Sunday, 24 November 2013

The Allende government

BY FH in 1995 
   


  On september the 11th, 1973, general Augusta Pinochet

directed a military coup which overthrew President Allende and

his government.  For the 3 years leading up to the coup,

Allende's government took many steps to establish Chile as a

socialist nation.  The Allende government nationalized major

copper mines, took over many of Chile's remaining private

industries and banks, and made numerous land expropriations and

collectivizations.

"By 1973, most domestic production had declined, and
    
severe shortages of consumer goods, food, and manufac-   

tured products were widespread.  There were mass demon-

strations against the government, recurring strikes,

violence by both government supporters and opponents,  

and widespread rural unrest.  Chilean society became

polarized into hostile camps."1
Many of Chile's middle-class citizens were upset at the Allende government, leaving the door open for Pinochet's Coup d'etat.  Through both economic and social reforms, Pinochet's military government brought Chile from economic hardship to economic prosperity.  There has been much argument among Chilean critics as to the positive and negative implications of these reforms.  The purpose of this paper is to focus on those reforms which affected GNP Per Capita, infant mortality rates, and income distribution.  These reforms include:  open-market orientation; decentralization and privatization of social policies; and relocation policies.

     GNP per capita measures the amount of domestic and foreign economic output per person of the respective economy.  In order for GNP per capita to increase, the growth rate of GNP must be higher than the growth rate of the population.  GNP per capita is a common indicator of a population's standard of living.
     The infant mortality rate is the annual number of deaths of infants under the age of 1 per 1,000 live births.1  The lower this number is, the better.  In order to decrease infant mortality, a country must increase education standards, and  specifically health standards.  Purified drinking water, proper raw sewage disposal, and immunization practices are the most common methods used to minimize infant mortality rates in developing countries.
     Income distribution over time shows which income group the growth(if any at all) in the economy is actually reaching.  Income groups are typically separated into quintiles.  An increase in income in the top quintile indicates that the rich are getting richer, and that the poor or middle class are getting poorer.

     In the period of 1970 to 1975, Chile's GNP per capita grew at an average pace of only 1%.  In the period of 1980 to 1985, Chile's GNP per capita grew at an average pace of only 0.6%.2  During this period, the population growth rate average between 1.6 and 1.7%.  Quite obviously, it is the economy of Chile during this period which is the cause of concern for the GNP per capita variable.
     The low GNP per capita(see figure 1) was caused by two periods in Chile's military regime(1973-1990).  The first such period occurred in 1973-1975.  In 1973, Chile endured an inflation rate of 500%!  In 1975, after enduring 2 years of high inflation rates and low GNP growth, Pinochet invited a group of economists trained at the University of Chicago('The Chicago Boys') to Chile.  These economists created a free-market economy by taking many drastic steps.
"Most markets were freed from government controls, and prices were allowed to float.  The peso was devalued, permitting an increase in non-traditional exports.  Tariffs were reduced in stages to a uniform level of 10%.  Under this free market policy, from 1976 to 1981, GNP increased in real terms by an annual average of more than 7%."3


    
     The annual average inflation was reduced to 9.9%, in 1982.4  Unfortunately, a heavy price was paid for the drastic action taken by the "Chicago Boys" (from 1976-1981) as the unemployment reached 20% in the mid to late 1970's.  By 1989, the effects of freeing up Chile's economy were still being felt.  "In 1989, the last year of Pinochet's rule, real wages were still only 90.8% of what they had been in the 1970 base year."5  The decrease in wages is quite dramatic.  Since there was an increase in real GNP per capita for Chile, a rise in real wages would be an obvious outcome.  If the increase in GNP did not reach the worker in real wage increases, than who did it reach?  This question will be answered when the essay focuses on the income distribution in Chile.
     As for "The Chicago Boys", their main goal was met:  To free Chile's economy for trade with any nation for any good or service.  The economists also compelled Chile to create new goods and services, in order not to rely on the income created from Chile's main export:  Copper.  As world demand decreased, demand for copper diminished as well.  "The  Chicago Boys"  were right, but unfortunately, the government of Chile had not reacted hastily enough.  For in 1982 and 1983, real GNP fell by 17% and 14% respectively!6  The decline in real GNP was due primarily to the decline in the prices of copper. During these two years, Chile accounted for the biggest decline in real GNP in Latin America.  Fortunately, Chile also experienced the biggest increase in real GNP, averaging 6%, from 1984 to 1991.

     As of 1994, Chile's IMR(infant mortality rate), except for Costa Rica's, is the lowest among all Latin American countries.  In twenty years, Chile's IMR went from as high as 44.0 in 1973, to as low as 13.9 in 1994.(see figure 2)  The favourable reduction in the IMR rate was due principally to "the outcome of public efforts to provide care for mothers and children, including nutrition programs for nursing children; in addition to this, the educational level of mothers was steadily rising, and there was a drop in the number of births."7
     Upon taking power in 1973, Pinochet's government cut many government social services "to the bone."  The government cuts had a large impact on social security, housing, and health care.  The government established a program of decentralization and privatization of social programs.  Social security and health care were privatized, and shantytowns were torn down as new low-income housing were built in favor of improved housing(although improved housing was not always the case.)
     Another part of the government program was to increase emphasis on the 'extreme poor'.  The main instrument developed to target the poor was the Ficha Cas.  The Ficha Cas was first developed in 1979.  The basic idea was that poverty produced certain symptoms, and by observing these symptoms, the government could make transfers to what the Ficha Cas found to be the 'extreme poor'.  A test was developed, and a typical person or family would either pass or fail.  If someone passed, a subsidy would be given, if they failed, they would not receive anything from the government.  The Ficha Cas was developed by the "Chicago Boys".  These economists were technocrats.  Therefore, if a family failed the 'poverty test' by even one point, they were denied access to the transfer payments.  Where the government drew the line on excluding or including someone depended on the amount of resources allocated for transfer payments to the poor that year.
     On a positive note, the Ficha Cas targeted citizens who were at the bottom end of the scale with respect to nutrition, clothing, housing, and health care.  Most of the resources of the Ficha Cas focused on the weak citizens:  Senior citizens  and young infants.  The payment plans towards these two groups were known as:  Subsidio Unico Familiar (SUF), a child benefit; and the Pension Asistencial (PASIS), a disability and limited old age pension.  The targeting of young infants was a large factor in the decrease of the IMR between 1973 and 1994.
     The Chilean government also used another method to target the 'extreme poor' and the mortality rate.  They had a reallocation of resources administered to lower levels of the population by reducing the benefits for the middle class families.
"...during the 1980's, targeting helped radically improve the nutritional situation of infants and children under five years of age - the most notable success area - and probably contributed to some other improvements, such as greater availability of household equipment among poor families.  More indirectly, sewerage and water systems in poor areas also showed substantial improvement."8



Through the disparities of human rights abuses, diminishing GNP per capita and government cuts in many, but not all social services, the decline of Chile's infant mortality rate was quite remarkable.

During the mid 1970's, Pinochet's government undertook  a policy of decentralizing and relocating social assistance.  Part of this policy included a reform for the resettlement of inadequately housed people of Chile's shantytowns.  This reform was also part of the new policy to target the 'extreme poor'.  It involved the creation of new urban developments on the outskirts of existing townships.  These townships held basic infrastructure and housing, but little else existed in terms of cultivation of food or employment.  These houses were often improvements over the previous shantytowns.  However with no community facilities within the vicinity of the townships, these developments often created near-homogeneous poverty and socio-cultural deprivation.
     Not only did many people of this "shake-up policy" endure the stagflation of the early 70's and 80's,  but any jobs which they had had in the shantytowns, had now disappeared in their new-built developments.  When these townships were turned into municipalities, many of these towns were ill-equipped to handle the responsibilities given to them by the Chilean federal government.  As much as this program was supposed to be make local governing more efficient and decrease 'extreme poverty', it accomplished the exact opposite of that.
     The most disturbing fact is perhaps the widening of the income distribution(see Figure 3) which was a direct result of this shake-up policy.  During the first two years of Pinochet's government, real wages fell to 62% of their 1970 levels.  In the last year of Pinochet's rule, 1989, real wages were still only 90.8% of what they were in 1970(nearly 20 years!)  As depicted by Figure 3, income distribution became more concentrated in the top 10% of  the population.  "A study conducted in Greater Santiago in the late 1980's noted that poverty had increased drastically, from 28.5% in 1969 to 49% in 1987."9
     In 1970, 60% of the social security payments were made by the government, while the remaining were made by employers and/or the workers.  After the coup, the military government had hoped to rid of the responsibility of social security completely.  As well, the government persisted that the employer no longer had to contribute to the workers' pension.  Much of the social security system became privatized.  Nonetheless, there was a transition period where both systems would remain in force.  The workers already on the old system could elect to remain on it, while the government would still be responsible for maintaining the mandated pension levels. The two largest financial conglomerates took control within months of privatization.  After the 1981-1982 recession, transnationals took control, at which point the system became even more undercapitalized.
     The nature of decentralization included creating municipalities in order to localize many of the services the federal government was providing.  These municipalities were given a certain amount resources from the Chilean government.  Unfortunately, the federal government did not reallocate resources according to need or wealth.  Instead, many rich areas of Chile such as Santiago, Providencia, and Las Condes (with only 21% of the population), accounted for 56.8% of all municipal investment in the period of 1980-1984.  In poor townships such as La Florida(pop: 191,800), "residents had to fight to gain permission to build a one-room wooden day-care centre, staffed half of the day by local women."10
     The health care system underwent reforms similar to social security.  The reforms privatized much of the health field.  The newly-formed companies were called ISTAPRES.  One of the major differences between the two systems is that under the old system a worker contributed 6% of his salary and, in return, received whatever medical attention was necessary.  However under ISTAPRES, medical coverage improved according to the amount contributed.  This system became highly elitist, as the quality of medical coverage depended on the individual's ability to pay.  Not surprisingly, most of the lower paid workers stayed with the state system(FNS)  The cost included a surcharge of 25% to 50% of the medical cost.

     Perhaps the most ironic fact of the Pinochet government from 1973 to 1990 was the lack of planning in their policies.  The main reason for the toppling of the Allende government was its communist outlook.  Communism was known to be  bureaucratic, inefficient and unrealistically idealist.  However when looking at the policies of the Pinochet government it is difficult to argue that their policies were nor idealistic, nor inefficient.  The "Chicago Boys" used a theory on Chile, however theories are not always, nor are they realistic.  In this case, the pure free-market economy was only an ideal.  Chile suffered in many ways more than one.  A very volatile economy, negative real wage growth, and a widening gap of income distribution and social services(such as social security, and health care)  A lack of planning allowed the Chilean government to waste money on reforms such as 'the shake-up policy', where conditions for the poor grew only worse.  After completing many hours of research it is quite remarkable to see that Chile was to decrease its IMR to such level, when at the same time, poverty has grown among the poor so much.
    




















FIGURE 3

DISTRIBUTION OF PERSONAL INCOME, PER HOUSEHOLD          
Quintile                1969      1978      1988                   
lowest 20%               7.7       3.1       3.1
  20 - 40%              12.1       7.4       6.2
  40 - 60%              16.0     11.8       9.7
  60 - 80%              21.0     19.5     16.8
 highest 20%            43.2     58.2     64.2
  Total:                100.0     100.0     100.0











































                         BIBLIOGRAPHY

1.     U.S. Department of State.  Washington D.C., 1993
               (Office of Public Communication)

2. Griffith-Jones, Stephany, The Evolution of External Finance, _
     Economic Policy and Development in Chile, 1973-1978.
          Brighton, England, 1981.(IDS publications)

3. World Bank International Economics Department.  Washington D.C., April 1994.

4. Barros, Jaime Gatica, Deindustrialization in Chile.  Boulder,
                Colorado, 1989.(Westview Press)

5.  Sunkel, Osvaldo, Consolidation of Chile's Democracy and
Development:  The Challenges and the Tasks.  Brighton, England
                    1993.(IDS publications)

6. Ffrench-Davis, Ricardo, Economic Development and Equity in 
  Chile:  Legacies and Challenges in the Return to Democracy.
      Brighton, England. January, 1993.(IDS Publications)

7. Oppenheim, Lois Hecht, Politics in Chile.  Boulder, Colorado.
                 1993. (Westview Press, Inc.)

8. 1994 World Population Data Sheet.  Washington D.C., 1994
                 (Population Reference Bureau)

























1.Backround Notes, United States Department of State,
  May 1992, Washington D.C.


1.World Population Data Sheet, Population Reference Bureau.          Washington D.C., 1994

2.World Bank International Economics Department, Washington D.C.
  April 1994

3.Backround Notes, United States Department of State.
  Washington D.C., 1992

4.Chile's Economy, Dr Harold Blakemore.  1991

5.Politics in Chile, Lois Hecht Oppenheim, 1993, pp. 154.


6.Backround Notes, pp.4

7.Economic Development and Equity in Chile, Ricardo Ffrench-Davis
  Chile, 1993, pp.13

8.Poverty-Focused Policies, Emanual De Kadt, 1993, pp.8-9

9.PREALC, Ernesto Tironi.  Santiago:  Zig-Zag, 1989, pp.26

10.Politics in Chile, pp.162-163


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