Miracle of Chile - Reforms

Reforms

The first reforms were implemented in three rounds – 1974–1983, 1985, and 1990.

The government welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business. The main copper company, Codelco, remained in government hands due the nationalization of copper completed by Salvador Allende, however, private companies were allowed to explore and develop new mines. Copper resources were, however, declared “inalienable” by the 1980 Constitution.

Minister of Finance Sergio de Castro, departing from Friedman’s support for free floating exchange rates, decided on a pegged exchange rate of 39 pesos per dollar in June 1979, under the rationale of bringing Chile’s rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose. Since Chilean peso inflation continued to outpace U.S. dollar inflation, every year Chilean buying power of foreign goods increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe recession that lasted more than two years.

Chile had a deep economic recession in 1982–1983, its second in eight years (in 1975, when GDP fell by 13 percent, industrial production plunged by 27 percent, and unemployment shot up to 20 percent). Real economic output declined by 19% just in 1982 and 1983 and most of the recovery and subsequent growth took place after Pinochet left office, when market-oriented economic policies were additionally strengthened.

In his Memoirs (“Chapter 24: Chile”, 1998), Milton Friedman criticized De Castro and the fixed exchange rate.

Starting in 1985, with Hernán Büchi as Minister of Finance, the focus of economic policies shifted toward financial solvency and economic growth. Exports grew rapidly and unemployment went down, however, poverty still represented a significant problem, with 45 percent of Chile’s population below the poverty line in 1987. Büchi wrote about his experience during this period in his book La transformación económica de Chile: el modelo del progreso. In 1990, the newly elected Patricio Aylwin government undertook a program of “growth with equity”, emphasizing both continued economic liberalization and poverty reduction. Between 1990 and 2000, poverty was reduced from 40 percent of the population to 20 percent. 60 percent of this reduction can be attributed to GDP growth, with the remaining 40 percent attributable social policies.