Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
11/05/10 (16,511w)+1,416refs ECONOMIC REFORMS IN CHILE: FROM DICTATORSHIP TO DEMOCRACY Palgrave, London, 2010 and New York, 2010 FIRST PART AN ACCOUNT OF FOUR DECADES Chapter I ECONOMIC DEVELOPMENT IN CHILE SINCE THE 1970s One main reason for the relevance of the Chilean experience for other emerging economies, with the implementation of a free market economic model, rests in the depth of transformations and the long period since this process was started. The first intense reforms were launched in 1973, under the dictatorship of general Pinochet. Usually, it has been generalized the idea that there is “one” successful Chilean model. The fact is that the over one-third of a century elapsed since 1973 includes several sub-periods, with different approaches, diverse external environments, and notably diverse economic and social outcomes. This diversity is of great significance, since Chile not only teaches of relevant successes but also of deep mistakes and failures to be avoided. The first stage of the reforms (1973-81) was characterized by the implementation of a neo-liberal model in its purest and ideological form. Deep trade and financial liberalizations, and the adoption of “neutral” economic policies, were accompanied by massive privatizations. In general, by 1981, success was achieved in reducing the inflation rate and eliminating the fiscal deficit, but at the expense of the external balance and recording a low investment ratio. The consequence was an economic and social collapse in 1982, with a GDP drop of 14%, high unemployment exceeding 30% of the labor force, and a significant increase in poverty with a worsening income distribution. The second stage (1982-89) implied moves toward more pragmatic policies to overcome the effects of the deep crisis. It involved a series of foreign debt renegotiations, several policy interventions aimed to balance the external deficit –such as tariff increases and “selective” export incentives- and the direct take-over of the collapsed financial system, and then privatizing it again when their balance sheets were in order thanks to heavy public subsidies to banks and debtors. At the end of this period, the economy had recovered, while income distribution had worsened even further than in the seventies. During recovery, actual GDP grew vigorously, but after due consideration of the 1982 recession, it emerges that average annual growth was under 3% in both halves of the Pinochet regime. 2 By 1990, in the return to democracy, the Chilean economy faced the challenges of achieving a sustained high average GDP growth and of serving the great social debt accumulated in the years of dictatorship. Thus, a third variant of the economic model began in 1990, under democracy. We have named this stage that of the reforms to the reforms, since it started from what had been inherited; the formal slogan of the Concertación Democrática, a center-left coalition of socialists and Christian democrats, was “change with stability” for achieving growth with equity in the socio-economic dimension of the program of the new government. There were significant reforms of the market model, strengthening the social component and correcting severe failures of economic policies. It included labor reforms (that restored several labor rights) and a tax reform (that raised public revenue in order to improve social expenditure). In addition, substantive counter-cyclical changes in fiscal, monetary, capital markets, exchange rate and regulation policies were implemented, aiming for a stable and sustainable macroeconomic environment, functional for economic development. It was in this context in which Chile expanded its productive capacity, in a sustainable manner in the nineties, growing at annual rates exceeding 7%, improving at the same time the social indicators; that is, it was partly achieved the elusive economic growth with equity. Nevertheless, gradually, after de mid-1990s, Chile weakened its counter-cyclical macroeconomic approach and became, as a consequence, vulnerable to the turbulences originated by the Asian crisis: the real exchange rate appreciated significantly and the external deficit doubled. As a consequence, the economy exhibited a stagnating actual output and a drop in the growth of potential GDP in the quinquenium 1999-2003. After a partial and hesitating recovery in 2004-08, and the arrival of the contagion of the global crisis in 2009, today it should be seeking reforms to the model that would allow resuming sustained growth after the weak economic performance of 1999-2008. We analyze all these situations across the text. Section 1 presents a brief summary of outstanding features of the Chilean economy since the fifties, advancing rapidly up to the period in which this book focuses, which begins with the military coup of 1973. Section 2 covers the Pinochet regime. Section 3 summarizes the four democratic governments of Presidents Patricio Aylwin, Eduardo Frei Ruiz-Tagle, Ricardo Lagos, and Michelle Bachelet. Finally, a methodological annex digs 3 into the long-run trends of Chile’s economic growth during the past half of a century; we emphasize (i) the contrast between average figures recorded in dictatorship and in democracy, and (ii) the respective instabilities exhibited by the real economy (employment, investment, output) in diverse sub-periods; finally, the annex presents alternative measurements of potential GDP or productive frontier. 1. A historical perspective on development strategies At the time of the Great Depression, the Chilean economy was one of the most developed of the region. The Great Depression affected the Chilean economy severely. The decline in the terms of trade and the collapse of exports were disastrous (see Muñoz, 1986). Following the worst years, however, the Chilean economy enjoyed a significant recovery, with a rate of industrial growth that mitigated the constraints imposed by the trade slump. Principally, this was the result of economic policies that responded actively to the crisis with new industrialization strategies. During the 1950s, however, the development model began to encounter new problems.1 On the one hand, indiscriminate protection to import substitutes reduced its productivity and discouraged the development of new exports. The instability of traditional export prices was transmitted to the domestic economy through recurrent balance of payments shocks. One main warning signal about the intensity of failures in the Chilean economy was the accelerating inflation of 1952-55, when the annual rate of increase in the index of consumer prices (CPI) jumped from 12% to 86%. The government of President Carlos Ibáñez, which had been elected by a large majority in September 1952, with the support of independents and leftists, lost its popularity, encountered growing social unrest, and ended up adopting an orthodox stabilization program. Both the money supply and government spending were sharply curtailed, and the complex system of regulations introduced during the Depression and World War II was cut back. But soon, the recessionary effects of these initiatives led to widespread social rejection. 1 The next three presidential periods –1952-58, 1958-64 and 1964-70– are analyzed in detail in FfrenchDavis (1973). 4 In 1958 was elected a rightist government. Given the prevailing high inflation, President Jorge Alessandri focused on achieving price stabilization. In his view, that was a pre-requisite for stimulating private investment. Stabilization was to be achieved by eliminating the "inflationary financing" of the fiscal deficit and pegging the nominal exchange rate. Consequently, a stabilization program anchored to a pegged exchange rate and import liberalization was designed, supported by abundant foreign loans to the government. This program enjoyed temporary success. Inflation was indeed substantially reduced in 1960-61, but the balance of payments deficits grew so large that international reserves were soon depleted. The investment ratio and output had risen, but the increase in exports was unable to offset the great expansion in imports, which exceeded the available external financing. As a result of a currency crisis, in 1962 the exchange rate was devalued, import restrictions were reinstalled, and inflation climbed back. In 1964 the Christian Democrat Eduardo Frei Montalva was elected President. The government strategy was based on a three-point platform: a gradual, multi-anchored, nonrecessionary stabilization program; an industrial modernization program that reactivated the role of the State as the generator of investment initiatives, introducing new, leading sectors (such as telecommunications and the petrochemical industry), and developing nontraditional exports; and a program of structural and social change that included a significant agrarian reform, the first steps in the nationalization of the nation’s large copper mines, and the development of community and labor-based grassroots organizations (Ahumada, 1966; Molina, 1972). In 1964, productive capacity was underutilized and real wages were depressed, which made it possible to reconcile a boost in output, wage increases, and a reduced inflation. This was facilitated by improved terms of trade in 1965-66. Increased fiscal expenditures of 1965 were funded by a significant tax reform, which raised revenue, diminished evasion, and improved tax equity. After strong growth of gross domestic product (GDP) in 1965-66, underutilized productive capacity gradually became exhausted, while investment continued at moderate levels. Real wages also rose much faster than planned, with a sharp surge in the organized sectors. This resulted in cost pressures on prices and had a negative impact on the government budget and on inflationary 5 expectations. Strikes spread, and relations between the government and urban labor unions deteriorated. Inflation, that had been dampened in 1965-67, began to rekindle in the subsequent years. The macroeconomic outcome was a gradual rise in the underutilization of productive capacity since 1967. In fact, actual average growth consisted of a vigorous 5.9% in the first biennium and a modest 3.1% in the final four years of the Frei Presidency. After reaching a high rate of use of labor and capital in 1966, the gradual underutilization of the capacity had generated a significant output gap by late 1970.2 Nevertheless, no disequilibria as traumatic as those of 1955 and 1962 in the past, or 1975 and 1982 in the future, were recorded. A great disequilibrium that increased over the years took place in the socio-political arena. Political antagonisms prevented the formation of a broad-based coalition government. The scope of the new development strategy was extremely ambitious. Evidently, without a broad and solid coalition the chances for success were slim. Differences concerning the nature and degree of change prevented the formation of a large center-left majority in favor of progressive reforms. Only after the military coup these two political sectors would reach consensus for the accomplishment of sustained economic and social reforms, gaining all elections since 1988 and in charge of the four presidential regimes from 1990 to 2010, until a defeat in the latter date. In brief, the Frei government implemented an ambitious program of progressive reforms. Productive capacity growth averaged only 4.3%, rather low compared with the 5.6% average recorded by Latin America. But currency crises were avoided and inflation was curbed (see table I.1). A significant reform of the tax system was accomplished and 51% domestic control over the large copper mines was achieved, leading to the capture of a sizable share of the economic rent from that rich natural resource. The rural sector –with the implementation of structural reforms, most notably the agrarian reform– and the industrial sector were modernized. Exports were diversified, with a steady increase in non- 2 After a drop in 1967, a sharp improvement of the terms of trade in 1968 and 1969 was recorded (equivalent to 6% of GDP), followed by a partial negative shock of 3% in 1970. A significant share of the improved external balance was captured by the Chilean government and saved as international reserves in the Central Bank, in order to face future deterioration of copper prices. This was a pioneer approach toward the implementation of a counter-cyclical copper stabilization fund, seeking to stabilize both the fiscal expenditure and the foreign exchange market. 6 mining items, and there was a strengthening of Latin American regional integration, which was also instrumental in trade diversification. The State apparatus was modernized by providing it with better qualified human resources. A stable real exchange rate policy was put in place and sustained, assisted by a sort of pioneer copper stabilization fund, and strides were made in rationalizing the import regime and export promotion. Table I.1] In 1970, President Salvador Allende was elected by one third of the national electorate. The Unidad Popular (UP) government sought far-reaching structural change, particularly with respect to property and without regard for macroeconomic equilibrium. It proceeded without a social and political majority. President Allende inherited idle installed capacity and large international reserves. This allowed an expansionary policy with rapidly rising wages and social expenditures. Economic activity responded positively, with an 8% rise in GDP and no significant inflationary pressures in 1971. However, the expansion was carried out with public revenue losses due to drops in real (public) utility tariffs, an appreciating real exchange rate, and a rapidly expanding money supply which financed a rising fiscal deficit. The fiscal deficit climbed to 12% of GDP in 1972-73, financed principally with Central Bank money printing. The huge deficit was strongly influenced by repressing price controls on the goods and services sold by public enterprises (Larraín, 1991), while public and private investment became depressed. Meanwhile, structural changes, including completion of the nationalization of the large copper mines and the nationalization of the banking system and several other enterprises, were under way. In addition, many firms and farms were taken over arbitrarily by workers or political groups. Aggregate demand rose disproportionately with respect to the slowing creation of new productive capacity, while external, fiscal, and monetary balances worsened at an accelerating pace. This deterioration was intensified by the persistent worsening of the terms of trade from 1970 to 1972, and by the sharp cut-off of private and US government loans (see Bitar, 1979; Dornbusch and Edwards, 1991). 7 A change of the head of the economic policy team in the middle of 1972 was accompanied by a serious attempt to correct the course taken. Nevertheless, the magnitude of the macroeconomic imbalances and the lack of governance frustrated this and several later attempts of rectification. During 1972-73, actual GDP declined 4.1% because of sectoral imbalances and bottlenecks resulting from import restrictions, countless strikes, distortions in official relative prices, a growing black market, rising underutilization of potential GDP, and accelerating inflation (Bitar, 1979). Meanwhile, income distribution initially improved due to significant expansion of employment and nominal wages, but it step-back later with the climbing hyperinflation (an annualized 700% in the four months before the September 1973 coup) and the underutilization of potential GDP in 1972-73. In all, this period shows a distributive improvement but within a deteriorated economy: a less concentrated distribution of a smaller cake. Economic policy ended up hurting the government politically, providing ammunition to a tough opposition. The size of idle productive capacity at the outset, as well as the State's inability to enforce price controls (at levels sometimes as low as 1/10 of generalized “black” market prices) and to sustain balance of payment imbalances, were highly overestimated. Macroeconomic imbalances were fully felt in the second year of the administration, and from there on the struggle for power absorbed most of the energies of both government and opposition. Economic disequilibria, black markets, hyperinflation, low governance and the growing inability to reach political agreements finally gave way to the dramatic institutional break-up and the prevalence of the coup supporters in September 11, 1973 (Baño, 2003). 2. The neo-liberal strategy, 1973-893 The period covered by the dictatorship of Augusto Pinochet is longer than the three democratic governments that preceded it (Alessandri, Frei Montalva and Allende) and the 3 This section is based on an abridged and revised version of “Economic and political instability in Chile: 1950-89”, co-authored with Oscar Muñoz, published in S. Teitel (ed.), Towards a new development strategy for Latin America: Pathways from Hirschman’s thoughts, Inter-American Development Bank, 1992. I am indebted with Sergio Bitar, Manuel Marfán, Patricio Meller, Oscar Muñoz, Dagmar Raczynski, Joseph Ramos, John Sheahan, and Simón Teitel for their valuable comments. 8 three that followed it (Aylwin, Frei Ruiz-Tagle and Lagos). This long period can be divided into two halves.4 The first one, between 1973 and 1981, is a case of orthodoxy or neoliberalism in its purest or extreme form. The second one, from 1982 until March 1990, within the same general approach, introduced numerous heterodox interventions, which gave a more pragmatic, down to earth, shade. They were stimulated by the severe crisis resulting from the most ideological policies of the first half. This second period can be identified as pragmatism (what is positive because it tries to adapt to the real economy); nevertheless, many of the interventions had a strong regressive bias (evidently negative), favoring sectors with high income and at the expense of medium and low income sectors. That explains the significant worsening of income distribution and poverty during the 1980s. a) Pure neo-liberalism, 1973-81 One distinctive feature of neo-liberalism is its “globalism”: that is, its neglect of the implications of sectoral imbalances; of the heterogeneity in productive structures and among economic agents, and in access to voice and power of different sectors; of the social and allocative implications of market segmentations, and of the difficulty of transmitting transparently information to all sorts of economic agents so that they can contribute to fulfilling the expectations of policy-makers. Ultimately, neo-liberalism also underestimates the frequent presence of destabilizing adjustment processes, lags and overshooting, and the incompleteness of markets and institutions in developing nations. These elements represent severe obstacles that prevent “neutral” and indirect global economic policies from being effective, by themselves alone, in emerging economies that are in the process of deep transformation like Chile was. In parallel with the changes in the economic field, there were structural reforms in social organizations. According to the rhetoric of the dictatorship, these were part of the project to create a competitive society of “free men”. This involved reforms in the 4 The economic and social dimensions are examined in CIEPLAN (1982; 1983); Büchi (1993); Edwards and Cox-Edwards (1987); Fontaine (1989); Foxley (1983); Larraín (1987); Larraín and Vergara (2000); Meller (1996a); Ramos (1986). Texts of wider coverage, with abundant references, are Correa, Figueroa, Jocelyn-Holt, Rolle and Vicuña (2002); Huneeus (2001); Moulián (1997). 9 university system, in the organization and dependence of elementary schools, in health services, professional associations, and student and labor organizations.5 The initial concerns of Pinochet's government lay with controlling the macroeconomic disequilibria and especially the hyper-inflation inherited in 1973.6 Soon, the arguments shifted into the inefficiencies of the prevailing economic system, according to the international speech that became in fashion in the following years. Increasingly, structural changes deepened, as an extreme neo-liberal group extended its power until it dominated the public policy making. (i) The reforms The main reforms were abolition of price controls; across-the-board import liberalization; sharp deregulation of the domestic financial market, both in terms of access by new financial institutions and of interest rates and lending policies, followed at the end of the decade by a deregulation of capital inflows; reduction of the public sector and restrictions on the activities of public enterprises; privatization of the pension system and part of the national health service; the return of expropriated businesses and lands to their former owners; privatization of many traditional public enterprises; suppression of most current labor union rights; and a tax reform, which, along with eliminating some distortions (e.g., the cumulative effects of sales taxes corrected by implementing a value-added tax), sharply reduced the share of direct and progressive taxes. The traditional role of the State, as entrepreneur and promoter of investment and industrialization, was to be curtailed as quickly as possible so that those functions might be fulfilled exclusively by private agents in liberalized open markets, under the “neutral” rules of a free-market economy. Privatization was not limited to transferring businesses expropriated during the regime of President Allende. It was also extended to enterprises created during successive governments after the establishment of the public Development Corporation (CORFO) in 1939. In 1970, CORFO controlled the ownership of forty-six enterprises, a number that 5 6 See Campero and Valenzuela (1981); Vergara (1981) and several articles in Revista Mensaje, especially Ruiz-Tagle (1979; 1980) and Zañartu (1980). Consumer prices rose 600% in 1973; as said, in the last four months of the UP government the annualized inflation rate reached 700%. 10 rose to around three hundred in 1973.7 In 1980 there were only twenty-four enterprises left in the hands of this institution, half of which were in the process of being sold. There were also a dozen public enterprises dependent on other governmental departments. Among these were the Copper Corporation (CODELCO) and the National Oil Enterprise (ENAP). The sale of enterprises was largely conducted amidst domestic recession and extremely high domestic interest rates. Hence, few agents were able to participate as buyers. This was one of the causes for the resulting acute concentration of wealth. 8 It is interesting that there was weak participation by multinational corporations, in contrast with the official expectations of a vigorous flow of foreign direct investment (FDI). However, massive loans from international commercial banks provided a substantial share of the financing required by the domestic economic groups acquiring the enterprises being privatized. In the agricultural sector, the transfer of ownership had dramatic significance. The agrarian reform that had taken place during the governments of Presidents Frei and Allende came to an abrupt end. After 1973, around one-third of the expropriated land was returned to former owners and close to another one-third was auctioned to non-rural dwellers. Barely one-third of the area was allocated to peasants. Given the curtailment of State provision of credit and technical support to peasants and cooperatives, these were some of the principal victims of the restructuring of public expenditure. It is estimated that, as early as 1979, about half of the peasants who had been assigned land had been forced to sell or rent out their farms (see Ortega, 1987).9 At the same time, a massive expelling of peasants from the farms on which they had been living before and during the agrarian reform took place. In 1980, another major step in the process of privatization was taken in the social security system. The pension regime, hitherto financed through a pay-as-you-go system, was replaced with individual capitalization in private social security societies (AFP) created 7 8 9 This figure does not include about 220 enterprises subject to intervention in 1973. See Vergara (1981); Bitar (1979, chap. X) examines the social property area program, its evolution, and resulting problems. It is well documented that the transfers were made at prices significantly lower than normal market values. See Dahse (1979); Devlin and Cominetti (1994); Foxley (1983); Marcel (1989). Two financial factors that contributed to the pressure on peasants to sell or lease their allotted land were the high cost of credit in the domestic capital market and the lack of prior relations between peasants and commercial banks. On the agriculture and peasant situation (see Ortega, 1987). 11 by the new system.10 Existing pensions and those of workers who would retire within five years continued to be the responsibility of the public sector; the rest of the workers could choose between remaining in the old system or transferring to an AFP. For merely making the transfer, the worker benefited from an automatic take-home increase of 11%. One enterprise of great importance that was able to evade privatization was CODELCO, the Copper public firm. It underwent powerful onslaughts from the economic team but succeeded in warding them off. Even so, it suffered budgetary restrictions and systematic constraints on its expansion imposed by the Ministry of Finance, despite the substantial profits it contributed to the Treasury. It was only permitted to make investments that allowed maintaining the production level reached in 1977. Within the contradictions produced by the privatization dogma, the government encouraged, unsuccessfully hitherto, the development of other copper deposits to be operated by foreign companies.11 With regard to trade liberalization, practically all non-tariff restrictions were removed. Tariffs were rapidly reduced from the high level predominant in 1973 (a simple mean rate of 94%) to a uniform tariff of 10% for all goods, since 1979. Likewise, trade reforms included the suppression of price bands, anti-dumping devices, and public purchasing mechanisms designed to attenuate the transmission of external instability into the domestic economy. In line with the objective of the unilateral and across-the-board opening to international trade, Chile withdrew from the Andean Pact in 1976. As well, a quite liberal statute for FDI was launched early in 1974. Chapter II covers in detail import and other trade policies. In the financial field, a drastic reform of the domestic market was introduced in 1975. The banks that had been nationalized under the President Allende regime were privatized. Interest rates were left totally free, regulations with respect to the terms and allocation of credit were eliminated, and new financial local and foreign entities were authorized with few restrictions. Finally, in relation to the capital account, there was a gradual relaxation of restrictions on financial inflows. Chapter III analyzes financial reforms, and their effective contribution to the acute recession that exploited in 1982. 10 11 The features of the pay as you go system and a comparative analysis with other options are discussed in Uthoff (2001). The health reform is analyzed in Titelman (2001). The main foreign investment in the 1970s was performed by Exxon through the acquisition of a deposit in exploitation. See Vignolo (1980) and Bande and Ffrench-Davis (1989). 12 (ii) Achievements and failures Utilization rates of installed productive capacity had recovered in the first twelve months following the military coup. Labor discipline (imposed through the repression of unions and persecution of leaders), the liberalization of prices, exchange rate devaluation, increased public works investment, and high copper prices, had removed bottlenecks and favored higher use of potential GDP. Rising copper prices in 1973-74 more than offset increased spending on oil imports, with a net improvement in the terms of trade equivalent to almost 5% of GDP in 1974 compared with 1972. A novel feature for Chile was the strength of the increase in the export volume. There were four causes for this outcome: (i) a very sharp real devaluation, (ii) export capacity installed in earlier years, (iii) removal of bottlenecks in the sector and the liberalization of imports of inputs, and (iv) a sharp reduction in domestic demand (see Ffrench-Davis, 1979). The implementation of the neo-liberal strategy was disturbed by two developments that affected negatively the Chilean economy during the 1970s: (i) an extremely high domestic inflation rate, which the monetarist stabilization policy had great difficulty in controlling, and (ii) the first international oil-shock, which, coupled with the sharp decline of copper prices in 1975, then created a severe balance of payments crisis. Until 1976, anti-inflationary action was based solely on monetary policy. From May to August of 1973, as said, the annualized inflation rate had sky rocked to 700%.12 A few days after the coup, most of the controlled prices were freed within a context of high uncertainty. The foreseeable result was a dramatic upsurge of inflation (88% in October 1973). As the fiscal situation was being brought under control, monetary policy became effectively restrictive in the course of 1974. The official line was that the new price fixers, the private entrepreneurs, had to take money supply behavior into account in order to define the price of their products. The concrete fact is that the information on money supply became widely available with a lag of some months and with various divergent indicators, 12 All the inflation figures used here refer to the consumer price index as corrected in Cortázar and Marshall (1980). The official index significantly underestimated the actual rise in prices, mainly in 1973 and in 1976-78. 13 and given the high inflation, prices were often adjusted more frequently than once a month. Under these circumstances, the main point of reference for each economic agent became the actual behaviour of entrepreneurs as a whole, measured through changes in the official monthly consumer price index (CPI), the more easily available and up-to-date indicator. The consequence was that annual inflation rates exceeding 300% still persisted by the third year of implementation of the model, despite monetary restrictions, a fiscal budget already under control in 1975, and a large recessive output gap (20% in 1975-76). Additionally, the price of copper dropped sharply by the second half of 1974, while the oil shock persisted, with a net negative terms of trade effect amounting to the equivalent of 6.4% of GDP in 1975 as compared to 1972. This sharp negative shock, coupled with persistent inflation, prompted the government to introduce a tougher adjustment program in 1975, based on a restriction of aggregate demand, led by fiscal and monetary contraction and significant exchange rate devaluation. The monetary restrictions, rather than influencing principally the price level, had a greater impact on economic activity: during 1975 industrial production fell by 28%, GDP declined 17% (see figure I.1),13 and open unemployment (including emergency programs) peaked at 20% (see Jadresic, 1986). The predominance of sharp demand-reducing policies over a weaker set of switching policies (those affecting the composition of demand and supply) explains the significant underutilization of productive capacity or output gap. This generated high unemployment, numerous bankruptcies, and depressed capital formation. The “price”, which was in fact adjusted swiftly downward, was that of labor: by 1975 wages had lost about 40% of their purchasing power owing to the drastic repression of unions, the huge unemployment, and the legal readjustment based on an underestimated CPI.14 [Figure I.1] 13 14 Naturally, the direct impact of the deterioration in the terms of trade observed in 1975 is not included in the figure of GDP decline. GDP measures real output; the terms of trade affect the real purchasing power resulting from a given GDP. As Cortázar and Marshall (1980) document, in that period there was a systematic, month after month, underestimation of the CPI; the official CPI was used as reference for wage and pension readjustments. Nonetheless, even the corrected CPI shows a gradual drop in the rate of inflation. 14 The monetarist recipe for controlling inflation multiplied, in the domestic economy, by three the depressive effects deriving from the negative external shocks and involved a notably high cost, both socially and in terms of economic activity (see Foxley, 1983; Ramos, 1986). By mid-1976, the economic team recognized –implicitly– that monetary control was proving to be incapable of restraining inflation on its own. Then the exchange rate anchor was incorporated into the anti-inflationary policy: Thus, began a long process in which this rate was used to slowdown inflation by reducing the cost of imported goods and attempting to influence inflationary expectations: analytically, it was a transition from closed to open monetarism. In June 1976 and March 1977, exchange rate revaluations were made (a reduction in the number of pesos per U.S. dollar), which were accompanied by a systematic mass media campaign.15 The measure had a significant effect, since inflation rapidly fell to levels below 100% annually after the first revaluation and below 60% after the second. There was a belated understanding that inflation was not being generated by an excess of demand and monetary expansion. The belated realization was, however, incomplete, since it implied an excessive conditioning of the exchange rate to the antiinflationary policy, thereby sacrificing external equilibrium and the production of tradables. The severe crisis of 1982 would show that had been a wrong bet. The evolution of anti-inflationary policy ended in 1979 with the freezing of the exchange rate. As a consequence, a new stage of automatic macroeconomic policy was introduced when the government fully adopted the “monetary approach to the balance of payments” then in fashion in several academic and orthodox financial circles. The new official version was that, with a fixed exchange rate, in an economy with free imports, domestic prices could not rise more rapidly than international inflation. This policy was supported by heavy foreign lending, which more than covered, until 1981, an expanding external deficit (see chap. III). When the exchange rate was pegged, domestic annual inflation exceeded 30%, while international inflation neared 12%. Subsequently, the convergence between the two rates occurred, but only gradually; as a consequence, for a couple of years, domestic inflation was markedly higher than the external rate, so that the exchange rate lost 15 After the publicized revaluations, daily mini devaluations were applied. Exchange rate policy is analyzed, abridgedly, in chap. II, and at length in Ffrench-Davis (1981). 15 purchasing power.16 Hence, the regime of free imports and an appreciated exchange rate caused a flood on the domestic market and an unsustainable disequilibrium in the current account during 1981. To face the external deficit, the official policy relied on an “automatic adjustment” in the style of the gold standard: it claimed that the real exchange rate would automatically adjust with the contraction of monetary liquidity associated with the current loss of international reserves in the Central Bank. This contraction was expected to have provoked a sharp drop in domestic prices and nominal wages. However, it was overlooked the fact that the exchange rate between 1979 and 1981 had accumulated, not a 2 or 3% but a 30% appreciation (besides the still lagged effect of import liberalization, as analyzed in chap. II). The outcome was a drastic fall in sales, output and employment, and a progressive strangulation of business firms through increasing indebtedness at extremely high real interest rates (see chap. III). Despite numerous tough restrictions on labor union activities and a real wage that remained below the average level of 1970, the authorities blamed salaries for their failure to achieve a fluent and rapid automatic adjustment.17 In mid-1982, they tried to establish a general reduction of nominal wages, but the economic team was unable to impose such a measure. Consequently, they turned to exchange rate devaluation, but with unsustainable disturbances in the productive and financial systems: between June and October of 1982, the nominal exchange rate was devalued by over 70% amidst a general crisis. The corresponding inflationary impact implied that the CPI increase in the following twelve months jumped to 32%, in contrast with the 4% recorded in the previous period. In brief, the exchange rate anchor was effective in curbing inflation, which by early 1982 stood at the international level, even below zero in some months.18 But once again the severity of the macroeconomic imbalances generated was underestimated. Efforts had been 16 17 18 It is relevant that external inflation (IEP, measured in US dollars) also decreased due to the sharp appreciation of the U.S. dollar with respect to the currencies of the other industrialized countries: in the 12 months before June of 1982, the IEP reached an annualized average of -2%. The lower limit for the adjustment in wages was determined by the official CPI of the preceding period. Various authors blame this rule for the costly recessive adjustment. Nonetheless, there were no international precedents of cases of massive deflation that had resulted from restriction of the money supply, which had operated fluently, at the required intensity, and without causing severe problems for debtors or economic activity. Several indicators of this episode in Chile are similar, in sign and size, to those in the currency crisis of Argentina that exploited in 2002: negative inflation preceding the crisis; sharp GDP drop, huge unemployment, and dramatic rise in poverty with the crisis. 16 concentrated on bringing down inflation, while external equilibrium and investment in human and physical capital were overlooked. As said, since 1979, the real exchange rate had lost a third of its purchasing power, the external debt doubled, the export boom faltered in 1981-82, and the current account deficit had climbed to 21% of GDP in 1981.19 (iii) Vulnerability and spurious growth The weaknesses of the model are highlighted when the composition of GDP is disaggregated (see table I.2). First, there was a rise in external indebtedness and of its cost. Around one fifth of per capita GDP “growth” recorded between 1974 and 1981 corresponded to interest and profit payments accrued to foreigners, which meant that the rate of expansion of the national product was lower than that of GDP. Second, the valueadded in (i) the marketing of imported products and (ii) financial services contributed a high share to GDP “dynamism”; these two sectors exhibited a dramatic cumulative expansion of 13% annually. [Table I.2] The first sector expanded as a result of an unsustainable rapid growth of imports of consumer and intermediate goods. As was discussed earlier, most of these imports were financed not by higher exports but by an increase in private foreign debt. This source of “dynamism” –value-added in the marketing of imports– was unsustainable in an economy that lacked vigorous real productive support and that was experiencing a notably high external deficit. The second source of “dynamism” was associated with the financial reform and responded principally to the spread between the rates of interest on deposits and loans and to the transfer of foreign credits in Chile. Thus, these two sources of “dynamism” rested on outlier values of imports and financial spreads, both of which were prejudicial to productive activity and investment. 19 Figures were calculated on the basis of the average exchange rate in 1976-78. With the very appreciated exchange rate of 1981, the deficit is 14.5% of GDP. Notice that GDP measured in current US dollars was US$15 billion in 1978, US$33 billion in 1981 and US$16 billion in 1985. Given the enormous volatility in these years, it is wise to “normalize” the exchange rate used, in order to make inter-temporal comparisons of GDP expressed in foreign currency. 17 There can be no doubt that, owing to the distortion implied by both sectors in the Chilean economy, the overall performance contained a sizable share of spuriousness. Hence, it is very significant that the rest of per capita value-added, which in 1974 amounted to 91% of gross national product, remained virtually stationary, as can be seen in column 4 of table I.2.20 Over and above this poor performance, GDP fell by 14% in 1982-83, while Latin American GDP diminished only 3.2% in the same biennium. The link with the future relates to national savings and investment.21 The supporters of the model claimed that it would achieve a substantial increase in savings, investment, and efficiency, all crucial sources of economic growth. The foregoing analysis has shown that the results were negative with respect to production. However, this could be consistent with a vigorous process of slow maturing investment. Unfortunately, in each of the years between 1974 and 1980, the gross fixed investment ratio was lower than that of each year in the 1960s; only 1981 recorded a ratio comparable with that decade. In 1974-81, the average investment ratio was 15.7%, in contrast with 20.2% in the sixties. In parallel, savings financed a lower share of investment; in 1970, around 90% was covered by national savings, whereas in 1978-81 scarcely one-half came from this source. The high rate of external borrowing followed by a sudden stop in 1982, led the country into a new recessionary crisis as severe as the 1975 one. For the second time in a decade, the Chilean economy underwent a sharp recession, the deeper in Latin America in 1982, with GDP declining 14%, followed by a widespread bank crisis and massive unemployment in 1983. Those disequilibria had been induced by excessive domestic spending on the part of the private sector, spurred by financial liberalization, huge capital inflows and the so-called monetary approach to the balance of payments. Underlying these disequilibria there was a 20 21 As mentioned earlier, production of exportables also grew at a significant pace. Therefore, a contraction in the rest of the economy –the non-exporting sectors– occurred. Within this subset, the industry, which accounted for the major share of economic activity, suffered the negative pulls of the recession in 1975, trade liberalization, and then exchange rate appreciation. See chapter II and Marcel and Meller (1986). By investment is meant what in the national accounts is called gross capital formation or gross investment in fixed capital or what I also call productive investment in contrast with purely financial or speculative investment. Besides investment, there are many other connections to the future that are not considered here. These include the impact that the model may have had on the capacity for technological absorption and adaptation; the degree of creativity of the technical and university education systems; national cultural development; the channels of participation and social capital that could serve for development strategies, based on a national consensus; and the dynamism and efficiency of the state as a development leader. 18 severe diagnosis error. The government assumed that, since it had achieved a fiscal surplus and external borrowing was being decided by private agents, a foreign exchange crisis would never occur. The explicit and strong support of the International Monetary Fund (see Robichek, 1981) reassured the government in that wrong assumption. It failed to realize that an unsustainable medium-term deficit could be generated in the private sector (Marfán, 2005). With the crisis, the producers of GDP faced massive bankruptcies. Political discontent against the iron-fisted dictatorship spread, while demonstrations of opposition proliferated even amongst many regime supporters. National accounts, both official and corrected (Marcel and Meller, 1986), show high “growth” between 1976 and 1981. However, in the first place, the model was not initially put in motion in 1976 but (in partial form) in 1973. Second, in 1975 there was a sharp recession, which multiplied threefold the depressive effect of external shocks, with the fall of 17% in GDP. Hence, to measure economic evolution from the low 1975 point implies measuring as “growth” what in fact was simply a recovery of the 1974 level. This gave rise to the mistaken impression that Chile was growing vigorously and would continue to do so at rates in the order of 8% per year,22 even irrespective of what might happen abroad. Whereas 1976-81 gives an annual per capita GDP increase of 4.7%, the period 1974-81 merely averages 1.4%. It is obvious that the greater the recession of 1975, the greater could have been the subsequent recovery. Thus, the greater the loss of production as a result of the recession (a true social and private cost) the higher appears the “growth” if the measurement begins at the lowest recessed point. This is an extremely gross technical error, but it is quite frequent. This misleading implication would emerge again in the second half of the dictatorship. b) Introduction of pragmatism, with a regressive bias in 1982-89 The impacts of the deep crisis of 1982-83 and the subsequent recovery were the dominant features of this sub-period. Renegotiations of the foreign debt with bank creditors, the IMF, World Bank and the US government played an outstanding place. As the government's power weakened with the 1982 recession, it was compelled to revise its strategy in several 22 See, for example, the illustrative statements quoted in Foxley (1983). 19 respects, including the change of the head of the economic team and the “nationalization” of the private debt. The government, that by 1981 held merely one-third of total debt, by 1987 held 86% of it. The determinant of the level of economic activity, in a very explicit way, was the availability of foreign country; thus the volume of the service of the debt and the loans from international financial institutions was crucial for the speed of recovery. With respect to the policy approach, the crisis revealed the extreme vulnerability to external shocks created by neo-liberal policies and the passivity of the State. The apparent economic success of the late 1970s had been based on a shaky policy of external and domestic borrowing with minimal regulations. The economic collapse and the climate of discontent made possible the reconstitution of some social movements that had been dismantled, especially labor unions and political parties of the Center and Left. In the economic arena, several adjustments were made by the government, along the next four years, including successive devaluations, the increase of import tariffs, band prices for the main agricultural products, subsidies to non-traditional exports, stringent regulation of the financial system, implicit nationalization of private debt and massive financial aid to the private sector (see chap. IV). All these changed policies, previously sharply dismissed by the neo-liberal approach, were signals of “pragmatism”, in order to reduce the “scarcity of foreign currency” (the binding external constraint) and to recover economic activity. This implied a substantial change in fiscal policy, which after exhibiting a strong surplus until 1981 went on to a deficit, averaging 3.4 % of GDP in 1983-85. However, this greater pragmatism was biased in favor of upper-income sectors, including generous subsidies, while a tough position was maintained toward labor and grassroots organizations. The consequence was a further deterioration in income distribution; indeed, the year 1987 recorded the worst income distribution since statistics are available (see chap. VII). A strong and sustained recovery of economic activity and domestic output began in 1986. Exports were quite vigorous, encouraged by a spectacular depreciation of the real exchange rate (130% between 1982 and 1988). In 1986-87, a gradual recovery of domestic activity proceeded in a sustainable macroeconomic framework, under a binding external restriction, but generously alleviated by loans from international financial institutions (IDB, IMF and WB). In the next two years, the situation changed, with the disappearance of the 20 restriction of external financing, due to a spectacular rise of the copper price. As a consequence, the expansion of aggregate demand and economic activity accelerated, culminating in the overheating of the economy in 1989, when actual GDP increased 10%. The jump in aggregate demand resulted from expansion of the money supply, tax reductions, and import liberalization with some exchange rate appreciation, which made imports cheaper. The installed capacity still available by 1987 and the sizable improvement in the terms of trade (copper prices) in 1988-89 made a sharp transitory jump in economic activity feasible. The last biennium of the Pinochet regime exhibited that high growth of actual GDP, in contrast with a quite moderate rise in potential GDP. Paradoxically, then, as it had happened in the late 1970s, the domestic recession of 1982-87 was useful for the “marketing” of the model. The model was able to show “growth” for several years, a circumstance that attracted extensive publicity in the national and foreign mass media. The prior sharp recession was underestimated or ignored by the media under a strong dictatorial regime. Hasta hoy, es común que la evaluación económica de ese régimen inicie el contéo del crecimiento desde 1986, desconociéndose la enorme brecha entonces existente entre PIB efectivo y potencial. In brief, the 1980s ended with the Chilean economy recording a high rate of capacity utilization and growth of actual GDP. However, average growth in the whole 1982-89 period was low: merely 2.9% annually, while per capita GDP only in 1988 reached the level it had exhibited in 1981. Additionally, the economy did show substantial disequilibria. During 1988-89, a number of macroeconomic variables exhibited inconsistent trends over the medium term. Real aggregate demand had grown swiftly –22%– in the biennium, and GDP had risen by 18%. Exports grew vigorously in the two-year period, but imports rose even faster. The large gap between changes in expenditure and production was compensated by an improvement in the terms of trade equivalent to 6% and 7% of GDP in 1988 and 1989, respectively, as compared to 1986. Output, in turn, rose sharply due to the progressive exhaustion of idle capacity. However, productive capacity was expanding a total 8% in the biennium. The contrast with the 18% increase in actual GDP led to full utilization of installed capacity and overheating of the economy. This manifested itself in 21 accelerating inflation and a deteriorating external sector during 1989. By January 1990, inflation in 12 months reached 23%, twice the 1988 rate.23 c) A summary of outcomes Notwithstanding that some key policies were significantly different, economic growth recorded similar annual averages in both halves of Pinochet's government: 3% and 2.9%, respectively (see table I.3). How can similar results be explained? The low average of both periods was associated with the severe abrupt crises of 1975 and 1982-83, and with the gradual recovery processes, which in both cases involved high rates of underutilization of productive capacity for several years. This persistent gap between actual and potential GDP, in turn, was the main factor discouraging capital formation (Agosin, 1998; Servén and Solimano, 1993), which was under 16% of GDP in each sub-period; that is, around four points (one-third in net investment) lower than in the sixties. [Table I.3] The reforms had significant different effects on the productive structure. Trade liberalization contributed to the significant expansion of exports. However, applied simultaneously with a tough monetary stabilization policy induced a depression that featured a 26% drop in industrial output in 1975. Nonetheless, in parallel with numerous bankruptcies, the sector achieved a rise in productivity among the surviving companies and by 1978 manufactured exports had risen by an average of 15% (Vergara, 1980), with greatly increased heterogeneity in the sector. It must always be recalled that what is relevant for the nation as a whole is the evolution of productivity including all people, not only those with a job! The high rate of business bankruptcies cannot necessarily be attributed to inefficiency resulting from protection under the earlier development strategy. In fact, after 1973, the long recession, real annual interest rates averaging 38%, and the accelerated 23 This is the inflation rate for the twelve months ending in January 1990. Between August 1989 and January 1990 the annualized rate of increase in the consumer price index (CPI) was 31%. 22 import liberalization-cum-exchange rate revaluation, can be identified as the determinant factors leading to high business mortality. Manufacturing lost a significant share of GDP. Exports, on the other hand, achieved great dynamism, particularly of non-traditional goods. In fact, between 1974 and 1980, the share of non-traditional exports (including manufactures) in total sales of goods abroad rose from 9% to 19%. These exports exhibited a falling share in 1981-85 (averaging 16%), and then renewed an upward trend to 22% in 1989. In all, in 1974-89, the volume of non-copper exports averaged an annual growth of 15%, undoubtedly a significant figure (see chap. V). The modernized business sector featured a surge of new economic groups and managers exhibiting vigorous innovative competitiveness. This modernization went in parallel with that of the Internal Revenue Service and of the Budget Office. Together with the export drive, they contributed, but not determined the economic success achieved latter in the 1990s. Furthermore, many classical conditions for development arose, among them, “correction” of some prices (especially exchange rate depreciation in the 1980s and reduced cost of imported inputs), market deregulation, and guaranteed property rights. But it also was the consequence of the substantial fall of real wages and of taxes on capital, and the elimination of many labor rights, while modernization still eluded the large majority of firms. At the end, there was a notable progress for some people, with exclusion of many. An extreme neo-liberal interpretation reports a vigorous growth, because only the results obtained after 1986 are considered. But, it does not have any justification to assess a set of reforms counting only the years with positive results and ignoring the negative ones. It induces to severe pitfalls of diagnosis and action, and encourages other nations to repeat the experience, what happened to a large degree among Latin American economies in the 1990s (see Ffrench-Davis, 2006, chapter. I). The concrete fact, that requires deep corrections, is that average GDP growth was mediocre in both sub-periods. Until 1982 “price corrections” had been very contradictory. In fact, the neo-liberal orthodoxy did not consider that financial liberalization could lead to high outlier interest rates or that trade liberalization could be accompanied by continuous exchange rate appreciation, as was the case between 1979 and 1982. Neither was it foreseen that the private sector would be “promoted” amidst a sharp restriction of aggregate demand, as in 23 1975-76 and 1982-83. In turn, the debt crisis dismantled the financial system, implying that the government did allocate the equivalent to 35% of an annual GDP to the rescue of some affected sectors, diverting these resources from the generation of economic and social development. This combination of events helps to explain why modernization in some sectors coexisted with a mediocre economic growth averaging 2.9% between 1974 and 1989, why the average investment ratio was notoriously below the sixties level, and why income distribution worsened so much (see chapter VII). As on many other occasions in Chilean history, economic policy was strongly influenced by a transitory notably improvement in the copper price. 24 It is undeniable that 1988-89 would have been quite different had there been a “normal” copper market in those years. Based on that abnormally high price, the Pinochet regime could finally boast an economy with impressive export values and actual GDP growth figures in 1988-89. But, evident macroeconomic imbalances had to be corrected in 1990. This explains the strong policy adjustment carried out in January 1990 –in full transition from dictatorship to democracy– in order to stop an overheating of the economy led by excessive aggregate demand. The adjustment was implemented, in January 1990, by the new independent Central Bank, ruled by Pinochet few days before the presidential election of 1989. The Bank acknowledged the severity of the disequilibria and the risk to wait until the inauguration of the democratic government in March 1990. Income inequality was notably greater than two decades earlier, as a consequence of strong worsening in the seventies and eighties. In fact, the share of the poorest quintile on total expenditure had been reduced from 7.6% in 1969, to 5.2% in 1978 and 4.4% in 1988 (see chapter VII, table VII.2). A determining variable of that outcome was the deterioration of the labor market, with average and minimum wages that in 1989 were below those in 1981 and 1970. The major swings in distributive worsening were associated to the 1975 and 1982 crises. In political terms, a salient development was the effective organization of social movements and political parties, which were able to compel the democratization of the system, even under the rules unilaterally imposed by the dictatorship. Following the triumph of the opposition, led by a center-left coalition, the Concertación Democrática, in 24 In fact, as was to be expected, copper prices did decline since late 1989. 24 the October 1988 plebiscite and the December 1989 presidential election, a democratic president, Patricio Aylwin, took office in March 1990. 3. Democracy, reforming the reforms and development, 1990-200925 Since 1990 the political arena was dominated by the administration of the Concertación de Partidos por la Democracia. The Democratic Concertación, a center-left coalition of Christian democrats and Social democrats, took over power with the successive elections of Patricio Aylwin (1990-94), Eduardo Frei Ruiz-Tagle (1994-2000), Ricardo Lagos (200006), and Michelle Bachelet (2006-10). The two first administrations gave rise to a period of the greatest prosperity in Chilean economic history, with a sustained average 7% GDP growth rate between 1990 and 1998. It marked a clear break with the historical trend (see table I.1). High capital formation and a generalized atmosphere of stability prevailed until 1998, when the Asian crisis hit Latin American countries. The vigorous growth was led by a 10% annual expansion of exports, a figure similar to the average recorded in the seventies and eighties (see chaps. V and VI). Nevertheless, GDP growth was radically different: 7% in the nineties and 2.9% in the two previous decades.26 Given the shared good export performance, evidently, the main factor explaining the success in the nineties was the strong expansion of the rest of GDP (non-tradables plus import substitutes) which averaged 6.5% per year in 1990-98 (see chap. VI, table VI.6). As in the three decades of intensive development of Korea and Taiwan (1965-95), a key of success were the links between the export sector with the rest of the economy and the persistence of a comprehensive real macroeconomic balance. The end of President Frei administration (1999) and the first years of President Lagos (2000-03) were characterized by a depressed economic environment. The sharp and sustained fall in economic activity was focused in the non-exported GDP, which represented around 70% of the whole economy. A drop in export dynamism –undoubtedly, 25 26 Collections of studies with diverse approaches and authors can be found in Bosworth, Dornbusch and Labán (1994); Pizarro, Raczynski and Vial (1996); Cortázar and Vial (1998); Larraín and Vergara (2000); Ffrench-Davis and Stallings (2001); Larraín, G. (2005); Meller (2005); Muñoz (2007); Vega (2008). Notice that in the three cases we “end the decades” in peak years: 1981, 1989, and 1998 in order to be “fair” in the comparison. From peak to peak, actual growth reflects better the creation of productive capacity than using mechanically calendar decades. 25 very significant– only explains 1.0 out of 4.5 points of lower growth in 1999-2003 with respect to 1990-98 (falta mencionar 2004-09!!). In all, GDP growth averaged 5.4% in the nineteen years between 1990 and 2008 (5% if the recession of 2009 is included). In turn, per capita GDP expanded 4% annually in the same period, in contrast with 1.3% in 1974-89. This notable difference, that is associated with improvements in the quality of macroeconomic policies since 1990 and some efforts to “complete” factor markets, explains the substantive economic and social progress achieved. Nevertheless, the brake in 1998 is significantly associated with setbacks in the quality of macroeconomic management (see chap. IX). a) From the reform of the reforms to the Asian contagion, 1990-98 The new administration of Patricio Aylwin focused its efforts on achieving stronger, stabler, and more equitable GDP growth. This required stabilizing the economy after the 1988-89 overheating generated by the Pinochet regime, and, among other things, an increasing investment ratio, the implementation of macroeconomic policies achieving sustained equilibrium in financial markets and in the real economy, diminishing vulnerability to external shocks, and progress in solving the most urgent social demands by enabling larger segments of population to benefit from the modernization of the economy. The aim was to reconcile macroeconomic and macrosocial equilibria, and implement a style of economic policy that would become legitimate within the new democratic framework. The new government had decided to avoid a radical change in existing economic policy, seeking "a change-with-continuity" and thus breaking with the rehashing tradition of several previous governments. In order to accomplish this goal, the government of President Aylwin had to gain support of trade unions and incorporate their organizations into the macrosocial decision-making process. The new administration had to cope with the potential conflict between macroeconomic stability and demand for more resources to be allocated to lower income groups. On the one hand, it changed the composition of public expenditure, increasing the share of social spending in the budget, and, on the other, it rapidly presented to the 26 Parliament a tax reform to increase fiscal income. Tax reform included a reintroduction of profit taxes abolished in 1988, and an increase of 2 percentage points of the value-added tax.27 Likewise, in 1990 the government proposed a reform of the labor code to Congress. It was aimed at balancing the bargaining power of employers and workers and sought to endow current labor legislation with greater legitimacy. To get this law passed, an agreement was reached between the government, labor and employer organizations, and most political parties. However, the reforms agreed (including the tax reform) were always less comprehensive than those originally proposed by the government. (Cortázar, 1996; Marfán, 1998). A determining fact was the group of senators that had been appointed under the Constitution designed by Pinochet, which more than compensated for the majority achieved by candidates of the new government in 1989 and 1993 parliamentarian elections. In 1990, a tripartite agreement was also reached between the government and the representatives of unionized workers and employers; this agreement provided for an increase of 28% in the real minimum wage between 1989 and 1993. In the early 1990s, significant progress in income distribution and poverty reduction was achieved in this constructive climate. Since 1994, poverty continued to decline, although more slowly. While 45% of the population lived in poverty in 1987, by 1994 had progressed to 27.5%, and by 1998 this share had been reduced to 22% (see chap. VII). It should be pointed out that greater social effort was attained with notable fiscal responsibility. As a result of the 1990 tax reform, the expansion of economic activity and imports, a higher than expected copper price (captured by Chile thanks to the fact that the nationalization of large copper mines had survived; now they were grouped under Corporación Nacional del Cobre, CODELCO), and a decline in tax evasion, the fiscal burden rose by 3% of GDP (to 18% of GDP). This allowed the government to increase public spending, in particular social expenditure, and at the same time expand non-financial public sector savings from 2% in the 1980s to nearly 5% of GDP in the 1990s (see table I.5, 27 It can be argued that the increase in value-added taxes included in the reform would tend to impose a regressive effect as low income families consume a larger part of their income. Nevertheless, a coherent comparison also has to consider that most resources are transferred to lower income families through an increase in social spending. The net effect results evidently progressive. 27 below).28 Higher savings not only financed public investment but also generated an average fiscal surplus of 1.8% of GDP in 1990-97; the surplus was used to reduce the high stock of public debt accumulated during the dramatic financial crisis of 1982-83. A new political agreement in 1993 enabled the approval of several previously transitory modifications on a more permanent basis. Subsequent evidence rejected the prediction of critics of the 1990´s tax reform, who claimed that it would have a negative impact on investment. After a decline of the investment ratio in 1991 –associated with the lagged effect of the 1990 adjustment - capital formation increased in 1992 and again in 1993, reaching in the next five years levels never achieved in the previous three decades (see table I.1). This high productive investment was the main factor behind the outstanding annual GDP growth, which rose from below 3% in 1974-89 to over 7% in 1990-98. As empirical studies show robustly, private investment, given its irreversibility, is positively correlated with real macroeconomic equilibria whenever they appear to be sustainable and fulfil two key conditions. First, for real equilibrium, effective demand has to be consistent with the productive capacity being generated, and, second, key macro-prices (interest and exchange rates) must be right (see Agosin, 1998; Coeymans, 1999; Ffrench-Davis, 2006, chap. II; Servén and Solimano, 1993). This is what we call real macroeconomic balances. Given the macroeconomic disequilibria generated in 1988-89, a severe adjustment through the increase in interest rates had been carried out in order to control the expansion of aggregate demand and a new outbreak of inflation. This adjustment was considerably complicated soon after by large capital inflows, which, like other economies in the region, Chile had been receiving since the early 1990s. The gap between domestic and international interest rates had increased significantly. In the meantime, risk-rating agencies had upgraded the Chilean economy inducing a strong inflow of short-term “hot money” and an appreciation in the exchange rate in the second half of 1990 (with a drop from the depreciated ceiling to the appreciated floor of its 10% crawling band of the price in pesos of 28 Depreciation of capital goods in public firms is included in gross private savings. Moreover, the fiscal sector generated financing to cover the deficit of the public social security system. Under the social security reform of 1981, the public sector continued paying already retired workers and financed part of the new pensions, while income was shifted to the private system. The fiscal figures do not consider the quasi-fiscal deficit of the Central Bank –which was initially caused by the government intervention to prevent a massive bankruptcy of the domestic financial system in 1983; it was enlarged, subsequently, with the operational losses in monetary sterilization in the 1990s (on this latter issue, see chap. VIII). 28 the U.S. dollar). The Central Bank was forced to buy large amounts of foreign currency to defend the band’s floor. Particularly, economic authorities faced the need to differentiate between permanent appreciation pressures, resulting from Chile’s net improvement in productivity and from having surmounted the debt crisis, and transitory pressures. Having identified the former, an attempt was made to avoid the latter in order to maintain the competitiveness of tradables. The strong external supply of both short-term and portfolio capital threatened to considerably diminish the capacity of the authorities to conduct monetary policy and to avoid excessive fluctuations in both the real exchange rate and aggregate demand. Faced with a massive capital inflow, Chilean authorities sought to reconcile these two objectives –an interest rate suited for keeping domestic balances and an exchange rate consistent with external balances– by applying several counter-cyclical policies. Among these were active exchange rate policy and monetary sterilization; selective liberalization of capital outflows; establishing a reserve requirement (encaje) on foreign loans and liquid inflows, which increased their costs, in order to avoid what considered an excess supply; and the extension of a tax, which had previously applied only to domestic currency loans, to include foreign currency loans. Empirical research documents that these policies were successful in reducing shortterm and volatile inflows and provided space for monetary policy and avoiding destabilizing exchange rate appreciation (see chap. VIII). But foreign direct investment (FDI) –risk capital was exempted from the reserve requirement– became increasingly large. FDI was stimulated by the attractive features of the Chilean economy: rich natural resources and the almost tax free transfer of the economic rent abroad (a loophole inherited from the dictatorship that required correction),29 high quality macroeconomic policies, and the positive perception of the democratization process. Therefore, a large surplus in the capital account, with effective long term financing, higher than the moderate deficit in the current account, was generated. The Central Bank responded with active purchases of foreign currency (implying a welcome replenishment of the low international reserves held by 1990) and open market monetary sterilization. 29 In 2006 it gradually began to operate a tax that plays a similar role to a royalty. 29 The set of policies, especially those affecting short-term and volatile capital inflows, contributed to keeping the current account deficit within sustainable levels (2.3% of GDP in 1990-95) and preventing an excessive increase in more volatile external liabilities. In so doing, Chilean economic authorities contributed significantly to macroeconomic stability, to the improvement of the social indicators, to the export strategy, and to overall growth. This became evident when Chile showed nearly complete immunity during the Mexican crisis of 1994-95 (see Ffrench-Davis, 2006, chap. VI). In 1990-95, GDP growth peaked at 7.8%. If the dynamism achieved in this period is compared with that of other episodes of high GDP growth in the past four decades, in contrast to previous occasions, this time a comprehensive set of positive features were fulfilled: (i) GDP growth, both actual and potential, was sustained for several rather than one or two years; (ii) growth occurred in a context of fast rising productive investment and national savings; (iii) growth occurred without significant inflationary or external account pressures; (iv) an orderly fiscal balance was maintained, and (v) no major macroeconomic disequilibria was built, thanks to several mini-adjustments thus avoiding the common need of traumatic maxi-adjustments. After each of these years of unsustainable macroeconomics in the past four decades, an adjustment program with heavy welfare costs had to be implemented. These significant changes in the macroeconomic environment are associated, in the external front, to the instability of the terms of trade and financing. On the domestic front, they reflect the high sensitivity of aggregate demand to external shocks, especially when the economy is operating under pro-cyclical policies. The impact of the adjustment program in 1990 on other economic variables was less severe and quickly reversed. As mentioned earlier, investment ratios recovered in 1992 and reached record levels since 1993. One main merit of policies in 1990-95 rests in that it was resisted successfully the temptation of achieving a faster disinflation with an increased domestic absorption of capital inflows and at the expense of exchange rate appreciation and a larger external deficit. Up to 1995 authorities implemented an effective monitoring of the counter-cyclical regulation on capital inflows. The strength of regulations (the cost or implicit fee and the coverage of the encaje) was adjusted continuously to the strength of the external supply of 30 funding. In the six year period 1990-1995, actual and potential GDP rose at similar rates, with the economy working close to the production frontier (that is, with a minor output gap between potential and actual GDP). However, policies lost their strength after 1995, thus allowing a real appreciation of the peso and imbalances in the external accounts in 1996-97. Chile did bend, partially, to the powerful international fashion promoting the liberalization of the capital accounts. That fashion was in general command, pressed by the US government, the World Bank and the IMF, the OECD and the academic world in the most influential spheres. It had been reinforced under the belief that the management of the tequila crisis had shown that the world had learnt to control financial crisis; such over optimism was absorbed domestically by business leaders and some public authorities. Recall that the IMF was in the road to impose all countries the obligation to open capital accounts. That extreme position experienced a sudden stop with the arrival of the Asian crisis in 1997. Fortunately, Chile did step back, since 1995, only to a mid-of-the-road position. Did not dismantle regulations but allowed a weakening of their effects, as discussed in chapter VIII (see also Le Fort and Lehmann, 2003) Consequently, Chile entered “vulnerability zones” --particularly with an appreciated real exchange rate and a large external deficit-- where it was caught by the Asian crisis. Additional factors, beyond the acute international fashion, can explain the policy change. First, the strength shown by the Chilean economy in face of the Mexican crisis in 1995 created a misleading sense of invulnerability. It led to disregard that immunity had been the result of a policy approach that had prevented (i) excessive exchange rate appreciation, (ii) a high current account deficit, and (iii) a significant stock of liquid external liabilities, and (iv) most inflows had been directed to capital formation, thus strengthening the capacity to respond to critical situations and to absorb efficiently inflows. Second, after 1995 a change in Central Bank priorities could be observed, with the prevalence of an anti-inflationary bias. Third, the outstanding performance of Chile transformed it into a preferred destination for foreign investors, in a context in which huge amounts of capital were being supplied to emerging economies. Despite this larger capital surge, most counter-cyclical regulations were kept unchanged instead of being 31 strengthened. Evidently, counter-cyclical policies must be adapted to the strength of the cycle, what did not happen in the second half of the 1990s. Therefore, when the Asian contagion reached Chile in 1998, with a strong negative terms of trade shock, the economy had accumulated significant imbalances: the real exchange rate had appreciated 16% between 1995 and October 1997, and the current account deficit had jumped to 4.2% of GDP in 1996-97, as compared to 2.3% in 1990-95, which worsened further with a sharp negative terms of trade shock in 1998. The fiscal policy of these two years (1996-97) deserves special consideration, since it has been an object of a misinformed debate. The fiscal policy of the nineties harmonized a significant expansion of social expenses with an increase of both public savings and investments. As said, a responsible fiscal management financed increases in expenses with the tax reform and the reduction of evasion. Real macroeconomic balances placed the economy in the productive frontier or potential GDP, with the corresponding high fiscal revenue. In the particular case of 1996-97, fiscal responsibility was kept. The actual fiscal surplus was 2.1% of GDP, exceeding that of the previous years. Consequently, the assertion that fiscal performance was responsible for the macroeconomic imbalance of this period has no support. The external deficit was evidently located in the private sector and was financed and encouraged by the weaker regulation of the capital account (see table I.4). [Table I.4] It is true that fiscal expenditure registered a rise in that biennium. But it must be said that it was an increase in items unanimously agreed by all political parties, related to education, health and pensions; additionally, recall that it was financed with taxes and not with indebtedness. In the meantime, GDP and productive investment kept growing up to 1998. All evidence show that where it was necessary to act strongly was on the cause of the real macroeconomic imbalance, that is, the excess of capital inflows in 1996-97. Because of that excess, the Asian crisis found the Chilean economy vulnerable, with a too cheap dollar price and a high external deficit. b) Recessive adjustment, 1999-2003 32 The final year of President Frei administration (1999) and the first four years of President Lagos (2000-03) were characterized by a depressed economic environment that frustrated the expectations of a spontaneous rapid recovery. The sharp and sustained fall in economic activity was focused in the non-exported GDP, which represented around 70% of the economy. As said, a drop in the volume of exports –undoubtedly, very significant– only explains 1.0 out of 4.5 points of lower growth in 1999-2003 with respect to 1990-98 (see chapter VI). The Asian crisis contagion arrived through two channels. On the one hand, there was a sharp deterioration of the terms of the trade (equivalent to 3% of GDP). On the other hand, a widespread reduction of capital flows towards emerging economies took place. Thus, since late 1997 there arose strong expectations of depreciation, which the Central Bank resisted during 1998, due to the fear of an inflationary overheating and the explicit concern for allowing domestic economic groups to reduce their debt denominated in dollars. First, massive sales of foreign currency were carried out by the Central Bank with an artificially low market price. Then, by mid-1998, the Bank reduced drastically the crawling band width intending to give a signal of nominal exchange rate stability, in combination with a rise in the real interest rate, which reached 14.5%. In this critical context, not only there was a drop of financial inflows, but also a massive residents' capital flight took place. In fact, from early 1998, there were voluminous capital outflows, principally from the private pension funds -speculating against the domestic currency, in the context of successive capital account liberalizations- totalizing almost 5% of GDP in 18 months (see Ffrench-Davis and Tapia, 2001; Zahler, 2006). It naturally had a strong contractionary impact on domestic liquidity and aggregate demand. Consequently, once again, a macroeconomic imbalance led by excessive capital inflows in 1996-97, was followed by an adjustment costly for both economic growth and equity. Beginning by mid-1998, aggregate demand fell sharply (with a 6% drop in 1999, while GDP decreased by 0.8%). Meanwhile, productive capacity kept rising, resting on the still high investment ratio of 1998. Consequently, with the fall in actual GDP and the increase in potential GDP, a large recessive gap between both output measures emerged. It is useful to examine in some detail the size and evolution of the output gap. It is not of obsolete physical capacity. It is economically productive capacity that was in use in 33 1997.30 New capacity was being created at a speed of about 7% per year which, as said, continued in 1998 and 1999, determined by the high investment ratios up to 1998 included. The downward adjustment in economic activity started by mid-1998, with actual GDP rising only 3.2% in 1998 and falling 0.8% in 1999. All added, a sizable recessive gap of about 6% of potential GDP was generated in 1999 and was still persisting in 2003. That was determinant of the sharp drop in the investment ratio in 1999-2003. As a consequence, the plateau of potential GDP growth had dropped from 7% to 4% per year, but actual growth fell even further, to 2.6%. As has been shown repeatedly, a significant gap between actual GDP and the production frontier is usually followed by a drop in productive investment. As in Mexico 1995, Argentina 1995 and 1999-2001, and Korea 1998, in Chile the investment ratio diminished substantially (by 18% in 1999) and remained depressed until 2003; the output gap plus the drop in investment had a deepening impact on employment too. The presidential campaign of 1999 was marked by the target of a fast return to 6-7% growth rates. Both Concertación Democrática and the opposition built their programs based on expectations that ex-post turned out to be overoptimistic. This mismatch between expectations of an imminent recovery and a depressed economy, with a stagnated aggregate demand, determined an imbalance between the resources needed to fulfil the government program and the depressed tax revenue. To face this context, the government implemented a new fiscal rule that works with the concept of fiscal structural balance (see Marcel et al., 2001; Tapia, 2003). The rule consists of sustaining a level of expenses consistent with structural fiscal income; that is, for each budget year the fiscal income is estimated as if the economy were fully using the “potential or trend GDP” and were facing the expected medium term copper price.31 Consequently, when the economy is overheated the Treasury accumulates savings; and under a recession it uses those funds (or borrow) to cover the foregone wastage of productivity and employment associated with an economic activity below potential GDP. This new public policy has been a great conceptual progress in fiscal 30 31 In order to estimate that capacity, to actual GDP of 1997 it was discounted an estimate of the output that was identified as non-sustainable in that year (see Annex). Two independent consulting committees, named by the Ministry of Finance, provide each year an estimate of the trend price of cooper (used to determine withdrawals and deposits to a copper stabilization fund) and inputs to estimate “trend GDP” for the next budget year. 34 and macroeconomic management, given the volatility of international trade and financial markets. This innovative fiscal rule was accompanied by two features that are not intrinsic of the rule. One is defining as target a structural surplus of 1%; after some time, inevitably, that goal leads to a net creditor state, a strange and non-desirable situation in a developing economy.32 The other one is to define as potential GDP what has been the trend GDP of the Chilean economy, which evidently includes the intense recessions that it has suffered. Obviously, trend GDP moves well below potential GDP or productive frontier (see Annex and chapter IX). The features of the Chilean rule implied a neutral fiscal policy with respect to the economic cycle, which involves a progress with respect to the pro-cyclical traditional norm of balancing actual fiscal budget period after period. In fact, initially it did not move decidedly into including counter-cyclical changes in public expenditure and taxes, a shortcoming which became evident in 2001-03. Beyond the highly praissable progress achieved in facing international volatility, the evidence provided by 1999-2003 shows that there is need for effective counter-cyclical policies to contribute further to a fast recovery of economic activity in recessions. As I stress along this book, that capacity is an essential ingredient of real macroeconomic balances. The Central Bank foreign exchange policy was evolving since the mid-nineties, when the monetary authorities began to lose confidence in the instruments that had been so successful in the first half of the 1990s. In September 1999, the exchange rate was fully liberalized, leaving behind the crawling band. During 2000-01, in what it was considered to be a policy consistent with the new floating regime, the majority of the remaining controls on financial flows were eliminated. One of the effects has been an intense financial activism, with voluminous inflows and outflows. Associated with the recessive environment, helping to keep it like that, in 2002-03 a net outflow of portfolio investments equivalent to 3% of GDP took place. Thus, national investors joined international markets in their pro-cyclical behavior. 32 By 2008 the Treasury was a heavy creditor, particularly in foreign currency. Correspondingly, in a belated decision, the surplus target was reduced to 0.5% of GDP in 2008 and to 0% in 2009. 35 Notwithstanding the persistent output gap, the government continued developing social reforms. In 2001 there was a second reform enhancing labor rights. Also, temporary public employment programs were intensified, covering nearly 2% of jobs in 2002-03 (naturally, with a countercyclical impact). It continued with the educational reforms, the complete day school, infrastructure improvements and some modernization of educational programs. Public health was significantly improved with the new "AUGE" health program, which includes universal access to a progressively growing number of pathologies. The "Chile Barrio" and "Chile Solidario" programs were started, in order to eradicate shanty towns and to incorporate indigents into the social network supported by the State (see Galasso, 2006). In 2002, there was started an unemployment insurance scheme that is financed by contributions of both private workers and employers (which go to an individual account of the worker) and government contributions (which go to a "solidarity fund"); in September 2009, after seven years in force there were 3.2 million (cifra por corregir con Super?) active contributors (about 85% of AFP private waged-workers). The high coverage in terms of number of workers affiliated has been accompanied by very modest amounts of benefits and a minimal use of the solidarity fund (see chap. VII). In brief, this insurance was a progress, but it needed great strengthening in terms of its magnitude, expeditious access, the expansion of the solidarity fund, and in its connection with effective labor training programs. In 2009 the parliament approved a project of the government that enhanced the extent and the access to the solidarity fund, including workers with short term contracts, introduced counter-cyclical features in the benefits, and offered job search intermediation labor training for the unemployed. All these progresses, very novel and promissory, were limited in their financing because of the output gap. But as much significant is the regressive impact that the gap has had on the labor market. In the period between mid-1998 and 2003, the number of workers with a job (including people in special programs financed by the government) grew in all the period scarcely 3.3%, while the 18-year-old or over population increased around 9%. The rate of labor participation, which had been rising during the 1990s but was still low by 1998 (54%), diminished 1 point, and open unemployment rose four points (above 10% of the labor force). The main determinant factor of this labor market deterioration was the real 36 macroeconomic imbalance, as we define it here: the high gap between actual and potential GDP, which implied underutilization of labor and capital, discouraging productive investment. In fact, the investment ratio (at 2003 constant prices) in 1999-2003 was three points below the average recorded in 1995-98. Chile could have implemented a vigorous domestic positive shock, taking advantage of all the strengths accumulated by the Chilean economy: large international reserves, a Treasury and a Central Bank with low external liabilities, outstanding fiscal discipline, among other attributes, and, a main issue, the great recessive output gap prevailing in all the period 1999-2003. c) Recovery led by a positive external shock in 2004-08 and the contagion in 2009 Along 2003, there was a sharp rise in the international prices of commodities, which lasted until the contagion of the international crisis in 2008.33 The commodity boom implied a strong positive shock for several Latin American countries LACs).34 In the case of Chile, the terms of trade improved the equivalent of 10% of GDP between the recessed 1999-2003 period and 2004-05; the hike in the price of copper and other commodities exported by Chile was notably stronger than that for the imports of oil. That was an exogenous shock contributing to a significant jump in GDP growth from 2.6% to 5.8% in the same sub-periods. Given that potential output was rising merely about 4% annually, this implied a noticeable reduction of the output gap. Generalized improved terms of trade and volume of exports enhanced, directly, the spending capacity of the private sector, and expectations returned to broad optimism. After a usual lag, productive investment started to rise. Naturally, the outstanding merits accumulated by the Chilean economy were a factor supporting the sharp recovery. But the leading force was the positive external shock. This reveals a macroeconomic weakness, since the merits of the Chilean economy were 33 34 Surprisingly, in 2009, amidst the intense global recession, prices relevant for the Chilean economy --such as of copper and oil—resumed comparatively high levels. A similar outcome has been recorded in stock markets: high prices in a depressed world economy could be interpreted as risky bubbles, as stressed in several occasions by the Nobel Prize Paul Krugman. It is noteworthy that actual GDP growth also jumped in Latin America, from 1.3% to 5.4%, between those two periods. The driving force was the same one for Chile. See a discussion in Ffrench-Davis (2008). 37 already present in the recessive period 1999-2003. Thus, the conditions for a domestic reactivating shock were at hand since the moment the excessive external deficit as well as the over-appreciated exchange rate of 1998 had been corrected in 1999.35 Given a large output gap by the debut of the positive external shock, domestic supply was able to respond with a rising GDP and low inflation pressures (within a target band of 2-4% set by the autonomous Central Bank). In the meantime, once again, the Bank allowed the real exchange rate to appreciate 20% between March 2003 and December 2005, contributing to anchor inflation and to further increase the purchasing power. Nevertheless, the partial recovery lost force in 2006, opening a period in which actual GDP grew below the expansion of potential GDP. In contrast with the experience of the 1990s, the Chilean economy performed under the average speed of Latin America, thus losing the lead that had exerted in the region since the late 1980s. It is true that, still, by 2008 exhibited a much better record since 1990, with the average 5.3% vis-à-vis the 3.2% of LACs, but in the margin (2004-08) had lost ground with a 4.9% average, lower than the 5.3% recorded by Latin America in the latter period. A mix of factors explains directly that weakening. The direct origin is located in 2006. The Central Bank overshoot the rise of the interest rate and left the exchange rate to revalue further; as well, the Ministry of Finance sterilized the positive impact of the copper price rise, and allowed most of the negative impact of the increasing oil price to penetrate in the domestic economy. A great virtue --the existence of the copper stabilization scheme-overshoot, sterilising in excess. The moderated increase in aggregate demand was strongly biased toward imports. Again, it prevailed a severe inconsistency between the current exchange rate policy and the consensus objective of fostering exports with higher valueadded, while SMEs faced external competition with reduced import tariffs and an appreciated exchange rate (see chapter VI). In brief, there was a combination of excessive priority for inflation, a sliding of economic policy towards more neutral policies, and the belief that actual GDP was already 35 For instance, at domestic positive shock, implemented by Korea and Malaysia in 1999 was highly successful, achieving a sharp recovery in one year (see Mahani, Shin and Wang, 2006). In my view, that option was also available for Chile. 38 too close to potential GDP.36 The fact is that in 2006 actual GDP grew somewhat less than the rise of potential GDP, thus resulting in an enlarged instead of a diminished recessive output gap. That implied forgone employment, wages and profits. Additionally, uncertainty was reintroduced in entrepreneurs’ minds, particularly in exporters and small entrepreneurs, and optimism was weakened. During the next biennium, effective demand experienced several ups-and-downs, affecting economic activity; the significant effects of demand on the response of real supply (that is, actual GDP) reflected that the Chilean economy was operating persistently below the production frontier. Exchange rate instability contributed to the weak performance. Actually, imports rose systematically nearly twice as faster than the volume of exports; high prices hided that persistent fact. Evidently, the exchange rate was an outlier, and quite unstable. That is the exchange rate regime combined two bads for the contribution of exports, and more broadly for tradables in general, to development. The international scenario played a relevant role, naturally enhanced by the openness of the Chilean economy. There were positive features for Chile, such as the spectacular price of copper and other large exports, which allowed the Treasury, with high responsibility, to accumulate sizable funds for eventual bad years (or awful years such as 2009); fiscal surpluses jumped further to an annual average over 7% of GDP in 2006-08. As well, world trade was dynamic up to the arrival of the international financial crisis. On the contrary, international prices of food were climbing. From mid 2007 to mid 2008, the price of food in the Chilean CPI increased 22%, what generated significant inflationary pressures, explaining about half of the nearly 10% annual inflation recorded at the peak of the commodities boom (by the third quarter of 2008; see Ramos, 2008). It was, mainly, an imported inflation. The Central Bank consistently expressed its bias for the inflation target, at the expense of growth. By late 2008, when already Chile was exhibiting negative monthly inflation, the monetary policy interest rate (8.25%) exceeded by over 7 points that of the USA. When the contagion of the global crisis arrived in 2008, the economy moved into open recession. In 2009 experienced a drop in GDP of 1.7%, similar to the Latin American 36 This belief was associated to the biased methodology that, working with a trend that includes recessive periods, leads to underestimating potential GDP. 39 average. Now the government adopted a decided counter-cyclical approach, making use of the stabilization fund, which provided broad space for counter-cyclical fiscal policy. Notwithstanding a drop in tax revenue resulting from a depressed demand, some taxes were reduced transitorily (on fuels, loans, SMEs). In parallel, expenditure was increased 18%, which implied a 4.5% actual fiscal deficit. The strong counter-cyclical fiscal policy was the main force compensating for the negative shocks, principally that suffered by the volume of exports. In fact, the volume of Chilean exports, which had risen 7.9% in the previous two decades, dived 5.6% in 2009. Fiscal policy softened to a significant degree the multiplication to the domestic market of the shock on exports. The domestic economy contracted by a negligible amount (see chapter VI, table VI.6), being in a significant recovery push already by the last quarter of 2009. For the first time since the opening of the economy started in 1973, the recessive adjustment, in face of external shocks, was stronger on exports than on the domestic economy. Counter-cyclicality of fiscal policy was effective and efficient in 2009. In all, as said, growth was moderate, but low compared with the potentiality of the domestic economy and the positive shocks from abroad. In 2004-08, the average 4.9% rise of GDP was determined by a 6.6% expansion of the volume of exports and 4.2% of the rest of GDP. This latter figure contrasts sharply with the 6.5% dynamic growth of non-exports in 1990-98. Systemic competitivity was failing. The failure was associated with the second variable behind the weak economic performance: a hesitant development agenda, whose shortcomings rank from unlucky shortages in the supply of energy, to a faulty exchange rate policy, and to lags and lacks in the incomplete links of capital markets with productive sectors (particularly SMEs), labor training and incentives to innovation. There have been relevant announcements of designing a more powerful productive development focused on SMEs, but notwithstanding some concrete progresses, still are mostly at the level of announcements. Chile made ambitious social reforms in this period; pensions and health were substantially improved, as detailed in chapter VII. They contributed to an improvement in income distribution, that today in notably less unequal than in the 1980s, and better than in the 1970s. Nonetheless, the Chilean economy is still quite regressive. That is related to the fact that the strong social agenda was not well matched by the economic agenda. Fiscal 40 responsibility was outstanding but derailed from a development concern. Structural reforms (as well as macroeconomic management, as shown) were weak and somewhat contradictory with introducing equitability in the market behavior. The latter required deep reforms in the capital market, away from the priority for the overnight markets, and moving decidedly toward enhancing the long-term market segment; developing segments for SMEs, and for entrepreneurs without wealth or history. As well, incentives to innovation were weak and have been taking a relevant shape only recently. Labor training for untrained workers has been improving but too mildly. The sharp increase in the number of years of education has come associated to a lowered quality, what demanded even more effective labor training. In brief, Chile missed, to a significant degree, what we call taking the road that leads from financierism to productivism. d) A summary of outcomes Notwithstanding the recessive gap in 1998-2003, actual GDP rose 5.3% in 19902008, in contrast with the 2.9% recorded in the 1970s and 1980s. The leading force behind that outstanding performance was the vigorous investment ratio achieved in the 1990s. The average ratio (21.4% in 1990-2008) was seven points larger than during the neo-liberal experiment (13.6% in 1974-89; all in 2003 prices). Even in the recessive period of 19992003, capital formation was significantly higher than that in the seventies and eighties, and sustained a potential GDP growth rate of 4%. It is important to stress that though the foreign direct investment (FDI) exhibited a very significant boom, 82% of the generation of productive capacity in 1990-98 was carried out by domestic agents (see Ffrench-Davis, 2003). During the years of significant recessive adjustment, 1999-2003, greenfield FDI also contracted, temporarily, but the major reduction focused on private national investment, demonstrating the strong sensitivity of domestic investment ratios under a persistent output gap. On the other hand, in 1990-2008 the national savings ratio averaged 22% (at current prices), the highest in recent decades (see table I.5). The higher savings ratio was associated with the stimulating macroeconomic environment faced by firms, with rather small gaps 41 between actual and potential GDP, leading to greater use of installed capacity, higher profit margins, and larger reinvestment of profits (Agosin, 1998).37 [Table I.5] The savings capacity is strongly affected by the terms of trade, which continue to be extremely unstable for Chile, as documented by the several mentions above of fluctuations of the terms of trade effect as measured by the national accounts. The main determinant of these fluctuations has been the price of copper, with a smaller influence of oil imports. For instance, in 1989 the high copper price implied additional foreign currency inflows equivalent to 3.7% of GDP into the copper buffer fund (CBF), which is one source of public and domestic savings. On the contrary, in 1999 the fund lost 0.8% of GDP. The change represents a net difference of 4.5 percentage points, which ought to be taken into account when analyzing the evolution of public and national gross saving figures in table I.5; that is required in order to measure actual savings effort in each year. However, that is only part of the story. The CBF covered only the proceeds of the large public firm CODELCO. But price fluctuations of copper have an effect on the taxes paid by the private producers.38 With the replacement of the CBF with the Social and Economic Stabilization Fund in 2006, the stabilization force of the fund was enhanced. In all, the copper stabilization fund has represented an outstanding factor of macroeconomic stabilization. In general, the authority has operated efficiently and responsibly with it. The CBF contributed to the implementation of the structural budget, thus allowing a move from pro-cyclical to neutral fiscal policies during the recessive years. But that valuable “credibility asset” was underutilized during 1999-2003, principally, as made explicit by the authority, because of the fear to be criticized and “punished” by financial agents if had adopted a counter-cyclical macroeconomic policy. 37 38 As pointed out above, the convergence between the productive frontier and effective demand is an essential ingredient for an efficient macroeconomic policy. The absence or weakness of this fundamental macroeconomic equilibrium has been characteristic of Latin American economies since the 1980s. See Ffrench-Davis (2006, chap. II). All the profits of CODELCO are transferred to the Treasury. The issue was a matter of discussion, particularly in recent years, when the fiscal budget had a huge surplus with funds provided by the profits of CODELCO, and this firm had to borrow abroad to finance its investment. In 2008 the Ministry of Finance allowed CODELCO to retain a fraction of its profits after taxes, raised to a significant US$1 billion (0.6% of GDP) for 2009. 42 Exports were the driving forces behind economic growth, increasing the external links of the Chilean economy and its potential for sustainable growth. It is interesting to note that the rate of export growth was relatively similar in the past three decades, contrasting with highly volatile GDP growth. In this context, it must be underlined that GDP growth in the 1990s performed notably better, than in the Pinochet regime, because the rest of GDP (non-exports) also grew dynamically, reflecting broader systemic competitiveness and the positive impact of sustainable macroeconomic equilibria. In fact, non-exports rose annually 6.5% in 1990-98, merely 1.7% in 1999-2003, and recovered to the already mentioned 4.2% in 2004-08. The sharp swings are mostly associated to domestic macroeconomic changes. Income distribution continues being very unequal in Chile. Nevertheless, it must be recognized, considering the diverse available data (see chap. VII), that in 1990-98 an improvement on income distribution took place. Both the decennial Household Budget Survey and the annual employment survey of the University of Chile for Santiago, show a diminishing ratio between income of the richest and the poorest quintiles of population. For example, the latter survey indicates that the ratio was 13 times in the sixties, 15 times in 1974-81, 20 times in 1982-89 and 14 times in 1992-95 (see figure VII.3). The regressive impact of recessive output gaps is evidenced in subsequent years, particularly in 19992002, with a stepback to 16 times. With the recovery of economic activity and strengthened social policies, a distributive progress was recorded in 2004-09, returning to a 14 times ratio. Nevertheless, still there is an enormous pending debt of the economy with most Chileans. The labor situation is a main determining factor of income distribution. It is a fact that the improvements of the labor market, recorded between 1990 and 1998, contributed to the distributive progress in those years, and that its worsening was a key factor explaining the partial deterioration in 1999-02. With regard to the unemployment rate, though lower than one-half the average rate under the Pinochet regime, it did not recover to the level of the 1960s in a sustainable pattern. Still more, after the long recessive imbalance since mid 1998, unemployment and income inequality worsened, and labor market informality arose as one of the greater challenges to restart the path of growth with equity. In recent years the positive features have been a significant increase in the participation of women in the labor 43 market, with its share rising to 43%, and the gradual increase in the share of the labor force under social security contributions, a progress toward formality and workers with the protection that contracts likely grant. The share of members of the labor force contributing to the private system had risen from 41% in 1989 to 54% in 2008. In summary, however, the Concertación administration compares favorably with all regimes since the 1950s in terms of (actual, potential and per capita) GDP growth, productive investment ratio, inflation, real wages, social expenditure and fiscal surplus (see table I.1). This good average performance implied that, in the years of democracy, Chile shortened the distance with the developed world, as it is documented in table I.6. Nevertheless, this performance was not sustained nor continuous. As it is known, the first half of the period (1990-98) involved a vigorous growth (tripling the speed of the US), with a strong convergence with the developed countries and a reduction on income inequality. In the second half (1999-2008), in continued shortening distance, but per capita GDP growth trend halved, and the strong development convergence exhibited in 1990-98, for example, with the United States was weakened, as well as previous improvements on income distribution. Table I.6) What explains this so remarkable change in the development trend? A mix of factors. Here, we mention four that are, naturally, interrelated. First, with no doubt, the Asian crisis constituted a significant negative external shock; however, we show that its direct influence via slowing exports growth only explains a minor share of the slower GDP growth (see chap. VI). Second, one of the structural elements: dynamism in exports was strongly influenced by natural resource exploitation (as in copper and forestry), and the development of public services (as in energy and telecommunications) in mega-projects that could be hardly replicated, at the same level of rising productivity, in the 2000s (Moguillansky, 1999). Consequently, a large number of smaller projects in sectors more demanding of the still pending systemic competitiveness became necessary in this new framework. Third, the strong social agenda was not well matched by the economic agenda. Evidently, there are several progresses. But a rather poor economic outcome in the second decade is what needs an explanation. There was need for a more comprehensive effort to 44 complete long-term capital markets; encourage diffusion, assimilation, and adaptation of technology; broaden labor training; and open external markets for Chilean non-traditional products (all with special emphasis on Small and Medium Enterprises, SMEs development). All this are essential ingredients of a renewed national agenda for growth with equity. My view is that these shortcomings had a relevant influence in the defeat of Concertación Democrática in the recent presidential (January 2010) and parliamentarian elections. But political analysis is beyond the reach of this book. Fourth, there is consensus that fiscal responsibility was outstanding, but some structural progressive reforms were weak and some changes were contradictory with introducing equitability in the market behavior. The latter required deep reforms in the capital markets, away from the priority for the overnight markets, and moving decidedly toward enhancing the long-term market segment; developing segments for SMEs, and for entrepreneurs without wealth or history.39 As well, incentives to innovation were weak, even though they have been taking relevant shape recently. 40 Labor training, for untrained workers has been improving but too mildly. The sharp increase in the years of education have come associated to a lowered quality, what demanded even more effective labor training. There appears to be a growing shortage of more trained workers and entrepreneurs, in an economy that has doubled GDP per capita, whose requirements for growth are now more demanding. In brief, Chile missed, to a significant degree after the promising start in the early 1990s, what we call taking the road that leads from financierism to productivism. A fifth factor refers to the macroeconomic environment. As will be detailed in chapter IX, policies applied in the second half of the 1990s, gradually, lost coherence and the ability to control the vulnerability of the Chilean economy in face of external shocks. Consequently, when the Asian crisis exploded, a climate of instability returned to Chile once again, opening a significant gap between actual and potential GDP since mid-1998. 39 40 There have been several reforms of the capital markets, which have improved the access to financing for SMEs and micro-credit. However, still the market is intensive in short-term and liquid dealings and the access remains quite limited for SMEs (see Consejo de Trabajo y Equidad, 2008). In 2008 was decided to focus the allocation of the proceeds of a royalty recently established on mining to a selected group of clusters. It represented an encouraging deviation from allocative neutrality (see Consejo Nacional para la Innovación, 2007). 45 This gap, as will be demonstrated throughout the text, was the main cause of the sharp drop in the investment ratio in 1999-2003 and the loss of entrepreneurship pull. It is essential to find the way back to real sustainable macroeconomic equilibria, after some confusing swings between the neo-liberal and the growth-with-equity approaches. Thus, along with deep microeconomic development–friendly reforms (proSMEs and pro-employment) -decidedly enhanced, located indeed as a priority of public policy- Chile can recover sustained high rates of growth of GDP and a progressive reduction of inequality. For both growth and equity it is necessary to reach sustainable real macroeconomic balances. Beyond low inflation and fiscal responsibility, also foreign exchange and interest rates approaches functional for productive development are required, as well as an active management of aggregate demand in levels consistent with productive capacity.41 The recent performance has been deficient on this matter. 41 It is fashionable to repeat that with the adoption of a floating exchange rate the national was immunized from external shocks. The truth is that exchange rate crises are eliminated, but at the expense of transferring great instability to the real economy, especially to the allocation of resources between tradables and non-tradables, and to aggregate demand. 46 REFERENCES Agosin, M. R. (1998), “Capital inflows and investment performance: Chile in the 1990s”, in R. Ffrench-Davis and H. Reisen, eds., Capital Flows and Investment Performance: Lessons from Latin America, OECD Development Centre/ECLAC, Paris. Ahumada, J. (1966), La crisis integral en Chile, Editorial Universitaria, Santiago. Bande, J. and R. Ffrench-Davis (1989), “Copper Policies and the Chilean Economy: 197388”, Notas Técnicas CIEPLAN 131, June; and Institute for Developing Economies, Tokyo. Baño, R. (2003), ed., La Unidad Popular treinta años después, LOM Ediciones/Universidad de Chile, Santiago. Beyer, H. and R.Vergara (2002), “Productivity and economic growth: The case of Chile”, in Loayza and Soto (2002). Bitar, S. (1979), Transición, socialismo y democracia: la experiencia chilena, Siglo XXI, México. Bosworth, B., R. Dornbusch and R. Labán (1994), eds., The Chilean Economy: Policy Lessons and Challenges, The Brookings Institution, Washington, DC. Büchi, H. (1993), La transformación económica de Chile, Grupo Editorial Norma, Bogotá. Campero, G. and J. Valenzuela (1981), “El movimiento sindical chileno en el capitalismo autoritario”, ILT-Academia de Humanismo Cristiano/IPET, Santiago, December. CIEPLAN (1982), Modelo económico chileno: trayectoria de una crítica, Editorial Aconcagua, (confiscated by the dictatorship), Santiago. -------- (1983), Reconstrucción económica para la democracia, Editorial Aconcagua, Santiago. Coeymans, J. (1999), “Determinantes de la productividad en Chile: 1961-97”, Cuadernos de Consejo Asesor Presidencial Trabajo y Equidad (2008), Hacia un Chile más justo: Trabajo, salario, competitividad y equidad social, Final Report, Santiago, August. Consejo Nacional de Innovación (2007), Hacia una Estrategia Nacional de Innovación para la Competitividad, Tomo I, Santiago. Contreras, G. and P. García (2002). “Estimating gaps and trends for the Chilean economy”, in Loayza and Soto (2002). 47 Correa, S., C. Figueroa, A. Jocelyn-Holt, L. Rolle and M. Vicuña (2002), Historia del siglo XX chileno, Tercera Edición, Editorial Sudamericana, Santiago. Cortázar, R. and J. Marshall (1980), “Indice de precios al consumidor en Chile: 1970-78”, Colección Estudios CIEPLAN 4, November. Cortázar, R. and J. Vial (1998), eds., Construyendo opciones: propuestas económicas y sociales para el cambio de siglo, Dolmen Ediciones, Santiago. Cortázar, (1996), “A labor policy for a new reality”, in Pizarro, Raczynski and Vial (1996). Dahse, F. (1979), Mapa de la extrema riqueza. Los grupos económicos y el proceso de concentración de capitales, Editorial Aconcagua, Santiago. Devlin, R. and R. Cominetti (1994), "La crisis de la empresa pública, las privatizaciones y la equidad social", Serie Reformas de Políticas Públicas 26, ECLAC, Santiago. Dornbusch, R. and S. Edwards (1991), eds., The Macroeconomics of Populism in Latin America, The University of Chicago Press, Chicago and London. Edwards, S. and A. Cox-Edwards (1987), Monetarism and Liberalization: The Chilean Experiment, Ballinger, Cambridge, Mass. Ffrench-Davis, R. (1973), Políticas económicas en Chile: 1952-70, Ediciones Nueva Universidad, Santiago. Ffrench-Davis, R. (1979), “Exports and industrialization in an orthodox model: Chile, 197378”, CEPAL Review N° 9, December. Ffrench-Davis, R. (1981), “Exchange rate policies in Chile: The experience with the crawling peg”, in Williamson (1981). Ffrench-Davis, R. (2003), “La inversión extranjera directa en Chile”, in O. Muñoz (ed.), Hacia un Chile competitivo, Editorial Universitaria/FLACSO, Santiago. Ffrench-Davis, R. (2006, chaps. I, II, VII and IX), Reforms for Latin America´s Economies: After Market Fundamentalism, Palgrave Macmillan, London and New York. Ffrench-Davis, R. and B. Stallings (2001), eds., Reformas, crecimiento y políticas sociales en Chile desde 1973, LOM Ediciones/CEPAL, Santiago. Ffrench-Davis, R. and H. Tapia (2001), “Three varieties of capital surge management in Chile”, in R. Ffrench-Davis (ed.), Financial Crises in Successful Emerging Economies, Brookings Institution, Washington, DC. 48 Fontaine, J. A. (1989), "The Chilean Economy in the 1980s: Adjustment and Recovery", in S. Edwards and F. Larraín (eds.), Debt, Adjustment and Recovery: Latin America's Prospects for Growth and Development, Basil Blackwell, Oxford. Foxley, A. (1983), Latin American Experiments in Neoconservative Economics, University of California Press, Berkeley. Galasso, E. (2006), “With their effort and one opportunity: Alleviating extreme poverty in Chile”, Working Paper, World Bank, Washington DC, March. Gallego, F. and N. Loayza (2002), “The golden period for growth in Chile. Explanations and forecasts”, in Loayza and Soto (2002). Hofman, A. (1999), The Economic Development of Latin America in the Twentieth Century, ECLAC, Edward Elgar, Aldershot, Great Britain. Huneeus, C. (2001), El régimen de Pinochet, Editorial Sudamericana, Santiago. Jadresic, E. (1986), “Evolución del empleo y desempleo en Chile: 1970-85, Series anuales y trimestrales”, Colección Estudios CIEPLAN 20, Santiago, December. Larraín, F. and R. Vergara (2000), La transformación económica de Chile, Centro de Estudios Públicos, Santiago. Larraín, F. (1987), ed., Desarrollo económico en democracia: proposiciones para una sociedad libre y solidaria, Ediciones Universidad Católica de Chile, Santiago. Larraín, G. (2005), Chile fertil provincial: Hacia un estado liberador y un mercado revolucionario, Ramdon House Mondadori, Santiago. Le Fort, G. and S. Lehmann (2003), " El encaje y la entrada neta de capitales: Chile en el decenio de 1990”, Revista de la CEPAL No.81, December. Mahani, Z.A., K. Shin and Y. Wang (2006), “Macroeconomic adjustments and the real economy in Korea and Malaysia since 1997”, in R. Ffrench-Davis (ed.), Seeking Growth under Financial Volatility, Palgrave Macmillan/CEPAL, New York. Marcel, M. (1989), “Privatización y finanzas públicas: el caso de Chile, 1985-88”, Colección Estudios CIEPLAN 26, Santiago, June. Marcel, M. and P. Meller (1986), “Empalme de las cuentas nacionales de Chile 1960-85. Métodos alternativos y resultados”, Colección Estudios CIEPLAN 20, Santiago, December. 49 Marcel, M., M. Tokman, R. Valdés and P. Benavides (2001), “Balance estructural del Gobierno Central, metodología y estimaciones para Chile: 1987-2000”, in Estudios de Finanzas Públicas N°1, September. Marfán, M. (1992), “Re-estimación del PGB potencial en Chile: implicancias para el crecimiento”, Cuadernos de Economía N° 87, año 29, August. Marfán, M. (1998), “El financiamiento fiscal en los años 90”, in Cortázar and Vial (1998). Marfán, M. (2005), “La eficacia de la política fiscal y los déficit privados: un enfoque macroeconómico”, in J.A. Ocampo (ed.), Más allá de las reformas: dinámica estructural y vulnerabilidad macroeconómica, CEPAL/Alfaomega, Bogotá. Meller, P. (2005), ed., La paradoja aparente. Equidad y eficiencia: resolviendo el dilema, Taurus, Santiago. Meller, P. (1996a), Un siglo de economía política chilena, 1980-1990, Andrés Bello, Santiago. Moguillansky, G. (1999), La inversión en Chile: ¿el fin de un ciclo en expansión?, Fondo de Cultura Económica/ECLAC, Santiago. Molina, S. (1972), El proceso de cambio en Chile, Editorial Universitaria, Santiago. Morandé, F. and R. Vergara (1997), eds., Análisis empírico del crecimiento en Chile, Centro de Estudios Públicos/ILADES, Santiago. Moulian, T. (1997), Chile actual. Anatomía de un mito, LOM Ediciones, Santiago. Muñoz, O. (2007), El modelo económico de la Concertación: 1990-2005, Catalonia/FLACSO, Santiago. Muñoz, O. (1986), Chile y su industrialización: pasado, crisis y opciones, Ediciones CIEPLAN, Santiago. Ortega, E. (1987), Transformaciones agrarias y campesinado: de la participación a la exclusión, CIEPLAN, Santiago. Pizarro, C., D. Raczynski and J. Vial (1996), eds., Social and Economic Policies in Chile’s Transition to Democracy, CIEPLAN/UNICEF, Santiago. Ramos, J. (1986), Neoconservative Economics in the Southern Cone of Latin America, 1973-83, Johns Hopkins University Press, Baltimore. Ramos, J. (2008), “La economía chilena actual: adios al milagro, bienvenido el blindaje”, El Mostrador(electronic media,Santiago), October. 50 Robichek, W. (1981), “Some reflections about external public debt management”, Alternativas de políticas financieras en economías pequeñas y abiertas al exterior, Estudios Monetarios VII, Banco Central de Chile, Santiago. Roldós, J. (1997), “El crecimiento del producto potencial en mercados emergentes: el caso de Chile”, in Morandé and Vergara (1997). Ruiz-Tagle, J. (1979), “Seis años de política social: una revolución en marcha”, Revista Mensaje N° 282. Servén, L. and A. Solimano (1993), "Economic Adjustment and Investment Performance in Developing Countries: The Experience of the 1980s", in L. Servén and A. Solimano (eds.), Striving for Growth after Adjustment. The Role of Capital Formation, World Bank, Washington DC. Tapia, H. (2003), “Balance estructural del Gobierno central de Chile: Análisis y propuestas”, in Serie Macroeconomía del Desarrollo, Nº25, CEPAL, August. Titelman, D. (2001), “Reformas al financiamiento del sistema de salud en Chile”, in FfrenchDavis and Stallings (2001). Uthoff, A. (2001), “La reforma del sistema de pensiones y su impacto en el mercado de capitales”, in Ffrench-Davis and Stallings (2001). Vega, H. (2008), En vez de la injusticia, Random House Mondadori, second edition, Santiago. Vergara, P. (1981), “Las transformaciones de las funciones económicas del Estado de Chile bajo el régimen militar”, Colección Estudios CIEPLAN 5, July. Vergara, P. (1980), “Apertura externa y desarrollo industrial en Chile: 1974-78”, Colección Estudios CIEPLAN 4, November. Vignolo, C. (1980), “Inversión extranjera en Chile, 1974-79”, Revista Mensaje N° 286. Zahler, R. (2006), "Macroeconomic stability and investment allocation by domestic pension funds in emerging economies: The case of Chile", in R. Ffrench-Davis (ed.), Seeking Growth under Financial Volatility, Palgrave Macmillan, New York. Zañartu, M. (1980), “Gasto social en los pobres”, Revista Mensaje N° 290, Santiago. 51 Table I.1 (27/04/10) Comparison of key macroeconomic variables, 1959-2009a During the government of: Alessandr Pinoche Concertació Frei M. Allende i t n 1959-64 1965-70 1971-73 1974-89 1990-2009 Aylwin Frei R. 1990-93 1994-99 Bachele t 2000-05 2006-09 Lagos GDP growth 3.7 4.0 1.2 2.9 5.0 7.7 5.4 4.3 2.8 (%) Exports 6.2 2.3 -4.1 10.7 7.2 9.6 9.7 6.3 2.4 growth (%) Inflation rate 26.6 26.3 293.8 79.9 7.0 17.7 6.1 2.9 4.0 (%)b Unemployme 5.2 5.9 4.7 18.0 8.7 7.3 7.5 10.7 8.8 nt rate (%)c Real wages 62.2 84.2 89.7 81.8 129.7 99.8 123.4 140.0 153.5 (1970=100) Gross fixed investment (% of GDP) In 1977 20.7 19.5 16.1 15.7 25.0 20.7 25.1 24.2 30.2 pesos In 2003 17.9 16.8 13.9 13.6 21.5 17.9 21.6 20.8 26.0 pesos Government surplus (% of -4.7 -2.5 -11.5 0.3 1.9 1.9 1.2 0.7 4.3 GDP) Structural surplus (% of n.a. n.a. n.a. n.a. 0.7 0.4 0.8 0.7 0.4 GDP)d Income distribution 12.1 13.7 12.8 17.7 15.3 16.0 15.5 15.6 14.0 (Q5/Q1) Population 2.5 2.1 1.8 1.6 1.3 1.8 1.5 1.1 1.0 growth (%) Sources: Central Bank, Budget Office (DIPRES) and National Bureau of Statistics (INE). a Annual growth rates of GDP and exports; average of annual rates of inflation and unemployment. b From December to December. c With emergency employment correction; without correction it is 13.3% in 1974-89, 7.4% in 1994-99, 9.7% in 2000-05 and 8.1% in 2006-09. d Official estimates that use trend GDP as structural tax base, underestimating potential GDP. 52 Table I.2 Evolution of GDP and its composition, 1975-81 (annual average rates of growth, %) Total 1975-80 (1) 3.8 3.4 1975-81 (2) 4.0 3.5 Per capita 1975-80 1975-81 (3) (4) 2.3 2.5 1.9 2.0 1. Gross domestic product 2. Gross national product 3. Value added a) Marketing of imports 15.5 16.2 13.8 14.5 b) Financial services 14.6 14.2 12.9 12.5 4. Gross national product excluding value added in 3. 1.9 1.8 0.4 0.3 Source: Calculations based on official figures of National Accounts, 1960-81, in pesos of 1977. Revised figures by Marcel and Meller (1986) give GDP growth of 2.6% for 1975-81, and not the official 4.0%; the main correction was placed in the industrial sector (here included in line 4). There are no disaggregated corrected figures in order to build a revised table. Table I.3 Macroeconomic variables during dictatorship: 1974-89a (annual averages) 1974-81 1982-89 1974-89 GDP growth (%) 3.0 2.9 2.9 Exports growth (%) 13.6 7.8 10.7 Inflation rate (%)b 138.9 20.8 79.9 Total unemployment rate (%)c 16.9 19.2 18.0 Official unemployment rate (%) 13.0 13.6 13.3 Real wages (1970=100) 75.7 88.0 81.8 Gross fixed investment (% of GDP) In 1977 pesos 15.9 15.6 15.7 In 1996 pesos 16.1 15.8 15.9 Government surplus (% of GDP) 1.6 -1.1 0.3 Sources: Same sources as table I.1. a Annual growth rates of GDP and exports; average of annual rates of inflation and unemployment. b From December to December. c With emergency employment correction. Table I.4 (28/04/10) Public and private budget balances, 1990-2008 (% of GDP at current prices)a Total Private sector Public sector 1990-95 -2.3 -4.4 2.0 1996-97 -4.2 -6.4 2.1 1998 -4.9 -5.3 0.4 1999-2003 -0.9 0.1 -1.0 2004-07 3.2 -2.7 5.8 2008 -1.5 -6.8 5.3 Sources: Author's calculations based on Balance of Payments data from the Central Bank and DIPRES for the public sector. a Total balance is the current account deficit or use of external savings. Public sector corresponds to Central Government (excluding public enterprises). Private sector is estimated by difference. Table I.5 (28/04/10) Gross savings ratios, 1982-2008 (% of GDP at current prices) External National Public sector Stabilization funds Other (1) (2)=(3)+(4)+(5) (3) (4) (5) 1982-84 8.4 3.1 -1.8 4.9 1985-89 4.9 16.5 3.3 1.6 11.7 1990-95 2.5 22.1 4.6 0.8 16.8 1996-98 4.7 22.7 4.8 0.0 17.9 1999-2003 0.9 20.6 2.3 -0.5 18.7 2004-08 -2.2 23.8 5.1 3.8 14.8 Sources: Author's calculations based on National Accounts data from the Central Bank and DIPRES. (3) The public sector includes here cash profits of public firms, principally of CODELCO (the public copper producer) collected by the Treasury, excluding Stabilization funds. (4) Corresponds to the Copper Buffer Fund until 2006, and the Economic and Social Stabilization Fund and Pension Reserve Fund since then. (5) Includes net private savings plus the Central bank balance, profits of public firms not transferred to the Treasury and capitalized by these firms, and depreciation reserves of all public and private firms. Table I.6 (04/04/10) Per capita GDP growth, 1974-2009 (annual average growth rates, %) Chile 1974-81 1.5 1982-89 1.2 1990-98 5.4 1999-08 2.6 2009 -2.5 Sources: Central Bank of Chile, ECLAC and the IMF. 54 Latin America 2.0 -0.7 1.4 2.0 -2.8 United States 1.5 2.6 1.7 1.6 -3.3 Figure I.1 ActualActual and potential GDP, and potential GDP,1960-2009 1952-2009 (log scale, GDP*1996 1996 ==100) (log scale, GDP* 100) 106 Frei Montalva Allende Alessandri Frei R.T. Aylwin Pinochet Bachelet Lagos 104 GDP growth and output gap (annual average growth rates, % of GDP) 1974-89 1990-2008 Actual GDP(%) 2.9 5.3 Potential GDP (%) 2.5 5.6 Output Gap (%) 10.4 2.5 102 100 98 96 94 92 90 Actual GDP Potential GDP (ICOR) Source: Author's calculations detailed in the annex of this chapter. 55 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 88 Figure A.1 Comparison ofof underutilized capacity, 1960-2008 Comparison two estimatesproductive of the Output Gap, 1960-2008 (% of GDP*) (% of GDP*) 25,0 20,0 ICOR PF 15,0 10,0 5,0 0,0 -5,0 Source: Author's calculations detailed in this annex. Corresponds to columns (3) and (4) of table A.1. 56 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 -10,0