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December 19, 2016
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May 16, 2006
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November 21, 1973
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Approved For ez-41,ozx IS-0,Y4?0-,7-3 21 November 1973 SUBJECT i The Currant, State of Chl.lo'o Economy . ME14ORAt2DUM rent Chief, OCI/wi11r/SAW Attached is the briefing material on Chile as per your request of 14 November 1973. If you have further 25X1 questions, ploaso contact Chief South P.marica Branch, OER Attachmenti As stated Distribution: (S-5690) Orig. & 1 - Addressee 1 - D/OER 1 - SA/ER 1 - ' t/D 1 - St/P i D/,,A OER/D/LA (21 Nov 73) 31A-RDP85T00875R001900010030-4 Approved For Release 2006/Qfll t?X-9i,~ 25X1 25X1 Approved For The Currant State, of Chil'?''s, Economy I. Salvador Allende was elected prenidont in 1970 by approximately 36% of the popular vote on a platform of social reform and egalitarian redistribution of income. The vote was divided along class lines with Allende's support coming largely from the poor and militant youth and main opposition from middle class business and professional interests. II. The first year of Allende's rule (1971) saw an apparent improvement in the economy. A. Income levels of the poor and workers were raised sharply. Be Rising demand took up the slack in the semi-stagnant economy and GDP grew by 8.0--while unemployment fell. C. Land was expropriated and turned over to the poor. N D. Business enterprises, including foreign-owned copper companies,. were expropriated. By 1973, more than half of GDP was generated by government-owned business. III. Behind the facade of prosperity remained the central fact that Chile was living on its capital and that decapitalization was taking place at a rapid pace. The effects of this policy became evident in 1972. A. Inventory stocks were drawn down and foreign exchange and credit were used to meet-rising demand. Approved For Release 2006/09/% l, f DP85T00875RO01900010030-4 .25X1 Approved For Release 2006/09/26: CIA-RDP85T0 B. Inefficiencies in the agricultural sector resulting from land redistribution were compensated for by rising imports of agricultural products and food. C. Foreign exchange was drawn down and debts incurred to support the rising level of food and industrial raw material imports. D. Exports declined duo to poor management of expropriated firms and the destruction of investor confidence. E. GDP declined by 0.7% in real terms in 1972 compared to an 8.4% increase in 1971. IV. Chile's international financial position deteriorated sharply under the Allende regime and its external debt nearly doubled from $2 billion to/$4 billion. A. in 1971, balance of payment deficits totaled $305 million compared to surpluses averaging $145 million annually in the three preceding years. B. In 1972, Chile's total external debt rose by nearly $910 million, including more than $200 million of short term suppliers' credits. The balance of payments deficit totaled nearly $330 million, despite the suspension and rescheduling'of more than $360 million of external debt repayments.- Approved For Release 2006M/262.+CIA-RDP8 001900010030-4 V. Approved For Rd The post-Allende regime's initial economic policies have been directed at stimulating domestic production while returning to an essentially market economy. A. The junta devalued the escudo by nearly 60% and. reduced the number of exchange rates from six to two. Devaluations are likely to continue until a single exchange rate is achieved sometime next year, a move which should eventually improve Chile's balance of trade and payments. B. The junta has adjusted prices to more closely approximate free market prices. The resulting increases, ranging generally from 200% to 400%, have eliminated the once thriving black market and have brought demand and supply of consumer and producer goods more nearly in line. C. The junta has increased the minimum wage while cancelling a scheduled general wage increase. The minimum wage, if enforced, should ease the-burden of the price increases on the lower classes while the freeze on general wages will hold down costs to ,permit the recovery of production as well as reduce demand. D. The junta increased the work week from 44 to 48 hours. The increase has already stimulated the Approved For Release 2006/09/26 : CIA-RDP8 Xt4V '1R001900010030-4 Approved For Rele recovery of copper production and reportedly is working wall in other sectors. Vi. The price increases and wage freezes., however, have reduced real incomes. A. Chile's cost of living ;}ti,mped 88% in October, pushing the inflation rate to 450% for the first ten months of the year. Inflation for the year probably will exceed 600%. B. Despite the price increases, it will take many months for domestic-production, especially agriculture, to recover. The immediate consequence has been windfall profits for many merchants. VII. Unemployment continues to be a serious obstacle to Chile's recovery. ? A. Payroll padding under Allende was a major cause of decreased productivity in nearly every sector -- even though it did reduce the level of unemployment. B. The junta has dismissed large numbers of unproductive government personnel thus increasing unemployment. VIII. The immediate problems of the junta are complicated by needs for substantial short-term credits and development assistance. A. Chile needs an estimated $720 million to meet its external requirements over the next year. It is -4- Approved For Release 2006/09/26 : Cl Approved For Release believed that this total is now available. 1. Credit lines inherited from Allende amount to about $350 million. 2. Chile has arranged $173. million in short-term credits from US avid Canadian banks and is negotiating for another $75 million. 3. Other pending financial assistance includes an estimated $442 million from Brazil and Argentina, of which $200 million would be earmarked for capital goods and $50 million for direct balance of payments relief. B. The United States has thu?a far granted $24 million in CCC credits for wheat purchases and another $28 million is pending for corn and grain sorghum purchases. C. Chile's grain needs are urgent due to the deterioration of agriculture under Allende. Food imports in 1973 will be about $700 million, compared with pre-Allende levels of $200-$250 million. Even with some agricultural recovery in 1974, they still will be around $500 million. IX. Assistance from International Financial institutions will depend on Chile's ability to develop a viable economic recovery and stabilization plan. Approved For Release 2006/09/26: CIA-RDP85T008QW16 010030-4 Approved For Release - RO01900016030-4 A. Failure to submit such a plan precipitated Allende's loss of credits from international sources. B. An IMF team is currently, in Chile to evaluate conditions and prospects. The team's report will be issued in January, prior '.:o a meeting of Chile's major creditors to consider the renegotiation of Chile's foreign debts of nearly $4 billion. X. The new government appears ready to meet its obligations eminating from Allende's nationalizations. A. Equitable settlement of outstanding compensation c_aims will encourage new foreign investment and serve to improve US-Chilean relations. B. The junta will not denationalize the copper properties. However, new investment opportunities on a contract basis may be possible in the future. ,XI. The copper industry, Chile's chief source of foreign exchange, will play a key role in economic recovery and is already showing signs of recovery. A. Although copper production in 1973 is expected to be around 650,000 to 670,000 tons -- down 8% from 1972 -- production in October was more than 52% above the October 1972 level. B. With improved worker discipline and better mine management, copper production in 1974 is expected to reach a record 750,000 tons. Approved For Release 2006/09/26: CIA-RDP85T0Q6iT 900010030-4 -6- !:i: - Approved For Rel D. Capacity in the major mines was expanded by nearly 200,000 tons prior to Allende's nationalizations. Although Allende failed to fully use this now capacity, the junta is expected to significantly increase production in the years ahead. E. At present, the major constraints to copper production are shortages of spare parts and such eervicable small rolling stock as tractors and service trucks. In some areas less than 40% of critical rolling stock is presently operable. F. Despite reports of large scale worker layoffs since the change of government, dismissals in the mining sector have amounted to less than 2.5%. Allende had increased the number of miners by over 25%. CIA/OER 20 November 1973 -7- Approved For Release 006/09/26 ?~ ' 01900010030-4 't'auJ.o 1 _ J Approved For ReWii%iO ffig6i .aChi~ FIPC 8goTmO .8c 5J.nc1LC0atoro 0-4 Total not foreign reserves (Millions of US $) Inflation (Percent variation from December. to December Exports (Millions of US $) Imports (Millions of US $) Customs registrations Import payments Payment gap Money supply (Billions of current escudos)- Copper production (Thousands of metric tons) Large mines Small and medium mines Iron ore production (millions of metric tons) '1969 ' '1970 25200 343.2, 29.3 34.9 1,174.0 1,135.0 917.0. 948.0 927.0 1,001.0 (10) (53) 7.7 12.1 688.1 685.6 (540.4) (534.5) (147.7) (151.1) 11.5 11.3 Urlemployment -- greater Sept. Santiago (Percentage),: 5.3 Central government deficit or surplus (as a percent of total central govern- Surplus expenditure) 1.3 Central government deficit or surplus (as a percent Surplus of GDP) Percentage growth of GDP (In 1965 prices) . 1973 1971 1972 Proiecte& 38.8 -289.3 -450 (Sap 22.1 163.4 300 984.0 '858.0 1,060 1,166.0 1,432.0 1,454 1,085.0 1,2P5.0 1 81 '' 147 . 25.8 68. 0 ' 708.3 ' 718.2 670 (571.3) (593.1) (540) (137.0) (125.1) (130) 11.2 9.2 9.0 Sept. Sept. Sept. Sept. 6.4 4.8 3.0 4-5 Deficit Deficit Deficit Deficit 11.6 33.3? 60.0 Deficit Deficit Deficit Deficit 0.2 3.3 0.7 3.1. 9.5 22.3 8.4'x.. -0.7 Approved For Release 2006/09/26 :'CIA-RDDP85T00875R001900010030-4 Approved For Release 2006/09/26 tC-RDP851Q0875R001900010030-4 n nue Chile: Important Economic Indicators 9;13` 1969 1970 1971 1972 Projected Percentago growth of GDP per capita (In 1965, prices) 0.7 0.6 5.5 -3.2 .-7.5 GDP growth by sector Manufacturing (Percentage +4.2 1.3. +12.9 +2.5 -10.0 change) Mining (Percentage change) +4.0 1.0 1.7 -0.8 -9.0 Agriculture 68/69 69/70 70/71 71/72 72/73 (C.op year) -4.0 +5.0 +5.1' '-16.0 -14.0 Approved For Release 2006/09/26 CIA-RDP85T00875ROO1900010030-4 Approved' For Release 2006/09/26: CIA-RDP85TO0875R9Q19Q0010030,4' .;,,'Summary, Balanco of-,'1?aymonts (IMF .format)' ,' . ~ ' 1 ' ' 9 70 19 71 ...r.., ? l972 Exports Imports (Registrations) -948, '?-1166'? ' -1432 . ' Trade Balance ' ?137 ?,'' -182 4. ,., Invostment Income 5... Other services . ; ' ? ' 1 6. Current Account Balance 7.' Private Capital. 8.. -Public Seoto,, . , 9. ?Capital,Account Balance 10.. Er.:ors and omissions 11. Total Deficit; (6+9+10) 12. SDR Allocation 13. Debt Relief 14. ? Growth in Floating Debt to Suppliers .15. Reserve Movement ? Tablo 2 . ? ,; , 11,35 ,984 ''.858 ..' -164 ,~ ,~ ,137 -64 ' +123 2Z ' .17 ..574''- -27 Approved For Release 2006/09/26': CIA-RDP65T00875'R001900010030-4 361 Approved For Release 2006/09/26 : CIA-Rifflc5-W0875R001900010030-4 Rcscr'c Aswts and Liabilltics of Ilia Bnnklng System Million115 S ? Dec Dec Dcc Mar Sep 1970 1971 1972 .. , 1973 1973? Total Disposable Assets; 439.4. 252.6 203.7- 166 3 130 or which.. . -Cent.ul Hank (378.8) (213.S)- (150.4) . , 06.7)' (70) "Commercial WAS ? (60.6) (39.1) (53,3) (59.6) '(60) Non-Liquid Aucts 16.7 7.6 1.4 22.4 LabUitics: 112.9 ? 222.0 494.4 548.2 600 Of which .. . -Central Bank .(62.8) ?(128.6) ? (261.3) (297.5) '-Commercial Banks (50.1) (93.4) (233.1) (250.7) (..) Net)tescn'cs: 343.2 38.2 -289.3 ?359.5 , ?450 9 Stim~ted Approved Por Release 2006709/26 CIA-RDP85TO0875ROO1900010030-4