SAN JOSÉ STATE UNIVERSITY
ECONOMICS DEPARTMENT
Thayer Watkins

Chile

Economic History of Chile

Background of Chile

Chile had a strong history of democracy before Salvador Allende. Its government consists of a strong executive branch, the presidency, but the National Congress also has considerable powers. In the election of a presidency there is no provision for a run-off election. The National Congress certifies the election of the president and traditionally it certifies the largest vote-getter in the election as president. This was not required by law but it was traditional.

Eduardo Frei, a centrist political leader of the Christian Democratic Party, had been elected president in 1964. With the support of more conservative elements Frei won the presidency with 56 percent of the vote against Salvador Allende representing the Socialist Party and a coalition of other leftist parties. Frei had received the support of more conservative elements because of their fear of an Allende victory.

Frei's term as president from 1964 to 1970 involved some fairly radical programs, such as the nationalization of the Kennecott and Anaconda copper mines. There was also extensive land reform. Frei was trying to gain the allegiance of the lower income groups but in the process he alienated the upper income groups and conservative elements of the electorate.

In the 1970 election Frei did not run. Tomic represented the centrist Christian Democrats. But, as a result of their experience with Frei, the conservative elements did not support the Christian Democratic candidates. Instead Jorge Alessandri ran for the presidency. In the election Allende got 36 percent of the vote, the conservative Alessandri got 35 percent and the centrist Tomic got 28 percent of the vote. Allende had the plurality but just by a bare 1 percent.

Although a runoff election was clearly what was needed there was no provision for it under the constitution. The National Congress had to certify the winner of the presidential race and many urged Congress not to certify Allende but Congress held to the tradition of certifying the top vote-getter. It was generally understood that a candidate receiving much less than a majority did not have a mandate to carry out radical change in the country.

Allende ignored the fact that he did not have a mandate and proceeded to implement a social revolution. When there was not enough funds to finance some of the social programs he had the government create money. This led to rampant inflation. The rampant inflation led the lower classes to look to the Allende regime to solve their problems.

An anecdote from Bruce Chatwin's book Patagonia illustrates some of the problems of the time. Chatwin in his travels came to a dairy farm in the mountains of Chile that had been established and operated by a British man. The Allende government encouraged workers to take control of the companies in which they worked. The dairy workers took control of the dairy and the British owner left. The dairy needed a new bull and the Allende government agreed to acquire a high quality bull for the dairy. The government arranged for the purchase of suitable bull from New Zealand and its shipment at great expense to Chile. Equally good bulls were available from Argentina but the Allende government wanted no dealings with Argentina while it was under the control of a military junta.

The dairy workers who had not had a high standard of living could not resist butchering some of the dairy cows for beef. When those were eaten up they butchered some more. Then they butchered more and more until all of the dairy cows were gone. There was no production of dairy products from the dairy and so no income for the workers. Then the expensive bull arrived from New Zealand. Since there was no dairy herd there was no need for a bull and the very expensive bull met the same fate as the dairy cows.

Around the country as output fell and prices rose discontent multiplied. The independent truckers who operated their own trucks and were an essential element in the Chilean transportation system were subject to harassing regulation and could not get adequate amounts of gasoline. The truckers went on strike. Middle class housewives marched in protest of the shortages of food.

The end came when the Chilean Army under Augusto Pinochet organized a military coup. The air force strafed and bombed the Presidential Palace and the Army later attacked it, killing Allende in the process. Pinochet assumed the office of president. Initially he tried to run Chile like an army but to no avail. Later he brought in a group of Chilean economists as advisers who had been trained at the University of Chicago and were therefore known as the Chicago Boys.

The Chicago Boys implemented a program that dropped the rate of inflation from about 1000 percent per year to about 10 percent per year. This was looked upon as a minor miracle in Latin America. They also proposed and implemented economic policies which initiated economic development and growth. Chile developed a good export economy, including the export of fruits and vegetables to the northern hemisphere when they were out of season and commanded high prices.

When the Pinochet regime was replaced by civilian government the economic policies of the Chicago Boys were not changed. ________________________________________


Major Institutional Reforms During the Pinochet Era

HOME PAGE OF Thayer Watkins