Country Study 10

Two factors make the Chilean experience of stabilization policies interesting. One is that probably no other government in Latin America (and perhaps also elsewhere) has been more diligent in pursuing liberal economic policies than the one which took power in Chile in 1973. Almost straightaway it set about reducing the role of the state in economic affairs, freeing business from controls and allowing more scope for market forces to allocate resources.Secondly, throughout its period of responsibility the Chilean government has endeavoured to adhere closely to the IMF prescription in its conduct of stabilization policy. And, according to the numbers, with some apparent success, too, both in the 1970s when it succeeded the Allende government and in the 1980s in the aftermath of the second oil price shock. One might add that in 1985-86 Chile was one of the first recipients of a World Bank structural adjustment loan after the unveiling of the 'Baker plan' for international debt.The tale, however, is not all success. Far from it. The authors point out that the government has not been consistent. It flinched from applying a 'market solution' when it was faced with a situation in 1981-82 of widespread internal indebtedness: instead of letting heavily-indebted companies go to the wall, they and their bankers were rescued by the public sector.More fundamentally, the authors criticise the Chilean government for being in too much of a hurry and for being insensitive to the employment and social consequences of its actions. Restructuring takes time, especially when a current account deficit reflects, as in Chile, both structural weaknesses and 'fundamental disequilibria'. Restructuring requires the application of gradual policies and not the shock treatment which most Latin American countries, including Chile, have undergone. The authors conclude by arguing the case for the application of gradual, selective and stable policies with adequate external financing, due regard for employment promotion and, if necessary, selective (multi-tier) exchange rates.