CHILE'S ECONOMIC VULNERABILITIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600040031-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 12, 2016
• Document Release Date: March 7, 2002
• Sequence Number: 31
• Publication Date: February 1, 1971
• Content Type: IM

2 I A ~Rr1Mr?~.-30 EC VP85 IOftvw~- ECO}f~OM I,C ULNERAE I L I T I ES
FEBRUARY 1971 ,o zr : 1 OF 1.
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Secret
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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Chile's Economic Vulnerabilities
pg..11 ~,\ U
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Secret
ER IM 71-30
February 1971
Copy No.
23
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
i8, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
oaoup I
F..IudMd I~n^ o~ Marie
Jn nq, o.I.~?~ Ord
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1971
INTELLIGENCE MEMORANDUM
Chile's Economic Vulnerabilities
Introduction
Allende's program to nationalize US properties
in Chile may be setting the stage for a serious
confrontation. The US government has insured
several properties against uncompensated national-
ization and stands to lose as much as $300 million
if Chile refuses compensation. US legislation
calls for an aid cutoff in the event of uncompen-
sated expropriations of US business interests.
This memorandum discusses the outlook for the
Chilean economy, its vulnerabilities, and the
likely impact of US economic sanctions that might
be considered.
Recent Economic Trends
1. Chile's economy has performed poorly in
recent years despite record copper prices averaging
more than twice those in the early 1960s. During
the last three years there was also a massive $560
million inflow of capital to expand the copper
industry, and foreign aid inflows of about $100
million annually. Even so, the average rate of
economic growth in real terms fell from 6% annually
during 1965-66 to less than 3% during 1967-70.
Per capita income has stagnated since 1966, while
inflation increased from a low of 17% in 1966 to
almost 40% in 1970. Investment outside the copper
industry has fallen since 1967 and, except for
Note: This memorandum was prepared by the Office
of Economic Research and coordinated within CIA.
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projects receiving government funds, private busi-
ness actually has been disinvesting.
2. Although the data are incomplete, it seems
likely that gross domestic product (GDP) fell in
1970 despite increased copper output and agricul-
ture's partial recovery from drought. Private
investment was especially depressed because of the
uncertainties surrounding the election, and indus-
trial output fell sharply following Allende's
victory in September. Domestic trade was also
severely disrupted during the year's final months.
Because of these factors, we estimate that per
capita income dropped appreciably last year and
probably was not much higher than in 1964, when
the Frei administration began.
3. Chile has traveled a long way down the
road to socialism in recent years. The state's
economic role, already large when Frei took office,
was greatly expanded during 1965-70. Increased
taxes, a wage-price policy that furthered income
redistribution, and increasingly vocal attacks on the
capitalist system strongly discouraged private
enterprise. At the same time, an ambitious
agrarian reform, although falling short of its
goals, radically changed land tenure in some
provinces and attitudes toward private property
rights. These programs awakened more desires
than could be satisfied -- especially after eco-
nomic performance generally began to deteriorate --
thus setting the stage for Allende's more radical
programs.
Allende's Inheritance and Initial Measures
4. Allende did inherit some substantial assets,
however. The copper expansion program begun in 1967
now is nearly complete and will about double capacity.
Foreign exchange reserves accumulated as a result
of extremely high copper prices during most of
1969-70 amount to about $400 million. And, lastly,
the foreign loan pipeline contains more than $400
million in authorized but unutilized credits.
5. Allende appears determined to spend this
inheritance, if necessary, to further his economic
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programs and consolidate political control, and
thus "make the revolution irreversible." To en-
hance his popularity, Allende has adopted wage,
price, and budgetary policies which will substan-
tially boost real incomes for most Chileans during
1971. Since his inauguration in November, money
wages have been increased by 45%, and prices
(which traditionally have risen rapidly after wage
adjustments) have been frozen. The imminent take-
over of the banking system will weaken political
opposition by giving the Allende administration
effective control over most businesses. At the
same time, accelerated radical agrarian refortt
and government toleration of peasant land seizure
are beginning to destroy the economic base of one
of Chile's most important conservative groups --
the medium- and large-size farmers in the southern
provinces, especially in Cautin, where former
President Alessandri won a majority in the Sep-
tember election.
Chile's Short-Term Prospects
6. Chile's economic prospects for the next
year or so were unfavorable before Allende's elec-
tion and have since worsened. Current policies
will generate increasing managerial problems and
shortages and prevent economic growth for some
time. However, a severe economic downturn is not
likely. The urban unemployment rate did grow from
6% in September 1970 to 8% in December, but
Allende 's wage and price policy should help to sus-
tain output, sales, and employment because decades
of inflation have conditioned Chileans to spend
their incomes rapidly. Moreover, if increased as
planned, public investment would largely offset the
loss of private domestic and foreign investment,
which accounted for less than 30% of total investment
during 1967-70.
7. The prospective sharp increase in consumer
expenditures threatens shortages of foodstuffs,
intermediate products, and manufactured consumer
goods in the months ahead. Because private invest-
ment in manufacturing has been extremely depressed
for the past four years, we doubt that output can
be expanded to meet demand -- especially since
private production incentives have been largely
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eliminated. Supply problems will be aggravated
if, as we expect, the radical agrarian reform
continues apace. Wheat output may increase this
year, partly because much of the crop was planted
before Allende's election, but private farmers --
who still supply most of Chile's foodstuffs --
have since sharply cut back their plantings of
other crops and have begun to slaughter breeding
stock. Since Allende will likely try to avoid
rationing or other unpopular steps, he probably
will try to minimize shortages by boosting im-
ports.
8. Increased imports, possibly compounded by
failing farm output, could force Chile to begin
spending its foreign exchange reserves. Export
earn ?gs this year could fall by $200 million
because of reduced copper prices, and capital in-
flows also are likely to decrease sharply. How-
ever, because capital goods imports will also
decline and profit remittances of about $70 mil-
lion to the copper companies will probably be
eliminated, Chile is unlikely to suffer a severe
balance-of-payments deficit. The balance of
payments may well deteriorate during the next few
years, however, especially if copper prices remain
low.
Economic Vulnerabilities
9. While the economy faces many problems in
coming months, it will not thereby bec..:ne particu-
larly vulnerable to economic sanctions. Invest-
ment is already largely concentrated in government
hands, and the complete loss of US investment
capital would not have a major immediate impact,
especially since the copper expansion program is
close to the end. Moreover, it would almost cer-
tainly be extremely difficult to enlist West Euro-
pean or Japanese support for any trading sanctions
against Chile because these nations have gone on
trading with Castro despite OAS-made sanctions and
because Chile meets a major portion of their copper
needs. For his part, Allende has apparently agreed
not to take action against their interests in
Chile. In any case, sanctions would boost
Allende's popularity and provide an excuse to
tighten political control and take desired but
unpopular economic actions.
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10. A US embargo of Chilean goods by itself
would not have much impact. The United States pur-
chased only 17% of Chile's exports in 1969, com-
pared with 22% in 1968, and with demand for
imported copper down in 1970, the US share of
Chilean exports probably dropped further (see
Table 1). Copper, which makes up most of US pur-
chases from Chile, could be diverted at least in
part to other markets (see Table 2). Other ex-
ports to the United States -- fresh fruits and
vegetables, iron ore, nitrates, fishmeal, wine,
and various other small items -- approximate only
$40 million a year, and about half of these could
be sold elsewhere. The remaining half, consisting
largely of animal products and fresh fruits and
vegetables &nd making up about 2% of Chile's ex-
ports, would be more difficult to sell. However,
such items may not be available for export, be-
cause of disruptions from agrarian reform.
Chile: Direction of Trade
1969
Percent of Total
Exports
Imports
United States
16.9
38.5
European Economic Community
27.3
19.3
United Kingdom
14.3
5.3
Other Western Europe
6.9
6.4
Japan
13.4
2.0
Latin America
10.6
25.4
Other
10.6
3.1
11. A US prohibition against imports of prod-
ucts containing Chilean copper, similar to the
action taken against Cuban nickel, undoubtedly
would be more harmful to Chile than direct trade
sanctions. However, such a policy would be costly
to enforce and would create problems with US
trading partners. In any case, this policy has
not proved particularly effective in blocking
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Chile: Copper Exports, by Destination
1964
1965
1966
1967
1968
1969
1970 ai
European Economic
Community
28.2
34.9
38.0
41.3
34.5
40.4
48.5
Of which:
West Germany
12.5
15.7
22.7
21.2
19.6
20.8
27.0
France
3.2
3.4
6.1
6.3
5.4
7.7
7.5
Italy
3.9
4.7
6.9
8.7
7.8
9.9
9.3
United Kingdom
16.5
15.9
17.0
16.1
17.4
17.4
14.2
Japan
1.9
2.8
4.3
6.2
8.4
9.3
8.8
United States
41.0
37.5
31.4
23.4
25.3
17.2
15.6
Other
12.4
8.9
9.3
13.0
14.4
15.7
12.9
Total
100.0
100.0
.700. 0
100.0
100.0
100.0
100.0
a. Estimated from data for first nine months.
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Cuban nickel sales and would be unlikely to pre-
vent Chilean copper exports. At best, it probable
would create a situation in which Chilean copper
was sold at a small discount from the world price.
12. Chile is not critically dependent on US
imports. The United States has been a major sup-
plier of capital goods, intermediate products,
and technical expertise -- especially to the
copper industry -- but these items are, in most
cases, readily available from non-US suppliers.
Moreover, experience with Western economic sanc-
tions against both Rhodesia and Cuba -- and before
them North Korea, Communist China, the USSR, and
Eastern Europe -- has shown that severing tradi-
tional sources of supply does not lead to severe
economic problems, although costs may be increased
and economic growth slowed. Because a smaller
portion of the Chilean capital stock is of US
origin than was the case in Cuba, the impact of
such measures as spare parts denials would be more
limited.
Operating the Copper Industry
13. US mining companies operating in Chile
state that Chileans can operate the mines despite
the loss of technicians now taking place, although
efficiency will fall and output probably will be
less than under US management. Although most of
the industry's capital equipment and supplies of
reagents and other essential items are of US
origin, denial of such items would have little
immediate impact. The technology used is common
to the copper industry, and supplies of reagents,
most capital replacements, and mining technicians
are available in Western Europe, Japan, South
Africa, and Canada as well as in the Soviet Union
and Eastern Europe. Moreover, Chile has inven-
tories of spare parts and supplies, in most cases
enough for a year or more. Over the longer run,
inability to obtain US equipment and supplies
would increase industry costs, but Chile would be
able to limit the impact by cannibalizing equip-
ment and purchasing replacements outside the
United States. Since Chile produces the world's
lowest cost copper, moderate cost increases would
not make the industry uncompetitive, although they
would reduce government copper income.
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Denyina Other Imports
14. Short of mounting a naval blockade and
interfering with coastal shipping, Chile would
not be vulnerable to a US-imposed cut-off in oil
or other critical supplies. About half of Chile's
crude oil requirement is produced by the state-
owned oil company (ENAP) in the Magallanes region,
and three state-owned refineries meet most petro-
leum product requirements. Chile now imports
most of its crude oil deficit from Venezuela, and
some refined products are obtained from Curacao
and other sources. If Venezuela and Curacao agreed
to halt shipments to Chile, crude oil would be
available from state-owned oil companies in North
Africa or the Middle East, and refined products
could be obtained in Western Europe or from Com-
munist countries. Chile also probably could
import the necessary amounts of oil from Bolivia,
whose crude oil is now largely exported via pipe-
line through the Chilean port of Arica. Although
Bolivian crude oil has a higher gravity than that
Chile now uses, it could be processed if necessary.
Chile recently imported 140,000 barrels of this
crude oil to run refinery tests.
15. A denial of US capital goods and spare
parts for the manufacturing and transport indus-
tries would inconvenience but not appreciably harm
the economy. Similar goods would be available
from both Western Europe and Japan. In contrast
to Cuba, where most transport equipment was US-
made, Chile has much equipment of West European
manufacture. The only serious limitation on
Cuba's imports from Western Europe has been a
severe hard currency shortage -- a limitation
Allende will not face.
16. Chile is highly dependent on imports for
foodstuffs and agricultural raw materials, but
the United States is not a major supplier of
either. Imports of about $175 million in 197G
supplied 20% of Chile's foodstuffs. These imports
consist mostly of cereals, sugar, and meat. With
demand likely to increase sharply because of in-
creased real wages and population and with farm
output likely to stagnate at best, agricultural
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imports will have to rise sharply if rationing is to
be avoided. Imports of agricultural raw materials
amount to another $25 million and also will prob-
ably have to be increased.
17. Because higher real wages for Chile's
lower classes are quickly translated into demand
for food, foodstuff requirements could increase
by 20% or so in 1971/72. This probably would
mean a doubling of food imports, if major shortages
are to be avoided. Increased demand will be
greatest for quality foods -- milk, poultry, eggs,
meat, and fruit. Because the livestock industry
is being particularly hard-11 it by agrarian reform,
the need to import or ration animal products will
be felt quiAly. With the ending of the current
slaughter of breeding stock (which comes on top
of the drought losses of 1969-70), the beef
shortage could be severe. Milk reportedly is
already in short supply as a result of these
factors. Aside from relatively minor PL-480 ship-
ments and some commercial wheat sales, the United
States has not been a major foodstuff supplier for
Chile. Most meat imports are from Argentina, and
Chile has been expanding imports of cereals and
dairy products from New Zealand, Australia, and
France. Chile recently concluded agreements with
Cuba to exchange temperate zone agricultural prod-
ucts Ond wine for sugar.
Monetary Sanctions
18. Chile is not particularly vulnerable to a
cessation of US government aid. According to
several estimates, Chile has a backlog of more than
$400 million in long-term credits usable over the
next three years; these are mostly West European
suppliers credits, Soviet loans, and loans from
international organizations. Receipt of some of
these Funds requires Chile to maintain interest and
amortization payments on its external debt which
average almost $300 million annually during 1971-73.
For example, in the event of an uncompensated expro-
priation, new loans from the World Bank would halt
because of established policy. Only about $70 mil-
lion of the total backlog consists of US official
loans (see TaIle 3). US sanctions would unquestionably
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give Chile an excuse to default on its $900
million debt to the United States. Because
interest and amortization payments due the United
States in 1971 will total 565-$70 million --
against only about $30-$50 :pillion in i.(_w disburse-
ments scheduled under all existing programs -- Chile
clearly would not be the loser. in following years,
scheduled US disbursements fall sharply, while
Chile's repayment obligations increase.
Chile: Unused Development
End of 1970
Credits
Million US $
United States (AID development
loans)
24
Export-Import Bank
48
World Bank
52
Inter-American Development
Bank
99
Belgium
mining
(for expansion of state
enterprise)
46
France
(for Santiago subway)
52
USSR (extended in 1967)
55
Estimated other
24-124
19. Prior to Allende's election, US commercial
banks and other financial institutions provided
about $250 million in short-term credits. This
total has already been reduced by about $50 mil-
lion and, because of the dismal outlook for
private enterprise in Chile, many banks are
attempting to reduce their exposure still further.
Chile probably will be able to substitute West
European trade credits for declining US trade
credits especially if its import pattern
changes -- but we doubt that it will be able to
replace US loans to Chilean banks and corporations.
However, Chile wants to maintain financial respect-
ability and probably would countinue to pay these
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obligations for at least a year or so even if this
meant drawing upon reserves. Interest on these
private US credits currently runs about $15-$20
million per year. The balance is being reduced
as rapidly as possible, however, and the total
outflow could reach as much as $50-$100 million
during 1971. Official sanctions would give Chile
an acceptable excuse for blocking this outflow.
Other Countries' Economic Reactions
20. US sanctions would offer Chile's other
trading partners a significant commercial oppor-
tunity. The British and French already have shown
their eagerness to expand exports to Chile. Japan
depends heavily on the US market and might not
aggressively pursue. trade outlets in Chile for
fear of offending the United States. However,
the Japanese are the largest non-Communist buyer
of Cuba's sugar and probably would not refuse to
purchase increased amounts of Chilean copper and
iron or supply Chile with capital goods. US
sanctions would also give the USSR a better oppor-
tunity to expand commercial and military ties
with Chile. Chile would have strong motives to
make prompt use of the Soviet economic credit
already extended and to seek others. Sanctions
also might rapidly lead to Soviet military sales
to Chile.
Conclusions
21. The Chilean economy has fared poorly in
recent years, and little or no growth is in pros-
pect for 1971. A severe economic downturn this
year is not likely, but expropriations, business
failures, and stepped-up land reform will doubt-
less cause some interruptions in output. Allende
apparently has adopted a policy of spending to
achieve immediate popular support and consolidate
his control. Workers' real incomes will rise
sharply, and Chile will probably substantially
increase its imports of foodstuffs, consumer
goods, and raw materials. Although exports will
fall in 1971, capital goods imports and profit
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remittances will also drop sharply and Chile
probably will not severely deplete its foreign
exchange reserves.
22. US economic leverage is small in Chile,
and economic sanctions would probably be of
limited impact on Chile's economy over the next
year or two. The United States took only 17% of
Chile's exports in 1969 (and probably less in
1970), and most of these could be sold in other
markets. The United States has been a major sup-
plier of capital goods to Chile, but blocking
future sales would have only a small short-term
impact because Chile would be able to purchase
similar goods from Western Europe and Japan.
Sanctions would probably improve Chile's finan-
cial position in the short run because they would
give Allende an excuse to default on US public
and private loans. Disbursements on these loans
at most will probably run Dnly $30-$50 million in
1971, while scheduled repayments, interest, and
cal'.ed loans probably will exceed $100 million.
23. In sum, traditional economic sanctions
such as those used against Cuba probably would
have little immediate adverse impact on Chile.
Indeed they could be counter-productive. Sanc-
tions would give Allende an excuse to tighten his
political control, boost his popularity locally,
and increase sympathy for his regime interna-
tionally as well as cause Chile to move more
rapidly to strengthen its ties with the Soviet
Union and Eastern Europe.
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