Latinnews Archive
Latin American Economy & Business - 11 July 1975
Chile braces itself for still deeper recession
According to General Augusto Pinochet, the economy will begin to recover by the end of the year, with a real decline in the rate of inflation by October. A businessmen's newsletter, Geminis, predicts deepening recession over the next five to ten months -- or for as long as the government maintains its current squeeze on the money supply.
The attempt to cure Chile's economic ills by strict application of a monetarist prescription is being watched with close attention in other parts of Latin America, where the problems might seem comparable. Uruguay is already embarked on a similar course and Argentina, if Celestino Rodrigo has his way, may not be far behind.
The dismantling of downgrading of the public sector, including autonomous state-owned corporations and all educational and social welfare agencies or departments, and excluding only the police and armed forces, has long been advocated by conservatives in almost every Latin American republic. But never until now has the theory been put into practice with such dramatic rigour.
The Chilean experiment throws some commentators into a frenzy of delight. The Review of the River Plate recently headlined a two page analysis 'Glimpses of a Promised Land', which concluded 'there is at last a stable policy and a sensation of confident power. . . . It seems now this period of continued serenity will lead to real results, to the control of inflation, the readjustment of social outlooks, and the establishment of real productivity to the general good. Results will be there sooner than expected.'
This view is sharply at variance with the Geminis study, which sees no prospect of early relief. In fact, the newsletter warned of increasing unemployment and hardship, and commented: 'The weight of economic policy will begin to fall for the first time in significant form on businessmen, who will see profits sharply cut back and, in some cases, important losses of capital'.
Inflation is currently rather worse than it was in 1974, with prices rising 150% during the first six months of the year compared with 120% during the same period last year. Government spokesmen draw some comfort from the fact that the May increase of 16% was lower than that recorded in any of the previous three months. The new president of the Sociedad de Fomento Fabril (SOFOFA), Domingo Arteaga Garces, set the government a target last week when he said: 'If we reach December with inflation down to 3% a month, all will be well. If the rate is above 8% the situation will still be serious'.
Prices rose by 20% in June but this was held to be the result of introducing a Value added Tax of 20%. Unemployment, even on the official reckoning, is expected to reach 20% this month.
If present policies are adhered to, inflation may well begin to slow down. But this will only have been achieved at the cost of a dramatic fall in industrial production. Steel and textile production have been cut back drastically in recent weeks. In the light of current projections, it is hardly surprising that foreign investors should be waiting on the sidelines. Out of more than US$1,000 million worth of foreign investments announced at different times over the past year, only about US$40 million dollars worth have actually materialised. The dropping copper price means that Chile may earn only US$900 million this year, against US$1,600 million last year. Oil production, which in 1974 was 12% below the 1973 level, dropped by a further 12.5% in the first quarter of this year. The country's external debt is likely to increase from US$4,000 million at the end of last year to US$5,000 million by the end of this year, largely as a result of the current account deficit.
It may be, as the monetarists predict, that the economy will 'bottom out' towards the end of this year, but it is far from clear that it will then be in shape to begin the long climb back to health. Orlando Saenz, whose criticisms of the junta's economic policies have been cited previously (see Vol. IX, No. 5), wrote recently: 'I sincerely doubt whether it is best modern economic practice to free prices and control wages, making a few rich and many miserable, to applaud bankruptcies and reduce the national product, to legalise usury and recommend that people should not get into debt'.
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