PROBLEMS CONFRONTING THE FREI ADMINISTRATION IN CHILE*

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R00904A001100010018-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 19, 2016
• Document Release Date: October 12, 2005
• Sequence Number: 18
• Publication Date: October 9, 1964
• Content Type: MF

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9 October 196+
SUBJECT: Problems Confronting the Frei
Administration in Chile*
Frei's impressive popular majority reflects not only a
:present reaction against Castro-Communism, but also the
popular expectation that he will accomplish a radical economic
and social transformation of Chile, with US aid, in keeping
with the Alliance for Progress. To succeed in that, he must
overcome formidable economic problems. As an essential first
step, he must reach agreement with the Anaconda and Kennecott
copper companies. He is willing to assure them against
nationalization, but must obtain sufficient "Chileanization"
of the Chilean copper industry to enable him.to represent that
Chilean sovereignty has been asserted.
Frei's efforts to achieve long overdue reforms in Chile
by constitutional means will be closely watched throughout
Latin America. If he succeeds, with US cooperation and support,
the Alliance for Progress will be greatly strengthened. If he
fails, his failure would lend support to Fidel Castro's thesis
that real reform can be accomplished only by violent revolution.
This memorandum was prepared in consultation
with DDP, OCI, and ORR.
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1. The election of Eduardo Frei to the presidency of
Chile was a stunning defeat for Castro-Communism, but does
not in itself ensure the elimination of that danger. Frei's
impressive popular majority reflects not only a present
reaction against Castro-Communism, but also a popular expecta-
tion that Frei will accomplish a radical economic and social
transformation of Chile, with US aid, in keeping with the
Alliance for Progress. Frei is fully committed to that
endeavor, but to succeed he must overcome formidable obstacles.
If he should fail, the consequent popular disillusionment
would almost certainly produce a further growth of the extreme
left and might bring a Communist-Socialist combination to
:power in the 1970 presidential election.
2. Chile's human and material resources are adequate
-to provide a decent living for its rapidly growing population,
but only if more rationally utilized, with a more equitable
distribution of the national income. For years the economy
has been virtually stagnant. It is vitally dependent on the
export earnings of a copper iix.ing industry dominated by two
US firms, Anaconda and Kennecott.* As a result of prolonged
neglect of agricultural development and the under-utilization
of land, Chile must now import foodstuffs which it formerly
exported. Manufacturing industry, fostered by protectionist
The copper mining industry now provides nearly 90 percent
of Chile's export earnings and 15 percent of its tax
revenue.
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policies, is also inefficient and still a drain on export
earnings. Servicing an external debt of $1.4 billion imposes
a further heavy burden on the country's balance of payments
at a time when new investment is urgently needed in such
basic development areas as transportation, communications,
electric power, housing, and education.* For years Chile
has suffered from foreign exchange and budgetary deficits,
both of which increase pressures for raising taxes on copper,
Chile's one profitable resource, and from an inflation which,
during the past two ears, was at a rate of 50 percent per
annum. Underemployment is chronic; the real income of most
of the population has declined.
3. As a first step toward coping with these problems,
:Frei is seeking to persuade the US copper companies to make
the substantial new investment needed to increase copper
productions for export. Those companies have been unwilling
to make new investments in Chile unless given reliable
assurances against nationalization or confiscatory taxation.
During the election campaign Frei countered his opponent's
demand for nationalization by proposing "Chileanization."
This term has not been defined. It appears to mean sufficient
Chilean control to ensure an increase in production, much more
During the past two years US program loans have financed
nearly 40 percent of Chilean public investment in these
areas.
-3-
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refining of Chilean ore in Chile, and some voice in the
marketing of Chilean copper. Frei is willing to give the
desired assurances and to negotiate on the subject of tax
adjustments. In anticipation of Communist charges of a
sellout to the Yankees, it is politically imperative for
him to obtain in return a sufficient degree of "Chileanization"
to enable him to claim that Chile's national sovereignty has
been asserted.
}.. An agreement with the copper companies on these
lines would increase Chilean foreign exchange earnings and
tax revenue. Frei would also expect it to facilitate the
financial arrangements needed to cope with residual foreign
exchange and budgetary problems pending the more even
development of the Chilean economy. In particular, he hopes
to negotiate a reduction of debt service requirements from
$290 million a year to $120 Milton, which he feels that Chile
can handle. In addition, he is seekin3 about $200 million
from foreign sources, public or private, for new social pro-
grams and balance of payments financing.
5. An important element of Frei's dome. tt.c program
Is agricultural reform intended not only to accomplish the
social (and political) purpose of distributing land tolandless
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peasants, but also to increase production through the more
intensive use of the land available, and to develop more
effective marketing methods. Related to this is a reform
of banking designed to make credit available to small
farmers and businessmen. Frei is also committed to a public
housing program, to meet an urgent social need, and to the
provision of increased opportunities for public education.
6. Despite his popular mandate, Frei's reform program
is likely to encounter resistance in Congress, where his
party, the PDC, now controls only 28 of 147 seats in the
Chamber and 4 of L15 seats in the Senate. Although the PDC
is likely to make substantial gains in the congressional
election to be held in March 1965, it is problematical
whether it can gain control of the Chamber and certain that
it cannot gain control of the Senate. Much will therefore
depend on Frei's ability to form ad hoc political combinations
in support of particular measures.
7. Frei's efforts to achieve long over-due reforms
in Chile by constitutional means will be closely watched
throughout Latin America. If he should succeed, with US
cooperation and support, general acceptance of the Alliance
for Progress concept would be greatly strengthened. If he
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should fail, his failure would lend support to Fidel Castro's
thesis that reform can be accomplished only by violent
revolution.*
25X1
SH RMAN KENT
Chairman
Castro has anticipated this result in the following
language: _
"We will see how this LPDJ revolution is effected.
We will see how they wipe out illiteracy... introduce
a program of medical care... reconcile the interests
of exploiters and exploited...LWe will see7
, whether
a country's oligarchic and feudal structure can be
changed with good wishes, with good intentions... The
imperialists apparently want to present the example
of Chile as an example countering ours ...We are delighted
to accept that challenge to see which country progresses
more, which experiment goes farther, which solves the
real essential problems of the peoples, and how long it
takes to solve them.
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SENDER WILL CHECK CLASSI ATION TOP AND BOTTOM
UNCLASSIFIED CONFIDENTIAL SECRET
CENTRAL INTELLIGENCE AGENCY
OFFICIAL ROUTING SLIP
TO
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DATE
INITIALS
DCI
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ACTION
DIRECT REPLY
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INFORMATION
SIGNATURE
Remarks :
In the li tf- f your conversation
with which I did not
hear a o` -- ought you might be
interested in the thoughts expressed
in this memo. I refer especially to
your Sunday night dinner.
i.U
FOLD HERE TO TURN TO SENDER
F ME. SS AND PHONE NO.
DATE
SHERMAN KENT AD NE 7 E 1+8
9 Oct 61+
UNCLASSIFIED CONFIDEN
A
SECRET
s d - 0=0 1 1(
U.S. GOVERNMENT PRINTING OFFICE : 1961 O-SB7ZBZ
25X1
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To:
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