The Multinational Monitor


I N T E R N A T I O N A L   F I N A N C E

The IMF and Chile

A Parting of Ways?

by Walden Bello and John Kelly

As Chile marks the 10th anniversary of the violent overthrow of the late President Salvador Allende, it is in the throes of an economic crisis far worse than anything ever experienced under the brief three-year reign of Allende's prosocialist Popular Unity Government.

The crisis has caused deep concern within the International Monetary Fund (IMF). A recent confidential memorandum from the Fund asserts that recent events "have adversely affected confidence at home, as well as abroad, in the authorities' ability to manage the economy."

In 1982, the Gross Domestic Product (GDP) of Chile plunged by close to 13 per cent, and unemployment skyrocketed from eight to 25 per cent of the labor force.

Just as one Chilean opposition party leader warned that "with this unemployment, we're sitting on a volcano," violence began to spill into the streets of Santiago. The rising cost of living and the economic policies of President Augusto Pinochet sparked public protests during the last week of March. As the demonstrations turned riotous, they were met with a show of police force not seen since the 1973 military coup. Similar protests staged in recent weeks in Brazil and Argentina - military-run countries whose economies are collapsing almost as fast as Chile's - suggest that such crises may trigger widespread social disruption.

However, the depression conditions do not constitute the country's main problem, declared the IMF in its highly confidential assessment. Instead, according to the IMF, Chile's "most pressing immediate problem is the massive . . . foreign debt [of] the Chilean private sector." Chile, a country of 11 million, owes the international banks $17 billion - at least $3.6 billion of which is due in amortization and interest payments in 1983 alone.

Because of the IMF's concern over Chile's external debt, it provided Pinochet's government with a balance-of-payments support loan in January 1983 of over $860 million in return for the government's promise to tighten up economic management. At the same time, the government, responding to pressure from Chile's business and finance sectors to relieve their plight, took steps in the direction of state intervention - steps generally regarded as inimical to Chile's orthodox free-market economics. And the IMF has balked at these moves.

The IMF's history in Chile demonstrates that it ill fits the role of benign savior in which it has been cast by the business media. The IMF, in fact, is one of the architects of the current economic mess.

The current critical situation of the Chilean economy is fundamentally a structural crisis of what has probably been the most radical free market anti-statist program of economic reform devised in the 20th century. This experiment was inspired by Milton Friedman of the University of Chicago, assisted and financed to the tune of at least $300 million in loans by the IMF, executed by Friedman's Chilean disciples, the so-called "Chicago Boys," and maintained by one of the most repressive armies in the world. The years from 1975 to 1983 in this tragic Latin American country provide a glimpse of how the Fund would like to administer its Third World wards if it had complete control.

The IMF program - referred to by its authors as "the shock treatment" - had three strategic thrusts: completely integrating Chile into the capitalist world market by destroying protectionism and debauching the currency; fighting inflation by drastically reducing government expenditures and government employment; and eliminating practically all nationalist checks on the entry and operations of foreign capital.

This fundamentalist monetarist program, which was conceived as a necessarily bitter antidote to Allende's "Keynesian socialism," provoked a depression in 1975, when GDP fell by 13 per cent, industrial production plunged by 27 per cent, and unemployment shot up to 20 per cent. Even the World Bank, the Fund's related agency, was moved to comment, "the social costs of enforced austerity were extremely high . . . "

But the depression of 1975, argued the Chicago Boys, was a necessary prelude to what they proudly pointed to as the halcyon years from 1977 to 1982. GDP growth averaged eight per cent per annum, prompting Ronald Reagan to proclaim Chile as one of his models for Third World development and provoking Friedman's memorable statement that the Chilean experiment was "comparable to the economic miracle of post-war Germany."

This was, however, a questionable miracle, where a high GDP growth rate coexisted with a high, depression-level unemployment rate. Down to three per cent in 1973, Allende's last year, the unemployment rate under Pinochet since 1975 has never gone below 10.4 per cent. It indicated a development which was positive to the IMF and the Chicago Boys but disturbing to others: economic growth, steadily divorced from the domestic market, had become dependent principally on expanding external markets.

For a few years, growing markets for Chilean exports like copper, wood, and fruits allowed the Pinochet government to both achieve economic growth and reconcentrate income. When the international recession began to savage these markets in 1981, "export-oriented growth" became the Achilles heel of the monetarist experiment.

In a more balanced economy, declining export demand could have been offset by expanding demand in the domestic market. But years of an iron policy of keeping down real income - "demand restraint" - to combat inflation had so gutted the internal market that it could hardly sustain production. By 1982, Chile was in the midst of its second depression in eight years - and its worst economic crisis since the Great Depression of the 1930's.

Under these conditions of external recession and internal depression, the massive flow of foreign capital to Chile became a time bomb. Most of this capital came in in the form of credit to Chilean financial institutions from big international banks like Citicorp, Wells Fargo, Bank of America, and Chase Manhattan. By the end of 1981, Chile's private banks had contracted a massive external debt of $10 billion. Forty four per cent of domestic credit extended by the private sector in 1980 and 1981 was financed from these foreign borrowings. As the depression swallowed up firms, however, many of these loans became virtually uncollectable. Since the Chilean firms could not repay the Chilean banks, the latter could not pay its foreign creditors.

But backed by a top credit rating from the IMF, Chile continued on its foreign credit binge. Bank of America, for instance, headed up a massive syndicated loan of $70 million for Chile's Banco BHC in late 1981, despite signs the latter was showing of already being seriously overextended. Most of the new domestic credits, however, no longer went to productive ventures but to financing consumption by the upper classes or to speculative activities. Thus the geometrically expanding service costs of foreign debt could not be paid out of newly generated wealth but out of newly contracted debt. Chile's private bankers, in other words were borrowing from one set of international banks to pay off another.

The financial bubble finally burst in 1982, confronting the Chicago Boys with an undoubtedly painful choice: to hew to long-cherished monetarist beliefs or to stave off financial collapse through state intervention. In a classic statement of the Chicago Boys' belief in the ideal of the free, unregulated economy, Jose Pinera, the young intellectual who has served as labor minister, once remarked: "To act against nature is counterproductive and self-deceiving." Mr. Pinera's colleagues chose to ignore his philosophical counsel and proceeded to act "against nature" - thereby also deviating from key IMF policy prescriptions.

This was not without irony, since the top officers of the big financial trusts that were now beseeching the aid of the state, such as Jorge Cauas, Pable Barahona, and Alvaro Bardon, had previously distinguished themselves as dogmatic anti-statists when they served as chiefs of government economic ministries.

To save the banks, the Chicago Boys adopted a number of measures, including a scheme whereby the Central Bank would "buy up" bad debts, and offer a preferential rate of exchange for debt service transactions and emergency lending from the Central Bank's international reserves.

But while the Chicago Boys chose to depart from the straight path of monetarism, the IMF refused to go along, precipitating a conflict which is captured in the IMF accounts of the negotiations leading up to the granting of the $860 million "standby" credit in early January.

The Fund registered displeasure at the Chilean actions on the grounds that "the reduction of private foreign debt facilitated by a strong expansion of Central Bank credit has resulted in a . . . loss of international reserves." The government technocrats, on the other hand, "strongly defended the introduction of the preferential rate as a necessary measure to forestall bankruptcy of a large segment of private industry, commerce, and the financial system."

The Fund was not swayed by this argument, however, and finally laid down the law: "The staff . . . would stress the importance of tight credit management by the Central Bank and of ensuring that Central Bank support of the private sector and financial institutions be temporary and strictly circumscribed so as to protect the international reserves target of the financial program."

Under the gun, the Chicago Boys decided that government assistance could not continue to hold up the private finance sector. In January 1983, the government took control of five Chilean banks, including Banco de Chile and Banco de Santiago, two of the largest private banks. Two other smaller banks and a finance company were targeted for liquidation. In short, the government intervened to rescue the private financial sector.

And contrary to the Chicago philosophy of "private gain, private failure," the Pinochet government took over and guaranteed the $3.8 billion in foreign debts owed by the banks and financial institutions. In a memorandum to foreign bank creditors, Chile's central bank president Carlos Caceres assured them that "with regard to foreign creditors, the provisional [governmental] administrators have been instructed to maintain the regular payment of principal and interest at their established due dates."

State intervention to save Chile's capitalism from itself: this is an ironic but perhaps fitting climax to the IMF-Chicago experiment in Chile. Yet the conclusion of this tragedy is still being written.

The most appropriate outcome would be one in which the people of Chile were moved to choose a more humane government and a more compassionate economic program.

Walden Bello is co-author of Development Debacle: The World Bank in the Philippines (1982). John Kelly is author of the forthcoming book The CIA in America (1983).

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