Crisis of 1982

Growth rate of Chile's GDP (orange) and Latin America (blue) between 1971 and 2007.

Economic history of Chile
Colonial era Real Situado Hacienda Encomienda Alerce logging Century of wheat Bourbon reforms
Early republic Silver rush Wheat cycle Long Depression
Saltpetre Republic Saltpetre War "Oreros" and "Papeleros" Sheep-farming boom Tierra del Fuego gold rush Meat riots Great Depression
Internal growth Copper mining during World War II CORFO (Production Development Corporation) UN Economic Commission Land reform Copper nationalization Vuskovic plan
Return of liberalism Chicago Boys El ladrillo 1982 crisis "Miracle of Chile" Asian crisis 2004 energy crisis

The Crisis of 1982 was a major economic crisis suffered in Chile. The crisis took place during the time of the Chilean military dictatorship following years of radical neoliberal reforms when but one non-neoliberal measure was enacted in 1979 by fixing the peso's exchange rate. The 1982 crisis was the worst economic crisis in Chile since the 1930s.^[1] The GDP of Chile retracted 14.3% and unemployment rose to 23.7%.^[1]

Background

After the socialist presidency of Salvador Allende (1970—1973),^[2] and following the 1973 coup the Chicago boys implemented the neoliberal economical policies outlined in El ladrillo.^[3] In 1979 however, Chile decided to depart from the neoliberal principle of free floating exchange rates, with disastrous results.^[4]

Boom and burst

The lead up to the 1982 crisis can be traced to the overvalue of the Chilean peso (which was helped by the peg of the peso to the United States dollar) and to high interest rates in Chile. This would have hampered investment in productive activities. In fact in the 1977—1982 period much of the spending in Chile consisted in consuming goods and services.^[3] From 1973 to 1982 Chile's external debt rose from 3500 to over 17 billion dollars.^[3]

In agriculture the entrance of speculative capital in the pre-crisis period lead to the bankruptcy of several processing companies.^[5] IANSA, a sugar company that belonged to the state before privatization, went bankrupt due to a short-term gains policy by its new owners.^[5]

Bank interventions

In November 1981, two banks were bailed out by the government on the basis of having taken excessive risks, these were large Banco de Talca and Banco Español Chile and the minor banks Banco de Linares and Banco de Fomento de Valparaíso.^[6] The financial societies of Compañía General, Cash, Capitales and del Sur were also bailed out.^[6] Banco de Talca and Banco Español Chile were nationalized removing the management and wresting ownership from shareholders, later these two banks were re-privatized.^[7]

On January 13, 1983, the government made a massive bank intervention, bailing out five banks and dissolving three others.^[6]

Agriculture contraction

All sectors of Chilean agriculture except fruit export and forestry contracted during the crisis but recovery was fast after 1984.^[8] Farm bankruptcies in Chile was overall high in the 1979-1983 period peaking in 1983.^[8]

Aftermath

The crisis has been credited of beginning, despite severe repression, a wave of protest all over Chile against the dictatorship.^[3]

In the years following the crisis the economic policy of the dictatorship changed to include price bands for some foodstuffs and a floating exchange rate.^[9]

Academic debate

Supporters of the neoliberal policy of the military dictatorship have argued that the crisis was born outside Chile and hit the whole of Latin America in the so-called La Década Perdida (The Lost Decade).^[3] Historians Gabriel Salazar and Julio Pinto have countered that this kind of crisis are inherent weaknesses of the neoliberal model.^[3] In contrast, economist Milton Friedman blames precisely the departure from the neoliberal model and political intervention which a fixed exchange rate is.^[10]

According to Ricardo Ffrench-Davis the unnecessary radicalism of the shock therapy in the 1970s caused mass unemployment, purchasing power losses, extreme inequalities in the distribution of income and severe socio-economic damage.^[11] He argues that the 1982 crises as well as the success of the pragmatic economic policy after 1982 proves that the 1973-1981 radical economic policy of the Chicago boys harmed the Chilean economy.^[12]

References