The Chile’s Economic History

Between the 1930s and 1970s  The Chilean economy had experienced one of the most state oriented economies in Latin America, and it was dominated by the system of using imports for substitution in their industries.  A large amount of subsides by the government had lead to a large inefficiency in the industrial sector.  The outcome of this basis was a high unemployment rate, an actual lack of nontraditional exports, a wide-ranging lack of growth and expansion, and a high rate of inflation.

The Economic Policies from 1950 to 1970  During that time, the Chile’s rate of economic growth was so low that the average GDP per capital growth was around 3.75%.  The domestic currency was appreciated in order to import more products as a substitution for their industries.  The currency appreciation damaged many nontraditional export sectors, mainly agricultural.  According to this reason, the lack of agricultural production is known as one of the Chile’s major economic problems in 1950s and 1960s.

The Economic Policies from 1950 to 1970  The other factor that the country was suffering from was inflation. During the 1950s, the country was enduring a persistent problem with a high rate of inflation.  The major problem was discovered to be due to improper use of fiscal policy; therefore, during 1950s and 1960s, three major stabilization strategies were initiated such as prices, wages, and exchange rate; however, the main cause of money growth were not considered.  In the 1960’s, during the Frei supervision, he setup some plans to reform the economy. One of the major plans was an agrarian reform, a partial liberalization of the external sector. Although, Agrarian Reform was launched to control the distribution, but land reform was so slow and costly, and as a result, the performance of the economy did not improve a lot.

The Popular Unity Government from 1970 to 1973  In September 1970, Salvador Allende, a “Unit Popular” candidate, became the president of Chile after the election.  At that time, the economy was so weak, mostly because of high inflation, that the growth of real GDP per capital was only 1.2 percent.  The UP had a number of short-run economic objectives: initiating structural economic transformations, including a program of nationalization; increasing real wages; reducing inflation; spurring economic growth; increasing consumption, especially by poorer people; and reducing the economy's dependence on the rest of the world, and the other goals were to increase output and consumption by increasing wages and reducing inflation rate.

The Popular Unity Government from 1970 to 1973  One of the main key assumptions of the Unit Popular macroeconomic program was a lack of utilization due to monopolistic nature of the manufacturing industry and the formation of income distribution. According to this assumption, they considered that the demand and output could be increased by redistributing income through increasing the wages of poorer groups, and controlling the price of products. Moreover, the UP ignored many of useful traditional economic theory for repairing the economy such as fiscal and monetary policy.  Thus, fiscal and monetary policies were not being attention as efficient tools, and the use of exchange rate policy, for determining macroeconomic equilibrium, was eliminated.

The Popular Unity Government from 1970 to 1973  In November 1970, two of their plans were executed.  First was the agrarian reform causing a large number of farms being expropriated, and the second was altering the constitution in order to nationalize the giant copper mines, which were mutually owned by U.S firms and Chilean state.  As a result, government expenditures increased significantly that the average of real wages in public sector reached to 48 percent, and wages in the private sector increased with the same rate. Overall, the economy seemed to be improving fast, when the real GDP, average real wages, and aggregate demand increased with low rate of unemployment.

The Popular Unity Government from 1970 to 1973  Unfortunately, the economy got into a new form in The high increase rate of GDP mostly was the result of high increase in importing of intermediate goods. On the other hand, the fiscal deficit rose from 2 percent to 11 percent of GDP in one year, and the rate of money supply surpassed 100 percent due to not taking attention to monetary policy.  In 1972, another major problem was appeared, which was high inflation. Its rate exceeded 200 percent, and the fiscal deficit surpassed 13 percent of GDP. Hence, the UP economists launched another program in February 1972 for stabilizing the economy, especially price controlling. Regrettably, this plan also failed.  In the first quarter of 1973, the economy had an inflation rate of exceeding 120 percent with low industrial output and foreign-exchange reserves.  Finally, in 11 Sept. 1973, The UP government came into the end, when President Allende’s suicide and military coup seized the power.