3.2 Fiscal policy during the military government, 1973-1989

From 1973, the oil crisis generated an increased deficit in USA and a high financial power of producing countries, giving rise to the so-called petrodollars or “Arabian money”, which led to a breakdown of the world financial system.

Arabs offered many loans with grace periods of up to 10 years. The evaluation of these loans gave unviable results. Consequently, there was exhaustion of the financing capacity of multilateral agencies such as the IDB and the World Bank.

There were no financing options for complex projects of long-term execution, since it was not possible to fix an appropriate interest rate. Uncertainty and risk developed as an evaluation criterion.

Due to all this, two solution options were set forth and taken:

•Interest rates referential to the New York market (PRIME rate) or to the London market (LIBOR) according to the transactions of the most important banks of those markets, plus a spread (intermediation surcharge).

•Banking syndicates were created as a measure to share risks. One bank was the head. It elaborated the economic dossier of the country to which the prospective credit contractor belonged and offered other banks to participate in extending the loan.

Briefly, the military government determined the economic recovery on the basis of the following policies, among others:

–Market economy policy, which in the short run meant doing away with price fixing by the State, in the so-called “shock policy” in which prices were fixed by offer and demand. The result was less traumatic than it had been expected.

–Substantial reduction of the public sector size.

–Prompt restitution of the most important companies as regards to supplying the population. Later on, privatization of other companies.

–Encouragement of exports, so as to improve exchange terms and to open markets for those products that could be exported and thus reduce the relative importance of copper in the economy.

–Ordering of external accounts, beginning by a notification system of the foreign debt that notified exactly how much the country owed, to whom and in which currencies.

–Public credit regulation, specifying the authority of the Minister of Finance to rate the options of public institutions. For external financing, the CACE, Comité Asesor de Créditos Externos (Counseling committee for external credits), was strengthened. It rated financial conditions, project evaluation and budget and financial feasibility of contractors.

–Fiscal policy regulation, granting more governability thanks to the Financial Administration Law, DL 1263 from 1975, still in force nowadays with few modifications.

–Rearrangement of tax system and creation of VAT.

–Encouragement and creation of an internal financial market as a basic instrument to channel and increase internal saving.

–Strengthening of the presidential system, with less parliament power. 1980 Constitution.

–Separation of monetary and fiscal policy thanks to the Central Bank autonomy.

–Privatization of the social security system, which meant a significant reduction of the fiscal burden.

–Economy indexation (creation of UF) which allowed for the economy to be less affected by the uncertainty experienced by the world in terms of finance, thus safeguarding the saving and investment process.

The 80s began with a worldwide crisis, which affects Chile, but less than other countries due to the arrangement carried out in previous years.

A polemic policy, but basic for the economic development of the following years, was the support of the growing National Financial System, through the state’s financing of liabilities of financial institutions in what is known as “the subordinated debt”, which is still being discussed, since some institutions have not paid that debt yet, after 20 years.

The advantage of this policy would be the lesser vulnerability of the Chilean financial and economic system before the recent globalization process.

Due to the political problems of the military government, the external financing that the country could get was scarce and since there was greater internal regulation, public debt began to decrease radically.

The policies defined in the previous period started to bear fruit and an inflation control led to a decrease in tax evasion, an increase in exports other than copper and a higher GDP growth, which together with a greater control of public expenditure already in 1985 started generating a fiscal surplus lasting over 10 years.

Such surplus was kept, despite the high levels of poverty that the country had, due to a responsible management of the sustainability that social programs must keep. It should be noted that though it was a military government, there were always pressures to raise expenditure, founded on the needs of the poor.

Although it was a requirement by an international agency for a specific project, the Fondo de Compensación del Cobre (Copper Compensation Fund) was created in 1985, which though it was founded only on a decree, up to now the Chilean political class recognizes it as a good anticyclical policy instrument.

In the context of macro economy, and independently from the discussion held nowadays about their prices, the product of the privatizations carried out in this period was not used to finance expenses that would generate future pressures.