(This is actually an assignment from my Spanish class: I made myself go through the economic discussion on the internet regarding to Chile's economic growth. I am not expert in this, so this is surely open for more discussion)
Chile, as many other Latin American countries, had a huge social divisions. The major production resources: Land, Copper mine, and capital, are consolidated in hands of a few, while the general public had little. The labor income was hardly justified the labor contribution. And, many of the fruits of economic production naturally go to hands for those who hold the production resources.
When Salvador Allende took power in 1970, Chilean people had a mixed feeling. Those who control the production resources were nervous. They saw a great uncertainly in Allende and UP (Unidad Popular, or People's Unity). An "nationalization would certainly come, yet the scale and process is unknown. Those who had nothing were jubilant. The "redistribution" would certainly gave them more resources in the society. Yet, for how long such system could be sustainable was the question here.
When Augusto Pinochet took power in 1973, Chilean society also divided in such feelings, although I guess, through the reading from different literature, such division was less than 1970. In most chaotic period in 1972-73, even the poor suffered, and may suffered even more before 1970. The hyperinflation crippled all market functions, that left only the black markets to allow people to trade.
However, the new policies were not necessarily better than the older one. The new government abandoned all policies in Allende period and favored, in names of "liberal economics", a restoration of market structure. Such policies actually created a new "privileged" class, which also led to misallocation on economic resources(capital) , and led to the crisis in 1982.
I would like to discuss
1.) A problem of government budgets:
Allende, with his socialism coalition, intent to offer a wide range of services to the public with an affordable price. "Affordable price" could come form all different form of "subsidies." We might not see it explicitly, however, if the government keep losing money on running certain services, we know that sector is funded by tax money which might not last forever.
1.a) Sources of government income:
Government should broaden its tax base. A socialism government might eye on the rich and intent to levy higher tax on them. Or, with drastic measures, nationalize the profitable sectors and make all the proceeds go as part of government revenue. It is a daring intention and it is possible to make such intention to succeed,. However, we usually see the government is not the best managers to run these industries. The worse scenarios of these measures are productivity drops, industry output plummet, and further lose its international competitiveness. (not being able to export) That is pretty much what happened to Chile back then.
(Some Chileans I met argue that was due to the international boycott and the "Cold War" strategy to cause Allende's failure. Though I agree to some extent, however, the government intervention into industries usually make such industry vulnerable to any attacks already)
The other sources of government income is tariff, which is rather linked to trade policies.
1.b) Distribution of government expense:
In Allende's period, the government employment increased to a higher level. I believe such increase aiming at the increase of services to be provided by government. For example, decent medical services and education.
Usually, labor market is very rigid, especially in governmental sector. It is extremely difficult to use layoff to justify the overall economic environment. Such policy creates a strong burden on government that could be difficult to shake off. (I did not even mentioned the pension likely to be promised by government)
2.) International trade policies:
Allende's international trade policy was rather "protectionism". They imposed a high import tariff, which, if successfully levied, could contribute to the sources of government income. However, that also has the problems to have imported inflation.
A country, like a person, cannot be created with all endowments they need for their future. All of them needs to be interdependent on each other. A "trade" system is crucial here. While they trade cannot be conducted easily, then there are problems in goods market.
The importation of intermediate goods rise in Allende's period. Chile produced the raw materials, Copper or other Agriculture products, yet in lack of industrial capacity to make further value-added production back then. Therefore, lots of them depends on international trade.
I consider a bad trade policy made Chilean economy eventually fall down to the ground. When they are unable to make the connect to the international market, the local demand could not absorb the full production. Though shortly the economy was better off with increasing wage and low unemployment, such period was too short. And the transition did not make its way through with more financial resources. At the end, that is a lose-lose situation for all.
3.) Crony capitalism:
Although Pinochet's "Chicago Boys" made a startling success to some extent, as they mentioned as "Milagro de Chile" (Chile's miracle). However, that also create a lot of problems.
First of all, noted that the production factors are all controlled tightly in a relative smaller group of people. Not all individuals are given similar, or equal opportunity to compete. That even worsen off by the labor market policy that non-labor union could be formed. If the bargaining power is given unequally to social groups, then exploitation is bond to happened.
The scenarios mentioned in the article I read told me that the wealth gap widen in Pinochet period. Such results is not surprising. Profits would bond to go to the social classes that control for the production factors. And labor ends up in nothing. And the exploitation rents are not competed out among different firms, yet, only a small group of firms tightly collaborate with each other to share these exploitation rents.
Such, I strongly doubt it, as a liberal economics. Although what Pinochet's did is clearly different from socialism, his government only creates another monster that only benefit for the few.
4.) Regulations from government:
There are only few regulations imposing to business at the beginning of Pinochet regime, however, more controls were exerted after 1981 crisis.
1981 crisis hit directly on the banking sector. The financial sectors were fragile back then and capital could fly easily, it gave the speculators the perfect environment to attack on Chile. Afterwards, government nationalize quite a few banks, and place a stronger regulations on banking sectors and industries. In other words, government tipped its hands further into the economy again.
That makes the crony capitalism situation even worse. Those who has preferable status in the society would benefit even further with this control. People consider the success of their economic decisions are not associated directly to their efforts, but the government regulation. Government would clear the way for them. And those less privileged would lose their power to make any assertions into politics, together with economic decisions. At the end, the price is only paid by those who cannot establish connection to the core of economic decision circles.
Conclusion:
a free market should be a better mechanism after all. However, the initial scenarios are crucial and a path to establish a free market economy is not easy, especially for Latin America that is endowed with an environment that production factors are controlled by only a few. A market is not "born" to be free when any regime takes power, however, they should aim at that as a goal.
An socialism government could serve an transition government, which initiate the protection on those who lost the bargaining power. It could restore the balance of control and allow people to bargain on their deals. However, if such process is taken too drastically, it would eliminate all motivations for people to make efforts in economy. (If all my life could be dependent on government redistribution, who would really wants to work eventually?)
In addition, economic liberty comes hands in hands with politic liberty. Without a channel to share information and bargain for power in legislation, I do not see a free market could be achieved.
In most of articles I read placed strong critics on Allende, while I believe he deserved another review on his economic policies. The free economic policies sounds fancy, and indeed looked well in numbers and in figures, yet the economy of Chile might well grow at the expenses of unheard groups.
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