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
