Microeconomic adjustments in Chile during 1977–1981: The importance of being a grupo

Abstract

This paper uses the financial statements of industrial firms to provide an integrated firm level view of the changes in the Chilean economy during 1977–1981. Both real side and financial shocks had major effects on the performance of some types of firms. Exportable goods producers did relatively poorly in ‘real’ activities, for reasons probably tied to Chile's real prolonged exchange rate appreciation. Import-competing firms that began the period with high protection did even worse, apparently reflecting the larger change in their output prices as protection was dismantled. The reforms thus shifted demand away from industries least in line with the country's comparative advantage, but they also hurt exportables — the very sector authorities intended to promote. On the financial side, the highly positive real cost of peso borrowing reduced industrial profits considerably. A handful of powerful conglomerates ( grupos) generated large (but presumably unrealized) capital gains by investing in the securities of related enterprises. Such activities allowed them to offset relatively poor returns on real operations; and their ownership of the country's major banks allowed them to consolidate control of a large volume of assets with debt finance. These two results explain why the grupos were suddenly in considerable financial difficulty when the Chilean boom ended in 1982.