Directorate of Intelligence

“ Chile already has the institutional framework for a rationing system and thus could take the step fairly easily. Rationing would be highly unpopular and politically risky for any government, but low-income groups would fare at least as well with it as in a continuing scramble to find things to buy. ”

“ Consumers face long~continued austerity, whether they like it or not. The USSR can be expected to provide help, but only to the extent of lessening the economic shambles. Because foreign reserves will be exhausted and borrowing capabilities limited, import capacity probably will fall substantially. Import constraints, in turn, will seriously impede production and squeeze consumption. Only increased world copper prices or massive foreign assistance — neither of which seems likely — will allow the present import level to be maintained. ”

“ Economists may wring their hands and the foreign press may view with alarm, but the fact remains that many Chileans are better off than before. Furthermore, many people are delighted with the leveling of incomes at the elite's expense. The shortages common in recent months have affected Allende's low-income constituency, but the living standards of the upper and middle classes have been hit much harder. ”

“ Government ownership and control, already widespread even by Latin American standards in the pre-Allende period, has about doubled in the last two years and now encompasses at least one-half of GDP. In some spheres - notably mining, large-scale manufacturing, electric power, communications, and banking - state control is virtually complete. ”

“ Moreover, people with extra money in their pockets for the first time probably have not yet begun to worry much about the lack of things to buy. In fact, Allende's actions have encountered little effective resistance except when they have threatened to cut deeply into middle-class interests. The month-long strike that nearly paralyzed the economy in October was triggered by independent truckers and small retail merchants, who were later joined by professionals and larger entrepreneurs. ”

“ In the unlikely event that Chile resumes debt service payments to its major creditors, imports would have to be cut even more sharply.Such an import cutback will require difficult allocation decisions. In the likely event that agricultural output continues to decline, large food imports will be needed to maintain a politically acceptable diet. Although Allende's advisers recently estimated that food imports in 1973 would have to be more than $50 million higher than in 1972, it is doubtful that the current level can even be maintained. ”

“ The recent price hikes granted state enterprises are unlikely to improve their profitability for very long because wages and other costs are rising rapidly. Although the Allende administration has kept the private sector on a relatively tight financial rein, the wage-price spiral and the public sector's deficits have inflated the money supply remarkably. ”

“ Employment at the mines has expanded considerably, as the administration rewarded the faithful with jobs. In addition to inept management, featherbedding, and poor labor discipline, the industry has been increasingly afflicted in recent months with machinery breakdowns and supply bottlenecks.As might be expected, production costs have skyrocketed since 1970. Traditionally the world's lowest-cost major producer, Chile now is barely breaking even — despite reneging on debt servicing. ”

“ Because official price rises began to accelerate in the last quarter, real wages declined somewhat, but at the end of 1971 they were still perhaps 25% higher than when Allende took office.Real wages for most workers peaked in January 1972, when Allende granted a general 22% wage increase to compensate for the past year's inflation. An annual wage readjustment is a tradition in Chile, but prices, normally erode nearly all the gain before the year is over. ”

“ Still mostly in the hands of small entrepreneurs, trucking has suffered from shortages of spare parts — especially tires and batteries.The government has increased its control over distribution but nevertheless failed to prevent confusion and growing shortages. Government control is in fact widely blamed for the scanty supplies of perishable foods at the peak of the harvest season. As one Chilean put it, "How many government workers do you know who are going to unload vegetables at two in the morning or on Sundays to keep them from spoiling?" ”

“ Last year's poor crop - the smallest since the early 1950s - reflects both increased idle land on state-controlled farms and extreme pessimism among many remaining private farmers, who failed even to plant wheat. ”

“ Although agricultural production probably will be down about 10% in 1972/73, the election will occur at the harvest season's peak, when most foodstuffs supplies will be at the year's highest level. Furthermore, December through February are the summer vacation months, when people traditionally flock to the seashore and sales of many things slump. During this breathing spell, the administration can concentrate its efforts on undoing supply snarls affecting important consumer goods.Allende should be able to keep import levels reasonably high until after the election. ”

“ Because the farms taken over had provided much of Chile's marketed output, foodstuff deliveries to urban areas have dropped sharply. The magnitude of production losses resulting from Allende's agrarian policies became apparent in 1971/72. Wheat, which accounts for about 15% of farm output and almost 40% of the caloric intake, suffered a 35% production decline. Because it can be grown relatively quickly and cheaply, wheat often has served as a "hedge" crop for nervous private farmers, and l970/71's record crop stemmed in part from the uncertain political climate during the presidential race. ”

“ Two main factors have fueled the sharp increase in demand since Allende's election: massive public sector deficits and a major income redistribution favoring the lower classes, who have spent as never before in 1971, overall consumption of goods and services (government and personal consumption) expanded by l5%-20% in real terms (see Figure 5) . This sharp jump was possible because of an 8% increase in GDP, rising imports, a sharp drop in fixed investment, and a rapid drawdown of business inventories. Even the official data show that private fixed investment plummeted by 55%-60% in I971. ”

“ Labor discipline has deteriorated badly because workers feel free to defy management, particularly in the remaining private firms. Equipment breakdowns due to poor maintenance have been on the rise, and — because spare parts inventories were also depleted — prolonged stoppages have become increasingly common.Managerial incompetence. which has crippled mining and agricultural output, has, however, been apparently less pronounced in manufacturing The state already owned plants encompassing about one-fourth of manufacturing output before Allende took office. ”

“ Largely because of the business profit squeeze and plunging copper receipts, central government revenues increased by only 25% in nominal terms and not at all in real terms despite new taxes and rapid economic growth. ”

“ Because of state enterprises' soaring operating deficits. the public sector deficit appears likely to approach 45 billion to 50 billion escudos, or almost 20% of GDP. Artificially low prices for public services, inefficient management by unqualified political appointees, and the rapidly expanding number of money-losing state enterprises all have contributed to the problem. Even traditionally profitable state enterprises such as the electric power and petroleum companies are incurring large deficits. ”

“ They handle almost all imports as well as most agricultural output that does not go into the black market. Retail distribution remains largely in private hands, but the government is rapidly expanding its control overfood marketing, particularly in low-income neighborhoods. In these areas. "Neighborhood Supply Committees" have been set up to oversee small private merchants and distribute foodstuffs supplied by government wholesale entities.Supply and distribution problems have been compounded by widespread hoarding as the people reacted to intermittent shortages. ”

“ Consumers increasingly have been hoarding foodstuffs and other household goods. while business managers have tried to stockpile raw materials and spare parts. Within hours of reopening their doors after the October strike, retailers found their shelves bared by consumers # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Imports - An Important Crutch So Far Rising imports thus far have enabled Chile significantly to increase consumer supplies. ”

“ Chile may also receive emergency assistance from Communist countries during this period. Although it is doubtful that Allende's December trip to Moscow will yield the massive aid being sought, the Soviets may be willing to match the $50 million in hard currency extended in 1972. Chile's Long-Term Economic Prospects Regardless of the election's outcome and subsequent political events, Chile faces grave economic problems during the next several years. The economy is a shambles in most respects and probably will deteriorate further before remedial action is taken. ”

“ The situation changed markedly in 1972, however, because fewer people were willing to hold cash balances, official price rises accelerated, and more and more goods were being sold through the black market. ”

“ Numerous breeding animals and under-sized beef cattle were slaughtered As a result, estimated beef output in 1971/72 fell to little more than half the extraordinary 1970/71 level and to about three-fourths the average.Most indicators point to a further substantial decline in agricultural output in the current crop year. ”