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CHILE's BALANCE of PAYMENTS, ECONOMIC DEVELOPMENT, and FOREIGN ECONOMIC POLICY DISSERTATION Presented in Partial Fulfillment O

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CHILE's BALANCE of PAYMENTS, ECONOMIC DEVELOPMENT, and FOREIGN ECONOMIC POLICY DISSERTATION Presented in Partial Fulfillment O CHILE’S BALANCE OF PAYMENTS, ECONOMIC DEVELOPMENT, AND FOREIGN ECONOMIC POLICY DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By ERIC NICOLAS BAKLANOFF, B.A., M.A. The Ohio State University 195S Approved by: V Advisor Department I Economics TABLE OF CONTENTS CHAPTER Page I. INTRODUCTION................................ 1 The Setting and the Problems .... 1 Scope, Objectives, and Approach . * 6 The Plan of Organization.............S II. THE LAND, THE PEOPLE, AND SOCIAL- POLITICAL INSTITUTIONS.................... 11 The Laiid............................ 11 The P e o p l e .......... 19 Institutions ....................... 22 III. ECONOMIC GROWTH, THE STRUCTURE OF RESOURCES, AND CAPITAL FORMATION..........37 The Pace of Economic Growth. .... 37 Distribution of Income .......... 4-4 The Structure of Resources: Capital and Labor.................... ^5 The Rate of Capital Formation. 52 Summary.............................. 5^ IV. THE BALANCE OF INTERNATIONAL PAYMENTS . 57 The Significance of the Balance of Payments.......................... 57 The Meaning of Disequilibrium. 58 General Structure of Chile's Balance of Payments. ............61 11 TABLE OP CONTENTS (contd.) CHAPTEB Page The Impact of World Depression, 1929-1932 ............................. 62 Recovery after 1932 ................ 72 The Post-World War II E r a ......... 76 Summary............................85 V. FOREIGN TRADE ......................... 87 The Capacity to Import and Economic Development .............. 87 The Capacity to Import: 1925-1956 . 93 The Structure of E x p o r t s ......... 96 The Contribution of the Large Mining Companies .................. 100 Direction of Chile*s Foreign Trade . 103 The Structure and Volume of Imports . 106 Summary........................... 109 IV. FOREIGN INVESTMENTS .................... Ill Foreign Capital and Economic Development In Chile: A Synopsis . Ill The Nature of Capital Movements ..115 Capital Movements and the Balance of Payments....................... 118 Methodology, Valuation, and Classification .................... 120 ill TABLE OF CONTENTS (contd.) CHAPTER Page The Structure and Origin of Foreign Investments.............. 12k Official Loans Guaranteed by the G o v e r n m e n t ...................... 132 Foreign Direct Business Investments 136 The Pacific Steel Company: A Case Study of Joint U.S.-Chilean Enter­ prise ............................. 138 Investment Climate .............. 150 Public Utilities ................ 152 The Foreign Investment Law .... 157 Nitrate and Petroleum ............ 159 The Case of Copper: An Opportunity F o r e g o n e ........................ l6*f Summary........................... 178 VII. MONETARY-FISCAL OPERATIONS AND THE EXTERNAL SECTOR ...................... 182 Sources of Post-World War II Inflation........................ 186 The External Sector and Fiscal Revenue ..... .............. 19^ Copper and Public Finance ........ 199 The Stabilization Program ........ 20^ iv TABLE OP CONTENTS (contd.) CHAPTER Page Summary........................ 206 VIII. FOREIGN TRADE CONTROLS AND THE ALLOCATION OF RESOURCES ................ 209 The Import T a r i f f ..................... 210 Quantitative Controls .............. 213 The Multiple Exchange S y s t e m ........ 217 Bilateral Trading Agreements .... 230 Major Objectives of Foreign Trade C o n t r o l s ............................. 233 The Resource Allocation Effect . 236 The Exchange Reform of April 1956 . 2^3 Toward A Sound Foreign Trade Policy . 250 Summary............................... 256 IX. CONCLUSIONS AND PROSPECTS .................... 259 Conclusions........................... 259 Prospects ..................... 271 BIBLIOGRAPHY......................................... 276 AUTOBIOGRAPHY ...................................... 279 v LIST OP TABLES TABLE Page 1. CHILE: ECONOMIC COMPONENTS, 1925-1953 . 41 2. CHILE: ECONOMIC COMPONENTS, 1950-1956 . k6 3. CHILE: CAPITAL STRUCTURE BY SECTORS . ^7 4. CAPITAL PER ACTIVE INHABITANT ........... 50 5. CHILE’S BALANCE OF INTERNATIONAL PAYMENTS, 1929-1932 ............................... 65 6. CHILE’S BALANCE OF INTERNATIONAL PAYMENTS, 1934-1939 ............................... 70 7. CHILE'S BALANCE OF INTERNATIONAL PAYMENTS, 1 9 4 2 - 1 9 4 5 ........................ : . 75 8. CHILE’S BALANCE OF INTERNATIONAL PAYMENTS, 1946-1957 ............................... 79 9. CAPITAL GOODS IMPORTS AS A PERCENTAGE OF TOTAL INVESTMENT ......................... 91 10. CHILE: CAPACITY TO IMPORT, 1925-1929 AND 1950-1953 ............................... 94 11. CHILE: EXPORTS OF COPPER AND NITRATE AND PROPORTION OF THESE IN TOTAL EXPORTS . 98 «* 12. CONTRIBUTION OF THE LARGE FOREIGN-OWNED MINING COMPANIES TO CHILE’S BALANCE OF PAYMENTS, 1955 101 13. CHILE: FOREIGN TRADE BY COUNTRIES, SELECTED PERIODS ...................... 104 14. CHILE: COMPOSITION OF IMPORTS ........... 107 15. CHILE: PHYSICAL VOLUME OF IMPORTS, SELECTED PERIODS ...................... 108 vl LIST OP TABLES (contd.) TABLE Page 16. CHILEi MOVEMENT AND SERVICE OF FOREIGN CAPITAL.................................... 121 17. FOREIGN INVESTMENTS IN CHILE, DIRECT AND PORTFOLIO, 1925-1956 ................ 126 18. FOREIGN INVESTMENTS IN CHILE BY COUNTRIES, 1939, 19^8 and 1953 ....................... 128 19. CHILE: DISTRIBUTION OF OFFICIAL EXTERNAL LONG-TERM OBLIGATIONS ..................... 13^ 20. CHILE: RATES OF E X C H A N G E .................. 221 21. CHILE: RATES OF E X C H A N G E .................. 227 vll CHAPTER I INTRODUCTION The Setting and the Problems Tremendous emphasis has been given by academic economists, researchers and policy makers to economic growth of the less developed nations in the period since World War II. The aspirations of leaders and the people of these countries for accelerated economic progress which has been characterised by the phrase, "The Revolution of Rising Expectations," have played a major role In this new orientation in economic thought and action. Another interesting fact Is that governments have emerged as con­ sciously active agents carrying a heavy responsibility for the success or failure of development goals. Among Latin American countries, Chile presents an especially interesting case study involving the impact of government policy on economic processes and events. The policy of economic isolation, characterized by the expression, "desarrollo hacia dentro" (roughly translated as Internal development) was born in the turbulent days of the Great Depression of 1929-1932 and emerged in the postwar period with increasing vigor. With the collapse 2 of world mineral markets, and the drying up of foreign capital flows, Chile’s exposed economy was jolted to the foundations. According to the League of Nations, Chile’s international trade suffered the most severe contraction of all nations surveyed. The economic crisis, outwardly Induced, was transmitted to the domestic economy In the form of unemployment and a sharp fall in national income. Moreover, these economic effects were accompanied by a great deal of political turmoil and social unrest. The policy of economic isolation progressively became identified with a goal of rapid industrilization; new government agencies were created to stimulate industrial development, foremost among which is the Development Corporation (generally abbreviated CORFO) - organized in 1939. A system of multiple exchange controls and Import licensing, absolute prohibitions on imports, bilateral trade agreements and other measures which were Initially applied as uncomplicated emergency measures in the Depression, evolved into highly complex and rigorous Instruments of foreign economic policy. Essentially, then, the Government intervened decisively to direct— by alter­ ing the free play of market forces— the movement of re­ sources into activities favored by it. Particularly was this true of the international trade and agricultural trade sectors. 3 If the quantity and quality of a country*s resources provide a meaningful index for determining a potential for economic development, then Chile, when compared with many of her sister republics, holds a most favorable position. Houghly 80 per cent of the adult population is literate and, with the exception of Argentina, Chile has the best trained labor force in Latin America. The heartland of Chile enjoys a bracing climate, a light rainfall and is considered one of the rich agricultural regions of the world. Moreover, the ratio of cultivable land to population is very favorable. The country is generously endowed with mineral resources comprising Important reserves of copper, sodium nitrate, iron ore, coal, petroleum, manganese, and sulphur. There exists, furthermore, a large hydro-electric potential which has been only slightly utilized. The population of about seven million persons is racially quite homogeneous and dedicated for the most part to a tradition of democratic institutions. In view of all these assets, tangible and intangible, Chile's rate of economic progress in the years after World War II when compared with Latin America as a whole has been disappointing. Between 19^5 and 1956, Chile's share in Latin America's joint gross product fell from 5*^ per if cent to 4.1 per cent, according to estimates of the United Nations. That Chile failed to share in the rapid economic growth of the other Latin American countries is particularly surprising in view of the considerable improvement of that country*s terms of trade
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