Economic Reforms in Chile, 1973–1981

Abstract

In 1973 the Chilean economy was virtually closed, and the productive apparatus was largely in the hands of the state as well as severely depreciated from several years of mismanagement and lack of maintenance. Literally hundreds of firms had been acquired by the state, frequently by means of dubious legality, during the prior regime. The fiscal situation was scandalous; a deficit of 24 percent of gross domestic product was being financed by wholesale printing of money, with the result that the inflation rate during 1973 was of the order of 1,000 percent. This inflation, which paradoxically occurred under a system of pervasive price control which extended to the labor market, the financial sector and the exchange rate, resulted in widespread shortages of many goods and tremendous price distortions. Markets were completely administered; as one would expect, most transactions were taking place in the black market. Real output was declining sharply, and disguised unemployment was on the rise.