Chilean 1982 Crisis Essay

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Chile before the Crisis In order to understand the crisis of Chile in 1982, we have to take a look at the various political actions that led to it. After World War II, the economy of Chile was under a lot of protection. The socialist government of Salvador Allende maintained the policies adopted by its predecessor, Eduardo Frei Montalva, which included the nationalization of the copper industry, and agricultural reforms. Under the ISI (Industrialización mediante Sustitución de Importaciones) Model, the economic activity in Chile was mainly controlled by the central government. This model – adopted by many Latin American countries after WWII – consisted in the substitution of imported goods by the creation of similar domestically produced goods. Such policy resulted in very high import tariffs and the restriction of capital inflows from foreign investors.
Although the economy of Chile was virtually isolated, President Frei’s administration was able to get stable macroeconomic figures. However, during Allende’s rule (1970-1973) this isolation could not be sustained. Allende´s goal of the socialization of Chile accelerated the nationalization of the copper industry and the agricultural reforms previously started by Frei Montalva. Also, under Allende, the central government took control over the bigger industries and banks. This lack of success under Allende’s administration was also a result of the intensification of the opposition’s acts against his policies, which later resulted in his overthrowing in 1973.
The Coup d’état in Chile in 1973 was led by Salvador Allende´s Commander in Chief, Augusto Pinochet. This movement, which involved the armed forces of Chile and the Carabineros – the police forces of the country – was also influenced by the democratic party Partido Nacional Democracia Cristiana. The movement was intended to end the political, social, and economic crisis of Chile, along with the various nationalizations and the increasing violence. One of the main advocates of the movement, and also an active participant, was the United States; the government of President Nixon, along with the CIA, organized the rising in order to eradicate communism from the western hemisphere.
At the end of this movement, Chile was in a deep economic disequilibrium. The 1971-1973 period was marked by its poor performance in various macroeconomic variables. The average growth of GDP fell to 1.2% per year from a 4.0% achieved during Frei Montalva’s rule. The growth rate of exports at the end of Allende’s rule was -4.2%, and the deficit of the country reached 11.5% of GDP. Although unemployment was kept artificially low, the wages drastically because of the growth rate of inflation, which went from 26.3% during 1965-1970 to 293.8% during the socialist rule. Finally, investment in relation to GDP fell from 19.3% to 15.9% because of the disagreement of the private sector with the nationalizations performed by Allende’s government (Table 1).

Table 1 *PIB=GDP (% Growth) Exportaciones=Exports (% Growth) Precios al consumidor=Consumer Prices (% Growth) Desempleo=Unemployment (% of labor forcé) Salario real=Real wages Inversión= Investment (% of GDP) Balanza Fiscal=BoP (% of GDP) In 1975, a group of Universidad de Chile’s economists called “The Chicago Boys” – due to their close relationship with the University of Chicago – proposed several reforms aimed to liberate the economy of the country from the control of the government. The first of these reforms proposed the elimination of all nontariff barriers and the gradual reduction of all existing tariffs. At the end of the last phase of the reform in 1977, tariffs were uniform at a rate of 10%. The second of these reforms was intended to liberate the financial market of the country. Before the military rule, all interest rates were set by the government and regulations were strict. Banks and financial
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