Public policy in Chile since the coup d'etat of 1973 has been formulated in a highly authori tarian institutional setting. The socio-political constraints that would normally militate against a radical redefinition of the social, economic and political basis of society have been all but absent. In the economic sphere, policy-makers, armed with a wide mandate from the army and possessing a strong academic grounding in monetarism, were able and deter mined to reverse dramatically the previous trend towards growing state intervention and planning—a trend that had begun in the 1930s, but which had reached its apex under the socialist government of Salvador Allende (1970-73). In reorganising the economic basis of society, policy-makers were guided to quite an extraordinary degree by the principles of economic liberalism. The doctrine maintains that in an exchange economy based on the division of labour, individuals left free to pursue their own self-interest will necessarily cause the welfare of the group be enhanced. The free market is argued to be sovereign and, through the price system, to constitute the best mechanism for allocating society's resources both in production and consumption. From this there stems an insistence on limiting the powers of government. During 1973, there developed in Chile a serious crisis of economic stability. When the army came to power in September of that year consumer prices were inflating at 2096 monthly, over 90096 on an annual basis. The imbalance between public sector revenues and expenditures had grown out of control, the deficit of central government alone reaching almost 25% of GDP. The deficit on the current account of the balance of payments stood at 2 -8% of GDP, while foreign reserves were actually US$231 M in the red. GDP, invest ment and consumption were all contracting (Table 1 shows the principal macroeconomic aggregates). From September 1973 to mid 1976, a period that can be viewed as constituting the first phase in Chile's experiment with liberalism, the top economic priority of the new regime was the reduction of inflation and the improvement of the country's external payments position. To this end the government, in conjunction with the IMF, adopted a highly ortho dox approach to stabilisation. The exchange rate was greatly devalued and restrictive monetary and fiscal measures introduced. Prices were decontrolled and denationalisation
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