Allende's government socializes the economy, nationalizing foreign copper firms, banks, and major estates. The government expropriates many factories and turns management over to workers and the state. Agrarian reform turns land over to resident workers as well. Wages and salaries are increased while prices are held down. For a year, exploitation of unused capacity produces strong economic growth.
Capacity limits in the industrial sector, a decline in private investment, the exhaustion of international reserves, and uncontrolled monetary expansion bring an economic downturn. The government does not impose austerity measures for fear of losing its working-class support. A black market emerges. Allende continues direct takeovers of land and businesses, further disrupting the economy.
Pinochet's government brings economic restructuring. It lowers tariffs, cuts government spending, and returns nationalized companies to their private owners. When the economy fails to respond to these measures, a group of Chicago-trained economists (the "Chicago Boys") advocate a strong free-market approach. Pinochet gives them the power to carry out their policies.
The Chicago Boys enact "shock therapy" policies. They free prices, liberalize trade, and deregulate the financial sector. Social security, education, and health care systems are privatized, welfare programs slashed. The government borrows heavily from abroad. Exports of nontraditional commodities increase. The economy grows rapidly during the "Chilean miracle," but at the cost of severe inequality.
Trade and financial liberalization accelerate. The government lifts most restrictions on international capital movements. Banks begin to accumulate an unprecedented volume of bad loans. The government adopts a fixed exchange rate policy, which overvalues the peso and erodes Chile's international competitiveness.
Further cuts on government spending and on the money supply bring about a downturn in the economy. Extreme debt, a global decrease in credit, and an increase in interest rates combine with domestic conditions to put the economy in recession. The country's GDP plummets by 14 percent, and unemployment reaches 33 percent. Many banks and businesses fail.
Pinochet's regime adds some changes to its continued neoliberal economic policies. The peso is undervalued to encourage exports, which grow rapidly. The government temporarily raises tariffs. Some businesses receive debt relief. Revenue from privatization and aggressive debt-conversion plans help Chile retire more than half of its debt. The economy recovers, but wages remain artificially low.
Advocating "growth with equity," President Aylwin maintains a free-market framework but promotes equality through social and labor policies. An export boom leads to a record GDP growth of 10.3 percent in 1992, and an average annual growth of 8 percent. The strong economy and favorable terms of trade enable a redistributive social policy. Productivity and investments increase.
Economic turmoil in Asia and the ensuing global financial crisis deeply affect Chile's export-dependent economy. Exports fall by 11 percent in 1998. Lower world commodity prices, especially for copper, further contribute to an economic slowdown. A severe drought exacerbates the recession, lowering crop yields and causing hydroelectric shortfalls, power rationing, and public discontent.
Chile's strong financial institutions, rebounding Asian markets, and rising copper prices return Chile to stable footing. GDP rises more than 5 percent in 2001. President Lagos continues market- and trade-oriented policies. In the 2001-02 global slowdown, Chile's growth rate falls to around 2.5 percent, but the economy resists the pressures that send neighbors Brazil and Argentina into crisis.
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