The Chilean Crisis In 1973 And The Weakened State

The Chilean crisis in 1973 and the weakened state

Overcoming a crisis is not easy and doing policies for development either, there will always be winners and losers, people who are in favor or against;But based on good policies, both things can be achieved by minimizing subsequent damage and giving way to a long -term development stage.

The task carried out by Chile to overcome one of the greatest crises in its history and aimed at a new stage of sustained growth was not at all simple, wrapped in a society faithful to the belief in which the State will solve its problems, the pressuresocial was visualized when this did not happen.

By 1973, Chile suffered a great blow to its economy. With the victory in the presidential elections of Salvador Allende three years earlier and trying to establish a socialist state consolidating to democratic media, the State weakened extremely and nothing could contain the military solution. Consequence of the inability of the ruling body to take the reins of the country, social pressure became increasing and concentrated on a weakened state, which finally led to chronic inflation and weakening the investment rate.

After the coup d’etat, Pinochet was at the forefront of an agonizing society, followed by the suppression of the democratic-representative political system founded in the 1925 Constitution (Tironi, 1990). With the change of government it was evident that a socialist model was not going to work, they had to change.

In those years, a group of right -wing economists called the “Chicago Boys”, soaked with a liberal thought with basic principles of the free market were responsible for taking the baton and supporting the now president Augusto Pinochet who no longer had another option since theown military did not have the ability to take care of the economy. The ideas proposed by this group strongly influenced by one of the most prestigious economists of the time, Milton Friedman, fit perfectly in the style of the military.

The challenges were great and the even greater motivation, Friedman (1975) refers to Chile as a "very sick man" and is very right in his statement, the seventies were a very hard transition period for that country reaching inflation toreach a level of 350% during the first half of 1973;The causes, although varied, are summarized in the strong rise in international oil prices and at the fall in the price of copper, the situation was further accentuated with the fundamentally closed economy and the high tariffs presented by Chile which caused a significant fallat the level of national and foreign savings and investment due to the enormous uncertainty that existed, which further deteriorated the country’s foreign trade situation;To this was added a process of nationalization and control of prices and salaries that did nothing but overwhelm private activity and distort the market (Larraín B. & Vergara m., 2001).

Milton Friedman during his visit to Chile in 1975 emphasizes two basic problems that this country has to face: the first is to contain inflation;The second, establish a vigorous market social economy that allows the country to “take off” in sustained economic growth whose benefits are shared by all citizens. Friedman (1975) states:

How can Chile end inflation?

There is only one way, only one, only one! It consists of reducing government expenses. A 20 to 25% reduction in government expenses is an absolute condition to satisfactorily end inflation.  The phrase mentioned by this great economist makes sense, inflation is an evil that must be controlled and at levels as exorbitant as it was during that time was not going to do anything but worsen the quality of life of Chileans. The government on duty had to solve a big problem and accompanied by the ideals of the "Chicago Boys" implemented a series of strategies dedicated to the liberalization of prices and markets, to the commercial opening and to the reduction of the size of the state. Pinochet began eliminating price and salaries controls, repealing the limitations to the entry of individuals to certain economic activities, and the same happened with the capital market (Tironi, 1990). 

The tariffs had a significant reduction since they were among the highest in the world, together with the decrease in foreign capital entry limitations, indebtedness and investment were favored. The reduction of the power of the State was a complicated but necessary task, through statizations the State had accumulated a great decision -making power over the country’s economy, a fact that Milton Friedman, a liberalist defender of the free market, disagreed, the governmentMilitary was fully aware that this was unsustainable in time, so they undertook a privatization program that had as a result the return to the private sector of 470 companies and 14 banks between 1973 and 1977 remaining in the hands of the State only 29 companies and 3 banks(Ibañez or., 1984).