Economic history of Chile

In the Far North the Pre-Hispanic economy of indigenous groups were divided among those that practised agriculture and were sedentary and the Changos that lived as coastal hunter-gatherers. The sedentary groups raised llamas and practised irrigation techniques. Bone necklaces, gold and copper objects interpreted as luxury goods suggest according to Villalobos et al. certain level of social stratification among the sedentary groups. At the time of the arrival of the first Spaniards to Chile the largest indigenous population concentration was in the area spanning from Itata River to Chiloé Archipelago. In this area indigenous groups practised glade agriculture among the forests. The forests provided firewood, fibre and allowed the production of planks. Tools are known to have been relatively simple. In addition the Mapuche and Huilliche economy was complemented with chilihueque raising. The southern coast was particularly rich in molluscs, algaes, crustaceans and fish. == Colonial economy ==

in 1541. The new cities were important for the economic order that emerged in Chile during its conquest. Spanish conquest (1541–1600) The conquest of Chile was not carried out directly by the Spanish Crown but by Spaniards that formed enterprises for those purposes and gathered financial resources and soldiers for the enterprise by their own. In 1541 an expedition (enterprise) led by Pedro de Valdivia founded Santiago initiating the conquest of Chile. The first years were harsh for the Spaniards mainly due to their poverty, indigenous rebellions and frequent conspirations. The second founding of La Serena in 1549 (initially founded in 1544 but destroyed by natives) was followed by the founding of numerous new cities in southern Chile halting only after Valdivia's death in 1553. Beyond subsistence the 16th century economy of Chile was oriented towards large-scale production. Spanish colonizers used large amounts of indigenous labour following the slave labour system used in the sugar cane plantations of the Mediterranean islands and Macaronesia. This system of labour successively killed the production base leading to the imposition of the encomienda system by the Spanish Crown in order to prevent excesses. In Chile Spanish settlers managed to continue to exploit indigenous labour under slave like conditions despite the implementation of the encomienda. Rich Spanish settlers had over time to face opposition to their mode of production by Jesuits, Spanish officials and indigenous Mapuches. were destroyed by 1604. The initial Spanish settlers of Chiloé Archipelago (conquered in 1567 After those dramatic years the colony of Chile became concentrated in the central valley which became increasingly populated, explored and economically exploited. Following a tendency common in the whole Spanish America haciendas were formed as the economy moved away from mining and into agriculture and husbandry. Over the course of the 17th century the indigenous population of Chile declined, making the encomiendas less and less important. Chilean encomenderos who had encomiendas in Cuyo, across the Andes, introduced to Chile indigenous Huarpes who they hired to other Spanish without encomiendas. In the 17th century economy of the Viceroyalty of Peru, Chile's husbandry and agriculture based economy had a peripheral role, contrasting to ore-rich districts like Potosí and the wealthy city of Lima. Husbandry products made up the bulk of Chilean exports to the rest of the viceroyalty. These products included suet, charqui and leather. This trade made Chilean historian Benjamín Vicuña Mackenna label the 17th century the century of suet (Spanish: Siglo del sebo). Other products exported included dry fruits, mules, wines and minor amounts of copper. These two areas exported planks to Peru. Century of wheat (1687–1810) In the 1650–1800 period the Chilean lower classes grew considerably in size. To deal with the poor and landless population a policy of founding cities and granting lands in their surroundings was implemented. Settling as a farmer in the outskirts of old cities (La Serena, Valparaíso, Santiago and Concepción) was overall more popular than joining a new city since it secured a larger consumer market for agricultural products. Chilean haciendas (latifundia) engaged little in the supply of Chilean cities but focused on international exports for revenues. Chile begun exporting cereals to Peru in 1687 when Peru was struck by both an earthquake and a stem rust epidemic. Chilean soil and climatic conditions were better for cereal production than those of Peru and Chilean wheat was cheaper and of better quality than Peruvian wheat. According to historians Villalobos et al. the 1687 events were only the detonant factor for exports to start. The 1687 Peru earthquake also ended a Peruvian wine-boom as the earthquake destroyed wine cellars and mud containers used for wine storage. The gradual decline of Peruvian wine even caused Peru to import some wine from Chile as it happened in 1795 when Lima imported 5.000 troves (Spanish: botijas) from Concepción in southern Chile. This particular export showed the emergence of Chile relative to Peru as a wine-making region. Some of this population settled in the outskirts of larger cities while other migrated to the mining districts of Norte Chico. In the 18th century the shipbuilding industry in Valdivia, one of the city's main economic activities, reached its peak building numerous ships including frigates. Other shipyards of Chile included those of Concepción and Chiloé Archipelago. The Chiloé shipyards constructed the bulk of the ships in Chile until the mid-18th century. Independence Era (1810–1830) The independence wars in Chile (1810–1818) and Peru (1809–1824) had a negative impact on the Chilean economy. Trade was disrupted and armies in Chile pillaged the countryside. The war made commerce a high risk activity and royalist Peru, then the only market for Chilean agricultural products, was closed to commerce with independent Chile. The Guerra a muerte phase was particularly destructive for the Biobío area and ended only to see a period of outlaw banditry (e.g. Pincheira brothers) occur until the late 1820s. Chilean mining activity came out of the independence wars with relatively little damage. Trade with Peru did not fully recover after the independence struggles, instead commerce with United States, France and United Kingdom took off in the 1820s. In addition to the finance of the Chilean army the nascent Chilean state had also to wholly finance the Chilean-Argentine Army of the Andes after San Martín begun to disobey the orders from Argentina and the Freedom Expedition of Perú, originally thought to be financed in part by Argentina. An expensive loan of £1,000,000 taken in 1822 in London in order to finance the independence struggle became a heavy burden for the Chilean state and took decades to pay off. Finance minister Diego José Benavente attempted to reform the tax system but met severe opposition to many measures. To pay off the loan the Chilean state granted the company Sociedad Portales, Cea y Cía a sales monopoly of tobacco in Chile, but this activity ended in failure. == Liberalism ==

Early republican boom (1830–1873) and primitive rafts in Huasco in the 1850s illustrates the uneven modernization of the Chilean economy. In the early republican period Chilean international trade grew considerably. Merchants from countries like England, Italy, Germany and the United States settled in Chile. The overall development resulted in Chile becoming one of the high-income countries in South America. Following the discovery of silver at Agua Amarga (1811) and Arqueros (1825) the Norte Chico mountains north of La Serena were exhaustively prospected. In 1832 prospector Juan Godoy found a silver outcrop (reventón) 50 km south of Copiapó in Chañarcillo. In the mid 19th century, these countries experienced large gold rushes which created a large demand for wheat. Chile was at the time the "only wheat producer of some importance in the Pacific". At the same time as the wheat cycle new irrigation canals were built and apiculture and some machines introduced into Chilean agriculture. Apart from that, new markets were explored for Chilean agricultural products. The "cycle" came to an end in the late 1870s due to the increased technification of agriculture in the United States and Argentina plus the competition of Russia and Canada. The end of the wheat cycle added to the already difficult situation that Chilean economy was passing through in the 1870s. In the mid-19th century the value relationship established by law between gold and silver coin undervalued silver coins causing the flight of silver from Chile due to better prices in the international market and a scarcity of silver coins in Chile. With the abolition of the silver standard in most countries that begun in Germany in 1871 the unadjusted Chilean rate that had previously undervalued silver came to undervalue gold instead. Following independence in 1820 Valdivia entered a period of economic decline. German immigrants that arrived from 1850 to 1875 transformed the economy of Valdivia and the whole Southern Chile. Among the achievements of the Germans immigrants was the deepening of division of labour, the introduction of wage labour in agriculture and the establishment of Chile's first beer brewery in Valdivia in 1851 by Carl Anwandter. Until the mid-19th century more than 80% of Chilean population remained rural working in agriculture or mining and was to a large degree self-sufficient to produce articles of consume. Saltpetre Republic (1873–1914) Starting in 1873, Chile's economy deteriorated. Chile's silver mining income also dropped. Contemporaries considered the crisis the worst ever of independent Chile. The crisis in has also been considered by Jorge Pinto Rodríguez a force behind the new pulse of conquest of indigenous lands that took place in Araucanía in the 1870s. When Chile found herself in command of the then still Peruvian province of Tarapacá during the War of the Pacific and being subjected to pressure from Peru's creditors, who threatened Chile's credit in Europe if their claims were not met, the Chilean government essentially had two options: to nationalize the industry for Chile (that is to pay the Peruvian debt certificates), or to recognize the holders of the Peruvian debt certificates (which John Thomas North hurried to purchase at knock-down prices) as the owner of the assets. On June 11, 1881, Chile issued a decree in favor of the second option and to enact an export tax upon the export of saltpeter. The Chilean war debts, the impossibility to assume the financial obligations of nitrate certificates and the will to deflate European opposition to the annexation were the reasons to the decree that was criticized in Chile after the war. As the victor and possessor of a new coastal territory following the War of the Pacific, Chile benefited by gaining a lucrative territory with significant mineral income. The national treasury grew by 900 percent between 1879 and 1902, due to taxes coming from the newly acquired lands. British involvement and control of the nitrate industry rose significantly, but from 1901 to 1921 Chilean ownership increased from 15% to 51%. The growth of Chilean economy sustained in its saltpetre monopoly meant, compared to the previous growth cycle (1832–1873), that the economy became less diversified and overly dependent on a single natural resource. During the Nitrate Epoch the government increased public spending but was however accused of squandering money. Since the 1880s some scholars argue that Chile was en route to becoming an industrialized nation before 1914, economist Ducoing claims no industrialization took place, but rather a modernization process. Valparaíso was one of the principal ports of the Pacific. Starting in 1878, the Chilean state increased the issuing of new banknotes (fiat currency) causing the Chilean peso to devaluate. When the War of the Pacific began in 1879 the government issued more fiat currency in order to afford the costly war, and continued to do so in 1880 and 1881. However, during the Chilean Civil War in 1891 the government of José Manuel Balmaceda issued more fiat money to finance this new war. Issuing of fiat money then continued until 1907 but from there on currency was issued with convertibility to gold or saltpetre mining related legal titles. These imports resulted in a lowering of meat prices in Chile. The rapid economic expansion of the late 19th century occurred not only in the northern regions but also in the extreme south where in Tierra del Fuego a gold rush was triggered in 1884 fueled economic growth in Punta Arenas and attracted a considerable amount of European immigrants. Tierra del Fuego and much of Magallanes Region also experienced a boom in the sheepherding industry since the 1880s accompanied by colonization of the sparsely populated Patagonian grasslands. In the South-Central Araucanía the Chilean invasion of native Mapuche territory caused the economy of Araucanía to change from being based on sheep and cattle herding to one based on agriculture and wood extraction. The Mapuches' loss of land following the occupation caused severe erosion since Mapuches continued to practice large-scale livestock herding in limited areas. Crisis and restructuring (1914–1938) , a town created to serve El Teniente during the early days of the large-scale copper mining ("Gran Minería del Cobre"). The opening of Panama Canal in 1914 caused a severe drop in traffic along Chilean ports due to shifts in the maritime trade routes. In addition to this international trade collapsed and state income was reduced to half of its previous value after the start of the World War I in 1914. The Haber process, first applied on an industrial scale in 1913 and later used as part of Germany's war effort due to its lack of access to Chilean saltpetre, ended Chile's monopoly on nitrate and led to an economic decline in Chile. While saltpetre mining gradually waned in importance copper mining rose, exporting raw materials to a level unprecedented in the history of Chile. By 1929 copper exports had reached the same values as saltpetre exports, and in 1937 the value of copper exports largely surpassed that of saltpetre. The main companies were; Anaconda Copper in control of Chuquicamata, Kennecott Copper Corporation in control of El Teniente and Andes Copper in control of Potrerillos. Between the 1910s and 1930 United States investments in Chile had a tenfold increase, the bulk of which was directed to mining activities. Edwin W. Kemmerer, referred to in an expression of the time as the money doctor, was invited to Chile in 1925 to deal with monetary policy and inflation problems which were considered one of the principal economic problems of Chile at the time. The visit by Kemmerer was used to back up monetary policies already outlined by Chileans. Saltpetre and copper exports collapsed. These policies contributed to an industrial recovery and for the industry to already by 1934 surpass the levels of activity of 1929. Overall industry recovered and expanded faster than the traditional exports in the post depression period. The Great Depression brought initially a period of deflation of Chilean currency followed by inflation in 1931 and 1932. The inflation was brought under control momentarily after 1932 but resurfaced again in 1936. Despite this, conditions in for rural workers remained harsh with Tancredo Pinochet denouncing the poor conditions of workers in the hacienda of president Juan Luis Sanfuentes during his presidency (1915–1920). The Faculty of Economical Science of the University of Chile was established in 1937 coinciding with the spread of Keynesian economics. == Internal growth era ==

Partial industrialization (1938–1958) Industrialization became a state policy from 1938 onwards. The perceived success of the Soviet economy, the fast growth of other centralized European economies and the influence of Keynesian economics helped to establish "development inwards" ideas in Chile paving the way for active state involvement in the nation's economy. These tendencies were reinforced in 1948 with the establishment of ECLAC (CEPAL in Spanish) in Santiago and the arrival of Raúl Prebisch in 1950 as director of it. Chile's "development inwards" policies were part of a regional phenomenon with Argentina, Brazil and Uruguay applying similar policies. To finance CORFO loans were taken by the government, the bulk of the taxes were raised and copper mining in particular got an additional tax. In doing so it injected capital and granted loans to the Compañía Electro-Siderúrgica e Industrial de Valdivia, the inheritor to the failed Altos Hornos y Acerías de Corral. Industrial activity experienced enormous growth in the 1940s, it expanded at least 6.1% annually in that decade. The agrarian production in Chile contracted from 1950 onwards. A government plan set up in 1954 to address this ended with meager results and in 1958 a new plan was presented. Inflation surpassed 200 percent, and the fiscal deficit surpassed 13 percent of GDP. By 1973, the economy was in recession. At the same time, the United States conducted a campaign to deepen the inflation crisis. == Neoliberal reforms (1973–1990) ==

From an economic point of view, the era can be divided into two periods. Monetarist shock therapy and "seven modernizations" (1973–1982) (1971–2007). After the military took over the government in 1973, a period of dramatic economic changes began. and the import substitution industrialization and structuralist economics supported by Chilean governments since the Great Depression. In a shock therapy, Chile was drastically transformed from an economy with a protected market, with strong government intervention, into a liberalized, world-integrated economy, where market forces were left free to guide most of the economy's decisions. The central bank raised interest rates from 49.9% to 178%. Thereby inflation could be lowered at the expected price of a sharp recession. When unemployment doubled some public work programmes were installed. Initial support by the business community dried out when contractionary monetary policies and hasty liberalizations caused a drop in manufacturing output of 26% in 1975. The first period advocating a Monetarist shock therapy and “seven Modernisations” is marked by a high rate of business bankruptcies and a significant loss of manufacturing share of GDP. The Chicago Boys argued that this was due to a lack of competitiveness caused by the development strategy supported before 1973. Chilean economist Ricardo Ffrench-Davis counters that the cause for those bankruptcies cannot necessarily be addressed to outright inefficiencies since the severe recessions (around 1973, 1975 and 1981), real interest rates at an average of 38%, hasty import liberalization and an artificially high exchange rate revaluation were the decisive factors of business mortality. After the recession of 1975 the economy expanded from 1977 to 1980 with high growth rates. It made Chile a showcase for Monetarists and economic liberals. Milton Friedman called it in his Newsweek column from January 25, 1982, a Miracle of Chile. Nevertheless, the economic growth rate of the whole 1975–1980 period was below the potential Chilean growth rate. The boom ended in the economic crisis of 1982. The Latin American debt crisis had a devastating impact on every Latin American country, but Chile was hit hardest with a GDP declined by 14%, while Latin American GDP diminished by 3.2% within the same period. Besides the Petrodollar recycling and the 1979 energy crisis there were some specific Chilean reasons for the crisis too. The Chicago Boys had expected that since the government had achieved a fiscal surplus and the decision for external borrowing was left to private agents a foreign exchange crisis would not occur. But in an effort to fight inflation Dollarization was introduced which lead to a Peso revaluation that caused high current account deficits which led to an increase in foreign lending. Additionally capital controls were abandoned and the financial market deregulated which led to an undamped increase in private foreign borrowing. The debt crisis led to a bank run which led to an economic crisis. With the economic crisis of 1982, the "monetarist experiment" came to be widely regarded as a failure. Pragmatic neoliberalism (1982–1990) Finance minister Sergio de Castro rejected a competitive devaluation of the Peso even in 1982 despite a quickly growing rate of business bankruptcies. He argued that only the strongest and fittest should survive, but with a deepening financial and economic crisis that position became unbearable and he had to resign. The economic crisis of 1981 led to the replacement of all the Chicago Boys. Pragmatic economists had to socialize the two biggest Chilean banks in 1982 and another seven collapsing banks in 1983. The Central Bank of Chile socialized much of the foreign debt. The public expenditure quota rose above 34%, even higher than during the presidency of socialist Salvador Allende. The pragmatic Chicago Boy Hernán Büchi was appointed as finance minister in 1985. He revived Bank regulation by founding the Superintendencia de Bancos e Instituciones Financieras (SBIF) and established capital controls to avoid another financial crisis. He also established ProChile, a Chilean government agency specialized in the promotion of exports. A further promotion of exports were fostered by cheap government credit and subsidies. Some tariffs were raised up to 35%. The socialized banks and some profitable public companies were re-privatized. == Concertación era (1990–2010) ==

After the return to democracy, the Presidents Patricio Aylwin (1990–1993) and Eduardo Frei Ruiz-Tagle (1994–1999) avoided radical change in favour of a “change in continuity”. To raise the lower income groups the share of government social spending was raised and a tax reform increased fiscal income. In 1990 the labor code was reformed with the aim to legitimate unions in order to balance the bargaining powers of employers and employees. Also in 1990 a tripartite agreement between government, unions and employers provided for an increase in the real minimum wage of 28% until 1993. In the first half of the 1990s a significant success on poverty reduction and a bit more equitable income distribution was achieved. in Fjord near La Junta, 2009. Chile is the second largest producer of salmon in the world. Capital controls such as a reserve requirement for foreign loans and a tax on foreign currency loans helped to prevent another financial crisis when many southern American countries suffered from the impact of the Tequila crisis. Nevertheless, the capital controls were not adapted to the disproportionate real appreciation of the peso and excessive capital inflows in 1996–1997. Thus Chile was affected by the 1997 Asian financial crisis and witnessed a financial and economic crisis, albeit a relatively short one. == See also ==