Stabilization with Liberalization: An Evaluation of Ten Years of Chile's Experiment with Free-Market Policies, 1973-1983

Abstract

The recent (post-1973) economic experience of Chile has attracted considerable attention, both from professional economists and from the media.' Most observers have been particularly impressed by the sharp contrasts observed in Chile in such a short period of time. For example, in 1973 Chile had one of the highest rates of inflation in the world (over 600%), whereas in 1981 it experienced one of the lowest rates of inflation (9.5%). Also, in 1975 real GNP declined by 12.9%, but during 1977-80 real GNP grew at an average rate of 8.5% per annum. In 1982, however, the country faced a new recession, with real GNP dropping by 14.5%. In 1983 the GNP was reduced further by 2.3%. The fact that these episodes developed while the military government was actively pursuing free-market-oriented policies that greatly liberalized the economy adds considerable interest to the Chilean case.2 The year 1973 marked an important turning point in Chile's economic and political history. In September of that year the military took over the government from President Salvador Allende, and a period of dramatic economic changes began. Chile was transformed from an economy isolated from the rest of the world, 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 period 1973-81 was characterized by important achievements: inflation was greatly reduced; the government deficit was virtually eliminated; the economy went through a dramatic liberalization of its foreign sector: tariffs were reduced to a uniform 10% level, and prices, including interest rates, were full liberalized. Probably one of the most interesting aspects of the Chilean economy during this period is that major