Chile, an Investigation of Aid as Imperialism by Teresa Hayter

Teresa Hayter’s ‘Aid as Imperialism’, was one of the first somewhat critical texts written about the post world-war II monetary institutions, from a so called insider’s view. Having spent some time employed at the Overseas Development Institute, the World Bank financed Teresa’s research on the effectiveness of aid packages provided to Third World countries. Given it was intended as a publication on behalf of the ODI, one certainly encounters a report which offers an objective overview of the various policy approaches that these institutions taken. The first half of the text, is an outline, not a critique. The second half turns to evaluating the implementation of these approaches in several countries. Here is where we find a critical evaluation, which best portrays the inflexibility of foreign aid packages, which, Teresa believed, were given more so as blanket prescriptions, dogmas even. A standard buffet of currency devaluations and austerity measures — liberalize, liberalize, liberalize! It is for this reason that the Overseas Development Institute rejected the original report for publication. Fortunately, it eventually made it’s way to us common readers. The following is an excerpt from the text, focusing on the involvement of these aid agencies in Chile, a country which is emblematic of the deep difficulties of modernization and sovereignty in the global periphery.

Structuralist Ideas on economics as usually propounded purport to provide an alternative to orthodox or monetarist ideas without drastically changing the constitutional framework. They offer proposals for a programme of expansion and redistribution of income, involving gradual changes in the structure of the economy, to provide the possibility of durable and stable growth. They oppose deflationary policies of the IMF variety on the grounds that they hurt the poorer sections of the population and that they inhibit growth and the restructuring of the economy. It is arguable that the Fret government was trying to apply these ideas in its first two or three years in office (1964-7). It appeared that it might have found a middle way in economics, as in politics, between stagnation and revolution. Its economic policies had some unorthodox features which at first seemed to be rather successful. The fact that their success was short-lived may possibly prove that the international agencies are, in one sense, right, there is no painless way of solving Chile’s economic problems, without somebody’s interests being hurt. The question, of course, is whose interests are hurt.

Inflation in Chile had been more or less continuous since the end of the nineteenth century. After the Second World War, stabilization programmers of the orthodox variety were tried on several occasions, with impermanent effects in 1963 and 1964 the Alessandri government was attempting to control inflation with the help of stand-by agreements with the IMF and programme loans from the AID, which on this occasion provided the main pressure for stabilization. Chile ran big balance of payments deficits and its foreign debt rose rapidly. Alessandri’s strategy was to borrow from abroad and pay for this out of the growth it was hoped to generate. Apart from this, efforts were concentrated on keeping wage and salary increases below the rise in the cost of living and on limiting government expenditure; admittedly they were not very successful efforts. At any rate, in 1963 and 1964 growth was barely equal to the= population increase, the rate of inflation in 1964 was 38 per cent.

The Frei government came into office in September 1964. The economic authorities, and especially the Finance Minister Molina, had clear views on policy. Their control and knowledge of the economy was more effective and sophisticated than under the previous government. Their economic programme had several structuralist features. The most important general principle of the programme was the intention simultaneously to achieve three objectives: to slow down inflation, to increase the rate of growth and to redistribute income in a progressive direction. The government’s emphasis on agrarian reform reflected these objectives. They were considered not to be alternatives, as monetarists might argue, but conditions of one another, both for political and for economic reasons.

The government was concerned as a major objective with the elimination of inflation. It was not prepared to try to achieve stabilization in the short run. The authorities conceded that it would be technically possible to achieve stabilization without growth, but from the political point of view it was considered impossible. And from the economic point of view, it was felt that the results were unlikely to be maintained: as soon as growth began again, all the old problems would recur, basically because nothing had been done to ensure that supply would be any more likely to keep up with demand than it had in the past. The Government claimed that it was attacking not merely the symptoms but also the ‘fundamental causes of inflation’. In other words It was tackling the failure of the economy to grow, and in particular the stagnation of agriculture and the difficulty in expanding Chile’s exports.

The authorities also agreed with the monetarist point of view to the extent of believing that stabilization programmes in the past had failed partly because governments had been politically unable to carry them through. Thus part of the sophistication of their policy was that they calculated rather carefully where the burden of readjustment was to fall. This was done by compensating workers for rises in agricultural prices by a fairly liberal wages policy, and devaluing the escudo by monthly adjustments, slowly at first, thus to some extent avoiding the all-round price increases which had usually followed devaluation in the past.

As far as growth was concerned, the government decided to concentrate as an immediate objective on an expansion in copper production and exports. Successive Chilean governments had tried, through incentives such as tax reductions and devaluation, to get the US copper companies to produce and export more. The Frei government made an agreement with the copper companies under which they were to double production by 1970, it undertook to provide most of the capital, and obtained a loan for this purpose from the US Export-Import Bank. Other industrial projects were supported through the State-owned CORFO: petro-chemicals, paper, a sugar refinery, cellulose. In addition government expenditure, both current and investment, expanded considerably, particularly in education , although there were also big tax increases, the budgetary deficit at first increased. The industrial sector, which had much unutilized capacity, apparently was able to expand production to meet the increase in demand and the shift in its pattern, some producers of mass-consumption goods in particular increased their overall profits, in spite of bigger wage and tax bills and reasonably effective price controls, as a result of a bigger volume of sales.

A major policy of the Frei government was land reform. Like other policies in the government’s programme, it was supposed to serve several purposes — anti-inflationary, productive, redistributive and social, According to structuralist theories one of the main causes of iodation is the slow growth of food supplies. Chilean agriculture is inefficient, and a number of large farms are under-utilized. It was considered that changes in the system of land tenure would not only improve material and social conditions for the rural poor but also increase production, in many cases immediately. It seems that production on the land expropriated in the first years of the Fret government did in fact increase, although the government was not particularly successful in expanding the general level of agricultural production. On farms which were not expropriated, output also sometimes rose, since their owners hoped to escape expropriation in this way, although there appears also to have been some precautionary disinvestment. The government’s land-reform law, which was held up in Congress for over two years, made expropriation somewhat easier and the terms for landlords somewhat less favorable.

In addition, the government had a number of other policies of a social and redistributory nature. As has been said, the government’s expenditure, current as well as investment, increased considerably. The land-reform law allowed peasants to organize themselves in trade unions, which had previously been banned. The minimum wage in rural areas was raised. Educational programmes were expanded and reformed, It was claimed that, with its programme of ‘promocion popular’, the government was laying the foundation for a ‘communitarian’ form of society. Unemployment was reduced. In general, the government’s fiscal policies, its policies on wages and prices, and its success in reducing unemployment, constituted what the IMF described as ‘a sharp redistribution of income’, and the redistribution in fact went further than had been planned.

All this did amount to considerable innovation along what might be described as structuralist lines. In the First two years it also seemed a rather triumphant vindication of structuralist arguments on growth and inflation. Chile achieved the hat-trick: more growth, less iodation, and some progressive redistribution of income. In 1965 the rate of growth was 5 per cent and the rate of inflation was down To 26 per cent. In 1966, growth was 7 per cent, inflation 17 per cent. In 1967, inflation was planned to be 10 percent. Chile also greatly improved its balance of payments position; in 1966 it had a record balance of payments surplus of $100 million Commercial arrears were paid off; the proportion of short-term high interest debt in Chile’s total foreign debt declined considerably. For 1967 the government was able to decide to do without the AID programme loan and the IMF stand-by.

But much of this success was made possible by high copper prices. In 1965, copper prices increased by II per cent, which accounted for most of the export increase of 15 per cent, in 1966 copper prices increased by 25 per cent, total exports by a third. The share of copper in Child’s total exports increased from 60 per cent in 1964 to nearly 70 per cent in 1966. Increases in copper prices are said to have accounted for half the increase in tax receipts. The government maintained that it could have adjusted its programme to a lower level of copper prices without distorting it, and that it would, in any case, have been possible to obtain aid in comparable amounts if copper prices had not risen. But the fact that copper prices fell in 1967, although they were still high, must be at least partly responsible for the governments failure to continue the slowing down of inflation in 1967 and 1968. It also of course contributes to the force of one of the structuralists’ main arguments: that the difficulties of developing countries are to a considerable extent caused by fluctuations in their export prices and deterioration, especially during the 1950s, in their terms of trade.

More serious perhaps from a theoretical point of view is that the Chilean government, like other governments trying to achieve stabilization, quite rapidly found itself faced with the difficulty of increasing investment. By 1967, existing capacity in the private sector was being fully used and new investment was needed for expansion. The limits in taxation had, in the governments view, been reached or possibly exceeded. There were some who felt that taxation must be reduced in order to allow the private sector to invest. The government resorted to a highly controversial alternative: wage-earners, instead of receiving their full wage adjustment in cash in proportion to the rise in the cost of living, were to receive part of it in the form of ends conferring ownership in new industries to be set up by the government. The government claimed that, faced with the alternatives of a reduction in the level of investment or a reduction in the level of taxation of the private sector, it had adopted a solution that would reduce the concentration of industrial power, the proposal could in fact be interpreted as quite radical, leading to workers’ ownership of state industries. But it was strongly attacked by the left, who saw it as undermining the standards of living of the workers and felt that the bonds were likely to become worthless. The policy had to be abandoned amid political crisis, rather like IMF policies before it. Since, in an effort to prevent the increase in the rate of inflation, the government also decided on restrictions in government expenditure and in the expansion of credit in 1968, many of the expansionist aspects of the government’s economic policies were abandoned.

In general, it could be argued that the government’s policies were too cautious, and they were quite unrevolutionary. This is particularly apparent in the case of the two major planks of the government’s political programme: ‘Chileanization’ of the copper companies, and land reform. As far as the copper companies were concerned, the government, like other governments before it, made big concessions to the copper companies in order to get them to agree to expand their production.. The companies got a large reduction in their rate of taxation. ‘Chileanization’ meant basically that the Chilean government put up most of the capital for expansion. In one case it bought a majority share in a compares capital, but acquired comparatively little management control. The copper companies were delighted with the arrangement. From an economic point of view Chile would almost certainly have gained if the companies had simply been nationalized. After their long and fruitful exploitation of Chile’s mineral resources, and with Chile’s almost total dependence on their activities, the copper companies no doubt know that they will, one day, be nationalized. As an interim arrangement, the Frei government’s ‘Chileanization’ is a great boon.

The land reform programme originally aimed at the settling of 100,000 families on expropriated land by 1970. This would have been about 40 per cent of the existing landless population. Partly because it was over two years before the government’s new law was passed by Congress, the programme was slow in starting. By 1967, about 5,000 families had been settled. It became clear that the target would be reduced. The main justification used for reducing it was that the programme would be too expensive. About a third of the cost was for compensation of land-owners, although much of this was in fixed-term bonds, and therefore involved an element of expropriation, it could be argued that it was further compressible. The rest was for new housing and roads, machinery, working capital, education and research. The government was determined that the programme should be thorough and that great efforts should be made to avoid a drop in production. But it is possible that part of its determination arose from the fact that it underestimated the capabilities of Chilean peasants, and that it failed to distinguish between what was essential and what, like government housing, was not. Possibly the government’s determination also arose from the fact that the Cabinet, most of whom were land-owners, had their own reasons for time-consuming thoroughness. Moreover, when land is transferred there is likely to be some fall in production on some farms, and certainly some increase in local consumption, however cautious the programme, before the undeniable and undenied long-term benefits of land reform are translated into higher marketed production. Other things being equal, therefore, the sooner the land is transferred, the sooner these benefits are likely to materialize. Also, if the period of transfer is short, one of the arguments advanced by the critics of land reform, that uncertainty about ownership causes land-owners not to invest, disappears.

What of the attitude of the international agencies? First it should be said that it is clear that one of the reasons why the copper companies, at least, were not nationalized, and why the Christian Democrats were elected rather than the FRAP, the Communist-Socialist coalition committed to nationalization, was fear of" the United States. Before the 1964 election, the Christian Democrats had come to an understanding with the United States government on various issues, including treatment of the copper companies. This was one reason why the United States decided to back them. In the absence of such an agreement, or had the Christian Democrats been defeated by the FRAP, the United States would have had various nears of retaliation at its disposal. The economic ones might not have been decisive. Forgoing aid and foreign private investment, nationalizing United States assets, and defaulting on debts could have had major economic advantages for Chile, and would presumably not have led to the loss of the 85 per cent of Chile’s markets for copper which are in Europe. But it was clear that the United States would have gone, and still would go, to considerable lengths, including possibly military intervention, perhaps through the intermediary of the Chilean army or of other Latin-American governments, to prevent a party or coalition committed to nationalization and radical social changes from winning the elections, or, if it did, from taking office, or at least from putting its policies into effect.

Once the Christian Democrats were elected, with their commitment to ‘revolution in liberty", the IMF and the AID were again involved. A Chilean mission went to Washington to negotiate a new standby with the IMF. A programme loan was negotiated with the AID. A rescheduling of Chile’s debts was arranged, mainly on the insistence of the United States government. The World Bank was not directly involved in negotiations of Chile’s general economic policies during this period, although it made a large loan for electric power in 1966, but it too expressed its views on Chilean policies and, its mission in Chile in 1966 wrote a general report.

The attitude of the international agencies to the Fret governments economic programme was interesting. It consisted mainly in trying to ensure that Chilean policies were ‘consistent’ with one another. A US State Department view was that the Chileans had a confused set of policies which were not internally consistent, and that programme loan negotiations in the first year had forced Chile to reconcile the conflicting objectives of simultaneous income redistribution and reduction in inflation. There appeared to he very little recognition of, or willingness to discuss, the theories behind Chilean policies, particularly the theory that the government’s objectives, far from being ‘inconsistent’ or were in fact conditional on one another. A notable exception to this failure of understanding was in the AID mission in Chile, where, at least in one case, there was considerable sympathy with and understanding for Chilean economic and social objectives. Elsewhere officials were prepared to admit, at most, that the Chilean authorities, with strong leftwing opposition, were justified in their concern with political support. There was also some recognition of practical successes. The IMF’s 1967 Annual Report, for instance, began with a laudatory paragraph on Chile’s achievement of faster growth, slower inflation, improvement in the balance of payments and sharp redistribution of income. The AID was of course prepared to admire some of the government’s social policies per se. The World Bank’s report was more negative.

At any rate, the IMF and the AID decided, with reasons, to give full financial backing to the government’s programme. The United States had essential political reasons for supporting the Christian Democrats, whatever their policies. In so far as the IMF and some US officials praised the government’s initial economic successes, they tended to ascribe these to what was felt to be a more vigorous application of the kinds of anti-inflationary policies which the two agencies had rather unsuccessfully been trying to persuade the Alessandri government to adopt. The AID was particularly pleased by, and apparently felt with very dubious justification responsible for, the government’s achievement in increasing tax revenues and reforming the budget. The IMF was encouraged by some relaxation and simplification of import and exchange controls, and by the considerable reduction in the rate of overall credit expansions Both in the IMF and in the AID there was praise for improvement in the techniques of monetary control. But there is little doubt that they also accepted aspects of the programme of which they disapproved, or at any rate which they would not themselves have recommended. The Chileans, in their presentation of their policies, played down some of their more unorthodox aspects and stressed their concern with controlling inflation, but they had at least to get acceptance for the notion that the control of inflation should be ‘gradual’

As far as criticism was concerned the main pressure in the reports, advice and negotiations of the three international agencies was on controlling public expenditure, especially expenditure for social purposes, and on controlling wage increases. The IMF considered that the gradual control of initiation must necessarily involve ‘increasingly tighter overall financial programmes year after year’. It also felt that the policy of income redistribution must be moderated if business savings were to be promoted. In the World Bank there was concern that the public sector was ‘getting too large a share of the cake’. The international agencies solution for the problem of investment was therefore that taxation should be reduced, and they felt that the government’s efforts to tax the private sector had gone too far. All three institutions were especially disturbed by the size of the government’s housing programme: the AID, it should be said, felt that the governments expenditure should be reoriented towards agriculture and other directly productive purposes, the IMF and the World Bank pressed for general limitation on the increase in public expenditure, and were alarmed that the budget deficit had not been reduced in the government’s first year.

Above all, both the World Bank and the IMF came down strongly on the side of reducing the target for land reform, suggesting 20,000 or 30,000 families as more suitable targets. Their main reason for doing so was that they considered the programme would be too expensive. The World Bank, indeed, on whose 1966 mission there were agricultural specialists, was of the opinion that the cost per family would be even higher than the Chileans had estimated international officials were also concerned ‘about the short-term effects of land reform on production, the perspective in the World Bank was ’the next four or five years’. Some still felt that higher prices were the solution for Chilean agriculture. At any rate, the decisions of the IMF and the World Bank on land reform were taken on the basis of its effect on public finances and of its short term effects on production. From both these points of view it was felt, rightly or wrongly that land reform was undesirable, and it was therefore discouraged. Even though it was recognized at a responsible level in the World Bank that Chile’s agricultural development in the long term was dependent on its basic social conflicts being resolved, it was nevertheless felt that Chile ‘simply could not afford’ a land-reform programme of the size proposed. As for the AID, its official attitude was fairly neutral, in the State Department it was claimed that the US ‘certainly did not hold up land reform.

For 1967 the Chilean government decided to do without an IMF stand-by and AID programme loan. This does not seem to have been because it wanted to avoid the conditions attached to them. Negotiations with the AID for a programme loan were in fact practically concluded; the Chileans told the AID they would carry out the agreed programme, and announced publicly that the loan would still be available if, for instance, copper prices fell. Similarly they assured the IMF that their decision to forgo the stand-by should not be interpreted as an unwillingness to formulate financial and general economic policies within the framework of an internally consistent programme. It seems there were several reasons for deciding to do without the financial support of the two agencies. One was political, it was useful to demonstrate that the government was not wholly dependent on external support. There was also doubtless a desire to reduce this dependence in fact, Chile’s heavy foreign indebtedness was an obvious limitation on its freedom of manoeuvre, so long of course as it hoped for further credit in the future and was not prepared to take the drastic step of defaulting on its debts. There were in addition various practical reasons: at a time when there was a boom Io foreign trade, there were strong pressures on the government to start new projects and to increase wages, especially in the copper industry, and the government wanted to put itself in a better position to resist these pressures by appealing to a patriotic desire to reduce foreign dependence. Finally of course it would have been difficult simply to put the AID loan into the reserves.

The Chilean economic authorities were not particularly bothered by the efforts of the international agencies to influence their policies. They tended to say that these efforts did no harm, and might even help in Chile’s case where the authorities had a clear programme of their own which in fact they persuaded the agencies to support. They felt that in countries whose economic policies were not so clearly formulated the pressure could be more damaging. Besides, policies which the agencies supported such as reducing the budget deficit, controlling wage increases and improving the management of monetary policy, were policies with which the authorities were in any case concerned. Those policies of a more expansionist or redistributory nature, which on the whole the international agencies opposed, were carried out in spite of them. Some Chileans felt not that the international agencies approved of Chilean policies, but that, in the political situation immediately after the elections, the international agencies ‘would have supported anything’; the programme was ‘approved’ reluctantly, but the agencies were later, on the whole, convinced by its success. As far as taxes were concerned, it was felt in one case that AID support might have had a beneficial effect in the sense that the opponents of increases in taxation could no longer expect support from the United States the US position was described as ‘a sort of green light’ for taxation, and even for land reform.

It was also felt by at least one Chilean official that the discussions were useful in the sense that they enabled the Chilean authorities to clarify their ideas. Some who were concerned with excesses in certain lands of public expenditure and in wage increases felt that their position was reinforced. The Chilean authorities also felt that the IMF and the AID were changing slowly and incoherently when asked whether international officials were capable of understanding what the Chileans were trying to do, one answer was that the quality of AID economists had gone up sharply, and they could now make a real intellectual contribution. IMF officials apparently varied; of some of those who came to Chile, the Chileans might afterwards be able to say: ’that was a good one, he understood.’

In any case, the differences between the Chilean economic authorities and the international agencies were not really fundamental. There were differences of emphasis, differences of method, and differences of understanding. But the ultimate goals were similar: both the government and the international agencies were basically in favour of financial stability, growth, a more equal distribution of income, legality and evolutionary change. The government hoped to achieve them all at once, the international agencies said Chile must choose between them, and tried to persuade the government to put stability and legality first. Whether, given even more political skill and determination, the Frei government could have achieved all its goals at once is doubtful. At any rate when the crunch came Chile seems to have abandoned many of its expansionist and reformist goals, and to have come down on the side of the international agencies.