Transcript babson1 - Salsa - Babson College

THE BRICK* : THEORY AND EMPIRICAL
EVIDENCE OF THE CHILEAN ECONOMIC
MODEL APPLIED DURING THE MILITARY
GOVERNMENT OF GENERAL
AUGUSTO PINOCHET U.
Lecture to be given to the audience from
BABSON College
Santiago, March 18th. 2002.
* Document originally written during 1969, for the presidential
candidacy of Mr. Jorge Alessandri R., and complemented
during 1973, to be proposed to the Military Government.
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INTRODUCTION
This document is not only of hitorical value, but it is
also fully relevant for the present times.
Unfortunately, we are back 30 years discussing again
some of the issues that this massive document dealt
with.
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OUTLINE
A.-
Historical Aspects and Socio-Economic Environment that
prevailed by the Time the Model was Initially Applied. (year
1973).
B.-
The Fundamentals of the New Model.
C.-
More Specific Policies by Sector.
D.-
Empirical Evidence of The Structural Change Suffered by the
Chilean Economy During the Seventies, and Eighties as a
result of The new Economic Strategy.
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A.- Historical Aspects and Socio-Economic
Environment That Prevailed by the Time the Model
Was Initially Applied (year 1973).
The Politics
•Socialist Party come to power in 1970, for a period of 1.000
days.
•It was a kind of special coalition with the Democratic Party.
•It is the government of the workers, and therefore “the
government of the people”.
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The Economic Policy
Main Economic Principles behind their way of thinking were:
• An “Appropiate” Distribution of the Rent
• The Market versus The Intervention:
Minimum Role for Prices as a proper allocation mechanism,
The Area of Social Property.
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The Results
Main Characteristics of the Chilean economy during
1930-1970, and specially at the end of 1973:
• Excessive Government Intervention:
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•
•
•
•
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Direct Government intervention to manipulate economic
variables. Examples of fixed prices: interest rates, wages,
exchange rates, etc...
The development of a well organized bureaucracy.
The propensity to generate activities in the goods and services
sectors parallel to those being developed by the private sector.
Nationalizations or expropriations of different businesses.
The increase of public investment in areas of very low social
profitability.
The politization of many different public institutions.
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•Government Interference implied Political Favoritism. Too
much government intervention has created a very inefficient
economic organization.
•The government was able to guarantee the success or failure
of different economic activities.
•The above made possible to arise in Chile a very special
class of entrepreneurs, “lobby oriented” instead of
business oriented.
•More openness to trade, more competition, and a antitrust
policy, are needed to improve efficiency and productivity.
•Government Interference implied Huge Fiscal Deficits, those
deficits being feed mainly by the inefficiencies of most of the
sectors where the government intervened. And you have to
remember that the government was intervening almost
everything.
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• A very poor allocation of resources.
• Main responsible were the under priced exchange rate, the
under priced interest rate (negative real interest rates), huge
distortions in the ad valorem taxes for imports letting aside the
many quantitative restrictions. Moreover high costs in the
pension system and increases in real salaries above the
increases in productivity. All the above produced high incentives
to substitute capital for labor in the productive areas.
• Other responsible were the low profitability of the government investments, more importantly when the private sector
was decreasing steadily its participation in the total investment.
• Moreover the fiscal policy instead of trying to guarantee a
proper allocation of resources had as its main objective to raise
up funds.
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• Low rate of growth of the productive resources.
• Main responsible for this was the interest rate policy, that we
mentioned before. Intensive interest rate controls discouraged
private savings, and therefore private investments. In order to
compensate for this, the government raised taxes, to speed up
investment, which unfortunately was of very low productivity.
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• Generalized Scarcity of Productive Jobs.
• Too Frequent changes in policies. Producing on the private
sector undesired levels of uncertainty.
• A Missing Agricultural Policy Implied a Deep Delay in that
Sector. The inward looking strategy put in practice through a
low real exchange rate made the agricultural sector a “servant”
of the industrial sector, in order to supply them with cheap food
and therefore low labor cost. Food imports increased from US$
100 million in 1970 to US$ 600 million in 1973.
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• A very limited development of the foreign sector.
• During 1973 the mining sector took account of more than 88% of
the total exports. Of course the responsible for this was mainly
the under priced exchange rate and the very high foreign sector
duties.
• An extremely low, and highly variable, rate of GNP growth,
and therefore an extremely high level of poverty.
• By 1940 the GNP was Eº 6.586 million (currency of 1965). If the
economy had grown at a rate of 8% since then to 1970, GNP would
had been Eº 66.272 million by 1970, instead of the Eº 22.060 that
reached in fact.
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Can anybody state that with an income threefold the country have
had the same problems that had by 1970?.
•General Scarcity of almost all kind of goods and services
•An extremely high inflation rate.
•A huge proportion of the Chilean population under extreme poverty.
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B.- The Fundamentals of the New Model
• The Subsidiary Role of The Government
• Let the government get involved only in those areas where the
private sector by itself does not find it productive to do so.
• The subsidiary role means:
•
To establish the priorities for the economic policy.
•
Main responsibilities for the government are :
Justice, Defense and Income Distribution.
•
Privatization Process. To reduce the size of the
government, create opportunities for improving
efficiency, and to favor competition.
•
Non discretional policies.
•
Concern for the extreme poverty sector. Social Policies.
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• The unrestricted respect for the Private Property Right
Actual conflict with chilean etnias (year 2002): land owners
are assaulted and wounded.. One year later the government
gives for free those lands to the etnias , paying with the
monies of everyone.
• The Market Price as the main Mechanism to Allocate
Resources
•
As far as there are not distortions, let the Market Work, and
whenever and wherever you find externalities try to internalize
them throughout the market mechanism. In other words let a
shortcoming of the market by cured by market methods.
•
•
Do not attempt to repeal the Laws of Supply and Demand,
because the market counter-attack.
Eliminate distortions in different sectors as:
trade restrictions and exchange rate controls in the
foreign sector.
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price controls everywhere.
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quantity controls everywhere
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• Open the Chilean Economy to International Competition
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•
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Let the Comparative advantages to work
Try to create sustainable competitive advantages
Look for an outward development of the economy, instead of
the historically inward orientation, specially when the Chilean
market is so small to take advantage of the available
economies of scale.
• Special Concern for the Macroeconomic Balances as a
requisite for Sustained Growth.
•
Look for the macroeconomic balances in the main sectors:
external, fiscal, and monetary, specially on the fiscal side.
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• Productivity is so important in the long run, that a
proper investment policy in human capital is required.
•
In the long run nothing has as great an effect on our material well
being, and the amount of goods an services that the society can
enjoy, as the rate of growth in productivity.
• A Proper Re-allocation Mechanism
•
The best way to get people out of the extreme poverty is trough
the increase in the rate of growth of GNP.
The empirical evidence shows that is easier to improve the
standard of living of the poor through distributing a larger cake,
than through dividing a smaller (or even the same) cake among all.
Chilean workers already understand that their future depend on
themselves .
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C.- More Specific Policies by Sectors.
• Non Interventionist Policy
• Causes of the intervention of the government in too many
activities:
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social and political pressures to increase the expenditures.
political paternalism (John Kennedy “What can I do for the
country, NOT what the country can do for me”). This fact has
conduced to let in the government hands many
responsibilities that correspond to the people.
“The dictation of a Law solves any problem”
“The State does the things always on behalf of the people”.
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• Main aspects of the Non Interventionist Policy:
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Identification of the proper Government Functions.
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Use the Market to allocate resources efficiently.
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Give administrative independence to the firms (i.e.
eliminate too much bureaucracy).
Decentralize the public services: Health, Education
and Housing. Favor the participation of the private
sector as well as intermediate associations.
Privatize Public Services as: Electric Light, Telephone
Companies, Railroads, Water and Sewerage, Garbage
Collection, etc..
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• Foreign Sector Policy
• Let the exchange rate to float and reach a (higher) real level.
At the same time that you allow the exchage rate to increase,
reduce the foreign duties and try to make them flat.
• Eliminate the quantitative restrictions to the foreign sector.
• Create mechanisms to promote exports.
• Judge the convenience of Free Trade agreements,
specially the Andean Pact (1974). Were have we gotten inside
the Andean Pact ..under totally different conditions we would
be living todayg.
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• Price Policy
• Give total freedom to prices in all those activities where does
exist a reasonable degree of competition internal and/or external.
• Establish an Efficient Mechanism of price control and/or
regulation in all those activities where monopolies and
oligopolies can not be faced against the internal and/or external
competition.
• Establish a clear Anti-Monopoly Law.
• Monetary and Fiscal Policy
In general, in the monetary sector keep the increase in real
balances at the same level that the increase in the demand for
those balances, nothing more, nothing less.
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• Design those policies to get:
• Price Stability, Full Employment and a sustainable product
growth rate.
• Other measures to keep inflation under control:
1.- Let the prices be dictated by the market, this will
eliminate losses in state run enterprises that causes big
part of fiscal deficits and then a higher inflation rate.
2.- Eliminate all kind of barriers to foreign trade, this will
allow internal competition and therefore will be the best
insurance against inflation.
3.- Adjust real salaries according to increases
in
productivity, specially on the public sector.
This is
required because those increases are taken as signals for
the negotiations in the private sector wages.
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4.- Reduce the fiscal expenses, specially the current ones,
and adjust the taxes.
5.- Eliminate fiscal subsidies with the only exception of social
programs and income re-distribution.
6.-Apply the program here described Promptly,Completely,
and WITHOUT “U” TURNS.
Only in this way the authorities will be able to generate the
necessary favorable expectations from the public in order
to stabilize the economy first, and put it on a sustainable
growth path later.
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• Tax Policy-Tax Reform
Main objectives of the Tax Reform were:
• Allow the most efficient allocation of resources from
a social point of view. Example replace the Sale tax
for the Value Added tax.
• Get the resources needed for the financing of social
programs without generating deficits or superavits,
unless they are desired from a counter-cyclical policy view.
• Tax over distributed profits, not over all profits.
• At the present time (2002) we are discussing the same issue.
• Contribute to generate a better income distribution.
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• Capital Markets Policy (Financial System)
It has to be designed to fulfill the following objectives:
• To Increase the domestic level of savings as much as
possible.
• To guarantee that those savings will be devoted to finance the
best investments (more profitable).
• It has to be possible to realize all kind of loans and deposits in
real terms.
• Freedom in the way the nominal interest rate is determined.
• Creation of new financial Institutions and Instruments.
• Promotion of all kind of institutions and instruments in order
to bring foreign credits and investment to the country.
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• Pension Funds Policy
New Fund system will be characterized by:
• The more the worker deposit for a longer time the bigger the
benefits.
• There is no incentives to early retirement, because the benefits
are a direct proportion of the monthly saving and the number of
years.
• It is an open system and can benefit any person.
The system is competitive and therefore it guarantees efficiency
and higher profits.
• The amount deposited monthly is deductible from income taxes.
• You can freely move from one fund to another.
• The system will have a life insurance, and a insurance for
handicapped people.
• The savings can not be used before a certain minimum is
reached or a certain minimum number of years.
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• Income Re-Distribution Policy
• There is no income distribution improvement without growth.
Re allocating “a cake of the same size” makes somebody better
off but somebody else worse off too”, and this can lead easily
to conflict.
• Investment in Human Capital is a necessary condition for
income distribution improvement.
• Labor Reform
• Individual decision concerning union participation.
• Collective bargaining at the company level.
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• Independent Central Bank
•Independent Council (5 members, 10 years tenure; election
of each member every 2 years, by the President of the
Republic with approval of the Senate).
•The Central Bank is forbidden to lend money to the
Government with the only exception of war situation.
•Considerable autonomy from the Fiscal Authorities,
with main objectives: Price stability and internal and
external payments stability.
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D.- Empirical Evidence of The Structural Change
Suffered by the Chilean Economy During the
Seventies, and Eighties as a result of the new
Economic Strategy.
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