CHILE'S ECONOMIC RECOVERY PROGRAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900010066-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 19, 2016
• Document Release Date: May 17, 2006
• Sequence Number: 66
• Publication Date: December 7, 1973
• Content Type: MF

25X1
Approved For Release 2006/09/26 :CIA-RDP85T00875R001900010066-5
 ~
L1EtSOftANDUM f.i /' '
S
Approved Po R1,~46A006/g9/26 : CIA'}~~P8TiT00~6
S-5749 - Was pmst;cci to
Distribution:
Orig. - CSS
1 - SA/ER I
1 - OCI C
1 - St/P
1 - D/D
1 - D/LA
OER/D/LA:
IOAUGI'5; 101 ?HICHCMAY`0t USED?01
941900010066-5
Approved For Release 2006/09/26 : CIA-RDP85T00875R00
 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010066-5
Chile's Economic r covrrv Program
The ruling junta in Chile is moving aggressively to
rebuild the economy by adopting a'harsh austerity program
and instituting policies designed to return the country to
a market economy.
Initial Efforts
Faced with shortages aggravated by heavily subsidized
prices, Santiago moved quickly after the coup on 11 September
to remove price controls on all but 30 basic commodities.
The Central Bank also devalued the escudo by some 60 percent
and simplified the exchange rate system in an effort to curb
import demand and case pressures on Santiago's meager foreign
exchange reserves. As a consequence of the devaluations and
relaxed price controls, Chile's cost of living jumped sharply
in October, bringing the inflation,rate to about 450 percenL-
for the first ten months of the year. Price rises during the
last two months of 1973 probably will push inflation to over 750
percent for the year.
The elimination of price controls and adjustment of
exchange rates caused the black market rate for escudos to
plummet from 2,200 to the dollar to 950. While exchange rates
changed and prices rose, the growth in the money supply was
sharply curtailed, causing a relative scarcity of local currency
and a liquidity crunch for busincs:;mo n. To finance business
Approved For Release 2006/ rT , RDP85T00875R00
VXUiti:
 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010066-5
activities,. holders of dollars are changing them into escudos
at official rates in record volumes. Over $14 million have
been converted since mid-November,'mostly to finance business
operations.
Domestic Impact
Despite a healthy increase in the minimum wage, working-
class consumers are finding it increasingly difficult to afford
even the barest necessities. Middle income groups are also
being hit hard. These conditions have been worsened in many
cases by dismissals of relatively unproductive and politically
suspect employees hired under the Allende regime. An
unemployment compensation program has been announced, but
it has not been implemented because of a shortage of trained
administrators and a lack of effective coordination. An
extensive public works program is under consideration.
The junta has attempted to enlist public support for the
austerity program through a series of public jawboning
sessions and repeated press conferences, all of them having
the theme of highlighting the dismal Allende heritage and
the consequent need for belt-tightening. Although businoin
is showing some renca;ed confidence, consumers and labor appear
to be less than enthusiastic about the junta's programs. No
organized resistance to the junta or its programs has appeared,
however.
Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010066-5
 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010066-5
Although some leftist groups might seize upon the wage-
price squeeze to foment strikes and other violence, the
left's ability to mobilize the workers against the regime is
questionable, because organizers and militants no longer havt?
easy access to the factories, and the clays of regular pay for
demonstrating rather than working are over. There is a risk,
however, of widespread unrest and spontaneous strikes if
pressures oa consumers and labor are not eased during the next
six months,
External Economic Relations
Chile still faces, large balance-of-payments deficits in
both 1973 and 1974 even if debt repayments are rescheduled
in both years. With the massive $4 billion foreign debt
hanging over Santiago's head, it will at best be several
years before Chile's balance-of-payments position improves
significantly.
Copper production has already increased more than 50
percent above last year's rate through better worker discipline,
a 9-percent lengthening of the wwrorkweek, and improved mine
management. Production will probably reach a record 750,000
tons next year, but shortage of spare parts, serviceable
tractors, and trucks constitute a substantial constraint to
further expansion of production.
Approved For Release 2006/09/26 CIA-RDP85T00875R001900010066-5
 Approved, For Release 2006/09/26 : CIA-RDP85T00875RO01900016066-5
Another major problem is how to increase agricultural
production rapidly. Agricultural imports, the largest drain
on foreign exchange, are likely to exceed $500 million in
1974. The recent sharp increases in agricultural prices
provided windfalls to farmers and merchants but will not
significantly affect output until the 1974/75 harvest, since
most crops are already planted and are well into the growing
season. Chile is importing grain to case domestic shortages
and has received $52 million in US -redits for grain purchases.
Continuing high world prices as well as adverse world reaction
to the coup have compounded Santiago's problems in obtaining
adequate grain supplies.
Chile also continues to face shortages of such critical
items as spare parts, transportation equipment, aluminum,
ferrous scrap, and petrochemicals for textile fiber production.
The aluminum shortage resulted from a cutoff in supplies from
Hungary and the USSR. Stocks of ferrous scrap are virtually
exhausted, and Chile will require imports of over 40,000 tons
next year. The US has granted hardship exemptions for the
export of 7,000 tons during the remainder of 1973.
While the problems of ac1equat.e short-run supplies of
raw materials and spare parts must be solved to boost production
quickly, long-run growth will depend heavily on Chile's
Approved For Release 2006/09/26,: Qq-RDP85T00875R001900010066-5
 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010066-5
ability to attract adequate foreign investment. Attraction
of substantial new investment, in turn, will depend on the
junta's ability to demonstrate good faith in the treatment
of foreign equity as well as its ability to instill confidence
in Chile's prospects for stable recovery and growth. A
critical first step in this area is timely settlement of
outstanding compensation claims emanating from the Allende
nationalizations. The junta has stated that it will either
return intervened firms to the private sector or, as in the
caseof the large copper mines, compensate the previous owners
adequately. Some 88 firms, including five with US inter.r.r;ts,
are already in the process of reverting to their original
owners.
The junta has succeeded in lining up sufficient foreign
credits to enable it to purchase capital. goods essential to
the recovery of production. Private US and Canadian sources
have granted nearly $200 million in now short-term credits,
$215 million has been granted by Argentina, and about $200
million by Brazil. Colombia is providing an additional $15-
$20 million in private bank credits.
Prospects
The economic outlook for Chile is cautiously optimistic
as the junta takes steps to correct the excesses of nearly
three years of state socialism under the Allende regime. The
Approved For Release 2006/09/26-3 :FA-RDP85T00875R001900010066-5
 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010066-5
programs are economically sound and offer a firm foundation
for recovery and growth of the economy. The emerging
dominance of Raul Saez is probably a positive factor, since
the junta's austerity program must be tempered if political
as well as economic recovery and stability are to be achieved.
Meanwhile, Chile is preparing to settle outstanding compensation
issues with the US. Timely resolution of these issues (includin(j
an early settlement with Cerro Corporation) would go far in
improv'.ng international investor and creditor confidence in
Chile.
Approved For Release 2006/09/26': CIA-RDP85T00875R001900010066-5
r' r? ,.