America, and now generates more total
investment from domestic sources than from
abroad-we believe it would be badly hurt if it
became the target of trade boycotts and restrictions or
of disinvestment by foreign creditors.
Export Vulnerabilities
Exports-equal to one-fourth of GDP-are Chile's
engine of growth. The press reports that an 11-percent
increase in export revenues drove economic growth to
5.7 percent in 1986.' US Embassy reporting indicates
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Chile's Economy in a Nutshell
Chile is generally ranked as a midrange developing
country, having a relatively advanced transport, pow-
er, and communications network and some manufac-
turing capability. Chile's population is highly urban-
ized and well-educated, and substantial social
spending has made it probably the most literate-
over 90 percent-and longest lived in the region.
Chile's economy is integrated into the world market,
and is highly dependent on trade and foreign invest-
ment. In recent years, its rising export trade-which
is now equivalent in value to one-fourth of the
country's GDP-has spurred industrial and agricul-
tural growth. Currently, this nation of 12 million
people produces $17 billion in goods and services, on
a per capita basis roughly half that of its neighbor
Argentina.
Resources
Chile's peculiar geography offers a wide variety of
resources that the government has been trying to tap
more effectively over the last decade. The Andes
Mountains that run along Chile's 4,200-kilometer
eastern border contain rich metal and mineral depos-
its-copper, gold, silver, iron, molybdenum, nitrates,
and lithium. Chile's aggressive mining policies have
made it the world's largest copper exporter. The
mountain slopes are home to a thriving forestry
industry that produces cellulose, sawed lumber, fur-
niture, and other wood products for export. Orchards
and vineyards that, spread through Chile's numerous
mountain valleys yield fruits-such as apples,
grapes, plums, and strawberries-that account for
over 10 percent of total exports. Chile's long Pacific
Ocean coastline on its western border offers a wide
variety of fishing, making Chile the world's largest
fishmeal exporter. By better utilizing its resources,
Chile has developed a more diversified export base in
recent years. Copper-which previously accounted for
over 80 percent of Chile's export earnings-now
represents about 40 percent. The government is also
encouraging the development of natural resources for
domestic use, initiating, for example, major energy
projects to develop its coal and hydroelectric poten-
tial.
Dependency
Nevertheless, we judge that the country's continued
development depends on access to foreign funds.
Chile traditionally has had a low rate of savings,
relying on export earnings and foreign sources to pay
for its growth and social programs. Chile's ambitious
development program in the 1970s relied on interna-
tional bank lending. During the 1982 world recession
and subsequent debt crash, bankers cut off Chile,
leaving the country with a large debt overhang. In
1985 Santiago asked the multilateral institutions to
help it develop a program to grow and pay its debts.
The main features of the agreed program include:
? An IMF Extended Fund Facility providing $750
million over three years for balance-of-payments
support.
? 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. Upon successful
completion of the original three-year program, the
World Bank may extend it.
? A World Bank loan of $300 million cofinanced with
commercial banks for 1985-86.
? A collection of project loans from the World Bank
and the Inter-American Development Bank worth
several hundred millions of dollars to cover Chile's
remaining financial gap.
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? A commercial bank rescheduling of more than $6
billion in 1985-87 loan maturities and $700 million
in loans disbursed in 1985 and 1986.
Figure 2
Chile: Key Economic Indicators, 1984-87
Bankers-who have been impressed by Chile's perfor- s
mance under its development program, according to
press reports-have granted additional debt relief in
early 1987 by rescheduling most of Chile's $15
billion commercial debt and lowering interest
charges. For its part, Santiago has promised to
increase its domestic savings and encourage foreign
corporations to invest in Chile. The export program
has shown good results, but creditor countries-
trying to pressure Santiago to stop human rights
abuses and liberalize the political system-have
twice nearly scuttled it by delaying consideration of
project loans and threatening to veto the crucial
World Bank structural adjustment loan.
Private Sector
Although the government controls Chile's major in-
dustries, the US Embassy reports that Santiago
welcomes foreign investors and is encouraging the
formation of private enterprises. Chile is courting
these investors by offering the most liberal profit
repatriation schemes and open-door investment poli-
cies in Latin America. The government has also
offered to form joint ventures and work closely with
foreign firms wanting to start new operations. Its
debt-to-equity program, in our view, is helping devel-
op a private capital market in Santiago, and the
government is taking advantage of this situation by
rapidly privatizing state corporations. According to
press reporting, foreign investor interest in Chile is
growing, but low world commodity prices, political
uncertainty, and the government's unsavory interna-
tional image still inhibit many investors and are
preventing Chile from realizing its full economic
potential.
Real Private Consumption 25X1
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Secret
Figure 3
Chile: Exports by Product Type, 1986
Other Industrial
4.7 (2)
Other
14.8 (6)
Copper
42 (1.7)
Mining Products
56.9 (2.4)
Livestock
.9 (.04)
that rural areas-which produce the majority of
exports-have most benefited from this expansion,
but the spillover effect has boosted urban commerce,
construction, and manufacturing and contributed to a
drop in unemployment.
We believe, however, that Chile's export performance
could be marred over the next two years by trade
restrictions imposed by its trade partners-some polit-
ically inspired and others protectionist reactions to
Chile's threat as a low-cost producer. For example,
trade journals report that US copper producers are
seeking protection against Chilean competition and
that the US Congress-viewing Pinochet's repressive
policies and his plans to retain power indefinitely-is
considering several bills to revoke Chile's trade bene-
fits and bar its copper exports to the United States.
For its part, the EC is considering limiting apple
imports from Chile, and consumer groups in Western
Europe and the United States have threatened to
boycott Chilean fruit to protest Santiago's human
Chile is understandably concerned about rumblings in
OECD countries:
? The OECD buys more than 70 percent of Chile's
$1.8 billion in copper exports.
? The United States and the EC purchase most of
Chile's $500 million in fruit exports.
? Europe consumes the bulk of $500 million in fish
products that make Chile one of the world's largest
fish-exporting nations.
Pinochet, in our view, would have little leverage with
OECD nations should they balk at buying from
Santiago, since Chilean exports have no strategic
importance and can be obtained from numerous alter-
nate suppliers.
Santiago is employing a variety of tactics to offset
foreign pressure for political liberalization
in 1985 Santiago
decided to lobby the US Congress and mount a media
rights violations.
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Table 1
Chile: Exports, by Destination, 1986
Total
4,222.3
United States
915.2
Japan
420.1
West Germany
441.2
Brazil
292.9
United Kingdom
219.8
Italy
215.8
Argentina
160.6
Netherlands
153.6
France
153.1
Spain
122.2
China
100.2
South Korea
91.8
Canada
58.4
Sweden
53.5
Other
746.0
campaign to improve its image, publicizing the steps
Pinochet has taken toward a democratic transition
and extolling the successes of Chile's free market
policies. Likewise, press reports suggest that Chile
stressed these same themes to other governments and
in international forums. Nevertheless, in the event
that Santiago cannot ward off sanctions by OECD
nations, it is developing alternative export markets in
the Pacific Rim and Arab countries. We believe,
however, that major inroads in these areas could take
years; to date, these new trade partners have absorbed
only a small part of Chile's increase in export produc-
tion.
Even if Chile's commercial partners impose some
trade restrictions, export-led growth may still, in our
view, be Pinochet's safest economic strategy. Recent
academic studies conclude that trade
restrictions have historically been ineffective because
they have been applied unevenly as each of the
participants maneuvers to protect its vested interests.'
For example, in Chile's case West Germany might
stop fruit purchases while continuing to import copper
for a plant that is jointly owned and operated with the
Chilean state copper company. New Zealand might
restrict copper, fruit, and fish imports but continue to
develop its Chilean lumber investments. Also, Chile
could probably find alternative buyers for its surplus
goods, although at less lucrative prices.
Pinochet's chief alternative to export-led growth, in
our view, is semiautarchy. Chile could try to reduce
its dependence on the international community by
improving domestic industrial capabilities and not
borrowing from multilateral financial institutions.
This alternative, however, is, in our view, neither
politically nor economically realistic, except in the
very short run. Although Pinochet might marshal
public support by playing to nationalist sentiment, we
believe the reality of economic hard times would soon
backfire on the government. Increasing self-sufficien-
cy would require Santiago to shift resources from
export production to domestic manufacturing. Many
export industries-deprived of substantial sums from
the multilateral development banks-would languish.
Slower export growth would then reduce Chile's
foreign exchange earnings, creating problems with
creditors and obstructing imports. Chile's economy, in
our view, would experience serious production bottle-
necks, rising production costs, shortages, and jumps in
inflation. We believe that the impact on Pinochet's
political standing would be uniformly negative. As in
1983, the middle class could conclude he was losing
control of the economy and the nation, sparking
recriminations from the President's erstwhile support-
ers in business and agriculture, strikes from vested
interest groups, and criticism from the military that
could eventually threaten his tenure in office.
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Import Vulnerabilities
Both the Chilean Government and private industry
are aware of the importance of imports to economic
growth. According to the US Embassy, Santiago has
tried to reduce this dependency by encouraging busi-
ness and consumers to "buy Chilean." For example,
the state development corporation gives state-owned
industries import substitution guidelines. The press
reports that, in this manner, Chile has already re-
duced imports of tools and relatively unsophisticated
machinery and equipment. Furthermore, the govern-
ment has cut food imports to the bone by granting
farmers large subsidies that shut out foreign grain.
According to US officials, import substitution has
reduced the nation's overall import bill by nearly 10
percent since 1984. Nevertheless, in our view, Chile
still remains vulnerable to the loss of crucial interme-
diate and capital goods that it cannot produce domes-
tically.
Oil is one of the most important of these potential
import vulnerabilities. Petroleum imports-those
from Venezuela, Egypt, Nigeria, Ecuador, and China
totaled nearly $400 million in 1986-provide over
half of Chile's oil and roughly 20 percent of the
country's total energy needs. Petroleum plays a key
role in several strategic economic areas: virtually all
of the transport sector is oil based, as is over one-
fourth of mining and industry. An oil shortage would
cripple Chile's trucking industry-the country's main
mode of transporting goods-and almost certainly
create bottlenecks in mining and industrial produc-
tion. The government, however, is taking measures to
reduce the country's vulnerability by spreading import
purchases among a variety of suppliers, by buying
more foreign oil when prices are low to conserve
domestic reserves, and by promoting oil exploration.
Other possible weaknesses, in our view, are the capital
goods and machinery sectors. Official statistics show
that as recently as 1982 Chile imported nearly 90
percent of its machinery and transport equipment.
Chile relies on the United States, Brazil, the EC, and
Japan for sophisticated machinery and capital im-
ports-equal to nearly $700 million in 1986-that are
vital to industrial expansion and to port, highway,
energy, mining, methane, and food processing
projects. US Embassy reporting suggests that, al-
though some industrialists have stockpiled imported
intermediate and capital goods, Chile's high utiliza-
tion of its present capital stock has left it with little
reserve capacity in this area:
? Mining equipment is needed to tap Chile's rich veins
of molybdenum, iron, and precious metals, and to
increase copper productivity.
? Forestry machinery is vital to expanding pulp ex-
ports and developing a pine board industry.
? Food processing and refrigeration equipment is key
to growth in the fishing and fruit export industries.
Nevertheless, we believe that Santiago has several-
albeit largely unsatisfactory-options if it faces im-
port restrictions from OECD countries. The.press
reports that Chile has recently improved its commer-
cial relations with several newly industrializing coun-
tries that could take up the slack, such as Brazil,.
China, and South Korea. These countries, however,
would probably offer poorer credit terms and lower
quality equipment. The government could also try to
evade trade restrictions by buying embargoed equip-
ment from third parties, although such transactions
would probably boost the price and delay delivery of
crucial imports. Santiago could also respond by fur-
ther developing its capital goods industry, but we
judge this to be only a very long-term solution. We
believe that over the two-year time horizon of this
assessment a serious disruption in Chile's capital
goods supply would produce production bottlenecks,
ignite inflation, and damage the export program. The
overall result-in the absence of a major shift in
government economic policy-would probably be
slower economic growth in the first year and even
lower growth thereafter.
Financial Vulnerabilities
We believe that Chile's greatest vulnerability is loss of
foreign funds to meet domestic investment needs.
Serious problems in this area would probably have a
quicker and more severe impact on the economy than
trade sanctions. Over the last decade, Santiago has
tapped foreign investors, commercial bankers, and
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Figure 4
Chile: Imports by Product Type, 1986
Automobiles
1.0 (.03)
Food
Consumer goods 1.3 (.04)
13.4 (A)
Nonfood
11.0 (.3)
Other
.08 (.002)
Transport Equipment
4.7 (.15)
Capital goods
21.2 (.66)
Machinery
16.4 (5)
Other
7.7 (.2)
Raw material
2.5 (.08) Other
1.6 (.06)
Supplies
7.5 (2)
Semiprocessed
18.8 (6)
Intermediate goods
57.7 (1.8)
Industrial goods
14.9 (5)
Petroleum, etc.
12.1 (3)
Table 2 Million US $
Chile: Imports, by Country of Origin, 1986
Total
3,156.7
United States
641.5
Venezuela
148.2
Brazil
247.6
West Germany
250.1
Japan
296.4
Argentina
122.5
Spain
82.2
United Kingdom
88.5
France
94.1
Egypt
34.1
Canada
54.3
Nigeria
49.5
Italy
64.0
Ecuador
58.8
Peru
56.3
Other
868.6
sources would hurt, since all are interrelated.
multilateral lenders to fund growth. Currently, multi-
lateral institutions are Santiago's biggest investment
lenders, but, in our view, loss of access to any of these
The Threat of Disinvestment. We believe that foreign
companies could inflict some damage on Chile's econ-
omy by either totally diverting or repatriating profits
from ongoing projects. To date, however, the press
reports that most foreign firms-although leery of
new commitments, given Chile's uncertain political
future- are trying to improve their present opera-
tions by reinvesting earnings. Moreover, recent US
Embassy reports indicate that foreign companies have
expanded their ownership of current operations by
using Chile's debt-to-equity conversion program. New
Zealand firms-buying forestry and dairy interests-
are especially active in this area.
We believe, however, that this situation could quickly
change if foreign investors concluded Chile was on a
collision course with commercial banks and multilat-
eral instititutions. Under such circumstances, foreign
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Figure 5
Chile: External Debt Stock, 1986-87
Billion US $
25
Table 3
Projected External Debt Service, 1986-89
Other
Short-Term Debt
International
Organizations
Total interest service
1,576
1,635
1,185
1,635
Official Lenders
International lenders
200
250
250
250
Commercial
Commercial lenders
1
141
1,150
700
1,150
Lenders
Official lenders
,
45
45
45
45
Short term
190
190
190
190
Total amortization
400
370
440
530
International lenders
50
100
140
220
Other
350
270
300
310
companies would probably take advantage of Chile's
liberal profit repatriation regulations and quickly
move large amounts of capital out of the country to
protect themselves against possible foreign exchange
controls. This would slow Chile's export program as
foreign owners stopped maintaining the production
capacity of their factories
Commercial Banks. Bankers, in our view, play a
pivotal role in Chile's economic stability-far greater
than foreign direct investment. Bankers have respond-
ed to Chile's pleas for debt relief over the past five
years by rescheduling the country's commercial debt
and lowering interest rates to keep debt service man-
ageable. In addition, trade credit lines provided by
bankers "grease the wheels" of Chile's export pro-
gram. According to press reporting, bankers consider
Chile a model debtor, but they are willing to grant
debt relief only as long as Santiago maintains its
current economic policies. For example, when in 1985
and 1986 Chile's export program was imperiled by
creditor country threats to veto World Bank loans,
commercial banks stalled negotiations with Santiago
until the loans were approved. Over the next two
years, however, we judge Santiago will not require
banker assistance since-according to US Embassy
reporting-Chile's latest commercial agreement re-
scheduled all maturing debt through 1990, granted
Chile low interest rates, and renewed $1.7 billion in
short-term trade credits.
The Multilateral Financial Institutions. Multilateral
lending, in our view, is the linchpin of Chile's export
program. The centerpiece of Chile's multilateral
package is a $750 million three-year structural ad-
justment loan (SAL) program with the World Bank
that began in 1985 with the goal of helping Santiago
make the long-term economic adjustments needed to
generate growth and assure timely debt repayments.
Chile receives additional project lending from the
World Bank and the Inter-American Development
Bank, bringing total lending from the development
banks to over $500 million a year.
Pinochet turned to these sources of funds
with considerable reluctance, largely because he
feared the political and economic pressures creditor
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countries could apply by threatening to veto develop-
ment bank loans. Indeed, should Santiago lose these
funds, we judge that the country's overall access to
external credit would crumble: commercial bankers
probably would reduce trade credit lines and refuse
debt relief, and investors probably would repatriate
profits in anticipation of foreign exchange restrictions.
? Apply selective legal discrimination against foreign
banks by country of origin.
? Adopt protective trade legislation.
Impact of Recent Financial Pressures. Notwithstand-
ing Chile's vulnerability to loss of development bank
funds, threats made over the last two years by OECD
countries to veto these loans have not induced Pino-
chet to make any fundamental political reforms. We
believe Pinochet has withstood this pressure through
deft lobbying, minor political concessions, and skillful
handling of commercial bankers. For example, in
1985 OECD countries threatened to veto Chile's first
structural adjustment loan unless Pinochet canceled
the state of siege. the
President dispatched lobbyists to Washington to ar-
gue that sanctions would jeopardize both Chile's fight
against Communism and its ability to pay its debt.
Meanwhile, Chile maintained good relations with
bankers by servicing debts, even though the country's
foreign reserves were nearly exhausted. Finally, Pino-
chet lifted the state of siege-although only after
imposing new laws that gave him roughly the same
powers-thereby securing the loan's passage.
Nevertheless, the economy remains vulnerable to the
loss of $500 million of development bank lending
should Chile's critics renew their threats to cut off
Santiago from multilateral funds. We believe, howev-
er, that under such conditions Santiago-anticipating
that it again could defuse the danger-would repeat
its past moves and hold out to the last minute before
making slight concessions. Chile-with reserves suffi-
cient to cover over eight months of imports, according
to the US Embassy-is in a good position to pursue
such brinksmanship. If, however, Pinochet felt that
this strategy was failing, we believe he would strike
back rather than accept fundamental political
changes. He could:
? Carry through on previous hints that Chile would
retaliate by defaulting on nearly $1.5 billion in
interest payments and $15 billion in commercial
debt.
Such a confrontation, however, would almost certain-
ly provoke short-term economic problems, including
capital flight, depressed foreign investment, and dis-
rupted trade financing and commercial relations with 25X1
creditor countries. If the dispute dragged on, Pino-
chet, in our view, would have little recourse but to
choose a policy of semiautarchy-which would in the
long term probably lead to the already examined
economic dislocations and political pressures on the
regime.
Chile is vulnerable to several types of internal eco-
nomic threats. Potential domestic economic disloca- 25X1
tions stem primarily from sabotage against public
facilities and utilities by leftist groups, massive strikes
that could disrupt the economy, and the country's
long-range potential for mass violence. Pinochet is not
unaware of this potential: the collapse of the Allende
government in the early 1970s was facilitated by
rightwing terrorist attacks against highways and rail-
roads that blocked the shipment of needed goods
between the ocean ports and Santiago, and by work
stoppages organized by labor and professional groups
that disrupted general economic activity. F___1
Economic Sabotage
In our view, Chile is most vulnerable to economic
sabotage in Santiago and the central valley-the
country's midsection that comprises less than 20
percent of the land surface but accounts for three-
fourths of the population and over 60 percent of the
economic wealth. The central valley runs 480 kilome-
ters south of Santiago to the Rio Biobio and extends
50 to 65 kilometers west to the Pacific coast. A
limited but well-maintained road network runs
through this region of narrow mountain valleys, facili-
tating trucking to Santiago of foodstuffs from the
central valley and imported goods from San Antonio
and Valparaiso-its nearest ports. Three main rail
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Figure 6
Chile: Central Valley
Rio Maipo
BERN,
POLITAN
Alto
eague-
RAL CR/o"
'GGINS
E
ineres
500 Kilometers
l~
500 Miles
South
Pacific
Ocean
South
Pacific
Ocean
BUENOS
AIRES
South
Atlantic
Ocean
Los Angeles Laguna
San '
Antonio
Pareditos
l
Pan American Highway
Other major road
--~-~ Railroad
Major airport
Major port
-?- Region boundary
Electric power network
^ Generating facility
? Substation
- Transmission line
0 50 Kilometers
i r=I
0 50 Miles
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lines radiate from Santiago: the north and south lines
parallel the Pan-American Highway and Chile's
transmission network, and the west line runs to the
port of San Antonio along Highway 78. Major power-
lines that crisscross the region and microwave towers
and satellite dishes that dot the mountainous land-
scape make easy targets, and, over the past three
years, leftist terrorists have exploited this by bombing
the electric power grid, occasionally blacking out
Santiago and at times depriving the entire central
valley of electricity.' Mining, agricultural, and forest-
ry exports could be readily disrupted by terrorist
bombings of bridges, roads, and rail lines snaking out
to coastal ports. Although government troops are
stationed along these facilities, the rough terrain
traversed by the transportation system makes a com-
plete defense problematic.
Chile has two main terrorist organizations that could
conduct a campaign of economic sabotage.' The older,
more radical, but smaller grou
is the
Castroite Movement of the Radical Left (MIR),
founded in the mid-1960s. Since the police arrested
many of its top leaders in late 1983, however, the
MIR has fallen on hard times. It still undertakes
terrorism-ranging from "armed propaganda" ac-
tions, such as distributing milk from hijacked delivery
trucks to slumdwellers, to the murder of police and
government officials-but, in our view, it is now little
more than an irritant to the regime.
The newer and larger Manuel Rodriguez Patriotic
Front (FPMR)-which we estimate at more than
1,500 strong and which
has ties to the Communist Party of Chile (PCCh)-
has claimed responsibility for most of the more than
3,000 terrorist bombings that have rocked Chile over
the past four years. These bombings-against buses,
subways, business and public buildings, utility lines,
and military bases-have been staged in a way seem-
ingly calculated not to cause widespread civilian
injuries. in several 25X1
instances FPMR units have established temporary
control over parts of Santiago's slums during anti-
Pinochet protests, giving political indoctrination and
weapons training to local residents. These units have
engaged in gun battles with the security services,
sometimes forcing them to retreat. 25X1
We believe, however, that the far left-facing public
disapproval over the massive arms caches found by
the military in September 1986 and,
hurt by the security services crack- 25X1
down after the attempted assassination of Pinochet-
is worried about being politically isolated and is
currently on the defensive. The FPMR is temporarily
reducing its violence and is working to strengthen and
tighten its internal organization and expand its influ-
ence with organized labor,
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Strikes and Demonstrations 25X 5X51
Chile's working and middle classes historically have 1
been well organized and politicized. The middle class
dominates most of the country's political parties and 25X1
and far leftists among its leadership.
is also organized along professional lines, giving rise
to organizations for businessmen, engineers, teachers,
students, lawyers, doctors, and civil servants, among
others. Chile's labor unions are grouped in two main
illegal confederations-the Democratic Workers Cen-
tral (CDT) and the National Workers Command
(CNT). Both have ties to the centrist Christian Demo-
cratic Party (PDC), but the CDT avoids association
with the left, while the CNT includes Communists
We believe that, if effectively organized, Chile's
professional groups and unions could wield tremen-
dous political and economic influence. Professional
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Capabilities and Intentions of Chilean Far Left
Groups
In September 1980, the Communist Party of Chile
(PCCh), the largest and best organized far left group
in the country, announced a strategy of "armed
struggle" against the Pinochet regime. Over the past
four years the PCCh has carried out recruitment
drives, enlarged its clandestine wing, built up its
military apparatus, expanded indoctrination of the
rank and file, and systematically tried to broaden the
party's appeal to the masses, especially in the slum
areas ringing Santiago and other cities.
In
addition, in December 1983 the PCCh supporte t e
creation of the Manuel Rodriguez Patriotic Front
(FPMR)-currently Chile's main terrorist group-
which the party is now trying to bring fully under its
control. We know relatively little about the structure
and leadership of the FPMR, but believe it has grown
from only a few dozen militants at its inception to
1,500 to 2,000 at present.
Several other far left groups advocate overthrowing
Pinochet by force, but none approaches the FPMR in
size or frequency of terrorist actions. Moreover,
there is only mini-
mal coordination by the PCCh and the FPMR with
these groups on terrorist activities, although most of
them belong to the Communist-led Popular Demo-
cratic Movement (MDP) Coalition. The PCCh uses
the MDP for many of its overt political activities,
such as calls for street protests and for liaison with
student, labor, church, and professional groups. It
also uses the MDP to keep in contact with moderate
associations and elements of organized labor contrib-
uted to Marxist President Allende's ouster in 1973 by
disrupting the economy. For example, small business-
men shut down their shops for two to three days a
week, doctors paralyzed health care, truckers froze
shipping, and miners disrupted mineral exports with
wildcat strikes. In mid-1983, many of these same
political parties and convince them that the Commu-
nists are a potent political force entitled to share in
the moderates' efforts to foster a peaceful transition
to civilian rule.
Nevertheless, we believe that the Communists are
committed to a long-term strategy of promoting an
insurgency in Chile, aimed at overthrowing the Pino-
chet regime and establishing a Sandinista-type gov-
ernment under PCCh control.
Two unexpected events in August and September
1986 suggest to us, however, that at least some
elements in the PCCh and the FPMR wanted to speed
up the timetable for launching an insurrection. The
first was the discovery by the Chilean security ser-
vices of several caches containing about 70 tons of
arms supplied by Cuba to the FPMR,
This almost certainly was pursu-
ant to an understanding that exists between the
Castro government and the PCCh. The second was a
nearly successful attempt by the FPMR to assassi-
nate Pinochet in September 1986, which we believe
must have been approved by at least some of the
groups tried to use similar tactics against Pinochet.
Copper workers called several "days of national pro-
test" to demonstrate against economic conditions and
press for an accelerated political transition. A series of
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lindicates that Communist
leaders believed that the PCCh would gain consider-
able political stature within Chile if it killed Pinochet
and could effectively weather the expected severe
reprisals by the security services.
The discovery of the arms caches and the failed
assassination attempt, in our judgment, have put the
Communists on the defensive. Press reports indicate
that the public opposes terrorism and Communist-led
protests. Moreover, moderate opposition parties seem
intent on avoiding even the appearance of cooperating
with the far left, and, in our view, improving economic
conditions have dampened prospects for Communist
agitators to capitalize on social discontent to foment
unrest. Moreover, bombings by the FPMR have
declined since at least September 1986, and the party
appears to be giving little consideration to mounting
major protests any time soon. Instead, Communist
leaders are emphasizing the PCCh's so-called politi-
cal line and are trying to cultivate the moderate
opposition, while playing down the military option
even to the party rank and file,
Consequently, we believe that
Communist leaders have reasserted their longer
range strategy for insurgency and probably realize
that their prospects will not be good for launching an
insurrection before the early 1990s, and then only if
Pinochet succeeds in holding on to power beyond the
end of his current term.
strikes disrupted the country's transport network and
the copper industry, leading the government to re-
spond with a carrot-and-stick approach- combining
debt relief for truckers with massive police repres-
sion-that ultimately broke the backs of the unions
and quelled the demonstrations.
Table 4
Chile: Types of Subversive Acts and Targets
Total subversive acts
420
1,635
4,467
5,419
Explosive charge (exploded)
190
978
829
951
Explosive charge (deactivated)
25
31
100
108
Explosive device (fake bomb)
36
24
79
41
Explosive threat (false alarm)
10
53
695
325
Incendiary device (ignited)
30
118
181
218
Incendiary device (deactivated)
1
8
14
41
Assault
38
88
102
49
Kidnaping
1
2
15
9
Other subversive acts
87
325
366
545
Acts not classified
2
8
5
33
Demonstrations, obstructions, etc.
0
0
2,081
3,099
Total targets
420
1,635
4,467
5,419
Domestic financial institutions
15
84
54
67
Foreign financial institutions
2
5
9
0
Private domestic business
39
109
170
216
Private foreign business
2
15
22
6
Government-related persons
or entities
70
199
307
389
Foreign public organizations
4
5
20
5
Domestic religious organizations
0
32
12
13
Foreign religious organizations
0
2
19
28
Public and individual
transportation
72
376
2,476
2,540
Public utilities
Not yet classified
0
The US Embassy reports that Pinochet has taken
steps in recent years to prevent a recurrence of the
massive disruptions of 1983. The government has
placed a variety of legal restrictions on unions that
have reduced their attractiveness to workers; unions
represented almost one-third of the labor force at the
outset of the Pinochet regime, but now less than 10
percent. Numerous press reports attest to the effec-
tiveness of the Pinochet regime's continuing efforts to
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destroy middle-class professional groups by depriving
them of funding and support. The government-
ostensibly as an austerity measure-has begun mass
firing of teachers, and academic studies report that
doctors have grown increasingly frustrated by govern-
ment work rules and hospital conditions. The govern-
ment has further hastened the decline of the profes-
sional groups' influence by dismantling housing,
education, and other social subsidies that they had
obtained by lobbying previous governments.
One area where we believe social violence could
increase modestly over the next several years is in
Chile's extensive slums. The press reports that cut-
backs in social programs have resulted in tight hous-
ing, high unemployment, and malnutrition in the
shantytowns that ring Santiago.
in the capital-where the poor compose one-
fourth of the four million inhabitants- leftist forces
are organizing slumdwellers and urging them to mobi-
lize against the government. The press documents
that antigovernment activity-in the form of griev-
ance meetings, noncooperation with the security ser-
vices, and the erection of barricades during protests-
is in fact on the rise in some slums. The sporadic
nature of these incidents, however, suggests to us that
the Communists do not have sufficient support among
the poor to persuade them to disrupt commercial
activity in the central business district or to occupy
the industrial plants near their homes.
the Communist Party
hopes to eventually use the slumdwellers to wreak
widespread social and economic havoc, but we judge
that it will make only marginal progress in this
direction during the two-year time frame of this
assessment.
Outlook and Implications for the United States
In its concern about the future, the Chilean Govern-
ment, in our view, worries foremost over the possibili-
ty of sanctions-especially the danger of losing access
to international credits. Last fall the Pinochet regime
mounted a full-scale diplomatic campaign to counter-
act what it viewed as threats by Washington to
persuade OECD countries to stop the second stage of
Chile's World Bank structural adjustment loan. The
government reacted equally strongly early this year
when-faced with a bank committee deadlock-it
threatened a debt moratorium unless bankers quickly
concluded a debt relief agreement, according to Em-
bassy reporting. We agree that a cutoff of internation-
al credit is Chile's greatest single economic vulnera-
bility because it would deprive the country of needed
foreign funding, hurt trade, reduce foreign direct
investment, and provoke capital flight.
Santiago is also clearly worried about the damage
trade sanctions could do. For example, Chile has
reacted to the Kennedy-Harkin sanctions bill, which
would revoke its Generalized System of Preferences
(GSP) trade benefits and ban US copper imports, by
attacking it at home as an intrusion into internal
politics and by trying to convince the US Congress
that Chile is already moving toward democracy.
Despite being aware of its vulnerability, Santiago has
not attempted to insulate itself from politically moti-
vated economic pressure on the model of South
Africa. We believe the government calculates it can
forestall the formation of an OECD movement for
sanctions against Chile by maintaining free market
policies. We expect Santiago to continue to buttress
its position by:
? Claiming that it is making fundamental political
reforms and is on a deliberate pace to civilian rule.
? Publicizing its model debtor status.
? Hinting that it would have no recourse but debt
repudiation if it were cut off from foreign funds.
Santiago probably expects only very moderate exter-
nal pressures-similar to last year's maneuvers sur-
rounding the World Bank vote-over the next two
years. the
government believes creditor countries will fail to stop
its third World Bank structural adjustment loan
coming up for approval later this year, although it
recognizes that the uncertainty preceding the vote will
probably delay other development bank project loans
by several months. Santiago may also expect minor
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The Role of the Security Services
We believe that over the next two years the security
services will be an effective counterweight to any
attempt by thefar left to mount a concerted campaign
of economic subversion. The Carabineros-Chile's
28,000-man national police-remain a highly profes-
sional, capable, and disciplined force, despite the
strains on morale and resources caused by leftist
violence over the last Jive years. To supplement the
Carabineros and the intelligence services-currently
the principal forces involved in countering radical
leftist violence-the regime can use the 60,000-man
Army and special units from the Navy and the Air
In our view, the security services will continue to
Carabineros and Army and Air Force units regularly
conduct security sweeps through the poorer sections
of Santiago to intimidate the inhabitants, and to
disrupt opposition groups' eff orts to organize pro-
tests. The Carabineros are well-trained in crowd-
control techniques and use effective, if occasionally
Force.
Although the security services have suffered from
lack of intelligence on the terrorists'plans-illustrat-
ed by the assassination attempt on Pinochet and
infiltration and caching of massive amounts of
arms-they have responded effectively on a counter-
punch basis. after the
assassination attempt, the Carabineros and the Na-
tional Information Center (the primary intelligence
agency) arrested many FPMR members, causing the
group to temporarily scale back terrorist operations.
We judge that, in the event of a full-fledged terrorist
offensive aimed at crippling Chile's economy, the
regime would rely principally on the intelligence
services to carry out counterterrorist operations, but
would make extensive use of regular military units to
protect vital industrial, communications, and trans-
portation infrastructure.
trade sanctions, such as Washington's removing some
tariff concessions on Chilean goods or eliminating
Chile from Overseas Private Investment Corporation
(OPIC) eligibility and European Community restric-
tions on fruit imports.
Should this scenario play out, Chile's economic
growth is likely to stay within the 3- to 5-percent
annual range that Santiago now forecasts, with no
dramatic economic dislocations over the next two
brutal, measures to disperse demonstrators.
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Even though the regime's security apparatus would 25X1
be able to contain economic subversion, the costs over
time could be high. A prolonged coordinated cam-
paign of mass social mobilization and economic
sabotage-though unlikely over the next two years-
would tax the resources of the security forces and 25X1
might begin to undermine morale. The use of Army
troops-who, in our judgment, are more likely to
respond with excessive force than the police-to quell
massive demonstrations would probably lead to high-
er civilian casualties, spurring a domestic and inter-
national reaction and causing unease among senior
military officers who have opposed an increased role
for the armed forces in controlling public protests. At
the very least, we judge that stepped-up security
measures would absorb resources that could other-
wise have aided economic growth.
years. We do not believe this level of pressure would 25X1
cause Pinochet to speed up moves toward democracy
or make any meaningful political concessions.F
Impact of Tougher Measures
Any number of unanticipated political events in Chile,
however, could elicit repressive measures from Pino-
chet, which, in turn, could help forge a strong OECD
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Table 5
Chile: Balance-of-Payments
Projection, 1986-89
-1,124.3
-930
-571
-898
1,065.7
1,100
1,089
1,200
4,222.4
4,418
4,889
5,400
3,156.7
3,318
3,800
4,200
-303.0
-400
-400
-448
Financial services
-1,887.0
-1,630
-1,260
-1,650
Capital account balance
1,243.3
872
539
570
Foreign direct
investment
319.0
450
280
250
Regular
57.0
100
30
100
Debt conversion
262.0
350
250
150
International lending
institutions
236.0
367
375
400
Sal I, II, III
275.0
225
125
0
Net amortization
-295.0
-770
-760
-680
Other long-, medium-,
and short-term in-
708.3
600
519
600
Change in reserves
119.0
-58
-32
-328
US investment estimated at well over $1.25 billion.
He would also almost certainly try to preserve growth
by reducing domestic consumption to boost savings
and redirecting investment to industry, such as reacti-
vating Chile's underused automotive and small manu-
facturing industries.
Economic Consequences
The initial results, in our view, would be rapid growth
led by the manufacturing sector and a drop in urban
unemployment. Chile is not prepared to sustain such
marked shifts in economic strategy, however, and the
resulting prosperity would almost certainly evaporate
within two years. Industrial bottlenecks would begin
crimping growth within 12 months as supplies of
intermediate and capital goods became exhausted.
The agricultural sector would find a good domestic
market in the first year or two, but we doubt the
government could sustain its price-support program,
and farmers' profits would eventually fall, as would
agricultural production. Exporters would be buffeted
by increasingly uncertain markets and lower prices,
forcing further dislocations in production and employ-
ment. US commercial banks would probably lose their
loan portfolio in Chile, and any surviving US commer-
cial operations would be hobbled by regulations.
front that would impose tough sanctions such as
rejecting further development bank lending to Chile
and imposing an effective trade embargo-for exam-
ple, if:
? The far left succeeded in a rash of high-visibility
bombings and made another assassination attempt
against Pinochet.
? The moderate opposition used its increased media
access to organize work stoppages and protests
against the government.
? A consensus developed in the Army officer corps to
replace Pinochet.
The President might then try to secure his rule
through a massive crackdown. If Pinochet were then
faced with a concerted effort by the world community
to destabilize his regime through economic sanctions,
we judge that he would probably declare a moratori-
um on Chile's commercial debt, discriminate against
OECD-based branch banks, and regulate or expropri-
ate mining corporations operating in Chile, including
Political Repercussions
Pinochet's political prestige might be buoyed initially
by a rally-around-the-flag sentiment, but we believe
that much of his crucial upper-class and rural support
would dissipate as farmers and exporters began suf-
fering reverses and as industrialists-experiencing
production bottlenecks-recognized their uncertain
future. The political parties would capitalize on short-
ages and inflation, and declines in .middle- and lower-
class income would encourage protests and work
stoppages. Furthermore, we judge that the armed
forces would begin to perceive Pinochet as a national
liability-having plunged the country into economic
chaos akin to that of the Allende period-and that
eventually he would be replaced by either a senior
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army general or a civilian, either of whom would
move at a more deliberate pace to restore democracy
and free the economy from sanctions
Sanctions Amid Internal Disruptions
Tough sanctions against Chile, however, are not risk-
free for the West. Economic problems could spur-or
simply accompany-heightened violence, terrorism,
sabotage, and the beginnings of leftist guerrilla activi-
ty. Given the capabilities of Chile's security services,
we see this scenario as unlikely over the next two
years. Nevertheless, the security services are already
strained, and the arms caches and the attempted
assassination of Pinochet demonstrated that the
terrorists have the wherewithal to pull off some
spectacular blows. Terrorists might also find recruit-
ment and mass social mobilization easier during bad
and uncertain economic times.
ment in Chile.
We believe, therefore, that there is a chance that
strong sanctions could help the left mount a serious
threat to the government. Pinochet would almost
certainly respond by blaming the country's woes on
the Communists, marshaling middle- and upper-class
support by raising the Allende specter, and by arguing
to the military that he was the only alternative to
political and social disintegration. We believe that
such a strategy would probably contain the immediate
leftist threat. Nevertheless, it would be accompanied
by massive human rights violations, no transition to
democracy, and sharpened political conflict-fertile
ground for the far left's long-term plans to develop a
full-scale insurgency and install a Communist govern-
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Statistical Appendix
Table A-1
Chile: Export and Imports,
by Region, 1986
million US $
Exports
4,222.3
North America
973.6
Common Market
1,441.3
Aladi
685.2
East Asia
730.4
Middle East
89.4
Africa
32.5
Other
269.9
Imports
3,156.7
North America
695.8
Common Market
588.7
Aladi
732.4
East Asia
446.8
Middle East
38.0
Africa
86.8
Other
568.2
Table A-2
Chile: Gross Domestic Product,
by Sector, 1986
8.8
1.0
8.4
20.7
2.6
5.5
Commerce
16.7
Transportation
5.7
Others
30.6
Table A-3
Chile: Public Investment Program, 1986
Total investment as share of GDP
Government as share of GDP
General government
Housing
Irrigation
Roads
Santiago subway
Water and sewerage
Copper company (CODELCO)
Power companies (ENDESA/CHILECTRA)
National petroleum company (ENAP)
National mining company (ENAMI)
Chemical company (SOQUIMICH)
Steel company (CAP)
National railroads
Port authorities (EMPREMAR, EMPORCHI)
Other
Table A-4
Chile: Savings Requirements, 1986-87
15.2
7.7
44.5
11.4
0.4
11.8
0.8
2.8
4.8
12.5
55.5
24.0
11.3
8.6
1.0
1.0
1.7
0.6
1.0
6.3
Total
15.7
16.1
Foreign savings
6.4
5.2
National savings
9.3
10.9
4.4
4.7
4.9
6.2
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Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04TOO907R000100210001-9