ELVA ROCIO ALARCON
Professors: Dr. Henry and Dr. Boone
November 4, 1998
Chile: A Country Profile:
The idea of globalizing economies and changing the old structures of
capitalism has been taking place in the third world since the developed
world has established a new economic order that exercises specific
pressures to establish a non-borderline economy, integrated and
transnational. With this model, the comparative advantage and competitive
markets engenders new characteristics to the performance of the economy in
each country. These kind of international pressures have obligated
developing countries, in their conditions of dependence, to shift their
economic structures, several times, regardless of the difficulties that the
country has to be exposed to the process of adjustment. There is not doubt
that a shifting atmosphere is spreading out within the third world-economy.
However, each country has reacted differently in accordance with the local
economic context and timing, in which the shifts are established. Although
in Latin America, Chile has been the most prominent experiment, the model,
and the best example because it was the first one to take the risk in the
1970's.
Even though the story of financial liberalization is too complex to explain
in a single international variable, the case of Chile is unique because it
has defeated the traditional theories of the political economy about the
conditions in which the global adjustment must take place. An authoritarian
regime and a global economy had not been seen as two structures that when
combined could succeed as strategy of development in any country. The
dictatorship was always seen as impenetrable state that tended to lead to
an economic protectionism as another way of repression and as a way of
strengthening its power while the preferences of the global economic was
for democratic governments, as a result of the possible vulnerability that
other types of regimes implied.
In contrast, the authoritarian regime of Chile was the precursor of the
transformation of the economy to a global structure. Even though high
repression and the permanent violation of human rights frightened the
political and economic structures at national and international levels,
Chilean dictatorship cut with the Marxist ideas, which had failed with
Allende's government, and called for a macroeconomic stabilization. In
fact, "in 1973, … the Chilean private sector essentially subordinated its
specific interests to a military dictatorship that promised to restore
favorable conditions for private investment" (Frieden, 1991,p 151).
As a result, this paper argues that despite two periods of crises, as a
unique case, Pinochet's liberalizing reform succeeded to the point of
preparing a positive global atmosphere for the reestablishment of democracy
in 1990. However, big international and national business groups were the
principal actors in the adjusting process of globalization, following the
German legacy, and they could influence policy making even at the
stabilization period. They established a strong business-government
interaction. After the independence of the central bank, the last strategy
of Pinochet's regime, Chile has entered the period of countering the social
effects of the global adjustment and the time of multilateralism with
regional trade strategy alternatives. The liberalized financial sector is
more diversified, and there is not concentration in the banking system.
Nevertheless, the power of conglomerates still exits since they continue to
grow and expand in different sectors of the economy. In consensus, they
still influence policy-making in the new era of democracy. According to
Maxfield and Schneider, in Chile like in other Latin American countries
such as Colombia and Mexico, "size, financing, and diversification of big
business" have had important implications for business-government
relationship.
An overview of the three stages that have taken place in the process of the
global adjustment shapes the first part of this profile. Second, the
transition to democracy and how the policies changed with this process are
developed. As a third part, this paper focuses on the importance of
business groups or conglomerates in the process of adjustment to global
tendencies that Chile has lived since the 1970's. Finally, the current
situation of the economy as well as the financial system and banks in the
1990's prove in a certain way, the success and consolidation of the
globalization in the Chilean economy after years of crisis.
First Period:
A three-party system _right, left, center_ had characterized the democratic
tradition in Chile. Economically, state reforms that were going back and
forth between macroeconomic policies and protectionism had dominated the
structure of Chilean economy and had sectored the society into
"conservative landowners and businessmen, moderate middle class, and
socialist workers, until 1973. By 1970, the negative effects of capitalism
that had adversely affected the stabilization of the economic growth
enhanced the democratic election of the first socialist, Salvador Allende,
who placed on an opposing capitalist system. However, the demands for
income and social programs, and the polarization of the country that
businessmen called "political confrontation and economic sabotage" resulted
in the deterioration of the economy. Thus, conflict became the main feature
of Chilean politics and its economy when, with the support of the right and
Christian democrats, General Augusto Pinochet took control over the state,
and "armed forces staged a coup in which president Allende died". The
conditions for an economic reform were present in Chile. Although
Pinochet's actions were political, his main concern was to establish the
required elements for a macroeconomic stabilization, and at the same time
leading groups agreed that a significant reduction of the state's role was
necessary to allow the economy to recover. The idea was to rebuild the
private sector, but one that would not rely in rent seeking and state's
protectionism. This goal also contained a political aim, and it was to
structure a strong private sector that could reduce the hazard of returning
to a socialist regime even through democratic elections (Frieden, 1991, p
152-53). The main macroeconomic measures were to replace state
intervention with market incentives, reduce inflation, and enforce
structural reforms to diminish state intervention in the market. From 1973
to 1975, Chile entered into a stage of readjustment, but continued in
crisis, trying to implement gradual reductions of the fiscal deficit and
inflation. In 1975, Chile's economic policy became dominated by a group of
orthodox economists who had studied in the University of Chicago; they were
called the Chicago boys and began a radical reform with the idea of the
construction of a liberal economy. It was a rapid, predatory policy based
on deregulation, privatization, low barriers, free markets, and even though
there was an expected economic decline in 1975, the dictatorship was
gaining the sympathy to specific private sector demands and international
investors. Fixed exchange rates, which the government used for freezing
inflation, attracted foreign investors. Even though with it, government
ignored domestic interests (Mahon, 1996, p 75).
Thus, international pressures came from many economic actors, especially,
from US government and investors, and the IMF. Since 1973, international
attention was attracted to Chile, not only because of the continual
violations of Human rights by the military regime, but also because of its
radical experiment with the economy. Because an authoritarian regime did
not fear to apply monetarism, which always was at risk with democratic
elections, the IMF played an important and determinant role at the
beginning of Chilean reform. It had disagreed with Allende's government due
to the international instability caused by socialist trends. As a result,
in order to reach the international confidence that the IMF and World Bank
recommended, Chile had to follow their conditions of reducing real wages
and tariff protection and enforcing foreign competition. (Carty, R, 1983).
For this reason, the most dramatic break with protectionism was the Chilean
withdrawal from the Andean Pact in 1976, which was a regional organization
against foreign investment and liberalization (EIU, 1998-99, p 13).
since 1976, "foreign finance flowed into Chile in large quantities from
1976 until 1982". The drastic and rapid shift in policies of liberalization
and privatization benefited international investors. In fact, these
investors had the opportunity to participate in policy formulation since
many of the Chicago boys had links with that narrow range of international
conglomerates. Their aggressive strategies of corporate expansion were
extended, and the trend caused the concentration of capital in privileged
conglomerates. However, it generally damaged the domestic economy. The
conglomerates, international as well as Chilean, were organized around
financial institutions that captured domestic and international savings, as
did their flagship industrial companies" (Maxfield, 1997, p 160). Although
according to Silva in Maxfield's book, Weberian bureaucracy, which is a
business-government relationship based on credibility and trust over an
insulated state rather than an isolated one, was not common in developing
countries. In Chile, many of the policies established in the period of
dictatorship drove the business-government relationship in a Weberian
direction. It brought about a closer interaction between policymakers and
international business groups that transformed the Chilean economic
structure. Insulation of the state encouraged confidence and credibility of
business people as well as enforced a technocratic feature in the
government that for an authoritarian regime meant a beneficial part of its
policy repression and increased state legitimacy. Nevertheless, the
successful economic performance was only shared by a small group of
capitalists, especially, foreign investors (Maxfield, p 165). Among the
losers were labor, owners and workers of previously protected industries
and farming sectors (Frieden, p 161).
In addition, the concern of the economic team about reducing inflation
within the macroeconomic policies determined the implementation of a fixed
exchange rate, which encouraged financial speculation. Exchange policies
have always been marked as an important factor that measures negatively or
positively the performance of the state. During the government of Eduardo
Frei (1964-1970), the exchange rate favored rich foreign and national
exporters. With Allende, old ways of exchange management returned and the
devaluation benefited the state, rather than rich foreign exporters. In the
first years of the authoritarian regime, rate policies shifted several
times. The government used fixed exchange rate to freeze inflationary
expectations, and this scheme attracted foreign capital, but ignored
domestic interests.
In this first stage of globalization, the adventure of financial
internationalization did not cause competition, but instead caused capital
flight, and privatization benefited conglomerates because the uncontrolled
allocation of capital permitted the control of banks by a few business
groups. Later, in the stage of stabilization within the military regime,
the state had to recover to a certain extent the control over the financial
sector. Buying banks and other enterprises, conglomerates took advantage
of the privatization process and accumulated loan portfolios that raised
interest rates with " 'false demands' caused by rolling over debts of
related firms" (Meredith Woo-Cumings, 1996, p 83).
The Crisis:
In Chile, the precipitated collapse of the financial sector in the 80's,
which was already damaged by the increasing bad loans that were acquired in
the initial period of the reform, was finally suffocated by high interest
rates, and consequently, high capital costs. In Maxfield's book, Silva
assures that the first period had negative effects because of the novelty
and inexperience of the reform and the difficulty of the adjusting process.
Also, it led to the greater vulnerability of Chile to the crisis in 1982.
Thus, the break down of the economy at that time affected the Chilean
economy in a larger degree, and even the conglomerates were broken up as
their holding companies collapsed.
Unemployment reached the highest levels in Chilean history. Crisis meant
the collapse in copper prices, the lead Chilean product, and the peso, the
stop of capital inflows, the bankruptcy of private sector and those banks,
which had borrowed in dollars. " The government had to rescue the banks and
take responsibility for the massive foreign debts they had contracted.
Moreover, the government decided to liberate exchange markets, so capital
flight reached the climax in 1982. As Mahon describes "it was an expensive
gesture. Because the central bank did not retire completely from the
floating market, it funded a great part of the outflow by drawing down
reserves _and it the same month the government also took over several
failed banks_" (1996, p 76). About this factor, Snider says that the
shifts toward credible market-oriented policies "appear to have prompted a
return of flight capital" (1996, p 17).
Silva points out that scholars have assumed mistakes in the use of
specific policy instruments and the confusing and unusual case of an
authoritarian regime promoting business interest and liberalizing markets
for them as the main causes of economic debacle in that period. At this
time, business people again, called for new policy changes in the economy,
and this time, they demanded more trade protection, reflation, and
subsidies to debtors (Frieden, p 171). "In sum, bad policy design and
errors in the timing and sequencing of the reforms, coupled with the impact
of external shocks, clearly affected the collapse of the Chilean economy in
1982" (Maxfield, p 163).
The period of stabilization under an authoritarian regime:
"Due to the crisis, the Chicago boys lost credibility and were replaced by
a more traditionalist economic team in 1984" (EIU, 1998-99, p 13). This
group of economists belonged to the business sector, but they met the
expectations of domestic markets. When the dictatorship realized that
conglomeration was creating regulatory and monitoring problems, it enforced
a broader participation in the economy and included in its ministers people
who belonged to Chilean domestic economy, mostly to the traditional
sectors. Thus, Pinochet began to achieve the trust and credibility needed
in the business-government relationship for a mutual dependence. Evans
describes this factor as a crucial quality in the establishment of an
embedded autonomy. "Neither autonomy nor embeddedness alone is effective,
it is a combination that accelerates development" (Maxfield, 1997, p 6).
Therefore, new policies in order to stabilize prices and promote domestic
production were implemented. In this stage, according to Silva, those
economists were less closely linked to specific conglomerates, but the
interaction between business associations and policy makers continued and
even strengthened. Although, there was a time during the crisis, in which
this close business-state interaction threatened the political stability of
the dictatorship because of permanent mass mobilization and economic
depression, that interaction permitted a consensus over general economic
policy.
In 1985, the economic model was restored in a more gradual level. Although,
the stereotype of dictatorship made created disbelief that this type of
regime could enhance a "barbed-wire neoliberalism" ( Mahon, p72). An
increasing credibility in the economic structure due to the new dynamic of
interaction between policymakers and business elites facilitated a more
flexible approach to "pragmatic neoliberalism" (Maxfield, p 172).
After the crisis in 1982-83, in the period of stabilization and recovery of
the Chilean economy, an established system of consultation between business
and state institutions engendered impressive economic results. The new team
of economists was prudent. Although a close interaction persisted with much
more confidence and flexibility, the successful results in the whole
economy with sustained high production rates in all the sectors undermined
the hazard of the concentration of capital in a narrow range of business
groups that radical neoliberalism had brought. In fact, Maxfield's book
affirms that even though the economic shift within the beginning of the
authoritarian regime caused a sharper economic decline in the crisis of
1982, generally, they became the bases of the economic recovery and greater
levels of investment (Silva, p 155). However, the business-government
relationship that resulted in the period of stabilization, in spite of
still being a system of conglomerates, seemed to reflect equilibrium. In
the time of recovery, Chile showed a unique example that reflected the
proposal of Peter Evans of the "embedded autonomy". In it, the state
accepted diminished interventionism in the markets and became a dependable
partner that provided a "strategy of state-society synergy" through a solid
bureaucracy capable of achieving collective goals and guaranteeing the
global business climate. Thus, more confidence and trust permitted a
synchronized performance of the actors of the economy although a
concentration in large-scale business still exists, the global trend could
be strengthening to the whole economic structure.
The transition to democracy:
As Haggard and Kafman highlight, Chilean represents a case of non-crisis
transition because of the recovery of the economy under the authoritarian
regime. Indeed, the dictatorship created the economic atmosphere in order
to facilitate the restoration of the economy with out the pressures of
economic disasters or bankrupts.
One of the factors that played an important role at the time of the
political transition was the independence of the central bank. According to
Boylan, though "the transition is a time of great uncertainty with a large
quotient of unpredictability", in the case of Chile, the idea of giving
autonomy to the central bank was a response of the Pinochet's predictions
of giving up some power when he lost the plesbicit and that democracy was
inevitable. Boylan describes that strategy as a way of protecting
government's interests and obligating it to continue with the same economic
policies. It was the moment, in which Pinochet realized that he would not
govern indefinitely, and together with the success of his economic
performance and the consolidated business-state interaction, that he pushed
the independence of the central bank in order to enhance credibility and
offer more dynamism to the economy. Although Maxfield assures, the
independence of central bank was a strategy in order to maintain
international crediworthiness, Boylan argues that it was simply the
coincidental timing after the process of recovery because Chile was not in
need of external creditworthiness, and international pressures did not have
a major role in this decision (1998, p 452).
The independence of the central bank seems to be a policy that is
determined by strictly economic factors. In the case of Chile, it was a
strategy in order to enforce power and security that permitted Pinochet to
defend the neoliberal government though the economic tendencies of the next
head of the government were different. As a result, Pinochet waited until
the last minute to establish the autonomy of the central bank, and now
democratic governments have had to deal with that "coercive economic
institution". Considered one of the most autonomous in the developing
world, the central bank of Chile could not provide direct or indirect
financing of government expenditures (Boylan, 1998, p 455).
Patricio Aytlwin was the "hero" of the country's transition from an
authoritarian regime to a liberal- democratic system. Aytlwin's period was
characterized by a market-oriented economy that determined the succession
of Pinochet's global system in the last period of the dictatorship. Then,
Eduardo Frei, a Christian Democrat president and "the father of the present
president, Chile lurched in 1970 to embrace the popular, neo-Marxist
Allende Government" (Country reports, 1995), inaugurated the second
democratic period in 1994. He has continued with Aytlwin's work. Also, he
promised modernization, with particular emphasis on improvements in
education, infrastructure and production. Another initiative of Frei's
government has been a new mechanism for awarding public works contracts and
overhauling the civil service as part of an ongoing anti-corruption drive
(Country reports, 1995).
In 1998, President Frei has reshuffled his cabinet of ministers in order
to enforce spending restraint in the process of adjustment to the
unfavorable external conditions of the Asian crisis. However, it has not
meant a shift in government's capacity, which was already diminished long
ago, over the economic decisions within the global reform (EIU, 3rd
quarter, 1998, p 10).
Business groups the actors and authors of the Chilean globalization:
As Maxfield points out concentration (referring to allocation of capital)
is a requirement in a competitive international atmosphere that exists
along with conglomeration (referring to sectoral diversification).
Concentration and conglomeration are strongly associated. Government's
policy serves consciously or unconsciously to encourage greater
concentrations.
The economic history of Chile has always favored foreign investors and
national conglomerates. The links of conglomerates with the Chicago boys
established a closer connection business-government that could touched the
borderlines of clientelism. Business groups needed an opened market in
order to join international markets and allocate capital outside of Chile,
and sometimes they were allies with foreign investors and share assets
through the famous "joint venture". Frieden describes the conglomerates
system that the Chilean neoliberal reform shaped under the dictatorship:
One interesting result of the Chilean experience, which largely subsumes
the intersectoral distributional effects of Chilean policies, was the rise
of a series of conglomerates, the grupos. Chile had a long-standing
tradition of related firms connected by ties of family or friendship, but
such horizontally integrated conglomerates proliferated under the military.
… The typical grupo [conglomerate] was centered around a financial
institution. The Cruzzat-Larraín group, for example, controlled three of
Chile's ten largest private banks (Banco de Santiago, Banco Hipotecario de
Fomento Nacional, and Banco Colocadora Nacional de Valores) with 17.1
percent of total financial-system loans by 1982. The Vial/BHC group was
organized around Banco de Chile (Chile's largest bank [at that time]) and
included two other major financial institutions (Banco BCH and Morgan
Fiannsa) with a 1982 total of 24.9 % of total loans. Grupo banks did much
of their lending to grupo firms… Groups also owned such smaller financial
institutions as insurance companies (1991, p 166).
Although Chilean business groups formed due to natural treasures of
families or to families that made their fortune in the mining sector in the
last century, the financial liberalization determined their consolidation.
In the earlier years, they were foreigners or migrants. Also, there were
some bankers associated with import activities. One of the main features of
the business groups at that time was their capacity to diversify their
investments. The groups of enterprises handled by John North and Robert
Harvey constituted the first business groups in Chile. Protectionist
policies favored specific sectors of the economy and sometimes resulted in
the deviation of state's resources. At the end of the decade of 60's,
twenty economic groups dominated the Chilean economy. With the Allende's
government, those economic groups were badly affected as Allende sought the
elimination of the conglomerates, enforcing the stagnation of the most
important enterprises of Chile.
Then, the military became the ally of those groups as well as the orthodox
economists that managed policy-making. During the Pinochet period, the boom
of privatization and the privilege of individual rights such as property
rights and liberalization were effects of opening the economy and letting
the market assign the resources and instruments of economic decisions.
Thus, the concentration of capital of the conglomerates into the financial
sector took place during the 1970's and at the beginning of 1980. At that
time, the banks and the financial system reflected the German and Japanese
models with business groups concentrated in banks. The concentration of
capital in a few banks that belonged to specific conglomerates was a
"credit-based system, in which a limited number of financial institutions
dominated the system" (Zysman, 1983). The business groups grew impressively
due to their links to financial institutions, and they started a process of
accelerated growth. However, with the crisis, the group and the government
started to conflict because the government looked for the desegregation of
assets in order to attenuate the effect of the strong link between banks
and business groups, but it did not have a successful response.
As a result, scholars have said that the financial liberalization was
encouraged by the grupos or conglomerates since it made the "foreign
borrowing by Chilean banks easier" (Frieden, 1991, p 167). Frieden
affirms that the influence of these groups in policy-making should not be
exaggerated and they were more a response of the government policies. They
supported the global reform because they would benefit from it, and for the
government, in addition to the willing to international institutions and
investors, it was the support that a dictatorship needed for maintaining
the political power.
In the first stage of the reform, conglomerates such as group Vial _Banco
de Chile_, group Cruzat- Laraion -Banco de Santiago and Banco Colocadora
Nacional fortified. Then, a second round of privatization came, but this
time trough the process of popular capitalism in which the assets of the
financial institutions are sold to the general public, diversified the
sector and gave opportunity to other groups.
Currently, the "Superintendencia Bancaria" distinguishes 58 business
groups and subgroups among national and international enterprises. Those
conglomerates could be divided in four groups ( Fuentes, 1997, p 47)
- Traditional groups: are the biggest and oldest ones. They are very
diversified and are truly linked to families such as Angelini, Matte, and
Luksic.
- The emerging groups: they are those that resulted from the bought of
enterprises in different kinds or management buy-out with the support of
foreign investors. Sigdo, Koppers, Pathfinder, Navieras, Pizarreno belong
to this group.
- The renewed family groups: they have been restructured after the crisis
of 82 and are similar to the traditional groups but smaller.
- The new groups: they are those that resulted form the capitalism and its
institutions. These conglomerates resulted from the formation of private
enterprises in the second round of privatization through the policies of
institutional and popular capitalism such as Enersis, Cap, Soquimich, and
others.
Although they were very concentrated in financial institutions, after the
crisis in 1983, the government regulated the financial sector, and the
conglomerates rested importance as investors of banks. The financial sector
was opened to a more equal system of credit allocation. It determined the
creation of new groups of conglomerates that is supported by institutional
investors. Currently, although some groups, the largest and more
traditional, are more diversified, there is a tendency of the new groups to
concentration and specialization. In fact, Fuentes assures that the more
relevant factor is that the degree of concentration in Chile is higher than
in Japan or Germany although in the last period of the dictatorship and now
with the democracy, the system tends to establish some policies that are
similar with the Anglo model (1997, p 137). They are still powerful.
Moreover, the Chilean conglomerates have demonstrated that they do not need
to own a bank in order to get credit. They find similar conditions of
credit in other banks, and they have access to dynamic markets even outside
of Chile (Fuentes, 1997, p 138).
The current economic situation in Chile:
As the 'pioneer' of economic reform in Latin America, Chile has
undoubtedly prospered better than many states elsewhere which have returned
to democracy after years of dictatorship. In the early 1990's Chile enjoyed
the highest growth rates although an estimated 1 million people climbed
above the United Nations poverty level.
Generally, Chile is the world's largest producer and exporter of copper.
This country derives much of its foreign capital from the sale of that
mineral, and its economy is very dependent on world copper prices. Although
the economy is diverse, the agricultural sector is still concentrated in
wine. Manufacturing is also an important industry.
Although inflation reached the target of 10 % in 1993, it has fell below
10% in 1994 and remained in single figures in 1995. Direct foreign
investments rose by 60 percent to US$ 2.2 billion, and export earnings
recovered. The high prices in copper and wood pulp, another key Chilean
export, contributed to a trade balance showing a US$ 400 million surplus
(Kaleidoscope, 1998).
In Addition, Chile is an associate member of the Mercosur trade group, and
it has begun to lead the strategies for an interregional trade that would
determine the development on the global atmosphere of the rest of South
American countries. In 1996, the country's main trading partners included
the United States, Argentina, and Brazil.
Trade agreements:
In the first stage of the reform, trade was unilateral with the reduction
of tariff barriers, and it eliminated the anti-export feature of the
Chilean import substitution system. With the crisis, the devaluation gave
clear incentives to the exporting sector. After 1983, the economic
atmosphere of free trade, privatization, deregulation, and reduction of
bureaucracy enhanced efficiency of the economy, and it attracted the
private sector. As a result, the exporting sector has consistently grown
since the global reform took place.
However, the trade alternatives have varied during the global process in
Chile. During the dictatorship, two unilateral trade processes were
implemented: one radical (1974-79) and another more moderate (1985-91). At
the beginning, Chile had a very restrictive foreign trade. Then, by the
1980's, tariffs were increased to 35% "in order to confront the situation
generated by the external debt" (Meller, 1997, p188).
Currently, the aim is to establish an integrated global economy, and Chile
could be the leader of this strategy in Latin America due to its
consolidated global conditions and the new democratic system. With the
three trade interregional blocs (the EU, NAFTA, and the Yen bloc), "there
is skepticism about Latin America" (Meller, 1997, p 196). However, the
alternatives are between NAFTA, Chile, and MERCOSUR, and the free trade
agreements among many Latin American countries that took place from 1990-94
were the beginning. The trend is to establish bilateral trade agreements in
Latin America, but with the successful of the economy, it is expected an
integrated bloc that would lead Chile.
The Financial System:
The financial system marks the "country's relative economic maturity"
(Country Reports, 1995). It is the most advanced capital market and the
highest savings rate in Latin America, and the level of international
confidence does not have equal in the region. At the heart of these
policies lies the government's concentration on monetary, fiscal and
exchange policies. "Interest rates have been allowed to remain high, tax
revenues increased and the peso allowed to appreciate against the dollar,
permitting cheap imports to compete with domestic products and prices"
(Kaledoiscope, 1998). Currently, in Chile, there are two stock exchanges,
so in order to compete in the international market, "leading institutions
have urged the transformation of Santiago into a regional finance center to
rival Buenos Aires" (Kaleidoscope, 1998). However, Frei's government is
facing with two law obstacles: the requirement to foreign investment to
remain within Chile for at least 12 months and the country's capital gains
tax.
The Banking system:
"The central bank, Banco Central de Chile, is the supreme monetary
authority. It regulates the money supply, exchange rates and interest rates
and, since December 1989, has had autonomy in setting monetary and exchange
rate policy" (Country reports, 1995). Lately, the central bank has had
succeed in slowing down the monetary growth. Although its autonomy, the
Banco Central is obliged to ensure currency stability as a means of curbing
inflation. Its advisory board controls the Formal Exchange Market.
Furthermore, the law stipulates the kind of transactions to be conducted
through the formal market and the advisory board sets limits on these
transactions for annual renewable periods.
In 1990, there were 43 financial institutions (the 38 banks included the
state-owned Banco del Estado, 15 domestic and 22 foreign-owned commercial
banks. There were also five private financial houses (financieras). Their
activities are under the supervision and control of the Superintendencia de
Bancos e Instituciones Financieras (SBIF). Foreign banks operate in Chile
with the authorization of the SBIF, through established corporations,
branches or representative offices. On the other hand, unlike banks, the
financieras are not allowed to accept current account deposits or conduct
foreign business. The banking sector has been more tightly controlled
since the state intervened in 1982-83 to rescue crisis-ridden private
banks. In 1985 the government recapitalized banks by selling additional
shares to the public, while the Banco Central purchased most of the banks'
liabilities.
The most striking regulation, which determined a important shift in the
concentration of conglomerates in the financial sector after the crisis in
1984 was that banks were prohibited to extending loans to companies within
the same financial/industrial conglomerate. These oligopolies were the
principal reasons for the failure of banking system in 1982.
Since 1986 banks have shown increases in their provisions and capital base
and have been able to buy back bad-debt portfolios from the Banco Central.
By the end of 1994 Chile's banks had assets totaling some US$ 35 billion.
The rate of exchange in the formal market is freely agreed upon by the
parties involved within a 10 per cent range of the official rate set by the
Banco Central. The official rate is adjusted monthly in line with
inflation. Foreign exchange for profit, dividend, royalty and foreign loan
interest remittances is available for investments, technology and loans
registered with the Foreign Investment Committee and approved by the
central bank. Profits can be remitted annually. Capital can be repatriated
after three years (Country Reports, 1995)
Consequently, although most of the banks are private and several foreign
owned, the analysis shows that there was not concentration of the banking
system with less than 0.15 (0.082). Thus, it indicates that conglomerates
have not longer used the financial system in order to build their fortune
though they are concentrated in other sectors of the economy such as
fishing, industry, etc. Currently, the banking system is much more
diversified, and it means that the financial liberalization has begun the
period of consolidation in Chile.
Conclusions:
As Stallings says, Latin American countries "moved from one stage of
development to another in a context of permanent elite disagreements and
resulting stability"(1995, p 135). Chile was not the exception, but was one
of the few that succeeded after a period of intense political and economic
crisis. While Stallings is only referring a success of development after
the military government, other authors such as Frieden and Maxfield agree
that a previous success and stabilization took place after the crisis 1982
within the authoritarian regime.
A neoliberal reform that at the beginning seemed to contradict the paradigm
of an authoritarian regime became the engine of the economic recovery and
perhaps even, political-social development. However, it was not the result
of the power of the state, but the result of endemic economic pressures
that through the wisdom of "educated" policymakers, the Chicago boys,
reflected the ideology of very consolidated business groups. Those
conglomerates enhanced a closer interaction business and government in
order to be able to participate in economic policy making. They provoked
the government to insulate itself and let them have access to implement
only those strategies that privileged them. This process was rapid and
aggressive, and the conglomerates were divided in three groups: those old,
those that the reform gave origin to, and those that arose after the reform
and the crisis. The new ones that the reform gave origin to "… were
organized around financial institutions that captured domestic and
international savings" even though these activities were damaging to the
Chilean economy as a whole.
Then, the economy recovered with a more regulated system and more
distribution of the allocation of capital. The opportunities for taking
advantage of the global tendencies were broader, and even though the groups
continue to grow, the establishment of institutional and popular capitalism
determined a shift in the structure that privileged the conglomerates. At
this period, Pinochet as well as businessmen realized that the diminishing
capacity of the state could not go to extremes, and it was needed for the
consolidation of a more pragmatic neoliberalism. Consequently, this
development and consolidations has continued with the new democratic system.
In the financial system, there is not concentration of the banking system
as great as it was in the first period of the reform with the boom of the
business groups, investing in banks. They are powerful, but the domestic
economic grows as well as conglomerates do, and they have created a context
of consensus in which national and international businesses are related.
The new challenge for economic groups is to seek a position in the
international markets by investing outside the Chile.
Snider affirms that " none of the Latin American dictatorships was a
caretaker government that viewed its political intervention as transitory.
All of these authoritarian regimes were discredited by the failure of their
stabilization programs in response to the Third World debt crisis (1996,
p118-119). However, Chile has the dictatorship of Chile has to be excluded
from this category because its economic recovery and the democratic
transition without experiencing another economic crisis determines
undoubtedly a certain degree of success and economic development.
Related with Colombia, although the conditions, the systems, and the time
are broadly different, Colombia is still experiencing the first period of
Chile's reform. liberalization, privatization, and free trade continue
happening. While Chile enjoys a consistent economic growth, Colombia is in
crisis, suffering the stagnation of the industrial, agricultural, and even
the financial sectors. Moreover, the rise of conglomerates that Chile
experienced during 1970's and 1980's is right now happening in Colombia,
and it could be one of the main factors of the severe crisis of the country
as it happened in Chile. Similarities and differences between these two
Latin American countries will be the focus of the next study.
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