CHILE'S ECONOMIC RECIPE
FEBRUARY 26, 1997
Like it's neighbors in South America, Chile has suffered decades of harsh economic times and many years of a brutal dictatorship. But now Chile is enjoying newfound democracy and economic growth, and the Chilian president, Eduardo Frei, is in Washington to discuss a possible trade deal with the United States. After a background report, Charles Krause discusses the state of affairs in Peru with a panel of experts.
CHARLES KRAUSE: Now for three perspectives. Alexander Watson was Assistant Secretary of State for Inter-American Affairs from 1993 until last year when he retired to become vice president and executive director of the Nature Conservancy's Latin America and Caribbean division. Sebastian Edwards is a Professor of International Business at UCLA and a former chief economist for Latin America at the World Bank. He's a native of Chile who's written extensively on economic reform and development in Latin America. And Arturo Porzecanski is chief economist for the Americas at the New York offices of Ing Barings, an Anglo-Dutch investment bank. Gentlemen, thank you for joining us. Amb. Watson, tell me, President Clinton called Chile a leader and a model several times today. Why has Chile's experience been so important to Latin America and the United States?
A RealAudio version of this NewsHour segment is available.
February 26, 1997:
Charles Krause reports on the economic rebirth of Chile.
January 23, 1997:
Margaret Warner talks with Canadian Foreign Minister Lloyd Axworthy about his visit to Cuba and economic policy.
October 22, 1997:
A report on now president Arnoldo Aleman in Nicaragua: Favoring Capitalism.
Browse the Online NewsHour's coverage of Latin America.
Chile Information Project: a good source of information and links related to Chile.
ALEXANDER WATSON, Former State Department Official: I think there are two or three areas where Chile really has been a leader in its experienced conservatism model for other countries. For instance, the President indicated an economic reform that began during the last phase of the military regime. The military regime didn't get it right initially but in the last phase they seemed to get it right, and it was continued by both the administration of President Allende and now President Frei.
And also deepened in terms of its social aspects by the two civilian administrations where they've lifted more than a million people out of poverty while maintaining high economic growth and opened the economy up and increasing their exports dramatically. I think that kind of a model has caught on throughout the hemisphere and most of the more successful economies that we see are adopting policies along those lines. Secondly, politically, as your opening piece suggests, the Pinochet regime is a pretty brutal military authoritarian regime, and I think the transition from that to the Allende regime--government and now the Frei administration has been notable for its peacefulness and its thoroughness. There are still some remnants of the old authoritarian regime which were left in place when the shift took place, because remember, it wasn't a violent shift. Pinochet and company had to actually agree to--to have a transition to civilian administration. So this was--there were some remnants leftover, some Senators who were appointed, and some people in the constitutional court because of all those disappearing over time, President Frei is changing some of the military commanders. Now the third thing, Charles, I think in the international political area, they're a very valuable member of the [U.N.] Security Council, and they had people doing peacekeeping work in Bosnia and things like that.
CHARLES KRAUSE: So it is a model in a sense?
ALEXANDER WATSON: I think to the extent that what happens in one country can be a model for another, I think Chile is exemplary in at least in these three respects, and including in their attention to social concerns after the onset of the civilian regime.
CHARLES KRAUSE: Mr. Porzecanski in New York, let me ask you, does Wall Street view Chile as a model?
ARTURO PORZECANSKI, ING Barings Bank: Yes, indeed. Its bonds and stocks are very highly prized. The--according to the rating agencies, for instance, Chile is by far and above well ahead of all the other countries in the region, so, indeed, yes, it's very finely held in high esteem.
CHARLES KRAUSE: Finally, Professor Edwards, I wonder how you feel as a Chilean and as an economist when you hear the kind of praise that Chile receives almost every day.
SEBASTIAN EDWARDS, UCLA: I think, Charles, that it's a well deserved praise, as Alexander said. The performance of the economy has been quite splendid during the last two years, and there has been a lot of creativity in the areas such as Social Security reform, the way in which the public finances have been balanced, and a number of other areas. So I think that there is--these are deserving accolades with respect to the Chilean economy. The key question, however, is whether this momentum will be maintained in the future and whether the Chilean economy will continue to grow at the rate that we have seen in excess of 7 percent per year, which is really what in the past we expected to see from East Asia but not from Latin America, or whether we will see a slowdown in economic growth and a return to a more average type of performance. And I think that it is there where we should focus our attention.
CHARLES KRAUSE: Let me ask you this. I understand that you were actually in Chile during the Allende period and at the time of the coup. I wonder if you could just briefly explain or describe what it was like then and how Chile has changed.
SEBASTIAN EDWARDS: The changes have been very, very dramatic, and I think that we have seen changes at every level of society. We have to remember that Allende came to power in 1970 at a time where the whole world was moving towards the left, I would say. This is after 1968 in Paris, after the Chicago Democratic Convention, the Vietnam War was getting more and more problematic; Mexico was having problems, and so on and so forth. There was a lot of enthusiasm when Allende came to power, also idealism, but very quickly it was found out that the type of policies that were being pushed by the Allende government were not working and that they were generating significant economic problems not only among the well-to-do but also on the middle classes and the poor.
CHARLES KRAUSE: What kind of economic problems? What was it like then?
SEBASTIAN EDWARDS: Well, I would say that there were two fundamental problems. The first one was that productivity just plummeted, and as a result of that, the second year of Allende already economic growth was negative, and the third year it was even more so. Second, inflation got completely out of hand and reached levels that had not been seen in Chile or much of South America, for that matter, at that time, 700 percent. At the same time the government controlled prices, and there was significant rationing of goods, and it was extremely hard, very, very difficult to get any item at the supermarket.
CHARLES KRAUSE: Food and cigarettes -- chickens, I remember, were almost impossible to get.
SEBASTIAN EDWARDS: The economy turned into a barter economy. And I do remember -- I was a college student at the time--my mother was able one time to secure a box of toilet paper, and she was calling her friends trying to get some cooking oil in exchange for toilet paper, and she called me and said, well, you're an economics student, what do you think should be the rate of exchange between toilet paper and cooking oil? And those are the type of problems that we were seeing.
These problems were the result of a combination of factors. One of them, of course, was the misguided economic policies that Allende was trying to pursue, with price controls everywhere. But also one has to be fair and say that political upheaval and opposition to the regime contributed to it.
CHARLES KRAUSE: Now, let me ask Mr. Porzecanski, tell me, what did the Chile government do under Gen. Pinochet that changed all that, that made Chile an attractive place for foreign investors?
ARTURO PORZECANSKI: Well, first of all, they privatized; all the property that had been confiscated by the Allende government was turned back to the private sector, and more than that. They went on a privatization campaign that was very, very extensive and was a first for Latin America. They privatized not just public utilities and the like but all kind of other things, including, for instance, the Social Security system, in a very pioneering reform that's now being emulated by a number of countries in Latin America. Beyond that, very sound fiscal and monetary policies, very cautious wage policy, and a unilateral opening to foreign trade and foreign investment that has paid enormous dividends.
CHARLES KRAUSE: How much money from abroad has gone into Chile?
ARTURO PORZECANSKI: Well, tens of billions of dollars. And it's a small country, so it's a lot of money. And they have put this money to such good use that now Chile is a major investor in the region. If you go to Argentina or Peru or just about anywhere in Latin America, it's Chilean investors who are now very prominent in the regional scene.
CHARLES KRAUSE: Now, as you know, Gen. Pinochet, even though he's no longer head of state, he, in fact, is still commander of the armed forces. How important is that for confidence among investors there?
ARTURO PORZECANSKI: No, I don't think it's important at all. I mean, Mr. Pinochet is really an aged leader. He's going to be retiring from his post in the armed forces very soon and taking up a totally honorary position in the senate. No, I don't think so. I don't think that his physical presence is an assurance to investors. What is--the assurance is the track record of many, many years of good economic policies, a good transition from military to civilian rule, and from civilian rule to the next civilian rule because they've had now several civilian presidents. So I think that is the guarantee.
CHARLES KRAUSE: Amb. Watson, do you think? Is the United States government at all concerned about the power that the military still has in Chile?
ALEXANDER WATSON: I don't think we're concerned about it -- I shouldn't speak as a member of the government because I'm not anymore, Charles -- but I don't think we're concerned about the power that the military has particularly because there's an evolution going on that a power is continually being attenuated, and as Mr. Porzecanski says, you know, Pinochet will be leaving the scene very soon. As I mentioned earlier, President Frei has already named other military commanders. And some of these other vestiges of the old regime will be--will be disappearing. One important thing to bear in mind -- and I think this will change too in the future -- is that right now the budget and the armed forces is quite independent. They get a certain percentage of copper revenues and things like that which puts them sort of off-budget, if you will. It gives them a little more autonomy than armed forces have in some other countries, and I think that's going to change over time, as well as it will be brought back into the full budgetary process.
So we've had a couple of moments. Remember a year and a half ago when Gen. Contreras, who had been the head of the Secret Police under Gen. Pinochet and who was convicted of having been implicated in the murder of Amb. Letelier in Washington and his subordinate were going to be sent to jail by Chilean courts. This would be a major confrontation between the armed forces and the civilian authorities.
I can tell you that we in the government were concerned about that. We spoke. I spoke personally to President Frei on a couple of occasions about this, asked him if there was any way we could be of help, and he told me, in his way, very politely but very firmly no, we will handle this through our judicial procedures. And it's precisely what they did. Those two gentlemen are now in jail, and the crisis was averted, so I'm quite confident that the civilians are firmly in control.
CHARLES KRAUSE: Prof. Edwards, as a Chilean, tell me, are you concerned, do you think your countrymen are concerned, about the residual power of the armed forces?
SEBASTIAN EDWARDS: I think that there is some concern, and there is the sense that this has to change and that in particular some of the institutional characteristics of the country's political system that were put in place by the military have to be reformed. However, I would say that this is going to happen in a gradual fashion, and there is confidence, as Alex said, that this will happen. There are some problems related to human rights violations and also there is interest among the population at large to solve these, but I am confident that this will happen gradually during the next few years.
CHARLES KRAUSE: Let me change the subject a bit. Today President Clinton reiterated his determination to see Chile join NAFTA. How important is that for Chile's continued prosperity?
SEBASTIAN EDWARDS: I think, Charles, that there is a matter of degree, and there are different opinions here. I happen to believe that it is not very important, and that the Chilean authorities have become obsessed with NAFTA, and that, in reality, it is not clear that it is to Chile's advantage. In fact, I think that if one looks back to the last two years, it has been quite negative, the invitation to NAFTA, because Chile has become paralyzed in terms of international trade policy and continues to have a significant degree of protectionism, instead of moving further in the direction of unilateral trade liberalization that, as Arturo Porzecanski pointed out, had done the country wonders. I think that it will be the success of NAFTA -- if it ever happen, and I have doubts that it will ever happen--it will be a matter of political and foreign affairs status, rather than economic benefit. I think that if it comes with very significant side agreements on the environment and on labor, it will not be on Chile's advantage. And I think that what Chile should do, frankly, is to continue to reduce its import [and] integrate itself to the rest of the world, and take advantage not only of the opportunities that the U.S. offers, which are significant, but not the only part of the world, but take--take advantage of the opportunities the whole world has to offer to the country. So I believe that this is in a way an obsession, and if it gets out of the way, the sooner it does, the better it will be, but frankly the country should not depend on it. And that has slowly become the mood in Santiago. Two or three years ago everyone was very enthusiastic. Slowly people have realized that what is--
CHARLES KRAUSE: Prof. Edwards, I'm sorry, our time is up. I want to thank you and the others and we'll come back to this again. Thank you very much.
SEBASTIAN EDWARDS: Thank you.