1973
Chicago Boys
Non regulated economy Open to the world Minimum role of the state Rigorous fiscal equilibrium Free functioning of the market
El Ladrillo
> Written during early 1973 > Straightforward but comprehensive liberalization plan > Prices are key to allocate resouces; they would reflect relative scarcities > An open economy is the best antitrust policy > Markets get it right almost all the time > Consistently eliminate all obstacles to private initiative and reduce influence of interest groups > State intervention bound to impersonal rules
4
Milton Friedman
Two Options: > Slow recuperation of patient (country) with risk of death > Shock treatment to revitalize patient, with severe inmediate effects
> Goverment spending is 40% of national income > One quarter of spending, not matched by explicit taxes
>
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12
Impact of Measures
> The shock treatment contemplated a 20% reduction in public spending, firing 30% of the state employees, an increase in the VAT, privatize most of the state companies and end the savings and loan system for housing purposes > GDP fell by 12%, the unemployment rate grew to 16% and export earnings fell by 40%.
> However, the system started to show positive results as of 1977 when the so called boom period started.
13
The Chilean crisis has its origins in the economic problems the country had been facing for decades
> > > > > Galloping inflation The public deficit High level of foreign debt The falling agricultural activity The need to recuperate the income from copper mining
14
Country witnessed: Expropriations Galloping inflation Food rationing Loss of political and economic rights
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16
Cooper
Fish
Agricultural
Industrial
1970
1971
1972
1973
17
GDP Total Real Incr. ( % ) Balance of Trade Deficit (% of GDP) Public Sector Deficit( % of GDP ) Copper Price (US$/ pound) Inflation ( % ) Unemployment rate( %) Real Exchange Rate
12,5
2,7 0,64 34,9 5,7 111,9
13,3
10,7 0,49 22,1 3,9 94,6
15,9
13 0,49 260,5 3,3 43,4
15,1
24,7 0,81 605,1 5 40,7
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External Accounts, Foreign Reserve Holdings & Foreign Debt (Millions of current dollars)
1970 Current Account Commercial Account Exports / Imports Capital Account Balance of Payments Foreign Reserve Holdings Foreign Debt Public / Private -81 156 268 114 393 1971 -189 -16 -27 -300 163 1972 -387 -253 327 -231 76 1973 -295 -138 242 -112 167
2767
2746
3002
3261
19
3,1
23,9 23,9
21,3
40,5 40,5
20
2500
Emission
2000 1500 1000 500 0 Dec 1970 Dec 1971
Prices
Dec 1972
Sept.1973
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22
Main Modernizations
Social security system Labor legislation Capital market Autonomy of Central Bank Reform of public sector Privatization process Close watch of free competition Decentralization of public services: Health, Education and Housing Social policies focused on extreme poverty Constitutional economic order
25
100
120
140
160
180
20
88 133 115
40
60
80
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
167
1989
26
27
28
30
Economic Reforms in Chile Public Sector Reforms Privatizations First Round (1974-1983)
> Returning the assets that had been expropriated to the previous owners > Privitization of enterprises acquired by the state i.e. banks and industries > State oowned enterprises reduced from 596 in 1974 to 48 in 1983 > Value added reduced from 39% to 24% of GDP
31
32
Economic Reforms in Chile Public Sector Reforms Privatizations (ctd.) Second Round (1985) > Public utilities and companies in hands of goverment since crisis of 1982 > Value added from state owned enterprises declined to 13% of GDP in 1989
Third Round (1990) > Infrastucture (Concessions) > Water companies > Value added fell to 9% of GDP
33
Economic Reforms in Chile Public Sector Reforms Tax reform Two major tax refoms: > Value Added Tax introduced at flat rate of 19% in 1975 > Drastic reduction of Corporate Income Tax (currently at 17%), integrating it with personal income tax
34
Unilateral tariff reduction 10% tariff on all imports (1974) Gradual reduction to 6% in 2003 Current weighted import duty: 2%
35
40 30 20 10 0
23,8 25,2
1960
1970
1980
1985
1986
1987
1988
1989
1990
36
39
40
41
42
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
43
> Liberalization of foreign direct investment by enacting Decree Law 600 to define the rules for foreign investment > Withdrawal from the Andean Pact, whose protectionism and bias against foreign investment were incompatible with Chiles new development strategy > This reform has resulted in a massive inflow of foreign direct investment, increasing from $12.7 billion in 19741994 to $35.9 billion in 1995-2001
44
> 1974: Goverment lifted restrictions on all prices > Wages were liberalized
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> Long tradition of respect for private property rights and enforcement of contracts > The respect for and strong enforcement of private contracts continued even through the 1973-1989 military regime
46
48
49
> Reforms pay off After the crisis of 82-83, growth averaged 7% for the next fifteen years, saving and investment boomed, unemployment fell and inflation was reduced to a 2-4% level > It is important to be patient > Financial regulation and supervision is key > Tax and pension reforms are essential in promoting investment and saving
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Conclusion
More investment More consumption More economic efficacy Sustained economic growth
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52
53
54
Conclusion
> Reform should proceed simultaneously across all fronts > Economic freedom leads to prosperity because free economies allow for competition Competition requires: The organization of institutions, such as stable money Minimal and transparent regulation Minimal participation of the state in economic activity Strong enforcement of property rights and regulations
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THANK YOU
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