Analysis of Chile's Economy

Introduction

This paper looks at the developments that Chile as a country has achieved so far. It employs one on one interviews with citizens of Chile while also conducting research on available literature on whether the World Bank and the IMF have been instrumental in the development of Chile or not.

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With a population of 17.62 Million people as of 2013, according to statistics from the (World Bank), Chile a South American country borders Bolivia, Argentina, Drake Passage and Peru. The country boasts of mineral deposits especially in the arid Atacama Desert in the country’s north. The majority of the population is concentrated in the central area where agriculture is mainly practiced.

Chile has been hailed as one of the biggest economies in South America by the World Bank. This is largely due to its policies like the fiscal policy, monetary policy, trade agreements etc. Chile’s fiscal policy for instance has a counter-cyclical nature which is facilitated by the application of a policy of structural balancing. The country is committed to a medium-term structural balancing as a percentage of GDP. This means that its expenditure increases when there is low activity and reduces when there is an increase. Between 2001 and 2007 for instance, the target was 1% of GDP. Chile enacted a Fiscal Responsibility Law in 2005 to incorporate key elements of this policy.

There was an economic slowdown in Chile in the late 90s and this led to unemployment which was at between 8-10%. However by 2006 the rate was 7.8% and in 2007 it was reported at 6.8%. This shows that unemployment rate has continued to drop since then. A Chilean citizen that I interviewed on 27^th March 2017 said that it is easier to get work today than it was years ago. He said that even for people his age, it is easy to get work and get a decent pay after the job.

According to the (World Bank), Chile has seen a high reduction in the poverty rates in the recent past. It has also experienced a rise in prosperity as the percentage of the people considered poor in Chile continue to decrease. The World Bank estimates the percentage of Chile’s population known to be below the poverty line or living with less than US$ 2.5a day) dropped from 7.7 percent in 2003 to 2.0 percent in 2014. The bank also reports that in 2003 and 2014, the average income of the poorest 40 percent of the population went up by 4.9 percent. A Chilean citizen I interviewed in March of 2017 said that since the times of Chile’s chronic inflation in the 1970’s when President Salvador Allende was in power, through its recovery under the leadership of Augusto Pinochet and Patricio Aylwin, the economy of Chile has come a long way and so has its development.

A third Chilean citizen that I interviewed on the same day felt that infrastructures including roads, hospitals etc are a pointer toward the developing country. She said that she has seen the country build roads, connect electricity, build hospitals and schools and provide many things that the people in the country need. She said that that is development because many problems have been solved.

This means that even the common man in Chile has felt the economic developments that have been made by Chile. Many appreciate the far that the country has come development-wise. They point out infrastructural developments as pointers toward a developed Chile. Older citizens compare the present and the past Chile with differing parameters. While others feel that the past was better developed economically in terms of access to jobs, others feel that the present far much better.

Two United Nations organizations have been involved in development agenda in Chile. The World Bank and the IMF have for several years lend and donated toward projects in Chile. This section of this paper looks at the impact of these two institutions on Chile’s development agenda.

Impact of World Bank and IMF on development in Chile

The two Breton Woods institutions have had a long relationship with Chile. This paper asks whether the two institutions are partners for development or against development in Chile and other developing countries in the world drawing from experiences in Chile and other parts of the world.

Both the International Monetary Fund (IMF) and the World Bank are organizations under the United Nations system and whose sole goal is to raise standards of living in the UN member countries. The World Bank and the IMF do complement each other in the delivery of their mandates. The IMF focuses on issues that are macroeconomic in nature whereas the World Bank concentrates on long-term economic development and poverty reduction.

Advantages and Disadvantages of World Bank to Chile

The World Bank has been of great assistance to Chile and many other developing and developed countries. Since its formation in 1944, the World Bank has disbursed lots of money toward development and especially to countries that need them the most. The primary objective of the World Bank is to alleviate poverty through the building of capacity of the government of the day. By so doing, the World Bank ensures that throughout the world and among the UN member countries, everyone gets a right to the basic developmental projects.

In 1946, the World Bank sent its first mission to Chile and its mission was to make economic and technical studies in relation to the loan application that had been made by Chile. Chile had applied for a loan to the World Bank for hydro-electric development, forest industries, railway electrification, transportation facilities and also the mechanization of its ports. These loans were both signed on March 25, 1948.

Today, the World Bank has a portfolio of two operations totaling US$140 million. According to the World Bank, the projects include a higher education project and a social inclusion and education project and a water resource project.

From the time that the World Bank opened its mission in Chile in 1946 to now, there seems to be a pattern in the kind of projects that it does and all are in line with alleviating poverty through development.

One of the advantages therefore that Chile attributes to the World Bank is that it is due to this first loan that Chile was able to undertake major infrastructural developments which it would otherwise not have afforded to undertake at that moment in time.

Whereas the World Bank has many good projects to its name, it still has a few others against it. The World Bank has sometimes been used to punish developing economies and Chile is not an exception. The most memorable period in the history of Chile with regards to the World Bank relationship is the year 1973 when the World Bank denied aid to Chile sending in into a crisis. The World Bank was used in 1973 by the US government to ensure that the economy of Chile was crippled.

This was when the then president of Chile, Salvador Allende ascended to power in 1972. According to (Ismi) President Richard Nixon and his National Security Adviser, Henry Kissinger, used the Bank to (as the President stated) “make the Chilean economy scream.” The subsequent economic crisis “paved the way for the bloody coup of 1973.”

After the coup, between 1973 and 1976, during the reign of Pinochet, the World Bank gave Chile a total of $350.5 million, almost 13 times the $27.7 million it gave during the three year Allende presidency, writes (Ismi).

The suspension of any loans to Chile by the World Bank at the period when Allende was president meant that even the IMF could not give loans to Chile. As such, both the World Bank and the IMF did not operate in Chile at that time. (Perry and Leipziger) write of the Chilean economy outperforming the rest of the Latin America and the Caribbean between 1985 and 1997. They however leave out the early 1970’s when the World Bank was not in operation in Chile and which contributed to its failure developmentally and economically.

Advantages and Disadvantages of IMF to development Chile

(Kapur, Lewis and Webb), write that the IMF has assisted Chile in times when Chile has a balance of payments deficit. The IMF has always stepped in to fill that gaping hole. IMF also serves as a council and adviser to Chile as it does to other countries when it is new economic policies. It also publishes papers on new economic topics.As (Kapur, Lewis and Webb) states, the IMF’s most important function is its ability to provide loans to member nations in need of a bailout. As part of its mandate, the IMF can attach conditions to these loans as it has done in Chile starting with the very first loan. These include prescribed economic policies with which borrowing governments must comply, (Kapur, Lewis and Webb).

Despite the IMF’s role, there are disadvantages that this institution has visited upon the countries it operates in. For instance, (Payer) writes that the IMF worsens economic problems. According to (Payer), the conditions of IMF loans cause more harm than good.

(Payer), gives the example of the 1997 Asian Crisis which IMF was criticized for how it handled it. The crisis was largely as a result of the IMF’s insistence on deflationary fiscal policy which insisted on spending cuts and tax rises, and higher interest rates. (Payer), insists that the IMF turned a minor financial crisis into a major economic recession which lead to high unemployment rates.

A failure of the IMF is its insistence on a One Size Fits All kind of approach. According to (Brown), the IMF frequently argues for the same economic policies regardless of the situation. (Brown) gives the example of devaluation of the exchange rate. While reduction of the value of the exchange rate may be the choice intervention for some countries, it need not be the only solution. This notwithstanding, IMF tends to practice it all the time including in Chile.

This did not particularly work in Chile. Policies of privatization and deregulation have been seen to work in countries especially in the West. However, implementation of the same intervention in developing countries may prove futile. The IMF use of these policies in Chile was detrimental to the economy.
Even though the bank offers loans to developing countries in order to boost their capacity to develop projects, this Breton Woods institution has some disadvantages too.

However, as (Hauner) states, despite its lofty status and otherwise commendable objectives, the IMF is attempting to pull off a nearly impossible economic feat: perfectly timing and sizing economic intervention on an international scale.

As (Hauner) writes, the IMF has been criticized for not delivering on its mandate as expected and for overreaching. It has been criticized for being too slow or too eager to assist failing national policies. The IMF had been accused of favoring big economies at the expense of smaller developing countries. As such, Chile, like other countries has been on the receiving end of IMF’s unlikely policies. (Payer) argues that since the United States, Japan and Great Britain feature prominently in IMF policies, it has been accused of being a tool for free-market countries only. As such, countries like Chile, which despite being a leading economy in Latin America is not yet considered as part of the free-market countries which include United States, Japan and Great Britain.

Therefore, free-market supporters roundly criticize the IMF for being too interventionist. Other member countries, such as Italy and Greece, have been accused of pursuing unsustainable budgets because they believed the world community, led by the IMF, would come to their rescue. This is no different than the moral hazard created by government bailouts of major banks.
According to (Brown), IMF has caused a decline in public services in most developing countries that it operates in. (Brown) writes that the insistence on spending cuts lead to the decline in public services. (Brown), suggests the IMF insistence on a reduction in expenditure leads to an upsurge in health problems in the countries where these intervention is implemented. Some reports have even linked IMF to cholera and tuberculosis increase in some countries. This may not be the case in Chile but though there lack of studies in this area in Chile, there are pointers to this effect. According to (Brown), the IMF has been frequently criticized for ignoring the impact of its policies on the poor people as it concentrates on the bigger picture of macro-economics.

Conclusion

Both the World Bank and the IMF, according to (Mason and Asher), take away political autonomy. Chile has over the years depended on these two institutions for aid. This has made it dependent on them for any development in the country. (Mason and Asher), write that in countries like Jamaica, the IMF has taken away their right to decide their national policy. They argue that such countries, Chile included have to follow the economic dictates of an unelected body. The fact that its perspective is skewed by free market ideologies and the interests of the developed world does not help especially in countries which do not share such ideologies.

(Kapur, Lewis and Webb), write that these two institutions are a moral hazard. According to (Kapur, Lewis and Webb), the IMF has also been criticized by free market economists arguing that they do not do much. They contend that their interventions creates are not always helpful because they encourage countries to be reckless especially since they know that they can rely on IMF and World Bank loans. (Kapur, Lewis and Webb), add that these institutions involvements are arrived at from the premise of misinformation and therefore do not really address the problems faced by the countries. This then creates a situation whereby countries depend on IMF and World Bank yet they should take personal responsibility.

Brown, Bartram Stewart. The United States and the Politicization of the World Bank: Issues of International Law and Policy. New York: Routledge, 1992.

Hauner, Linda Kay. Poverty and the World Bank: An Examination of Economic Development Theories and Practice. Kansas: ProQuest, 2008.

Ismi, Asad. Impoverishing a Continent:The World Bank and the IMF in Africa. Ontario: Halifax Initiative, 2004.

Kapur, Devesh, John P. Lewis and Richard C. Webb. The World Bank: Its First Half Century. Brookings Institution Press: Washington D.C., 2010.

Mason, Edward S. and Robert E. Asher. The World Bank since Bretton Woods. New York: Brookings Institution Press, 2010.

Payer, Cheryl. World Bank: A Critical Analysis. New York: NYU Press, 1982.

Perry, Guillermo and Danny M Leipziger. Chile: Recent Policy Lessons and Emerging Challenges. Washington D.C.: The World Bank, 1999 .

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