INTELLIGENCE MEMORANDUM THE CHILEAN ECONOMY: A STATUS REPORT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020055-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: May 19, 2010
• Sequence Number: 55
• Publication Date: October 1, 1971
• Content Type: IM

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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1971
INTELLIGENCE MEMORANDUM
THE CHILEAN ECONOMY: A STATUS REPORT
Introduction
1. Chile's announcement on 11 October that Anaconda and
Kennecott would receive no compensation confirmed the worst fears of
US companies and government officials alike but came as no real surprise.
Payment of adequate and timely compensation - a sine qua non of US
policy if intergovernmental friction is to be avoided - never had appeared
likely, and prospects for a satisfactory settlement had progressively dimmed
over recent months. By mid-August, Allende - a consummate politician
on all fronts - was already pointing to new US economic policies to justify
any internationally unpopular decisions that Chile might "also be forced
to take to defend its economy."
2. After less than one year in office, the Allende government can
justifiably claim substantial progress in effecting its socialist revolution. The
President has proved himself remarkably adept at keeping his seemingly
unwieldy coalition together and his opposition divided. Despite its minority
representation in the Congress, this political dexterity and full use of
traditionally strong executive powers have permitted the Allende
administration to assume pervasive economic control with only an occasional
bending of constitutional law. Its policies, however
have seriously
,
aggravated some chronic economic problems and created others that will
have to be d
lt
i
ea
w
th in the months to come. This memorandum chronicles
economic developments in recent months and describes the status of key
domestic indicators and foreign economic relations as of early October. It
on the copper question.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
25X1
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damaging but equally important signs are the decline in investment,
production problems in copper and other industries, and the continuing
drop in foreign reserves. Although Allende's speeches contain increasingly
frequent allusions to "the hard times to come," his regime apparently does
not yet feel ready to take the harsh actions required to bring supply and
demand into equilibrium or to impose upon the populace the sacrifices
inherent in a shift from "the year of consumption" to "the year of
accumulation" (i.e., forced investment in basic industries).
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Discussion
Allende's Confrontation Decision
3. President Allende -- clearly the indispensable man in today's
Chile - thus far has managed to stay on top of the rapid and radical changes
that are transforming his country into a socialist state. Developments of
the past few months, however, reflect a mixed bag of successes and failures,
progress and problems. By the end of September, the two most important
elements affecting Allende's thinking were:
A perhaps exaggerated view of Chile's importance in the world
and its i.iternationai "respectability" resulting, among other
things, from the meeting with Argentine President Lanusse, the
successful tour of Peru, Colombia, and Ecuador, Chile's vocal
participation in various international forums protesting the new
US economic policy, and the presence of numerous visiting
foreign delegations in Santiago.
Growing worry about worsening economic problems and his
ability to consolidate political power in time to deal with them.
Both elements bear heavily on Allende's policy decisions, affecting the pace
of "irreversible change" in Chile's domestic society and the administration's
stance confrontation or cooperation vis-a-vis the United States
regarding, copper compensation and other financial obligations.
4. Food and other consumer good shortages are perhaps the most
embarrassing indication that c shift away from the populist policies of the
regime's first eleven months is now overdue. Somewhat less politically
5. The need to effect such a shift was a key factor in deciding which
way Chile would go on the question of compensation for large expropriated
properties. For months, the Allende regime had been weighing the relative
gains and losses to be derived from taking a hard or a soft line with the
US companies involved. As the mid-October deadline on copper decisions
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approached, both Allende and the Communist Party were visibly moving
toward the more radical Socialist Party line of negligible or no
compensation. Allende's final hard-line decision almost certainly was heavily
influenced by his increasing conviction that, by so doing, more would be
gained in terms of Chilean popular commitment to the socialist revolution
than would be lost from damage to Chile's international credit rating.
6. Chile had completed nationalization of the formerly US-owned
copper industries on 16 July when the "copper amendment" to the
constitution took effect and President Allende signed five decrees giving
the Chilean State Copper Corporation (CODELCO) possession of
Kennecott's El Teniente, Cerro's Andina, and Anaconda's Chuquicamata,
El Salvador, and Exotica operations. The amendment, passed unanimously
by the Chilean Congress some months earlier, permitted nationalization with
little or no compensation but provided the administration latitude for
negotiating an acceptable settlement with the companies. The Comptroller
General was given 90 days in which to determine the book value of the
expropriated firms - the basis for compensation stipulated in the
constitutional amendment. At the same time, CODELCO was clirecte(1 to
"inventory" the installations to determine the amount to be deducted from
book value because of deterioration in physical plant and mismanagement
of the mining properties. President Allende in effect had the responsibility
for determining the final amount of compensation to be paid, having been
given the right to deduct "excess profits" from the modified book value
figures.
7. President Allende's. announcem,;ijt on 28 September that $774
million in excess profits would be deducted from compensation paid to
Anaconda and Kennecott left little doubt that Chile had opted to risk a
sho ,vdown with the US government. Allende's excess profits figure far
exceeded the likely book value estimate of the companies' current holdings
being compiled by the Comptroller General's office. At the same time,
CODELCO - using methodology with no pretense of being anything but
vindictive - filed a $1 billion claim against the companies for deficient
equipment and "damage to the mines." Under these circumstances, the
amount of "negative compensation" Chile would offer also canceled out
existing claims by Kennecott and Anaconda for the earlier sale of 51%
equity in. their properties. In fact, the final announcement issued by the
Comptroller General on 11 October claims the US companies owe some
$388 million that the Chilean government has no means to collect.
8. Chile's claim of "negative compensation" may be used to justify
reneging at least in part on Allende's earlier promises to h
onor some
$350-$400 million in debts to Eximbank and other third-party creditors
i
r
d
h
ncu
re
by t
e companies in carrying out their recent expansion programs:
SF.rR FT
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In an attempt to retain some respectability in international financial circles,
however, Chile is likely to pursue a more generous policy regarding the
repayment of the $100 million or so owed to Japanese and European
financiers than it adopts toward Eximbank. For similar reasons, it has
promised to pay for Cerro Corporation's equity in Andina -- a newly
developed mine that has not yet earned the company any profit. The
amount involved, moreover, is a small enough price to pay for continued
access to US equipment and technology, as assured in Cerro's agreement
in late August to act as the Chilean government's purchasing agent for
material needed to operate the expropriated industry.
9. Chile's failure to offer adequate compensation for expropriated
copper properties will give the investment guaranty program operated by
the Overseas Private Investment Corporation (OPIC) its first major test.
Under this. prograrn, the US copper companies involved could file claims
against the US government for as much as $368 million. Moreover, because
Chile's adoption of a hard line on copper does not bode well for ongoing
negotiations with International Telephone and Telegraph (ITT) for purchase
of its equity in the Chilean Telephone Company (Chitelco), upcoming claims
against OPIC could be even higher. ITT's current coverage on its Chitelco
investments alone totals $108 million.
Domestic Economic Developments
over by the state were formerly owned by US interests.
Socialization of the Economy
10. In an early September speech outlining his party's strategy for
carrying out the Chilean "revolution," Communist Party Chief Luis Corvalan
justifiably counted as a major victory Chilean capitalists' acceptance of the
government's economic program. The Communist Party has long recognized
that Allende's socialization of the economy will make his revolution
irreversible. Corvalan pointed in particular to capitalist leaders' acquiescene?
in the division of the economy into three sectors as an accomplishment
that substantially eases the Allende government's task. This view was
probably only strengthened when the Christian Democratic Party (PDC)
agreed in mid-Septer?.oer to vote against Economic Minister Vuscovic's
impeachment in exchange for an open-ended commitment by Allende to
submit a draft law "soon" that would establish nationalization standards
and try to define clearly the public, private, and mixed sectors of the
economy. It is doubtful that the government itself has any detailed timetable
for nationalization of various firms and activities still in private hands. In
any event, the question is rapidly becoming largely academic in that the
government already has gained or soon will have direct or indirect control
over all key economic areas. Except for two branches of European banks
and a couple of minor plants, all of the foreign operations thus far taken
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Industrial Production
11. Increased purchasing power among lower income groups has
continued to nurture the mini-boom in manufacturing output, but growth
is leveling off as more industries reach full capacity production levels.
Industrial production increased by less than 2% in July, and about 4% in
August, compared, with 8.5% in June. Moreover, although overall industrial
output during the first eight months of this year averaged about 6%-7%
higher than in the same period in 1970, performance among the various
manufacturing sectors was very uneven. Consumer goods and various
intermediate products showed the most dynamic growth,.while construction
and . investment goods remained depressed. Initiation of a massive
government housing program and,repair of earthquake damage probably
spurred demand for construction materials beginning in August, however.
A ricultural Production and Agrarian Reform
12. President Allende and other top government officials appear
increasingly concerned about the expected decline in agricultural production
in the next year or two. Agriculture Minister Jacques Chonchol, a key leader
in agrarian reform under both the Frei and Allende administrations,
contends that output wiil be normal and that the sharp rise in agricultural
import requirements to some $250-$300 million annually is solely
attributable to increased consumption among lower income groups. Other
government spokesmen, however, have been more candid about the
production problems on both newly expropriated. farms and those still in
private hands. The US Embassy in Santiago estimates that dislocations and
uncertainties deriving from government policies will cause at least a 10%
drop. in agricultural output. If so, production would be little higher than
in 1965 and, barring unpopular restraints on consumer demand, agricultural
import requirements woul'. be even larger than now planned.
13. While hoping to minimize the production costs involved, the
Allende government clearly is willing to pay a substantial price for
irreversible, revolutionary change in the countryside. Recent official
statements point to an acceleration in the pace of land redistribution,
indicating that all large farms will be expropriated by iyid-1972. Moreover,
various bills now being. drafted or already in the Congress could lower the
maximum permissible farm size from 80 basic hectares (under the 1967
agrarian reform law) to the 40 basic hectares called for in legislation
sponsored ' by , the PDC or to tl, 20 basic hectares advocated by the 'Socialist
Party. The Allende government also has decided .to change officially the
tenancy procedures called for under the Frei law - in effect, killing the
myth that peasants would eventually receive individual titles to expropriated
land. A new system of agrarian reform centers - collectivized groupings
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of expropriated farms to be worked cooperatively by all peasants in the
area - will replace the asentamientos (transitional agrarian reform
settlements on individual estates). Although few if any settlers actually
received land titles under the asentamiento system, the new tenancy
arrangements dash any lingering hopes for eventual land ownership the
peasants may have had. In an effort to reduce agricultural inefficiency, the
structure and operations-of the new agrarian reform centers also will give
the government more complete control over planning, production, and sales.
Shortages
14. While food and other consumer good shortages have not yet
reached crisis proportions,' they are a source of ever-increasing political
embarrassment to the government. Economic Minister Vuscovic and other
officials have publicly attributed the shortages to problems inherited from
earli;?r administrations, 0 earthquakes and other natural catastrophes, to
a US "boycott", to a domestic "reactionary plot", and the like, but
opposition party allegations that the full blame should be laid on the
doorstep of government policy appear to be gaining more credence.
Aithough bad weather and earthquakes in fact did aggravate food supply
problems, the sharp reduction in herds following Allende's 1970 election
and subsequent price and agrarian reform policies' are basically to blame
for spreading shortages of beef, pork, lamb, poultry, eggs, seafood products,
and various dry and canned foods. As supply dependability decreased,
hoarding has further complicated the problem. Shortages of consumer
durables also are increasing as industries reach full-capacity production and
are understandably unwilling to invest in plant expansion. While the inability
to fulfill demand for such items as household appliances ar.d television sets
will simply be reflected in longer waiting lists, government officials are more
concerned about expected shortages of shoes, clothing, r tid other necessities
in the next few months. As in the case of food, the government probably
will try to cover these shortages by increasing imports, as long as foreign
reserves - l' ymt.
Contained Inflation in a State Economy
15. The government's ability to hold the rise in the consumer price
index (CPI) to 12.7% through August (compared with 29.5% during the
first eight months of 1970) is an important political achievement but not
a very useful economic indicator. The, CPI rarely has been an accurate
measure of actual price increases, and current opposition charges that it
understates the real inflation rate thus far this year by something like
one-half are equally applicable to periods ui.der previous administrations.
Black market activities al.o.), are not a new phenomenon, although a wider
variety of goods probably now figures in this trade. The important difference
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from past experience is that the CPI is now even less efficient as a barometer
of inflationary pressures than it was before. With more and more production
in state hands - and therefore subject to government subsidies - and little
official concern for private entrepreneurs' dwindling profit margins, prices
less and less reflect free market demand and supply relationships.
16. The Allende government has continued its expansionary. policies
contrary to Central Bank to :ommendations some months ago that it curtail
deficit spending (now running at an estimated 30% of government
expenditures), raise prices charged by nationalized enterprises, allow prices
particularly on luxury goods to rise, reassure private investors, and devalue
the escudo to stimulate exports and reduce imports. A government intent
upon building socialism is not likely to adopt such orthodox tools for
dealing with economic realities. Nevertheless, because output cannot
continue to rise for very long in the face of negative savings in the public
sector and no investment in private industry and because prospects for
increasing supplies through imports are increasingly bleak, the adoption of
austerity measures in one form or another can only be a matter of time.
Foreign Economic Developments
Foreign Exchange Reserves and Policies
17. Because of rising imports, lower export earnings, and the drying
up of traditional sources of short-term credit, Chile's net foreign reserves
have declined from about $350 million at the end of last year to an
estimated $140 million in mid-September. By the end of 1971, reserves
could be as low, as $100 million - the equivalent of one month's imports --
if the overall balance-of-payments deficit reaches $250 million, as expected.
Because of the inflationary impact of such a move, the Allende government
thus far has stuck by its pledge not to devalue the escudo used for
commodity trade (i.e., the bankers rate). Nevertheless, it has introduced
various regulations to slow the inflow of "non-essential" imports and
thereby stem the worsening balance of trade. The government also has
recently moved to cut losses from tourism and other non-trade transactions
by changing the brokers rate from 14 to 28 escudos to the dollar, by
imposing various foreign exchange taxes, and by tightening quantitative
restrictions on tourist allowances. As a result, Chile now has a full-fledged
multiple exchange rate system: 12.2 escudos to the dollar for exports and
approved imports, 28 escudos for. foreign tourists, 38 escudos for payments
to foreign creditors, and 43 escudos for funds for foreign travel by Chileans
and for payment of foreign royalty or licensing fees. Speculation concerning
additional changes in exchange rates reportedly has driven"the black market
rate substantially above the 65 escudos to the dollar averaged in recent
months.
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18. Private firms committed to heavy foreign payments have been
hard hit by the recent escudo devaluations. The Chilean National
Manufacturers' Association (SOFOFA) estimated that private firms owe
about $300 million in short-term and medium-term debts abroad -- largely
to US banks and companies. Of this amount, about $50-$70 million is due
this year, as are large royalty and licensing payments. SOFOFA has warned
the government that the increased, escudo burden of their foreign debts
may bankrupt many firms and increase unem to ment.
Foreign Debt Repayment
19. Chile's total foreign debt is estimated at $2.4 billion, not including
commitments to compensate for foreign private properties nationalized by
the Allende government. Heaviest repayments are scheduled to occur in
1971-73, averaging more than $300 million annually. The United States
is by far Chile's most important creditor, accounting for approximately half
of the scheduled capital outflow. Allende's recent speeches indicate that
Chile may be preparing to impose a debt rescheduling on its creditors. In
view of the understandable reluctance of US investors to put new money
into Chile, the lack of any substantial USAID commitments, and Eximbank's
postponement of a decision on the Lan-Chile loan (and, by inference, other
loans) until Chile's expropriation compensation policies are clarified, Allende
may decide that he has little to lose from simply defaulting on payments
to US creditors. He will make every effort to protect his credit rating
elsewhere, however, and at worst will formally request refinancing of
outstanding obligations to Western Europe and international financial
organizations. If the large balance-of-payments deficits expected in 1971
and 1972 materialize, Chile's ability to pay will be seriously limited and
its creditors would have little alternative but to agree to a debt rollover.
Alternative Sources of Western Capital
20. In general, the Allende government has been disappointed in its
efforts to obtain loans and investment in Western Europe where most
countries appear to be following a "wait-and-see" policy. An exception to
this policy may be European response to efforts by CAP (Compania de
Acero del Pacifico - Chile's state iron and steel complex) to obtain $100
million in foreign financing for its expansion program. In mid-September,
CAP's General Manager Flavian Levine stated that he would soon be going
to Europe to make final arrangements for $75 million in credits previously
negotiated and to arrange for an additional $25 million reportedly available
in England. Belgium, Yugoslavia, Spain, and possibly West Germany
apparently are expected to participate in the project. Although details are
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lacking, it is probable that this financing represents suppliers' credits
covering European exports of equipment for the iron and steel project.
Both Western Europe and Japan have shown far more interest in this type
of financial assistance as a means of increasing their share of the Chilean
market than in supplying untied loans and direct investment capital.
Japanese interest in the project also reflects its worldwide search for
long-term supplies of raw materials. Japan recently signed a seven-year
contract with CAP to purchase large amounts of Chilean iron ore, in addition
to those supplies earlier arranged for with Bethlehem. Mitsubishi, CAP's
sales agent in Japan, also is a major supplier of equipment for the expansion
program.
Communist Aid to Allende
21. Despite continued resistance by Chilean industry and military
alike to a shift to Commis list area equipment and technology, Soviet and
East European involvement in the country clearly has. been growing.
Numerous technical missions have arrived in Chile in recent months to do
feasibility studies on a wide variety of projects to be undertaken with
Communist assistance. Since Foreign Minister Almeyda's mission to Moscow
and East European capitals in May-June, long-term credit agreements
involving more than $100 million are known to have been signed, bringing
to $164 million total Communist commitments to Chile. All of these credits
are designed to cover purchases of material and technical expertise from
the donor country. To date, no untied financial assistance has been offered.
Long-term credits extended and projects thus far agreed upon are shown
in the table.
22. Chile and the USSR apparently have signed a military agreement,
involving an exchange of army attaches and perhaps the extension of large
Soviet credits on favorable terms to cover purchases of badly needed
equipment and material. Although a $50 million figure has been quoted,
there is still some question about the amounts involved and the types of
equipment that will be purchased. In any event, Allende appears to be
gaining ground in his campaign to buy the military's loyalty with promises
of modernization aid to reduce its opposition to a shift away from
dependence on Free World equipment. Allende also may succeed in winning
Lan-Chile's concurrence in purchasing Soviet Ilyushins as the only viable
alternative to the Boeing 707s and 727s that Eximbank thus far has refused
to finance. The Soviet aircraft industry reportedly has offered to sell Chile
on any terms as many civilian jets as it wants. Although opposition by
Lan-Chile technicians to buying Ilyushins because of their incompatibility
with the existing Boeing fleet caused the postponement of a Chilean mission
to Moscow in early September, a Lan-Chile team is now scheduled to depart
soon for discussions with their Soviet counterparts.
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Known Long-Term Credits From Communist Countries
USSR
earmarked for roadbuilding equipment)
Jul 1971 $55 million a/ Machinery and equipment ($5 million
a'an 1967 $42 million industrial plants (port improvement,
lubricants plant, housing project,
chemical. plants, agriculturalassist-ance, technical aid to copper facili-
ties)
Czechoslovakia b/ Apr 1968 $ 5 million Machinery and equipment
Hungary c/ Sep 1971 $15 million Pharmaceuticals plant, copper mining
and transport equipment
Hungary Jun 1971 $ 5 million Machinery and equipment
China
Jun 1971 $20 million Mining equipment, health supplies,
possibly cargo crane plant
Jul 1971 $20 million Sulphuric acid plant, agricultural
machinery, possibly copper manu-
factures plant
Jul 1971 $2.5 million Grant -- earthquake relief
a. Expansion of $12.8 million credit extended in 1967.
b. No credits have yet been announced to cover reported Czech agreement to
enlarge the Osorno compressor plant and finance two plants for motorcycle motors
and machine tools.
c. A $33 million credit to finance an aluminum plant presumably is still under
discussion.
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