Chile Forum

On chilean "industrializacion":

In the mid forties don Pedro Aguirre Cerda, was elected president, starting a long era of Radical Party in power, it was humble from origin, (basic teacher) and very aprreciated by his good feeling with people "Gobernar es Educar" was his motto. During his rule he created CORFO (Corporacion de Fomento) with a double purpose:

1. to build a state owned trust of manufacturing companies (in the sovietic style, which was admired in those years, and radicals was allied with socialist party during Aguirre Cerda in the called "Frente Popular")
2. to give "soft credits" to chilean entrepreneurs, that is why "fomento" (credits) and "produccion" (state owned companies)

Aguirre Cerda died during his rule and his sucessor was also radical (Juan Antonio Rios) and also died during his rule, then another radical president (Gabriel Gonzalez Videla, the corruptum maximun) closed the radical era with a huge public bureaucracy and many state owned companies in several fields (heavy industry, manufacture, agriculture, tec.). All those companies operated with loses covered by state funds every year.

Then was elected to power General Carlos Ibañez, who tried to fix the huge corruption of radical era, but he was an old man and his goverment was unable to improve things, then it comes, after many years the first rigth wing president; Jorge Alessandri, but also cannot improve th big economic decline inherited from the radical model of entrepneur state financied with public money. The next president was Eduardo Frei Montalba, father of the actual Eduardo Frei Ruis Tagle (also ex president), and the economy continued declining. At this point, as Universidad de Chile´s head of economy Sergio Vuskovic said, Chile was the second poorest country in Americas, following Haiti.

With very bad economic situation, Salvador Allende was elected with a very small margin above Jorge Alessandri, as usual in Latin America and extreme left colition taked power in the middle of a big crisis. In short terms, Allende goverment acelerated the process of state owned companies and the state controled formally 52% of the chilean economy trough the CORFO holding, and informally most of the rest (40.000+ business "taked" de facto and state controlled). SOme figures:

During Allende ruling cooper had high price, months before the coup the price was at top historic, despite that inflation was 300% in 1973, trade deficit over US$ 450 millions (when Allende taked power superhabit was over 175 millions), an 60% increase of external debt, fiscal deficit of 45% of total fiscal expense, the investment decreased to 2/3 of 1970. The industrial production decreased in one year (1972-73) of 6% (also an historic figure).

The participation of workers in total income decreased respect 1970, when Allende taked power, child mortality and disnutrition increased, etc. etc. The "industry" in Chile was complely broked not just some industries but all the sector as a whole. Most of the national budget was devoted to pay the huge losess of CORFO holding, there was no one single state company with profits and this crisis caused that goverment financed loses with money recauded for retirement funds of older people, so this system was also broke and people had technically lost all their pension funds.

After the military coup the productive system of the country was bankrupted and CORFO owned hundred of companies with a big "book value" (fictitious) but improductives and zero market value. There was another problem, many of those industries has been expropiated without any compaensation for political reasons , so it was necessary give back to their original owners. the big problem was what to do with them because there are all improductive and dragging loses during decades (some of them, the biggest, from Pedro Aguirre Cerda 40s).

As the new economic model implied open economic borders and supress import taxes (typically 10000%) most of industries was "inviable" and simply broked or dissapeared. the still profitables state owned industries was licited openly and adquired for the few ones who had some cash at market value. The myth of "broke companies to sell at vile price" is just that, a mith and no serious economist has never supported, there was an investigating comision from the congress devoted to review all privatizations and they never can determine any of those claimed "arreglos".

The manufacturing industry in Chile never existed as some politicians claim now, it was just state owned with huge loses covered with national budget (taxpayers money) since 40s to 70s and tose private owned was protected wit import taxes of ten thousand percent or such. I worked in IRT and Mellafe y Salas during late 70s, it was a joke in economical terms.

Very, very interesting, Tomás. You've persuaded me that (with, doubtless, a handful of exceptions) Chilean industry was never genuinely competitive; I've heard as much from others, but your explanation is by far the most detailled.

Might you have citations of one or two print- or web-based sources for your information? I'd find it useful in controverting some of the neo-Marxists I deal with here (yes, discredited or not in the eyes of most of the Western world, the "school of thought" still exists in the United States).

Again, thanks -- very.

A very in-deep commentary from the economist Rofl Luders at http://www.dii.uchile.cl/~revista/revis ... /n2/09.pdf

Sad it is in Spanish, and criticizes the book from Patricio Meller "Un siglo de economía política chilena (1890-1990)"
It is plagued nowadays of books trying to explain the economic disaster from Unidad Popular, remember that many of responsible of those policies are now ministers and high rank officers in international organizations. During the Unidad Popular the ministro de hacienda, Mr. Americo Zorrilla was formerly a printing worker (lynotipist) with no formal study, Ricardo LAgos, our former president was secretario general at Universidad de Chile.

CEPAL, the UN economic organization from Americas an Caribe, was the think thank where most of economic policies from 1940 to 1973 was developed, so there are tons of books with excuses, expanations and evading own responsability.

The best source are oficial statistics, from Universidad de Chile and Banco Central

I just find a good paper in English on this issue. http://www.gdnet.org/pdf2/gdn_library/g ... le_gdn.pdf

Many economic studies are politically biased and ignore two important facts:

1.-Fiscal policies in economy are relevant in the economic achievement, many left-wing economist suggest that there are no important, and the local results just reflect global situations (that way they excuse the poor performance on past governments)

2.-The effect of policies take 3-5 years to reflect in the numbers and have an important inertial effect

Thomas,
I just finished my first read of the english piece you linked.
While I agree with the conclusions of placing values of labor and capital to the economy, and the heavy expense of government overhead, I did not find any mention to the relative "real" values to trade partners. My understanding of this study indicated some adjustment for distortions, without defining the distortions adjusted. It is very easy to err in any analysis in our world today simply because there is no standard with which to value the monitary system under study. An example of this error would be trading with the EU while at the same time valuing the peso in US dollars. Since both of these economies are hevily manipulated, the data would be skewed with no apparent reason. I can easily see that the error may have come into effect within this study because of the increase of export to the EU while declining to the US, not to mention a difference in importation to other countries. If not taken into account, the study, while fitting the past perfomance, nay fail to predict the future.

The reduction of government overhead is as any rational economist would expect, and which is totally ignored in the modern financial paradym. It however shows up in the study bearing out the fallicy of government (or other) intervention causing distortions.

Interesting read......Thanks, Gene

Well, there are an agreement between economist on the poor results of Chilean economy in the last 100 years (as any other LA country) excepting between 1987-1997, but there are two main explanations:

One group of economists (those near to left and center-left) say that economic policies of government has minor importance because the Chilean economy is so small that fluctuates according the world cycles (terms of trade, world crisis, etc.)

Another group say that -on the contrary- economic policies of government matters and are the key to explain the results, as one of the conclusions of the paper states "What policy implications can be drawn from the Chilean experience that can help other countries and Chile itself? Good policies matter; the most robust measure of distortions that we found in this document is captured by the share of fiscal expenditures on GDP. We find that this variable not only offsets the positive effects of the improvements of the quality of capital goods, but also that it has detrimental effects on the level and volatility of the Solow residuals.
External shocks are off course important, but among the variables that can be controlled by the authority, distortionary policy can help to explain several of the episodes of mediocre growth that Chile experienced"

The key of debate is the fiscal expenditure as share of GDP and -at the end- the size of the state, those that say that fiscal policies has minor impact are the same that endorsed a big state and high fiscal expenditure, and they try to demonstrate that fiscal expenditure is not related to grown showing such figures as 1987-1997 with high fiscal expenditure and high grown, however they don't mention that fiscal policies has no immediate effects in the economy, they take some years to be noted and also they have inertia, the trend is sustained for some time after the causes stopped. There is a political interest to increase the size of state, taxes, etc. behind the first explanation.

I am convinced that a big state is the worst for a country like Chile, just increase the corruption and increase the poverty, apart from numbers or regressions I saw that personally during the 70s 60s 90s and now, I is clear to me that a small govermente with less regulation and lower taxes is needed. Fortunatly I am not alone in this idea, this is an opinion who is growing in Chile and probably in a future we will have some people in power with sound economic policies.

On what you mention as he relative "real" values to trade partners, same as international crisis, deteriore of terms of trade, etc. is true, they have an unavoudable impact but most of those is out of government control and it must be consider as the natural disasters, with sound economic policies we will be much better prepared to face any external inconvenience.

The austrian economic system comes from studies done by Ludwig Von Mises. The principals are from the 1500's work of Adam Smith known as "the causes that affect the wealth of nations". Mises updated the work to include the effects of industrialization. His material is available on misas(dot)org.

I would recommend anyone to study his material to gain a better understanding of affects and results of differing policies.

One point that he made was that it was imposssible to model an economy affected by distortions (related primarily to socialism) or intercessions. That statement is demonstrated fully. It sheds light on the topic under discussion.

Yes Chile has a small economy, however fiscal policies affect even miniscule economies. As an example, your own private fiscal policies effect your sustained wealth, or lack thereof compared to others in your neighborhood. The Smith work (the causes that affect the wealth of nations), while lengthy (1700 some pages) gives excellent explanations of every aspect of the principals. When these are violated by distortions etcetra, you create what the modern world calls inflation, recession, stagflation, bubbles etc. Watching the modern world with this knowledge is very interesting.

Good models to study include the Irish "Celtic Tiger", Singapore and the latest, Malaysia. In each case, the monitary policies followed austrian policies. Each created a great business environment which, indeed, greatly increased the wealth of the nations. More importantly they largely improved the conditions of most of their citizens.

A good example of the reverse is Argentina, which followed the "policy dosen't matter" path. After much economic destruction of it's own policies, they took the poison pill of the World Bank. Once the internationalists looted the country, you saw the worst hyperinflation to date as the true remaining wealth was adjusted to. That appears to be what caused the periods of Chilean performance you have illustrated in previous posts.

I am once again encouraged that the majority of Chilean people want smaller government and a tight fiscal policy.

I also believe that the closer a country comes to self sufficiency, the less it is affected by the antics of the rest of the world. This is almost certainly what caused Chile to respond very differently than the rest of Latin America to the same world events.

Hi gene,
I'm more for the third way beyond socialism and capitalism..austrian economics led the policies after WWII in the west and spread worldwide but they have their flaws.
Go for distributism and social credit. I think Chile is in a unique position to change the way people do business , liberal capitalism bought little but unrest and agitation with the masses sharing the most burden.
Bankers should not have power to issue and create money, this is best left up to the states, money must serve the public not vice versa.
You mention singapore which is my country, the widening income gaps, state enterprises domination and aphaty from different statas of the society are things you seldom heard about.Austrian liberal economics may be a boom to the minority but to the majority life is ever a struggle.Welfare system is always lurking around the corner under such a system cause people felt little incentive to work under growing inflation in jobs they do not like.

Asean, in Chile we had decades of re distributive policies, soft credit from government, huge government bureaucracy and such. We are like scalded cats in front of boiling water, to hope government help is the worst mistake, on the contrary, is the state and all the bureaucracy who live with our tax money.

There are differences of income and will always be: not all people take good decisions, most of people commit big mistakes and others are not interested to do the sacrifices required to earn money , those are mostly who demand from state help, another big mistake in my opinion. In Chile we had long experience on that.

It appears that in complete liberal capitalism, that 2 trends appear. Monopolies flourish and income disparity insreases. In the past, antitrust laws tried to thwart the monopolies, and trade unions tried to mitigate wage dispartiy. Neither is perfect, nor even necessarily good.

Unfortunaly we live among less than perfect people. ou always have the cunning, less than honest, uncaring, greedy, criminal and many other traits which result in less than perfect performance.

Under laizze fair capatalism, the economy seems to become so strong that increased wealth would be able to raise the living standards of all residents. Unfortunatly, greed and corruption assure a truly unfair distribution of wealth. As Thomas points out, In any economic situation, uneven distribution will be present. Always has, always will. This is probably not a flaw, but a natural effect of the difference in effort people are willing to endure. The efforts I mention are primarily ncreased by lack of education, rather than actual back-breaking work. Unfortunatly there is no protection from devious men.

Under socialism, the will to improve is reduced, and may even become non-existant. The result is the economy does not provide enough capital to improve the overall wealth of the nation. Usually it falls. In practice, there are fewer people who are in extreme poverty, but most of the population can never progress above a subsistance level of existance. It is even worse, because if they do, the excesses are taken and redistributed, causing people to never strive for betterment.

In both models, you always see a class whom become very wealthy. This is usually accomplished by corruption.

Of the systems available, I would choose laizze fair capatalism, and battle the income disparity problem simply because it creates enough wealth to progress, while socilism has never produced this result.

In the end, Singapore is rated 2nd in the world in the economic freedom, and 4th on the world in the corruption perception index. This, in my opinion, is very good performance. I admit that I have not studied the past history of Singapore to judge improvement. I suspect that it was near stellar at some point.

Hi guys,
Distributism by GK chesterton and belloc is not socialism but sound christian economics if you can put it that way.
Social credit is full reserve banking and is much better than usury system which by itself promotes unearned wealth by a tiny minority elite.
We need to go beyond capitalism and socialism if we are to sustained a healthy and more importantly a more humane socio economics model for our children.
I see new urbanism and the return of guilds and associations, divideneds instead of salaried serfdom in the new jerusalem and who knows Chile may have what it takes to lead us there as she does not suffer from the industrial and high tech hangover most countries do

Asean wrote:. . . . I see . . . the return of guilds and associations, . . . and who knows Chile may have what it takes to lead us there as she does not suffer from the industrial and high tech hangover most countries do

Interesting thought. Perhaps the subject of another thread, but it does lead me to wonder whether Chile has any outstanding artisans in the finest of jewellery- or cabinetmaking, or tailoring or shoemaking, or stained-glass working, or leathercraft. I'd guess not, as the affluent Chileans among my acquaintance apparently go to Buenos Aires, western Europe, or the United States for excellent clothing, furniture, and so forth; but I'd be glad to learn that I'm mistaken.

Asean,

I believe that this system has some merits. I also would not subscribe to it in full.

I feel that nation banks were/are a large mistake. I would subscribe to a fully secured monitary system. One problem today may be what to secure the monies in.??? Also, if banks are not to make money on usery, then they need some way to pay the bills. I don't think many would be willing to run an establishment without at least recovering costs. (heaven is not that near yet).

Notice that the system is completely opposed to large manufacturing. I for one would rather have the luxury of a car, lawn mower, computer, and even a walkman and TV. Where would these come from? It may be interesting to note that technology and manufactureing has been so sucessful, that even when the vast majority of the increase is stolen by the unscrupulous, the crumbs exceed that of the posessions a lord a few centuries ago.

Better that we try (once more) to contain the expansion and corruption of the state, and destroy the capability of creating and maintaining monopolies. For the latter, I would propose a simple system wherin a company was not allowed to pay a higher salary (including perks) of 10 times (or some number?) the lowest paid employee. We would soon see the lowest wages increased greatly. Fines on the offenders would pay for the compliance apparatus. We would also probably see an increase in the willingness to actually earn a living.

Taxes should never be levied on personal property, or inventory. These are the first 2 that come to mind. I know of no fair tax system yet devised. The main point is that taxes should never be taken and then returned - That's just plain silly.

I believe that Chile is very progressive on the contitutional ban for the state to operate paying businesses as pointed out by Tombrad2. That is a real irritant of mine.

Speculative markets should be outlawed. The current capitalist economies which are under pressure have been threatened primarily by speculation using hundreds of devices created for the purpose of gaining (read stealing) money. The real rub on this is that taxpayers are usually tasked with paying for the losses.

I am not a one worlder. As Tombrad2 points out, the lowest level of administration possible should be used. Very limited powers should be given to the federal. Maybe clauses for the military to interceed in clear cut cases of usurption of power would keep them in check. Just a thought, not a recommendation as of yet.

Finally, they demonize capatalism. Capitalism is much like money. Money iteslf is not evil, the love of it is. Capatalism is not in and of itself evil, when it becomes monopolistic and manipulatory it is.

Curse the tyrants and robber barrons !!!!

Thoughts ????????
Gene

Well, Asean, if you are considering Chile to move, take into account that -despite some modification in the last democratic years- our system is fundamentally laissez faire and libertarian. If you lose your job government will not help you with paychecks, if you want to send your kids to college you have to pay it and if you are sick you also have to pay from your own pocket, either in cash or with a health insured financed... by yourself.

Government has grown in the last 17 years, but not to welfare state but to benefit the small politic class. I think this is may be a good thing because is easier to retire big privileges to small group than retire small privileges to a huge group. Chilean system is based in wealth generated by everyone and everyone taking care from his own problems.

Personally I feel comfortable with such system and I prefer the government noses far away from my business, even in my actual situation as unemployed! I prefer look for my own opportunities that live at government "charity" paid with workers taxes (taxes are ALWAYS paid by the worker class). On usury, well I think that everyone has the right to use their own money as he wish and if "A" lend his money with 10000% interest rate and "B" accept the deal, I don't see what has the government to do with the deal. I guess I am some archaic but I am convinced that in economy, things are much better solved if you left alone than with big brother intervention as referee. For me, government intervention=distortion=unintended consequences, lets the money circulate!

Anyway, maybe due US elections or who know why, I see that opinions has been much more controversial by those days, but funny and interesting also!.

Central banks should not have the kind of power the state has given them, of course no one will ban the private banks given the conditions of our time, but the power to issue money must be return to the state.
Most importantly the public must understand how private banks earn their wealth and whether it's ethical and good for the economy.I do not understand how usury will be ever good for societies in the long run, many civilised societies are being ruined by it in the past