Reddit reviews The Unidad Popular and the Pinochet Dictatorship: A Political Analysis

> The ‘blockadists’ Farnsworth and Petras stress that before Allende, Chile had always relied on external aid and credit to cover balance of payments shortfalls arising from the volatility in the price of its main export, copper. They also argue — reasonably — that numbers alone don’t tell the whole story, because the scarcity of short-term credit restricted Chile’s ability to obtain from the United States spare parts for critical industries. Much of Chile’s equipment stock was US-made and required American parts.
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> (2)
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> Sideri (1979) is the only one that contains a semblance of economic analysis. Otherwise, as far as I can tell, none of the multitude of papers and books written by economists about Chile since 1970 even mentions the “invisible blockade”. At least you won’t find it in the works of economists like Ffrench-Davis, Bosworth, Meller, Dornbusch, Edwards, Larraín, etc. (I’m open to correction on this point.)
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> But there’s a good reason for this silence — it’s difficult to take seriously the idea that the “invisible blockade” had much to do with this:
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> chile macro
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> [Source: Larraín & Meller in Dornbusch & Edwards; unless otherwise noted, other tables below come from the same source.]
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> The CPI inflation rate of >600% in 1973 actually understates the true rate, since retail prices were subject to controls under the Allende government. According to Larraín & Meller, the wholesale price index rose 1000% in 1973; and black market prices were five to ten times higher than official retail prices. And here is the proximate cause of the inflation (click to enlarge):
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> [dornbusch_edwards_larrain_mellerT716b](https://pseudoerasmus.files.wordpress.com/2015/05/dornbusch_edwards_larrain_mellert716b.jpg?w=500&h=598)
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> The Allende government’s budget deficit (fourth-to-last line, “overall surplus”) was 15%, 25%, and 30% of GDP in the years 1971-73. That’s massive! Greece at its worst in 2009 hit 15% of GDP. If the United States had budget deficits equal to 30% of GDP, that would amount to $5 trillion — more than three times the actual US budget deficit at its nominal peak in 2009.
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> But more importantly, the last line (“net internal financing”) shows that the Allende government cranked up the printing press. Almost the entire budget deficit was financed by money creation.
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> The largest single factor in the deterioration of public finances as of 1971 was clearly the higher spending on wages and benefits. This was a deliberate part of the populist programme of the Allende government to achieve income redistribution by raising nominal wages while freezing or even reducing menu prices.
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> By the end of 1972, however, inflation was eating into tax revenue in real terms (i.e., the Olivera-Tanzi effect). And the international price of copper, Chile’s main source of foreign exchange earnings, was 25% lower in 1971-72 than in 1970, until it recovered in 1973. [Bosworth et al., Table 1-1, pp 32-33.] Combined, these two effects eventually cost the Chilean treasury about as much as the increased spending on wages and benefits.
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> By 1973, the single biggest factor behind public sector deficits was the subsidy to state-owned enterprises other than copper. The Chilean government had, de jure or de facto, nationalised large portions of the private economy :
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> SOE share of output
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> In 1973, the Chilean state made up for losses in non-copper enterprises equivalent to almost 10% of GDP !!! [See the line “subsidies to social area” in table 7.16b, or the more detailed table of public sector finances from Larraín & Meller.] The huge losses were in part due to disruption in production from nationalisation and management problems, but also to the deliberate state policy of lowering retail prices charged to consumers :
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> soe output prices
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> For me, this is quite sufficient as an explanation for the catastrophe of Chile in August 1973. Expenditure on wages, benefits, and industrial subsidies, combined with the falling price of copper and the inflationary erosion of real tax proceeds, explain nearly all of the 30% of GDP deficit by 1973.
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> How do you produce such a situation through external intervention ??? Did the CIA install printing presses in the Andes and haul sacks of money by llama to the cities of Chile?
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> (3)
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> What about those spare parts that Chile had difficulty importing because of insufficient trade finance? Surely that must have affected industrial production, contributing to the shortages; and affected government revenue via lower output in mining ? Every ‘blockadist’ author emphasises this. And there would be feedback effects: lower output –> lower revenue –> more inflationary finance –> etc.
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> But the supply side of the Chilean economy in 1971-73 was completely dominated by one fact: in order to curb inflation, the Allende regime resorted to rationing, price controls, and the nationalisation of product distribution. This induced massive shortages, hoarding, and queuing. And the price controls would have contracted output in the residual private sector. The severity of the problem can be gleaned here [from Meller] :
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> meller black market 46Just before the coup, the black market exchange rate was more than 40 times the official rate! And the growing black market premium seems to track the decline in industrial output :
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> sectoral chile
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> It’s more plausible that the mining sector, whose output was declining as early as 1972, suffered from a shortage of spare parts. But without micro-level data on spare parts imports and industry usage, this question can’t be answered.
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> (4)
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> Yet there’s another factor. A common corollary to the “invisible blockade” is that the CIA directly or indirectly funded strike action by truckers and trucking company owners, which not only destabilised the country politically, but also caused shortages. The most often cited are those of October 1972, lasting 24 days; and of July-September 1973. But even if the truckers’ strikes had indeed been funded by the United States, they were but a part of the much larger wave of labour discontent in the last year of Allende plaguing a country which had already been fairly strike-prone :
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> falcoff strikes
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> [Both tables 5.3 and 6.10 from Falcoff p. 137-9 and 192-3, respectively] The nation-wide wave of strikes in the summer of 1973 demanding the indexation of wages to inflation was initiated in sympathy with copper miners who walked out for over 74 days and even clashed with police.
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> falcoff mining strikes
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> It’s difficult to see how this state of affairs can be blamed on external factors. Either hyperinflation was eroding real wages despite large nominal wage increases, or the political ascendancy of the left was raising worker expectations. Socialist and communist labour unions were part of Allende’s Popular Unity coalition, but they often had little control over the workers.
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> Of course none of this helped the real economy: strikes by miners alone is estimated to have cost about 7-8% of copper export earnings.
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> (5)
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> In terms of its balance of payments, two misfortunes coincided for Chile in 1971-72: the aforementioned 25% fall in the world price of copper; and the rising dollar price of imports thanks to global inflation. At the same time, domestic agricultural production was severely disrupted by land reform :
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> wheat chile
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> sectoral chile
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