CONFIDENTIAL
PAGE 01 SANTIA 12078 01 OF 02 231842Z
ACTION ARA-10
INFO OCT-01 ISO-00 CIAE-00 DODE-00 PM-04 H-01 INR-07 L-03
NSAE-00 NSC-05 PA-01 PRS-01 SP-02 SS-15 USIA-06
AID-05 COME-00 EB-07 FRB-03 TRSE-00 XMB-02 OPIC-03
CIEP-01 LAB-04 SIL-01 OMB-01 INT-05 AGRE-00 IO-13
DHA-02 /103 W
------------------231913Z 109770 /42
R 231648Z DEC 76
FM AMEMBASSY SANTIAGO
TO SECSTATE WASHDC 2729
INFO AMEMBASSY ASUNCION
AMEMBASSY BRASILIA
AMEMBASSY BUENOS AIRES
AMEMBASSY LA PAZ
AMEMBASSY LIMA
AMEMBASSY MONTEVIDEO
USCINCSO
C O N F I D E N T I A L SECTION 1 OF 2 SANTIAGO 12078
EO 11652: GDS
TAGS: PGOV, ECON, CI
SUBJ: THE CHILEAN ECONOMIC PICTURE AT THE YEAR END
REFS: (A) SANTIAGO 1157, (B) SANTIAGO 8904
1. SUMMARY: ON HIS DESIGNATION AS AMBASSADOR IN WASHINGTON,
CHILEAN ECONOMIC MASTERMIND JORGE CAUAS WON ANOTHER VICTORY
FOR HIS POLICIES WHEN PRESIDENT PINOCHET BESTOWED HIS MANTLE
ON A PROTEGE AND MOVED THE REST OF THE TEAM UP A NOTCH. EVEN
BEFORE CAUAS STEPPED DOWN SUCH ECONOMIC DEBATE AS EXISTED IN
CHILE WAS AIMED MORE AT NIBBLING AWAY AT HIS ORTHODOX ECONOMICS
THAN, AS A YEAR BEFORE, REPLACING IT WITH SOMETHING
CLOSER TO TRADITIONAL CHILEAN RELIANCE ON STATE INTER-
VENTION. ALTHOUGH THE CONOMIC TEAM HAD MADE PROGRESS
IN REDUCING INFLATION, BUILDING INTERNATIONAL RESERVES, AND
CONFIDENTIAL
CONFIDENTIAL
PAGE 02 SANTIA 12078 01 OF 02 231842Z
BRINGING PUBLIC SECTOR EXPEDITURES UNDER CONTROL, MANY OF
CHILE'S BASIC ECONOMIC PROBLEMS REMAIN LITTLE CLOSER TO
SOLUTION THAN WHEN THE TEAM TOOK OVER. THE BANKING AND BUSINESS
COMMUNITIES, THE LABOR MOVEMENT AND CONSERVATIVE POLITICAL
CIRCLES HAVE INTENSIFIED PRESSURES FOR BENDING IF NOT FUNDA-
MENTALLY MODIFYING POLICY. BUT PRESIDENT PINOCHET'S ENDORSEMENT
OF THE TEAM, COMBINED WITH THE DEPARTURE OF THE AGILE CAUAS,
PRESAGES LITTLE GIVE. END SUMMARY.
2. HOW IT WAS: A YEAR AGO, SANTIAGO WAS FILLED WITH
SPECULATION THAT THE CHILEAN ECONOMIC TEAM UNDER FINANCE
MINISTER JORGE CAUAS WOULD SOON BE THROWN OUT. UNEMPLOY-
MENT WAS RISING TOWARD A 20 PERCENT RATE, INFLATION WAS
VERY HIGH DESPITE CAUAS' EARLIER PROMISES THAT IT WOULD
BE UNDER CONTROL, SALES HAD JUST PASSED THEIR LOWEST
POINT, AND THE PRICE OF COPPER WAS HANGING AT ABOUT 55
CENTS A POUND. JUNTAMEMBER GENERAL LEIGH'S COMMENTS
ABOUT THE SOCIAL COSTS OF THE AUSTERITY PROGRAM BARELY
VEILED HIS MISGIVINGS ABOUT SOME OF THE TEAM. RUMORS
WERE RIFE THAT OPPOSITION TO CAUAS' POLICIES REACHED
INTO OTHER HIGH ECHELONS OF THE MILITARY. AND IDEOLOGI-
CALLY ACCEPTABLE ALTERNATIVES TO CAUAS' "FREE MARKET"
POLICIES ABOUNDED. MANY OF THE LOCAL ECONOMIC
COGNOSCENTI INDICATED WILLINGNESS TO COLLABORATE IN
AN ECONOMIC PROGRAM WHICH LEANED MORE HEAVILY ON GOVERNMENT
INTERVENTION AND RESTRAINTS.
3. BY THE END OF FEBRUARY 1976 PRES PINOCHET HAD
INCREASED HIS STRENGTH AND MADE CLEAR THAT
FINANCE MINISTER CAUAS' FREE MARKET POLICIES WOULD CONTINUE
AS THE ORDER OF THE DAY. POLITICALLY MEANINGFUL "ECONOMIC
DEBATE" ENDED, THOUGH CRITICISM DID NOT CEASE.
4. CRITICISM CONTINES: CHRISTIAN DEMOCRATS STILL USE
THE SLOWNESS OF ECONOMIC PROGRESS TO ATTACK THE GOVERNMENT.
CRITICISM FOR SOME ELEMENTS IN THE BUSINESS COMMUNITY AND
CONFIDENTIAL
CONFIDENTIAL
PAGE 03 SANTIA 12078 01 OF 02 231842Z
FROM CONSERVATIVE POLITICAL CIRCLES HAS GROWN. ORGANIZED
LABOR IS MORE EFFECTIVE IN COMMUNICATING ITS CONCERNS.
WORKER FIRINGS COMBINED WITH POOR SALES HAVE LED MANAGEMENT AND
LABOR TO VOICE SIMILAR COMPLAINTS ABOUT CONTINUING LOW DEMAND,
AND ABOUT FOREIGN COMPETION BEING STIMULATED BY FALLING TARIFF
BARRIERS AND REAL EXCHANGE RATE APPRECIATION. MORE
RECENTLY THE GOC SET WHEAT SUPPORT PRICES WELL BELOW
EXPECTATIONS (THOUGH ABOUT WORLD PRICES) AND GREATLY AGITATED
CHILE' S WHEAT FARMERS AND RECENT WINE IMPORTS FROM ARGENTINA
HAVE ANGERED CHILEAN WINE GROWERS. AND WE KNOW THAT SOME
MILITARY OFFICERS RAMIN CONCERNED AT THE SOCIAL COSTS OF
AUSTERITY, AND THE INFLEXIBILITY OF THE TEAM'S APPROACH.
5. THIS CHRISTMAS EASON THE DEBATE HAS A DIFFERENT
QUALITY. A RENEWED SLUMP IN THE COPPER PRICE NOTWITH-
STANDING, THE CHILEAN ECONOMIC SITUATION IS SOUNDE THAN
A YEAR AGO. FOREIGN EXCHANGE RESERVES ARE UP, AND THE
SITUATION WITH RESPECT TO INFLATION AND UNEMPLOYMENT HAS
IMPROVED. PUBLIC SECTOR FINANCES ARE IN MUCH BETTER
SHAPE. MOREOVER, BUSINESSMEN AND CONSERVATIVE POLITICAL
CONFIDENTIAL
NNN
CONFIDENTIAL
PAGE 01 SANTIA 12078 02 OF 02 231857Z
ACTION ARA-10
INFO OCT-01 ISO-00 CIAE-00 DODE-00 PM-04 H-01 INR-07 L-03
NSAE-00 NSC-05 PA-01 PRS-01 SP-02 SS-15 USIA-06
AID-05 COME-00 EB-07 FRB-03 TRSE-00 XMB-02 OPIC-03
CIEP-01 LAB-04 SIL-01 OMB-01 INT-05 AGRE-00 IO-13
DHA-02 /103 W
------------------231912Z 109924 /44
R 231648Z DEC 76
FM AMEMBASSY SANTIAGO
TO SECSTATE WASHDC 2730
INFO AMEMBASSY ASUNCION
AMEMBASSY BRASILIA
AMEMBASSY BUENOS AIRES
AMEMBASSY LA PAZ
AMEMBASSY LIMA
AMEMBASSY MONTEVIDEO
USCINCSO
C O N F I D E N T I A L SECTION 2 OF 2 SANTIAGO 12078
CIRCLES NOT HAPPY WITH THE GOC ECONOMIC POLICIES
RELUCTANTLY PREFER THE PREDICTABILITY OF CURRENT POLICY
TO RADICAL CHANGE. THEY ALSO RECOGNIZE THE LIMITS OF
THEIR POWER AND HESITATE TO INCUR THE DISPLEASURE OF
THE GOVERNMENT BY EXPRESSING OPPOSITION TO VOCIFEROUSLY.
THOSE WITHOUT POLITICAL OR ECONOMIC INFLUENCE -- ORGANIZED
LABOR AS WELL AS THE WIDE GROUP OF THE UN- AND UNDER-EM-
PLOYED -- CONTINUED TO BE UNHAPPY. THEIR DISCONTENT WILL
LIKELY REMAIN MUTED, HOWEVER, SO LONG AS THE STATE'S REPRESSIVE
APPARATUS REMAINS INTACT. MOREOVER, MANY STILL BLAME ALLENDE
FOR THEIR HARDSHIPS.
6. PINOCHET RECONFIRMS SUPPORT: FINALLY, WE UNDERSCORE
PINOCHET'S CONTINUING STRENGTH AND THE SOLID BACKING HE
GIVES THE ECONOMIC TEAM. HE APPEARS CONVINCED THAT RELATIVELY
FREE MARKET POLICIES OFFER THE ONLY ANSWER TO CHILE'S LONG
CONFIDENTIAL
CONFIDENTIAL
PAGE 02 SANTIA 12078 02 OF 02 231857Z
RANGE ECONOMIC AND SOCIAL PROBLEMS. FURTHERMORE THE
TEAM PRODUCED RESULTS WHEN HE NEEDED THEM INTERNATIONALLY.
BY FORCING CHILE TO LIVE WITHIN ITS MEANS, AT HIGH SOCIAL
COSTS, THE TEAM ENSURED THAT CHILE COULD MEET ITS FOREIGN
COMMITMENTS. IT THERBY EARNED THE GRATITUDE OF
PINOCHET AND THE MILITARY FOR SPARING THE GOC THE NECESSITY TO
CONFRONT THE POSSIBILITY OF HAVING TO TRADE UNPALATABLE
POLITICAL CONCESSIONS FOR FOREIGN AID AND DEBT RESCHEDULING.
7. NOW PINOCHET HAS LAID TO REST A SPATE OF RUMORS THAT
FOLLOWERS OF CONSERVATIVE EX-PRESIDENT ALLESSANDRI WOULD
PICK OFF SOME KEY POSITIONS IN A RESHUFFLING, ONCE CAUAS RESIGNED.
WITH
THE CURRENT ECONOMIC TEAM EACH MOVING UP A NOTCH AND WITH
PINOCHET'S EXPLICIT ENDORSEMENT OF CURRENT POLICIES,
SUPPORTERS OF CAUAS' POLICIES (WHICH INCLUDE POWERFUL JORN-
ALISTIC VOICES SUCH AS "EL MERCURIO" AND "QUE PASA") HAVE
CLEARLY WON ANOTHER ROUND.
8. LOOKING AHEAD OVER THE NEXT TWELVE MONTHS AND ASSUM-
ING SLOW WORLDWIDE ECONOMIC RECOVERY WITH COPPER PRICES
STABLE AT OR UNDER 60 CENTS PER POUND WE DO NOT SEE ANY
INSURMOUNTABLE OBSTACLES TO THE GOC REPAYING ITS FOREIGN
DEBTS WITHOUT RESCHEDULING (THE GOC PLANS, REASONABLE, FOR AN
AVERAGE PRICE OF 67 CENTS). IT HAS BUILT UP RESERVES OF SOME
$325 MILLION WITH WHICH TO FINANCE AN EXPECTED BOP
DEFICIT OF ABOUT $300 MILLION. SHOULD A WORLD RECESSION
FURTHER DEPRESS COPPER PRICES AND COMPEL ANOTHER YEAR OF BELT-
TIGHTENING WE THINK THE GOC WOULD BE ABLE TO PLACE BLAME ON
EXTERNAL FACTORS AND RIDE OUT THE STORM. THIS IS NOT
TO SAY THAT CHILEAN POLICY IS IMPERVIOUS TO EXTERNAL
PRESSURES. IT RELIES HEAVILY UPON SHORT AND MID-TERM
COMMERCIAL CREDITS, LARGELY FROM US BANKS, AND LONG-TERM
CREDITS FROM THE EXPORT-IMPORT BANK, IBRD, AND IDB.
PRESSURE FROM THESE SOURCES WOULD REQUIRE THE GOC TO
RESTRICT IMPORTS. OVER A LONGER TIME FRAME, IT MIGHT
CONFIDENTIAL
CONFIDENTIAL
PAGE 03 SANTIA 12078 02 OF 02 231857Z
EITHER ACCELERATE POLITICAL AND HUMAN RIGHTS IMPROVEMENTS
OR LEAD TOWARD TIGHER AUTHORITARIAN REPRESSION.
POPPER
CONFIDENTIAL
NNN