Chilean History

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Chilean History

• Eduardo Frei Montalva (1964 1970)
• Nationalization of Copper
• Agrarian Reform Gradual Stabilization and
  Structural Reforms
• Salvador Allende Gossens (1970-1973)
• Farms taken by Force, Nationalized Mines
  Banking System.
• Major structural changes w/o care for
  Macroeconomic Equilibrium
• Augusto Pinochet Ugarte (1973 1990)
• Chicago Boys
• 1982 Crisis
• liberal economic policies good trade
  relationships internationally

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• Patricio Aylwin and wife, Santiago, Chile-89

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• Economical structural characteristics of the
  national economy should be maintained
• An open international competitive economy be
  maintained
• And that extensive use of the market and private
  sector to will lead to growth

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• Concentration Platform
• A tax reform
• A labour legislation reform
• Halting the privatization programme
• Regulating some natural monopolies or those
  economic activities that produce backward and
  forward linkages.

• Tax Reform
• Labour Reforms
• Income transfer

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Macro Equitable Development

• Basis Of Equitable Development
• Maintain an annual GDP growth rate 5-6 percent
• Graduate Reduction in inflation

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How to achieve it?

• Player
• Private Sector
• Catalyst
• Export Sector
• Beneficiary
• Poorest section of the population
• Variable
• stabilize q at high levels attained during late
  80's

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Initially

• Macroeconomic Imbalance, exacerbated by excessive
  spending of the Pinochet Government
• Fall of Growth due to Macroeconomic Adjustment
• 1989 5.5
• 1990 0.8

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Deal with Inflation First

• Tackle Macroeconomic Equilibrium Imbalance
• as a result of sharp increase in fiscal
  spending(Previous Administration)
• if not dealt no a chance of medium-term strategy
• The Culprits
• 1989 spending increased by 12.7
• imports growing at annual rate of 35
• Factors In the 80's(not expected to last)
• Copper Price Favourable Debt Negotiations/Drop
  in Copper Prices Amortization Payments ?
  repatriation of foreign capital
• No Fiscal PolicydD(legally sanctioned)
• Instead raise interest rates

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CB ? R From 6.8 - 8.7 (march 1990)

• GDP growth rate braked
• 1989 5.5
• 1990 2nd Quarter 0.8
• 1990 3rd Quarter 0.2
• Average Growth Rate 2.1 lowest since 1985
• Investment was satisfactory high
• 20 of GDP
• 8 Annual Growth of Exports approaching 30 of GDP

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Other factors affecting inflation

• External Negative
• Global Increase in Price of Fuel(desert storm)

• Domestic
• High degree of indexation
• Prolonged Period of drought
• Effects of Tax Reform from 16-18

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Stabilization Strategy Pays off

• After October 1990 inflation begins to drop
• Due to Improvement in the External Sector
• high copper prices debt renegotiations
• Domestic Positive
• fall in interest rate in the final six months of
  1990
• decline in domestic spending
• External Positive
• Improved Expectations of External Sector(Copper
  P)
• End of Gulf War(uncertainty over regarding oil
  prices)
• 1990 last quarter 9.9 growth rate

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Macroeconomic Equilibrium and Possible Imbalances
Remain a Concern

• 1992 4th Quarter
• Strong acceleration of spending growth
• neutralized by sustained decline of inflationary
  tendencies
• Is inflation really decreasing?
• or it is a side effect of cost push up
• real exchange rate
• ?15 from 1990- mid 1992
• Final six months of 1992 slight drop as a result
  of policy aimed to improve exchange rate and
  eliminate disincentives for exports

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Difficulties eliminating push up inflation

• Demand-pull inflation would remain
• because productive capacity is completely
  utilized
• 1992 Difficult to lower interest rate to single
  digits
• CB concerns raise R at the end of 1992
• stable growth had reached its limit
• 1993 policy formulated under a moderate
  increase(5.5 )
• end of 1992 economy driven by private sector
• Economic policy aimed at regulating growth in
  order to maint Macroeconomic Equilibrium(long run
  goals)

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Is the government correct in trying to regulate
growth

• Against
• inflation continues to decline
• international reserves continue to grow
• Economist argue that economy has more room to
  grow

• Pro
• There is a trade deficit(external sources)
• import growth 26
• export growth 12
• Trade surplus has fallen
• deteriorating exchange rate
• Increase in q
• international reserves increase due to R
  differences

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Achievements

• Inflationary Pressure
• 1990 27.3
• 1992 13
• International Reserves
• exceeding US9 billion
• Best Economic Indicators in 30 years
• 10 GDP Growth Rate
• 6 Unemployment(June)
• 19 National Savings
• 3 government Surplus(According to Finance
  Minister)

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1990's 1970's

• Stimulated by ? Investment and ?in Exports
• Moderate Consumer Spending
• public
• private
• Sustained reduction of foreign debt as of GDP
• 1989 2.2
• 1991 -0.8
• Surge in domestic savings
• Solid growth based on
• Domestic Resources Economic Policy

• Based on growing use of foreign savings

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FOREIGN EXCHANGE MARKET
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Incentives for ex VS Investment

• Administering foreign Change Surpluses w/o
  generating monetary and exchange rate
  imbalances(External Sector no longer a
  restriction)
• Short Term
• Monetary Policy
• CB buys foreign exchange and increase
  international reserves
• This creates monetary expansion and inflationary
  risk
• CB compensates with open market operations
• sell foreign debt bonds
• limited by R and conditions in the Fin Market
• If market not able to absorb all available
  liquidity
• CB must increase R which serves as a disincentive
  to investment
• International context does not favour the control
  of domestic spending

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• CB sought to control influx of short-term capital
• abrupt changes in E while maintaining the same
  overall trend over medium and long term
• Stimulate Imports in order to avoid greater
  accumulation of reserves
• reducing Tariffs from 15 to 11 to produce shift
  towards tradable goods
• Compensated by increase in certain taxes(petrol)
• 20 obligatory on external credits(stemmed shor
  term )
• Interest rates dropped accompanied w/ prepayment
  of US200 million by the Treasure to the Central
  Ban
• Generated by Tax Collection(1991)
• alleviate difficult cash flow of CB(legacy from
  1980's)
• signaled commitment to maintain macroeconomic
  stability

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FOREIGN DEBT
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• Foreign Debt Accumulated as a result of 1982-3
  crisis
• Decrease in the ratio of debt over GDP and debt
  over exports
• 1990 government still had no access to voluntary
  credit
• Chile sought to renegotiate its commercial
  foreign debt and succeeded in substantially
• postponed amortization payments on commercial
  debt from 91-94
• with payments resume in 1995
• interest paid annually instead of every 6 months
• As a result
• Chile regained access to voluntary credit
• Government issued bonds US320 dollars over 2
  years
• 1991 initially issued US220 million

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THE END

• The decrease in pubic foreign debt during 1991-2
  was basically the result of the public sector
  policy, which stipulated that excess resources be
  allocated to the amortization of the foreign
  debt. The private sector however, has increased
  its level of debt by expanding investment,
  particularly in minerals, cellulose and energy.

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