A Historical Materialist Account of The Chilean Capital Control

A Historical Materialist Account of the Chilean Capital Control: Prototype Policy for
Whom?
Author(s): Susanne Soederberg
Source: Review of International Political Economy, Vol. 9, No. 3 (Aug., 2002), pp. 490-512
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R outiedge
Review of International Political Economy 9:3 August 2002: 490-512 Taylor&FrancisGroup
A historical materialist account of the

Chilean capital control: prototype
policy for whom?
Susanne Soederberg
University of Alberta
ABSTRACT
After the tumultuous 1990s, capital controls are making a comeback.

Although about 14 emerging markets have implemented capital constraints,
the Chilean variant (1991-8) has drawn the most attention. Many scholars
and policymakers, especially of the Keynesian variant, are quick to sup-
port country-level capital controls as a useful device to quell further socio-
economic devastation largely brought about by the speculative activities
institutional investors. While this is an important concern, their analyses
tend to treat capital controls as ready-made, technical policy instruments
usually devoid of political and historical considerations. On the contrary,
the Chilean case demonstrates that capital controls can form one moment
of larger accumulation strategies from which a minority of the population
benefits. By examining the Chilean control through the lens of historical
materialism, this essay attempts not only to provide a more rigorous and
critical scrutiny but also seeks to 'politicize' this seemingly neutral policy.
In doing so, the essay suggests that the URR was not a means to an end,
but rather an integral moment of a larger class-based strategy - paradox-
ically named 'growth with equity' - that was designed to stabilize and
reproduce a development model, which serves the interests of powerful
transnational financial capitals and industrial conglomerates.
1. INTRODUCTION
With the increasing volatility in the international financ

controls have become fashionable again (cf. Soederberg, 2002). Despite
the fact that 14 emerging market economies have employed a variety of
capital controls over the past decade (see Ariyoshi et al., 1999), the Chilean
capital control (1991-8) is viewed as the most successful in averting the
negative side effects of an abundance of short-term financial flows, such
as exchange rate appreciation and capital flight. The popularity of the
Review of International Political Economy

ISSN 0969-2290 print/ISSN 1466-4526 online (? 2002 Taylor & Francis Ltd
http: / /www.tandf.co.uk
DOI: 10.1080/09692290210150699
SOEDERBERG: A HISTORICAL ACCOUNT OF CHILEAN CAPITAL CONTROL
Chilean control is closely tied to the country's economic stability and

strong growth - averaging around 6.5 percent annually - in the face of
large levels of capital inflows during the 1990s (Hojman, 1995; Aninat,
2000).
The Chilean control, whose technical name is the unremunerated reserve
requirement (or, URR), required all non-equity foreign capital inflows to
pay a one-year, non-interest-bearing deposit. Although there has been a
considerable amount of literature devoted to the Chilean URR, these
studies have to a large extent been dominated by economic analyses (cf.
Eichengreen and Wyplosz, 1996; Ariyoshi et al., 1999; Buch, 1999; Ffrench-
Davis, 1998). The following quote furnished by an official at the Central
Bank of Chile sums up the unproblematic manner in which the URR
has been understood up to now: the control is like an umbrella, which
'you use it when it rains and close it when the rain stops' (Valdes-Prieto,
1998 in Eichengreen, 1999). Yet precisely because of its 'prototype status',
it is important to critically scrutinize whom the URR umbrella actually
sheltered?
Many economists - especially of the Keynesian variant- are quick to
support country-level capital controls in emerging markets as a mechan-
ism to quell further socio-economic devastation largely brought about
by the speculative activities institutional investors. While this is an impor-
tant concern, these analyses tend to treat capital controls as ready-made,
technical policy instruments devoid of political and historical dimen-
sions. But, as this essay demonstrates, the absence of an historical and
political understanding of the URR has led to at least three analytical
weaknesses. First, the social relations of power specific to the Chilean
political economy have been excluded from the analysis. This neglect
has led to the difficulty in identifying various political and economic
interests that are served by the URR. Second, the debates fail to acknow-
ledge that capital controls are means to larger policy objectives, rather
than ends in and of themselves. This oversight has led to a narrow
understanding of the broader role played by capital controls, mainly
because it fails to make the wider connection between the URR and a
larger policy objective, which is usually aimed at furthering certain
interests in a specific form of capital accumulation. Third, the lack of a
historical perspective lead many analyses to fall short of grasping not
only the continuity of Chile's development model but also the under-
lying contradictions involved in reproducing it. The general disregard
for history leads to a neglect of the impact past policy choices have on
present contradictions and weakens the ability of the analysis to appre-
ciate the social forces and structural conditions involved in change and
continuity.
By examining the Chilean control through the lens of historical mate-
rialism (cf. Gill, 1993), this essay attempts not only to provide a more
491
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
rigorous and critical scrutiny but also seeks to 'politicize' this seemingly
neutral policy. In doing so, the essay suggests that the URR was not a
means to an end, but rather an integral moment of a larger class-based
strategy - paradoxically named 'growth with equity' - that was designed
to stabilize and reproduce a development model that has been in place
for more than two decades, but also which serves the interests of power-
ful transnational financial capitals and industrial conglomerates. There-
fore, those that uncritically celebrate the Chilean capital control as a
prototype policy tool for the developing world are unwittingly abstract-
ing from its function as part of a class-based strategy aimed at protecting
an existing mode of accumulation that not only rests on high levels of
social inequality, but also reproduces a mode of accumulation that is
based on a growing dependence on short-term, financial inflows from
which a minority of the population benefits.
Before proceeding with the historical materialist analysis within which
we will critically evaluate the URR, it is important briefly highlight the
terms of the debate that the present analysis seeks to transcend.
2. THE DEBATES ON THE CHILEAN URR
The Chilean government views the URR as a way of dealing with huge
surges of short-term capital (hot money). The URR is said to accomplish
this task in that it is an indirect, price-based measure that operates as an
'asymmetric Tobin tax' that discriminates between capital leaving the
country (capital outflows) and that entering the country (capital inflows).
Like the Tobin tax, the URR levies fees on foreign exchange transactions
in the hope of limiting speculation (Eichengreen, 1999). The official
objective of the Chilean URR, was, by clamping down on short-term flows,
to attract longer-term capital to support currency stabilization and thereby
prevent further revaluations, which would inevitably hurt firms that are
dependent on export markets (Krugman, 1998; Stiglitz, 1999; Laurens and
Cardoso, 1998; Nadal-De Simone and Sorsa, 1999; Ffrench-Davis, 2000).
Those in favour of the URR also argued that it is able to weed out the
negative effects of arbitrage capital flows (i.e. buying cheaply in one mar-
ket and selling dearly in another) while harnessing their benefits (Massad,
1998; Stiglitz, 1999). In doing so, the URR encourages more fruitful and
stable forms of investment, such as foreign direct investments (FDI), as
opposed to short-term inflows (Griffith-Jones, 1996; 1999: 1). According
to some sympathizers, the URR has an additional benefit in that it created
some breathing space for the Chilean authorities in the form of increased
autonomy in monetary policy formation, so as to improve banking and
financial regulatory structures (Eichengreen, 1999).
Whether the Chilean URR actually achieved these aims, however, is
intensely debated. Some writers argue that URR's goal of stemming
492
short-term capital inflows seems to be negated by high differentials in

real interest rates (i.e. adjusted for inflation), which were raised after the
control was introduced in 1991. For example, during the 1985-91 period
real interest rates were hovering around 3.1 percent; however, the rate
increased to 5.2 percent from 1992 to 1997. Due to this increase in interest
rates, it is believed that the URR did little to deter short-term capital
flows. From 1990 to 1995, for instance, short-term inflows averaged 7.3
percent of the GDP, and then jumped to 11.7 percent of the GDP from
1996 to 1997 (Ariyoshi et al., 1999: 12). Using a different set of measure-
ments than the Central Bank of Chile, Sebastian Edwards shows how
short-term inflows in Chile were not significantly lower than other Latin
American countries that did not implement capital controls, such as
Argentina. What is more, Edwards demonstrates that Chile's short-term
debt (due within one year) was higher than Mexico, another country
that did not have capital controls (Edwards, 1999). Other sceptics suggest
that the majority of these inflows did not seep into productive invest-
ment with the aim of diversification, but instead into speculative activities
and the acquisition of existing assets (Ffrench-Davis et al., 1995). In sum,
the evidence surrounding the URR is highly inconclusive (Kaminsky and
Schmukler, 2001; Cohen, 2001).
Although this largely technical debate helps us understand the stated
objectives of the URR, it does little to shed light on either the particular
social forces underpinning this policy or the relation between the URR
and the larger class-based strategy of which it was a moment. In other
words, since the above economic framework treats the URR as an isolated
and ready-made policy mechanism, it fails to grasp that the Chilean
capital control was not an end in itself, but rather a means to a larger
objective. Relatedly, this ahistorical debate fails to locate the URR within
the underlying contradictions of the Chilean development model or mode
of accumulation. In what follows, the essay attempts to resolve these
blind spots by both widening and deepening the parameters of this
debate through the application of historical materialism.
3. AN HISTORICAL MATERIALIST ACCOUNT

OF THE CHILEAN DEVELOPMENT MODEL
In the mid-1970s, General Augusto Pinochet (1973-989) implemented one

of the most radical forms - in both the speed and extent - neoliberal
restructuring in the developing world, so as to assist a new emerging
development model based on export promotion industrialization. In
doing so, the Pinochet administration ascertained favourable condi-
tions by lending government support to the capital operating within
its boundaries, largely irrespective of the citizenship of the legal owners
of this capital. During this period, macroeconomic policymaking was
493
influenced not only by technocrats who favoured Friedman-like mone-

tarist forms of supply-side economics (the so-called 'Chicago Boys'), but
also by a handful of powerful and rapidly expanding conglomerates,
who had the economic means to adjust to pointed economic change (Silva,
1996). The confluence of these interests manifested themselves in the
following two important policies, which would come to characterised
Chile's EPI development model: (1) the Foreign Investment Statute, and
(2) the particular expression of financial liberalization.
In 1974 the government implemented the Foreign Investment Statute
(Decree Law 600, or simply DL-600). This legislation, which remains
largely unchanged today, effectively removed state supervision of the
activities of foreign corporation and the sectoral destination of their
resources. The DL-600, for example, granted preferential treatment to
foreign investors (i.e. transnational actors) through various benefits
covering areas such as the guaranteed right to profit remittances, the
option of holding escrow accounts outside Chile to pay interest, divi-
dends, royalties, and to purchase raw materials (Ffrench-Davis et al.,
1995). The DL-600 quickly became one of the key means through which
the development model was financed. For example, from 1975 to 1980,
the Chilean economy recorded annual FDI inflows of around US$188
million, most of which were heavily concentrated in the mining sector
(ECLAC, 2000: 90).
Also in 1974, the Central Bank of Chile created a new type of non-
bank financial institution with unregulated interest rates, namely: the
financiera. In 1975, the interest rates set by these financial institutions
increased to 178 percent (based on the annual equivalent of a 30-day
interest rate in real terms), and were to remain ridiculously high until
the debt crisis in 1982 (Fortin, 1985: 168). The upshot of rapid financial
deregulation was the concentration of wealth in the rentier class. By July
1981, two financial groups (Banco Hiptecario de Chile and Cruzat-
Larrain) were controlling 75 percent of the newly privatized social
security contributions. Furthermore, social security companies were
all subsidiaries of the largest groups who controlled some 71 percent
of the capital and reserves of the private financial system (Fortin,
1985: 183).
Taken together, these policies resulted in a development model char-
acterized by two growth-poles. One pole constituted a primary resource
'export-enclave', with little value-added to the production process and
with few links to the rest of the economy. Indeed, of the total FDI entering
Chile over the past decade, about 60 percent has gone into Chilean mines,
especially copper. This growth-pole benefited hugely from a devalued
peso, which made Chilean exports more competitive on the international
market. Services (including finance) comprised the other growth-pole.
This largely unproductive sector of the economy not only accounted for
494
about 80 percent of the recorded growth between 1976 and 1981, but
also was comprised of speculative capital (Petras and Leiva, 1994: 32-3).
The setting of high interest rates supported this growth pole, since this
policy had the effect of luring short-term capital into the country.
The tide began to turn in 1978 when a surge of short-term capital
inflows led to a revaluation of the peso, and subsequently pushed up
the price of Chilean exports. The trade imbalance that ensued led to a
mounting public deficit, which resulted in greater financing through
foreign loans. In the attempts to stop this vicious cycle, the Chilean
government implemented a URR between 1978 and 1982. The official
rationale for implementing this capital control, which was more strin-
gent than its more recent counterpart, was to stem inflation by keeping
interest rates high (cf. Edwards, 1999). However, as in the case of the
more recent version of the URR, it merely allowed the government to
continue to pursue a macroeconomic policy that supported the devel-
opment model through currency devaluations and high interest rates
and thereby dealing with the expanding trade imbalance.
Chile registered impressive levels of expansion during between 1977
and 1980, with annual GDP growth averaging 8.6 percent. However,
when viewed historically, this expansion was only a recovery of the
aggregate levels of activity proceeding a deep recession of 1975. Specific-
ally, Chile's per capita GDP was only 5 percent higher than it was in
1971 (Fortin, 1985: 190-2). More important, the Chilean development
model was based on a deep-seated dependency on financial speculators,
for whom the acquisition of productive businesses was merely a profit-
able short-term manner of investing liquid resources, usually in the form
of loans. It should not come as a surprise that Chile experienced high
levels of foreign indebtedness throughout this period. Between 1974 and
1981, for example, 20 percent of per capita growth in Chile went to
payments of interests and profits abroad (Fortin, 1985: 191). In 1982, the
Chilean bubble burst as capital flows dried up and headed to safer and
more profitable havens, particularly the US with its mammoth increase
in real interest rates (e.g. from 0.8 percent over the 1971-80 period to
11.0 percent in 1982). Like many developing countries at the time, Chile
entered into a debt crisis in 1982.
4. EMERGING POLITICAL CONTRADICTIONS IN

RESTRUCTURING THE DEVELOPMENT MODEL
Chile's external debt was distinct from other Latin American countries
in that the majority of it was private debt held mostly by banks and
financieras (Scott, 1996). The amount owing was not insignificant. For
example, in December 1981, the superintendent of banking announced
that financial institutions owed US$2.5 billion - double their combined
495
capital. By 1982, national reserves had fallen by a billion dollars and the
daily demand on the Central Bank of Chile was US$22 million (Martinez
and Diaz, 1996: 58-9, my emphasis). The immediate problem facing
the Pinochet regime was how to resuscitate the economy whilst dealing
with a high debt load and less than favourable international condi-
tions, most notably the shortage of voluntary capital flows (in the form
of bank loans) to the developing world between 1982 and 1987 (Ffrench-
Davis et al., 1995), which was being replaced by private portfolio capital
inflows.
The reaction of the government was to substantially increase public
spending. During the period between 1983 and 1988, average govern-
ment spending, as a proportion of GDP was 25.1 percent. Despite the
rhetoric of fiscal discipline, the level of government spending (exclud-
ing public debt repayments and fiscal revenue) was higher under the
Pinochet regime than in 1961-70 (Martinez and Diaz, 1996: 66). Moreover,
to hold on to its strong support base in these unsettling times the Pinochet
regime guaranteed the transfer of assets between capitals was made
easier through further deregulations and privatizations. Between 1985
and 1990, this move was augmented by a debt conversion mechanism
(Chapter XVIII and XIX of the Chilean Central Bank's Compendium of
Rules and International Exchange). This mechanism gave investors dis-
counts amounting to approximately 46 percent of the value of the assets
in extractive industries in logging, fishing and mining- and, which were
not available under the DL-600. According to the United Nations
Economic Commission for Latin America and the Caribbean (ECLAC),
during the period in which Chapter XIX was in force (1985-90) the
Chilean government generated close to 80 percent of its total FDI flows.
During the second half of the 1980s, FDI increased under the mecha-
nism of the DL-600. Most of these inflows seeped into new mining
projects, which according to the ECLAC, accounted for 54 percent of
DL-600 inflows from 1985 to 1990 (Ffrench-Davis et al., 1995; ECLAC
2000: 91).
These ownership transfers had several important and overlapping
effects on the character of the accumulation regime. First, they increased
the material base of already powerful financial and transnational capitals.
Second, because of the threat of investment strike or flight, these transna-
tional interests played an enlarged role in domestic policy formation.
Third, to accommodate their interests, tariffs were lowered and the real
exchange rate (RER) was depreciated by about 70 percent by the end of
1985 (Laurens and Cardoso, 1998). The upshot of which was, of course, a
surge in Chile's exports. In light of the knockdown prices of Chilean
assets and exports, it is unsurprising that the country's industrial perfor-
mance grew at an average of 6.7 percent a year between 1985 and 1990,
compared to -1.3 percent from 1980 to 1985 (ECLAC, 2000b: 91). However,
496
as official international agencies such as the Inter-American Development

Bank indicate, this growth was based on a disproportionately high level
of idle capacity and particularly favourable conditions for Chilean
exports, especially copper (Petras and Leiva, 1994). Although the pur-
chasing power of wages began to recover, they remained well below their
1970 level in 1989. Over the same period, indicators show that the living
standards of at least 60 percent of the population swiftly deteriorated.
For example, an estimated 41.2 percent of the population was living in a
state of poverty while one-third were considered indigent or desperately
poor with a level of income that could barely support existence (Petras
and Leiva, 1994: 33-41). In fact several authors claim that indigence
and poverty levels remained higher in the 1990s than in 1970 (Scott, 1996:
170-1; Schneider, 1993; Raczynski, 1999; Fazio, 2000). It should be under-
lined that the government spending clearly did not seep to the lower
echelons of society; but rather to assist powerful bourgeoisie recovery
by both direct assistance and paying off the huge debt incurred by the
profligate and irresponsible financial community.
Unlike previous manifestations of discontent against the dictator, the
emerging protest transcended class lines to include the working poor,
middle classes - who seemed to dominate this movement - national
industrial bourgeoisie, who saw General Pinochet's deteriorating polit-
ical legitimacy as a way of regaining power in relation to the larger
transnational capitals. Despite their very different agendas, these classes
and groups remained united in their calls for democratic reform. Not-
withstanding strong financial and political support from powerful capi-
talists' interests to hold onto a dictatorial regime, Chileans voted in a
September 1988 plebiscite to move towards a democratic regime, and
thus a development model that favoured their economic interests. This
prompted conglomerate and financial interests to throw their support
behind the next best alternative, namely: a coalition of conservative polit-
ical parties. When the Conservatives were defeated by a coalition of
political parties of a more centre-left position, the Concertacion de Partidos
por la Democracial (or simply, Concertacion) a new symbiosis of interests
transpired. It became apparent to the more conservative and pragmatic
elements in the Concertacion that they required the support of the
powerful capitals not only to win the election, but also to carry out their
mandate (cf. Silva, 1999). To this end, Concertacion entered into a
compromise with the powerful transnational industrial and rentier
classes. The main thrust of this co-operation was that the development
model would be left in tack. In 1990, a more centrist Concertacion came
to power, along with a new, democratically elected President Patricio
Aylwin Azocar (1990-4).
Because these social forces are important in understanding both the
political meaning of the URR and the larger class-based strategy of which
497
the control was a moment, namely: 'growth with equity', it is useful to

briefly highlight the meaning of this new state form. Since a capitalist
state is rooted in the particular social relations of production, it does not
alter its nature simply because its expression of political domination has
changed from a dictatorial to democratic form. Rather, this position holds
that the there was a consensus within the capitalist class to seek a more
inclusionary political form to safeguard the reproduction of the existing
development model. Because of Pinochet's ineffective strategies to uphold
dwindling levels of political legitimacy, and the potential deleterious
effect this could have on the country's 'business climate', it became
clear to powerful fractions that new state managers were required, not
only to safeguard their own interests, but also, and more importantly, to
stabilize the particular form of capital valorization in Chile. To secure
the backing of these powerful class fractions, the Concertacion had to
convince them that it would not diverge from the neoliberal strategy,
which supported the maintenance of Chile's development model. Put
differently, the change in regime did not make the inherent political and
economic problems experienced by the Pinochet administration simply
'go away'.
Flowing over from the Pinochet administration, the incoming Alywin
government faced the following policy problems: On the one hand,
the government had to intervene into the economy in such a manner as
to guarantee the reproduction of the existing development model by
keeping interest rates high and the external value of the peso down. On
the other hand, to maintain legitimacy, and more importantly in terms
of luring portfolio inflows into Chile, the semblance of political stability,
the Concertacion had to address its campaign promises on issues of
social justice and political power to labour.
5. POLITICAL SOLUTIONS: 'GROWTH WITH

EQUITY' AND THE URR
The subsequent 'growth with equity' strategy may be understood as

an attempt by the Concertacion government and its economic techno-
crats based in the Corporacion de Investigaciones Economicas para America
Latina (CIEPLAN), to deal with the above issues. Interestingly, this pro-
ject resembled the Pinochet regime in many ways in that it sought to
strengthen the existing development model by integrating Chile more
deeply into the world economy. For the Alywin administration this was
to be achieved, inter alia, by improved foreign access to Chile's financial
and productive sectors through policies such as an across-the-board low-
ering of import tariffs from 15 to 11 percent, the granting of permission
to private banks to engage in external trade financing activities among
countries other than Chile, and other deregulatory activities (cf. Petras
498
and Leiva, 1994). The major distinction between the Concertacion's

strategy and Pinochet's neoliberal dictatorship was the 'equity' aspect of
the strategy, or the objective of reducing social polarization in Chile.
Under the guise of scrupulously crafted social pacts (e.g. the 'anti-
poverty' Fund for Solidarity and Social Investment, FOSIS) and consensus
building, the Concertacion attempted to facilitate the reproduction of the
basic class relations that characterised the Pinochet regime, rather than
modify them (Petras and Leiva, 1994: 133). As noted earlier the powerful
social forces represented in the Pinochet regime were present in the
Concertacion, and the wider government structures, such as the Senate.
This meant that the interests of the rentier and industrial conglomer-
ate classes would also make themselves heard in policy formation. For
instance, although the Alywin government was well represented in the
Senate, conservative political parties, such as Renovacion Nacional (RN),
which not only were closely tied to rentier and industrial conglomerate
interests, but also wielded significant power in the Senate. Both the RN
and powerful bourgeoisie were against ceding political power to labour
unions and implementing an extensive welfare programme.
The fate of two significant campaign promises made by the Con-
certacion provides a good idea of just how much social justice meant to
those in power. First, the reform of the labour code, which would effec-
tively grant labour more power, especially in terms of wage negotiations,
was substantially watered down to such a degree that labour remained
as powerless as they were during dictatorial Pinochet's regime. Second,
Concertacion's proposal for a tax reform, which would have allowed the
government to make good on its promises of addressing the issue of social
equity by increasing corporate taxes, received a cold welcome in the
Senate. The powerful bourgeoisie were able to effectively reduce the cor-
porate tax rate from 15 to 10 percent - substantially less than the admin-
istration expected. Additional funding was subsequently scraped together
through the means of regressive taxation, whereby the state raised the
value-added tax reform from 16 percent to 18 percent (Silva, 1999).
On a deeper level, the question of equity in Chile remains firmly rooted
in nature of the existing development model, which, as we saw, repro-
duces high levels of social inequality through, for example, the ongoing
transfer of ownership of artificially devaluated firms, as well as the
common feature of speculative-led economic activities as opposed to
long-term investment in the productive structure. The irony of the
Concertacion's 'growth with equity' programme is that its focus was on
reproducing the existing development model largely through the high
influx of capital inflows, which will be discussed below. It should come
as no surprise that indigence and poverty levels remained higher in the
1990s than in 1970, despite the much heralded growth rates of the 'Chilean
model' (Scott, 1996: 170-1; Schneider, 1993; Raczynski, 1999). Drawing on
499
Table 1 Distribution of income 1987-98
Quintile 1987 1990 1992 1994 1996 1998
1st 4.3 4.4 4.6 4.3 4.1 4.1

2nd 7.9 8.2 8.5 8.2 8.2 8.2
3rd 11.7 12.3 12.2 12.0 11.9 11.8
4th 19.0 18.1 18.4 18.5 19.1 19.1
5th 57.2 56.9 56.3 56.9 56.7 56.8
Source: MIDEPLAN: Pobreza y Distribuci6n de Ingreso en Chile 1990-1998. Santiago, 1999,

quoted in Marcus Taylor, 2002 (forthcoming).
the government's statistics, Marcus Taylor demonstrates that the bottom

60 percent of Chilean society receive under one-quarter of the national
income (Table 1). Indeed, as World Bank figures reveal in 1996, Chile had
one of the most unequal income distribution in the world (Drake and
Jaksic, 1999).
Before moving to a few technical dimensions of the 'growth' compo-
nent of the strategy, it is important to draw attention to the changing
nature in the global political economy, which was highly favourable for
the incoming government. To begin with, the price of copper, one of
Chile's most important commodities increased from 1990-3. Since the
government is still a major shareholder of the largest copper industry in
the world, CODELCO, this price rise provided the incoming government
with substantial revenue. Likewise, massive flows of capital entered the
Latin American region during the early 1990s. Rather than being the effect
of some rational economic explanation, such as sound macroeconomic
policies, these flows occurred because of the deep recessionary period
(1990 to 1994) within the OECD countries, which in turn led to relaxed
monetary policies and more specifically low interest rates in the OECD
countries. Like most Latin American countries, Chile took advantage of
this situation by increased differential yields on investment even further
through high real interest rates (Griffith-Jones, 1996). There were several
differences between these flows and those of the previous decades. The
first feature was their sheer size. The monthly net private capital flows
entering Chile swelled from an average of US$39 million between 1988-91
to a monthly average net flow of US$970 million in 1992-5, most of which
were short-term in nature (Cordoso and Goldfajn, 1997 in Aryoshi et al.,
1999: 3). The second feature was that unlike the inflows dominated by
commercial banking that entered the country during the 1970s, the share
of portfolio equity and bonds increased - to the detriment of FDI. And,
characteristic of all global markets, the third feature was the decreased
length of repayment on loans because of the larger shift in borrowing
from securities (both bonds and equities) as opposed to syndicated loans.
500
In effect, loans were relatively shorter-term in the 1990s than in

vious decade (Laurens and Cardoso, 1998: 4). Seen from this perspective,
it is understandable that concerns about speculation and, more impor-
tantly, the external value of the peso, moved into the fore of policy
priorities.
To reproduce the existing development model, which was dominated
by a recessionary environment in OECD countries and high levels of
financial flows, it was necessary to maintain high real interest rates,
particularly relative to the international exchange rates to attract invest-
ment while maintaining a stable yet competitive real exchange rate (RER)
(Aryoshi et al., 1999). The outcome of setting competitively high interest
rates to lure in short-term capital flows is a revaluation of the country's
currency, since it is now in demand. The government wished to prevent
an exchange rate appreciation like the one experienced in the previous
period of abundant capital inflows (e.g., during the 1978-81 period)
(Ffrench-Davis et al., 1995: 99). To maintain a healthy level of exports, the
government had to mediate the value of the Chilean peso so that it did
not rise too far.
Several key economic policy instruments were employed by the gov-
ernment to ensure that the peso did not revalue, despite large inflows
of foreign capital. First, the government turned to the selective liberal-
isation of capital outflows, which had the effect of drawing in more cash
flows because it enhanced investor confidence whilst lowering domestic
asset prices (Guitian, 1997; Ariyoshi et al., 1999). Second, instead of allow-
ing the peso to be determined by the forces of supply and demand on
the international markets, or fixing its value to one currency, the Aylwin
administration opted for a 'dirty float'. Put simply, this means that the
external value of the Chilean peso was to be pegged to the value of a
basket of currencies of Chile's most important trading partners (US, Japan
and Germany). Third, to control revaluation the government used the
method of sterilization (or, sterilized intervention), which describes a pro-
cedure whereby the Central Bank attempted to insulate the domestic
money supply from foreign exchange transactions by offsetting sales or
purchasing domestic assets. The latter had the (desired) effect of keep-
ing domestic interest rates high, encouraging further capital flows. And,
fourth, the Chilean authorities (re-) introduced the URR control on cap-
ital flows in the form of a 20 percent tax on foreign borrowing. Specifically,
the URR was applied to financial loans, foreign-currency, and deposits.
It should be mentioned that during its initial stages, loans that were tied
to FDI were also subject to a reserve requirement. For example, venture
capital in productive investment had to be held in Chile for a minimum
of one year.
Eager to signal the soundness of Chile's financial system, especially in
light of the 1982 fiasco, the government subjected its banks to relatively
501
strict levels of prudential regulation, including a selective supervision of

assets and required provisioning, plus restrictions and drastic penalties
on operations with related parties (Laurens and Cardoso, 1998; Ffrench-
Davis, 2000: 208-9). The URR was also applied to investments in second-
ary American Deposit Receipts (ADRs). Some elaboration is needed here.
There are two fundamentally different types of ADRs: (1) initial offering
or primary ADRs; and (2) inflows or secondary ADRs. Primary ADRs
are shares placed on US stock markets and represent an opportunity
for expanding the capital of firms at relatively low cost, since capital costs
in international markets tend to be lower than in Chile (Agosin, 1998:
117). Secondary ADRs, which are by far the most popular from of ADRs
in Chile, constitute purchases made in the local stock exchange of any
existing shares of firms that have passed stringent financial requirements,
such as a certain capital and gross income minimum, and solvency
classification.
Most important of all, however, secondary ADRs must be placed on
the US stock market. After fulfilling the above noted requirements, these
shares are converted into ADRs tradable in the US with the benefits in
Chile of tax exemptions on capital gains and of access to the formal for-
eign exchange market. There are also flow backs. These refer to oppo-
site operations that involve converting ADRs to shares and re-selling the
latter on the local market. All such procedures rely on access to the for-
mal foreign exchange market for converting US dollars to Chilean pesos
and vice versa (Ffrench-Davis et al., 1995: 109). Thus because interest in
Chilean securities increases when major price differentials arise between
the local and the foreign stock exchanges as well as price/profit ratios,
secondary ADRs require both a stable peso and competitive interest rates.
Against this backdrop, the unlikely combination of high interest rates
and a stable (devalued) peso was facilitated by the way of the URR,
which justified government intervention to achieve the desired mix of
interest and exchange rates.2 In other words, high interest rates drive up
the external value of a country's currency. Given the nature of Chile's
EPI, the latter scenario would be detrimental to its export sector. Yet bla-
tant intervention into its exchange rate would send negative signals to
the international financial markets, since this move is against the spirit
of neoliberalism. However, the URR - viewed here as an integral moment
of the government's 'growth with equity' strategy - legitimated state
intervention into exchange and interest rates.
Thus, in June 1991, the same month that the URR was implemented,
swathes of foreign exchange entered the country. Subsequently Chile
began to face the destabilizing consequence of a foreign exchange glut
that made it difficult to follow a restrictive monetary policy, e.g. high
interest rates. The government reacted to this situation by reversing its
restraints on imports, thereby burning off excess foreign exchange that
502
benefited the wealthy who could afford to purchase foreign lux

In May 1992, however, the state attempted to reap higher rewards from
these flows by raising the reserve requirement from 20 to 30 percent.
During this same period, a 1.2 percent stamp tax on local currency credits
was extended to all foreign loans, excluding trade credits (Buch, 1999).
The question which looms here is not if the URR achieved its stated
objectives of attracting longer-term capital to support currency stabi-
lization and thereby prevent further revaluations; but rather, how did
it assist the government in achieving its larger goal: the reproduction of
the existing development model in the face of large and potentially desta-
bilizing short-term capital inflows? Who benefited from this strategy?
7. A CRITICAL ASSESSMENT OF THE URR
While the URR, along with other policy instruments, did succeed in
neutralizing the effects of new cash inflows, particularly moderating the
inevitable exchange-rate appreciation (Ffrench-Davis et al., 1995), it did
little to stem the amount of these types of inflows entering the country,
which was, also one of its explicit aims. As mentioned at the outset of
this discussion, the URR should not be viewed as a neutral policy that
is an end in itself. Instead it should be assessed as a moment a larger
'growth with equity' objective that was aimed at overcoming the policy
paradox of the Concertacion administration in the wake of changing
external factors in the global political economy. Seen from this angle,
the URR was successful in reproducing a development strategy that
favoured industrial conglomerate and rentier classes, and political elites.
At first blush it appears that Chile enjoyed steady growth rates during
the 1990s. Its average per capita GDP, for example, was 5.3 over the past
decade (ECLAC, 1999: 14). Nevertheless, it is important to underline that
this growth was not accompanied by modest recovery in investment
ratio. Overall investment, for instance, grew much less during the first
half of the 1990s than did capital inflows; most of the flows corresponded
to short-term bond finance, secondary stock market trading and acqui-
sition of privatized firms. Only about one-fourth of net flows assumed
the form of FDI and primary ADRs (Ffrench-Davis and Reisen, 1998:
12-13). Whereas the FDI in gross fixed capital formation, in the 1985-90
was 21.5 percent, it dropped considerably to 9.2 percent from 1990 to1995
(Rasiah, 2000: 946). Moreover, the economy has grown even more depen-
dent on natural resources as it was during the Pinochet regime. Indeed,
'[b]rute raw materials constitute 44 percent of exports, moderately pro-
cessed raw materials constitute 26 percent, and manufactured goods a
modest 10 percent. Under the Concertacion the rate of growth of manu-
factured exports plummeted from 32 percent in 1991 to 8.2 percent in
1997' (Taylor, 2001: 19).
503
These new capital flows into the country did little to alter the nature
of the development model, especially in terms of economic diversifica-
tion. On the contrary, these swathes were used to prop this strategy up
whilst its transnational capitals continued to raked in profits in the finan-
cial and extractive sectors. This dominance of financial flows over the
productive sphere expressed itself in Chile's balance of payments where
the capital account (inward and outward flow of financial capital) has
increased to the detriment of its current account (imports and exports
of goods and services) (see Table 2).
In response to its deteriorating current account, the government sought
to boost investment in the productive sphere by revising the rules per-
taining to the URR in 1995. For example, the URR was to exclude FDI
and first issues of ADRs. The URR was also applied to credits after their
first rollover. Likewise, the maximum proportion of foreign investment
projects that could be financed through debt was lowered from 70 to 50
percent and the minimum amount of FDI exempted from the reserve
requirement was raised. This step was necessary because trade moved
to less regulated markets, such as over-the-counter (OTC) derivatives
markets (Buch, 1999). Upon closer inspection, however, the nature of
these capital inflows sustained Chile's accumulation strategy that has
been in place since the late 1970s, and concomitantly the interests of
powerful transnational financial bourgeoisie and industrial conglomer-
ates. 'The concentration of wealth of Chilean conglomerates, such as the
likes of Luksic and Angelini, have grown substantially through mergers
and acquisitions as have many foreign transnationals and particularly
Spanish owned groups in the financial sector' (Taylor, 2002; cf. Martinez
and Diaz, 1996; Fazio, 2000). Furthermore, about 60 per of these flows
were diverted into FDI within traditional sectors of resource-extraction,
i.e., copper mining, pulp and paper. As in the 1980s, the majority of
these FDls represented the transfer of ownership through the re-purchase
of existing assets. The remaining 40 percent went into services, espe-
cially the financial sector (Ffrench-Davis et al., 1995; Agosin, 1998). As
in the past, mining continued to be the main focus of interest for foreign
investors. In the period 1990-5, when mining accounted for 58 percent
of total FDI flows. Manufacturers accounted for 15 percent of total
FDI flows in this period, with investments linked largely to resource-
processing industries (agribusiness, foodstuffs, and pulp and paper),
involving low-skilled labour (and thus low-paid) (ECLAC, 2000a).
Two main types of short-term cash flows that entered the financial
sector from 1990 to 1994 were mutual funds and secondary ADRs. While
mutual funds were organized in the major international capital markets,
the issuance of ADRs was managed by a handful of large Chilean corpo-
rations. In effect this allowed for the further concentration of assets of
the Chilean rentier class, while providing cheaper methods of financing
504
Table 2 Balance of payments ($ millions)
1980 1985 1990 1991 1992 1993 199
Current account -1971.0 -1414.0 -484.5 -98.6 -958.1 -2553.5 -1585.

Capital account 3241.0 -1395.0 2857.0 965.2 3134.2 2995.9 5293
U1i Source: ECLAC (1999: 14) Statistical Yearbook for Latin America and the Caribbean 1999 Edition
? America and the Caribbean.
than found at home due to the high interest rates. Contrary to the offi-
cial objectives of the URR in deterring speculative, short-term inflows,
the two most common types of external liabilities (e.g., ADRs and mutual
funds) are relatively liquid. The upshot of which is that both forms of
investment can be rapidly withdrawn from Chile through the formal
foreign exchange market, if investors see fit to sell their assets in the
domestic market. In 1994, for instance, secondary ADR represented an
additional net inflow of 2 percent of the GDP, which could become a
significant source of instability (Ffrench Davis et al., 1995). As in the case
of FDI generated through the DL-600 and debt swaps, mutual funds
and ADRs have not led to an increase in productive capacity leading to
higher wages, or economic growth; but instead in a change in the owner-
ship of Chilean assets. Hugo Fazio (2000) argues that the dominant
foreign interests in Chile are no longer US but Spanish financial houses.
The immediate consequence of which is, of course, a deeper commit-
ment on behalf of the government to the current development model,
which favours industrial and financial transnational capitals.
Capital inflows dropped considerably after 1994 due to the combined
effects of the Mexican currency crisis, the rise in US interest rates, and
tighter financial regulation in Chile (Agosin, 1998). Nevertheless, to lure
capital flows the Chilean state still offers a plethora of incentives,
such as the repatriation of capital one year after an investment, foreign
investors' guarantees of the right to profit remittances, a choice between
the tax regime applicable to national corporations or a fixed rate of tax-
ation on their profits guaranteed for a certain period of time (Ffrench-
Davis et al., 1995). More recently, the Chilean government announced its
plans to abolish the 15 percent capital gains tax levied on foreigners (Latin
American Weekly Report, 30 May, 2000).
As mentioned above, private inflows increased, public flows to the
economy, particularly infrastructure support for the private sector, have
decreased substantially. In 1995, for example, public sector outflows
surpassed large net inflows of private foreign capital (Agosin, 1998).
Coupled with the revenue earned from the URR and from debt-equity
swaps, the government sought to pay off its debt burden. Indeed from
1989 to 1991, the majority of public net outflows took the form of debt
repayments. Paradoxically as the government is maintaining its preferred
debtor status by busily paying off its external debt, the private sector's
external debt rate has skyrocketed (see Table 3). The latter doubled
between 1997 and 1999 and constitutes about 50 percent of Chile's annual
GDP (Taylor, 2001).
The promotion of more liberalized trade of its financial and natural
resources and labour-intensive extraction processes has increased the
power of finance and transnational interests during the 1990s; but this
growth appears to have been sustained by large amounts of borrowing,
506
Table 3 Chile's private external debt

(1989-99) ($ millions)
Year Amount*
1989 4.001
1990 5.633
1991 5.810
1992 8.619
1993 10.166
1994 12.343
1995 14.235
1996 17.816
1997 21.613
1998 25.977
1999 28.157
Souirce: Central Bank of C
largely through ADRs and easy access to international credit. Paradoxi-

cally, Chile's 'growth with equity' strategy has not only reproduced the
powerful position of transnational corporate and financial elites, but also
its Achilles' heel, namely its vulnerable dependence on external borrow-
ing and investment. Not surprisingly, and despite the government's
claims of a healthy economy, Chile finds itself in a structural position
similar to that of the late 1970s immediately before its crash in 1982 -
save, of course, for the existence of large voluntary capital inflows. When
these inflows began to rapidly peter out with the advent of the Asian
crisis in 1997, the government was pressured international circumstances
to do away with the URR and begin courting over-cautious potential
investors and creditors on more lucrative terms. Ironically this move
came at a time when the country was not only experiencing a number
of speculative attacks against the peso, but also an outflow of about
US$2.1 billion of capital in 1998 alone (IMF, 2000 quote in Taylor, 2002).
The URR was discontinued for the same reason it was implemented,
namely, to feed the paradox of the development model by removing any
obstacle in place that would block capital inflows, regardless of their
level of volatility. Chile's currency came under tremendous pressure in
the wake of the Asian crises, due to the precipitous fall in Chilean exports.
In response, the government successively reduced the deposit require-
ment from 30 to 0 percent in September 1998 (Laurens and Cardoso,
1998). Thus, 'precisely at a time when currency turmoil elsewhere would
suggest that a Tobin-type tax might prove particularly useful, the Chilean
authorities apparently concluded that, whatever the benefits of the tax,
they could no longer afford to turn away foreign capital' (Sebastian,
507
1999; Buch, 1999: 6). In this light, the official justification of the URR to
favour equity over debt financing and long-term over short-term financ-
ing fell apart. The country's debt-ridden accumulation strategy required
a steady stream of cash inflows. The concern to maintain these flows
was highlighted by investment strikes arising from what Irene Grabel
(1999) refers to as 'guilt by association' which plagues all emerging
market economies during panics when investors and lenders see these
countries in an undifferentiated fashion. In response to this, the URR
was suspended in 1998. The Chilean state set out to accommodate the
need by raising interest rates to attract inflows. Concurrently they slow
allowed the peso to decline in order to support exports in late 1997. The
government's response to the Asian crisis shows that the URR was itself
one moment of a larger strategy aimed at Chile's integration into the
world market via development model that is based on cheap assets,
labour and exports evolving around primary resource extraction and
finance and services.
8. CONCLUSION
The main objective of the essay has been to subject the Chilean control
to a more rigorous and critical scrutiny by examining it through the
lens of historical materialism. In applying this framework the essay has
suggested that the URR is to be evaluated neither in isolation of politi-
cal and historical considerations, nor as a policy in itself; but rather as a
moment of a larger class-based strategy, paradoxically named 'growth
with equity'. In this manner the URR may be viewed as a means to reach
a particular end, namely: the recreations of an accumulation regime,
which has been in place since the late 1970s, and which served the inter-
ests of powerful transnational financial interests and large manufactur-
ing conglomerates operating in Chile. In this regard, the URR as a moment
of the 'growth with equity' strategy has been successful in reproducing
a development model that by its very nature leads to ever increasing
concentration of wealth in the extractive and financial sectors, as well as
high poverty rates. Moreover, it would be stretching the truth to state
what Chile's former Minister of Finance, Eduardo Aninat, has so boldly
claimed: 'Chile at last has broke free of two long-standing economic
handicaps: a highly volatile pattern of economic growth and a long his-
tory of inflation' (IMF, 2000b: 1). While the high interest rates pursued
by the URR put to rest, at least temporarily, inflationary problems, the
Finance Minister's understanding of stable growth should be seriously
questioned, particularly in terms of which type of growth and in whose
interests?
In all, the Chilean experience should make its supporters hesitant to
embrace country-level capital controls without addressing the underlying
508
policy paradoxes and power structures associated not only with histor-
ically developing national forms of development models, but also how
these accumulation regimes are intertwined with the existing power rela-
tions in the wider global political economy. To be sure, if these concerns
are left unattended, capital controls can be used as a policy device to
reproduce existing power structures that are founded on income polar-
ization as opposed to striving toward long-term economic stability and
social justice. If we begin to view capital controls as a means to a larger
end, then they can only be truly effective as a policy mechanism if their
ends are also laudable, that is achieving economic stability and univer-
sal social justice.
ACKNOWLEDGEMENTS
For their comments on an earlier version of this article I thank Benjamin

J. Cohen, Adam Harmes, Paul Langley, Louis W. Pauly, Marcus E. Taylor,
Fred Judson, the editors, and two anonymous referees of Review of
International Political Economy. All usual disclaimers apply.
NOTES
I The Tobin tax, which was first conceived in 1978 by Nobel-prize laureate
James Tobin, was conceived to fall disproportionally on transactions moti-
vated by short-term capital movements. In doing so, 'it would tend to drive
participants with extrapolative expectations from the market, leaving the
price of foreign exchange to be governed mainly by traders with stabilizing
expectations (Eichengreen, 1996: 274).
2 It should be mentioned there is far from a consensus over the URR. Econ-
omists disagree about the effectiveness of the URR's ability to affect interest
rate behaviour as well as moderate speculative capital inflows (Agosin, 1998;
Laban and Larrafn, 1998; Edwards, 1999).
3 According to Paul Drake and Ivan Jaksic (1999), the Chilean model became
famous not only because of its seeming robust economic growth and self-
acclaimed reduction in poverty, but also due to its consistent application of
privatization schemes as well as decentralization strategies concerning
labour.
4 The explosion of the external debt, for example, from 40 percent of GDP in
1979 to 100 percent in 1983; yearly interest payments increased from 3 percent
to 10 percent of GDP. The sharp curtailment of capital inflows in early 1982
amplified the problem and pushed the economy into a deep recession
(Riveros, 1998).
5 Although technically speaking the Concertaci6n is an amalgamation of
around 15 parties, it is represented by two main parties, the Partido Democrata
Cristiano (PDC) and the Partido Socialista (PS).
6 The Aylwin government responded to the second element of the policy
dilemma by implementing an 'anti-poverty' programme, FOSIS (Fund for
Solidarity and Social Investment, Fondo de Solidaridad e Inversi6n Social)
in 1990. As with the 'growth with equity' strategy, the philosophy behind
the FOSIS was not to create social and political change through economic
redistribution; but rather to reproduce the existing system.
509
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A Historical Materialist Account of The Chilean Capital Control

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A Historical Materialist Account of the Chilean Capital Control: Prototype Policy for

A historical materialist account of the

After the tumultuous 1990s, capital controls are making a comeback.

With the increasing volatility in the international financ

Review of International Political Economy

Chilean control is closely tied to the country's economic stability and

2. THE DEBATES ON THE CHILEAN URR

short-term capital inflows seems to be negated by high differentials in

3. AN HISTORICAL MATERIALIST ACCOUNT

In the mid-1970s, General Augusto Pinochet (1973-989) implemented one

influenced not only by technocrats who favoured Friedman-like mone-

4. EMERGING POLITICAL CONTRADICTIONS IN

as official international agencies such as the Inter-American Development

the control was a moment, namely: 'growth with equity', it is useful to

5. POLITICAL SOLUTIONS: 'GROWTH WITH

The subsequent 'growth with equity' strategy may be understood as

and Leiva, 1994). The major distinction between the Concertacion's

Table 1 Distribution of income 1987-98

Quintile 1987 1990 1992 1994 1996 1998

1st 4.3 4.4 4.6 4.3 4.1 4.1

Source: MIDEPLAN: Pobreza y Distribuci6n de Ingreso en Chile 1990-1998. Santiago, 1999,

the government's statistics, Marcus Taylor demonstrates that the bottom

In effect, loans were relatively shorter-term in the 1990s than in

strict levels of prudential regulation, including a selective supervision of

benefited the wealthy who could afford to purchase foreign lux

7. A CRITICAL ASSESSMENT OF THE URR

1980 1985 1990 1991 1992 1993 199

Current account -1971.0 -1414.0 -484.5 -98.6 -958.1 -2553.5 -1585.

Table 3 Chile's private external debt

Souirce: Central Bank of C

largely through ADRs and easy access to international credit. Paradoxi-

For their comments on an earlier version of this article I thank Benjamin

Agosin, Manuel R. and Ffrench-Davis, Ricardo (1996) 'Managing Capital Flows

Fazio, Hugo (2000) La transnationalizaci6n de la economia chilena:Mapa de la Extrema

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