I This report is restricted to use within the Bank.

No. E-177a

RESTRICTED

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPM~NT

ECONOMIC POSITION OF CHILE

Economic Department Prepared by: Gerald Alter

August 28, 1951

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CHILE

Basic Statistics

Area Population 1950 Current rate of population increase Current rate of increase in labor force

Monetary unit Par value Effecti ve rat,e for bulk of imports 1,000,000 pesos ~

National ~~come (1948)

I

Per capita dollar equivalent Per cent of national income originating (1948)

Agriculture Mining Industry Commerce Other

~dget Results (In millions of pesos)

Expenditures 1950 Receipts 1950

Deficit

296,717 square miles 5,B09.0CO 1.87b. per year 2. 57& per year

Chi1e~n peso 31 peso s per dollar 60 pesos per dollar US$ 16,667· (at 60 pesos rate)

16 billion pesos $350

in 17. 6~6

7.07b 24 .. 0% 16.6% 34.8;6

20,638 17,908

2,730

Per Cent Distribution of Government Revenues 1949 Income and otller direct taxes 36% Indirect taxes 45% I.

Other 19/0

Per Cent Distr~ution of Governwent ~~r~~itures 1949 General a.dministra.tion :I:conomic development and investment Social and cultural Defense and internal security Financial service Other

Basic Statistics _. page 2.

Balance of Payments, Current Account 1950 Mer'chandi sa receipt s Total current account receipts

Payments for imports Profits of foreign companies Total current accoQ~t payments

Current aCcolli1t balance

Forei~ Debt (June 30, 1951.) Dollar debt Sterling debt Other

~ota1

Total Gold. end Exchange Reserves

December 1939 December 1950 May 1951

$297.9 million $334.4 million

$256.1 million $ 50.0 million ::?340.2 million

- 5.8 million

~38. 0 million $ 60.1 million $ 2l ,4 million

$319.5 million

$33.3 million $54.9 million $66.4 million

Money Supply (end of year) - in billions of pesos

1S139 1949 1950 1951 (April)

Co st of Li ving Index i

AV. 1950 (1939 = ~Oo) Per Cent increase December 194~

Deceml,ler 1950 575

16.5

8/17/51 No.572

CHILE AVAILABLE GOODS AND SERVICES (BILLIONS OF CHILEAN PESOS IN 1940 PRICES)

+20 ~~----------------------------~+20

+15

+10 AVJ\.ILABLE

FOR USE TOTAL

PRODUCTION

-5~----------~ ~----------~

1925-29 AVERAGE

1945-49 AVERAGE

CONSUMPTION AND INVESTMENT

YEARLY

+15

+ to

+5

~--~----------------------------~-5 '38 '45 '46 '47 '48 '49 '50 '51 '52

(BILLIONS OF CHILEAN PESOS IN 1940 PRICES) (MILLIONS OF PE~SONS) 40~----------------------------------------~--------------~8

30

20

10

YEARLY (+- d~FT SCALE)

GROSS I'tATlONAL PRODUCT

{~LEFT SCALE} INVESTMENT

'40 '41 '42 '43 '44 '45

PRODUCTION INDEXES (1937 = ;00)

400 I I I I I I I " YEARLY

." ELECTRIC POWER, ••••••• ••

.. ' .... ••••••• MANUFACTURING .... ~

300

200

(+- LEFT SCALE) NATIONAL INCOME

'46 '47 '48 '49 '50 '51 '52

PER CAPITA PRODUCTIVITY INDEXES (1937= 100)

7

6

5

~~~~~~~~~~~~~~~150 YEARLY

MANUFACTURING, POWER, AND BUILDING 125

~~~~~~~~~~--~--~IOO I ~ '."

..... ~ 100L-~--~-~~-~'~~·~~~~~~3C=~·~-~·--J

I ' ..... "'~ I \ AGRICULTURAL 75

AGRICULTURAL MINING MINING

0~~~~~~~~~~~~~~~~~~~~~'~~~~~~~~~~~50

'36 '38 '40 t42 '44 '46 '48 '50 '36 '38 '40 '42 '44 '46 '48 '50 '52

I.B.R.D. - Economic Dept.

8/17/51 No.573

REVENUES AND EXPENDITURES (BILLIONS OF CHILEAN PESOS)

a 10 20 I

194 8 EX PEN D I T U RES I!;mffilmm1'H:!!!:: ~OR::;:D~I N:7':A:-;::R7;'y --:e::-:U:;::"DG:::::E:-!:T'"!!::rm:::rm:::!!!:::A. ~- SPEC I AL BUDGET REVENUES ORDINARY eUDGET,,,,-,,,,-A.-A.""""-

1949 EX PE N D IT U RES :::::::::::::::::::mS::::Hm::mmmm:::::::m::mmm:' REVENUES

1950 E XP ENDITURES i:ism::ii=iS=immmmmmmmm:smmmmmmmmmmmmmm:s:: REVENUES

EXPEND TUR S .• 19 5 I I E ::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::m::::::

(Budget) REVENUES

1952 EXPENDITURES REVENUES

BANK CREDIT (BILLIONS OF CHILEAN PESOS)

CHILE

30

COMMERCIAL BANKS CENTRAL BANK 25 20 15

I· I TO GOVERNMENT

AND OFr'ICIAL ENTITIES

10 5 o END OF

I ~ 1938 TO PUBLIC

1946

1947

1948

1949

1950

1951

5 10

I TO GOVERNMENT

AND OFFICIAL ENTITIES

MONEY SUPPLY AND COST OF LIVING (INDEX, 1937=100)

1200~~~~~~~

YEARLY

1000

800

600

400

20'0

a '---...1.--.....1. _--L-.--l---!...----l

'46 '48 '50 '52 D J

1949

D J

1950

D J D J

1951 1952 I.B.R. D. - Economic D~pt.

1000

800

600

400

200

8/17/51 No. 574

TOTAL EXTER NAL 'TRADE (MILLIONS OF U. S. DOLLARS)

CHILE

500 I ~------~~--------~----------~--------~40 YEARLY TOTALS

400

300

200

100

o

30

20

l 'O MONTHLY - Scale is 1/12 of annual scale

~~~~~~ ~~~~~~~~~~~~~~~~.uu.i I I I I I I I I I I ~O

EXTERNAL TRADE WITH U. S. (From U. S. statistics) (MILL IONS OF U.S. DOLLARS)

400 ~--------~.----------~--------~--------~

300

200

100

o

YEARLY TOTALS

EXPORTS

MONTHLY - Scale is 1/12 of annual scale

COPPER: EXPORTS AND N. Y. MARKET PRICES

30

20

10

(MILLIONS OF U. S. DOLLARS) 45 (CENTS PER POUND) 30

20

10

~--------~ ~--------~~--------~----------~-----------~30 MONTHLY AVERAGES MONTHLY

EXPORTS (~LEFT SCALE)

--\-COPPER PRICES (Electrolytic)

(RIGHT SCALE ~)

20

10

o ~wuuu~~~~~~~~~~~~~~~~~~~~O

'38 '46 '48 '50 '52 J 0 J 0 J 0 J 0

1949 1950 1951 1952

5

4

3

COPPER PRODUCTION (MILLIONS OF METRIC TONS)

YEARLY

WORLD

2 .,

o '39 '46 '47 '48 '49 '50 '51 >'f,2

NITROGEN PRODUCTION (MILLIONS OF METRIC TONS)

YEARLY

" "

5

4

3

2

~--~--~---~--~--~~O '39 '46 '47 '48 '49 '50 '51 '52

YEAR ENDING JUNE 30

I.B.R.D. - Economic Dept.

8/17/51 0.575

20

BALANCE OF PAYMENTS (MILLIONS OF U.S.DOLLARS)

1946

RECEIPTS

PAYMENTS

1947

RECEIPTS

PAYMENTS

1948

RECEIPTS

PAYMENTS

1949

RECEIPTS

PAYMENTS

(Prelim.) 1950

RECEIPTS

PAYMENTS

1951

RECEIPTS

PAYMENTS

o 100 200

NOTE: L.M.C.- Large Mining Companies in copper, nitrate, and iron.

GOLD AND FOREIGN EXCHANGE ASSETS

I r I -) -, i

END OF

~ -

>\:...... . )< •••• • ~ ..... : .. ......... -

-

xx~

CHILE

300 400 I

- 20

)G

0'38 '46 '48 '50 ~~~~~~~~~x~x~~~x~x~~~~~~I~j~j~~-L~~I~WWO

'52 J 0 J 0 J 0 J 0

1949 1950 1951 1952

I. 8. R.D. - Economic Dept.

CHILE: ESTIMATED DEBT SERVICE AS OF AUGUST 1951 (MILLIONS OF u. S. DOLLARS)

25 ,..-,- ·'--r----r~-T J -r----~J I ' 25

201 ; ~ 120

TOTAL SERVICE

I 5 I ~-- \ " -1 1 5

10~1 --------------+--- --------- I' 1 10

TOTAL AMORTIZATION

51 I ' ~, 15

o l..--J- J 0 1951 1955 1960 1965 1970 1975

I.B.R.D.-Economic Dept.

No. 579

CONTENTS

S't.JII&!ARY NJ.J CCHCLUS IONS .. .. .. .. .. .. . .. .. . .. .. .. . . . ~ .. . PROLUCTICIN AND INCCUE • .. r .. .. .. . .. . .. .. . . .. . .. . .. .. . AGP..I CU"L TUBE • t • • • .. .. .. • • • • • .. • . . .. .. .' .. . ..

.. . . .. .. .. . . ..

.. . . . . . Copper." Nitrates Coal •• Oil •• ~ . . .. .. . ..

.. . ~ . . .. , .. .. .. .. . . ~ .. .. · .. ~ . . . . .. .. · . . . .. . .. .. . . .." . · .. .. .. . . , . . .. . . .

nfWSTRY . . . . . . . . . . . ... . . . . . . . . . . . . . . . . COMPOS IT ION OF IN'VESTMENT IN" CHUsE . .. . . . . . . . . . . . . ~

P~e

i

1

3

4 4 5 5

6

8

1X11viillST Ie FI~JANCE AND INFLAT ION • .. • • • • • • • • • • .. .. • ... 10

B.ALAl{CE OF PAn1El1TS POSITION

Historical Review • .. • .. • • • • • .. .. .. • • .. .. • .. .. .. • • Short .... Term Prospects • .. • • • • .. • .. • .. .. • , • .. .. Long-Term Bal8nce of Payments Prospects and Creditworthiness

12

i~

SUMMARY AND CO;NCLUSI0NS

Over the past decade, the Chilean econo~y has sho~ progress, with an increase in total output of goods and services at a faster rate than the in~ crease in !)opulation, so that average real incoIte per capita has risen at a rate of about 1% ar~ual~y. The population actively employed has i~creased more rapidly than total pO~fjula.tion and it is' that increa.se in total. employment! rather than any increase in product i vi ty per lflorker, y'hich has secured higher incomes for the Chilean. people.

During the same period, investment has averaged about 1016 of total out­put t a rate wh:i,ch is by no means high even for underdeye.Loped countries. How­ever» tIll S has been large enough, to provide for mc.intenence of existing capi­tal as well as to provide rnafficient net investment to increase the total capital at a more rapid rate than the growth of the employed labor force. Out­put per '~:orker has nevortheless not risen.

The failure of labor producti vi ty to increase during the past decade is attributable to certain weaknesses in Chile's oll1n development effort as well as to forces beyond Chile's control,

The major weaknes~es in Chilean development efforts du~ing the 1940ls -r;ere: (1) the slow rate of growth in agricultural production, despite apparent possibilities of substantial production increases on existing arable land. There has been a 10t1 ~evel both of private and public investment directly in agr:i.cul ture and in the necessc~ry public facili ties support ing agricultural production; (2) the encouragement given to industry by various governn1ent ro1i­cies was not sufficiently selective; (3) inflationary pressures diverted a disproportionate volume of investment to luxury housing and to other unp~·oduc,... ti ve fields which served as anti""'!'inflation hedges; end (4) the general eco!lomic policies of the government ~ere insufficiently coordinated and in part even tended to hinder rather than to pro ulote development ~ These diffi .... cul~ies were added to the basic structural problems created by the qepression of the 1930' s and the deteriorating long-term tre,de position of natural ni­tr~tes, one of Chile's major exports. The basic adjustments required in the economy of the country ha(l not been fully completed ~:hen World War II started and during the ~ar limited evail£bility of imported capital equipment seriously restricted productive investment.

At the same time there have been increasingly vigorous demand~ by the Chilean people for immediate irrmrovements in consUTIiption levels nrhich have risen, on a pE'jr capita basis, at the rate of about l;~ annual~y. Consumption demands and the investment effort resulted in inflation, ~~i th the domestic price level rising by about 15~~ annually.

The rise in money incomes at a much faster rate than the increase in domestic output inevitably caused demand fOI' imports to increase and thereby accentuated Chile1s balance of payments problem. Chile VIas unable to expand e}~orts by more than 1'1'0 to Iffo per aIlnUln even though domestic output was in­creasing G.t the rate of 2Mb annually., Balance of 'p~ents pres~ures have con­tinued, necessitating retention of import controls.

Chile's foreign exchange earnings are likely to rise in the long term but by n~t more than ~nough to pay for an increase of irr:tports at the rate of 1% to I-tb annually, approximately the same rate imports have risen during the past decade. Thus. if Chile succeeds in expanding ~omestic prod~t~on, in~ cl'J.diug import substitutes, at about the same rate as in the past, balance of payments pressures will contip.ue but sbould be no V!Ofse than th~y are at present. In 1950 balance of payments data indicatec,i a small current account deficit while foreign exchange reserves increa.sed slightly during the year •.

In view of the probable trends of future output, expol'ts, 9!ld imports, the present level of foreign debt service should continue to be manageable. Nevl credits to Chile, therefo~"'et '-I~hich merely offset scheduled amorti~ation repEyroents, do not a})peFlr to be beyond Chile's service capacity. On this basis loans of about $11 - 12 million per year' could be undertDkon since this is cpproximutely the acheduled rnte of repe,yrnent.

Under these conditions t however t with Ii ttle or no increase in output per worker, the growth of total output ,K:ill be relatively modest" A better economic performance can be secured only by more effective use of Chile's own investment resources. This '~ould involve changing the direction of investment to obtain improved over811 pro duct ivi ty. A net inflow of capital. from abroad. would gre2tly assist such a re81locotion, since it is quite l.ikely that during the transition (unti 1 higher "()roducti vi ty is establi shed), improvement in the CQl11pQsi tion of investment 'inould ;require some increase of total domestic invest­ment, However, foreign borrO'fWTing on a larger scale t.'1ould be 'l,';li se for Chile only if there were good prospects for sq.bstnntially better production per­formance. Only then could an incre8sed margin for debt service be secured'. Until a 1"Tell-conceived development program is prepared, promising faste;r growth of output, a.l'J.d on that basis also, a wider ffiergin for debt service, the assumption by Chile of a higher level of foreign debt Y!Quld involve serious risk.

Some init~al steps have recently been taken leading toward the prepara­tion of a coordinated development program, ~he President of Chile appointed a hi~1~~evel cOTuwitt~e of government officic~s to advise upon development poli­cies on the basi s of" techn~cal and economic studies. A new plan.l1ing department was established in the Fomento Corporation to prepare th~se studies in co11abo­r~tion ,vi th other agencies, In recognition of the special importance ot' the agricultural problem, the Chilean Government has invited the Bank, jointly with the Fi\o, to ass;ist in the formulation. of [.~n agricultural development progrem and a survey group is now in Cnile. .,A.l though. it is still too early to observe practical result $ from these measures, they are an encouraging beginning to the solution of Chile's major problem •

.. i1 .....

PROIDCTION AND IHCOMB]

Over the past ten years Chilean production of goods and services in­creased at a. higher rate than population. This was a better performance than in tne previous decade when population growth exceeded production growth,. In the thirties a precipitous decline in world markets produced a severe economic shock in Chile. This Se1"i01).9 cyclical decline was s1lperiIIl])osed upon 8. longer-' term deteriorati.on of one of Chile r s major export industries, natural. nitrates. Under these circumstances, the C~lean authori tie s sought more diversified economic d.evelopment and GoveI'Illllenta1 policies were increasin£!).y orieI).ted toward promoting gI'owth of domestic manufactures. In earlier -()eriods \'IJhen ex­port minerals were being developed Chile received a large inflow of foreign capital; du~"ing t.i:le 1930' sand 1940r s, however, Chile's investment ,,~ras. ex­cept for a fe'!;T years, reduced by a virtual stoppage of capital inflow. It wee clso impaired by a deterioration in Chile f s terms of trade as compared, VIi th previous periods in Chile f s d~velopment.

At the same time, the aspiracions of the Chilean people for a more se­cure and a higher level of living bec[:1me more vocel. Labor u.nions rapidly de­veloped and upward press1,.1.res on ,na.gs levels were intensified. There yras in.,.. cree.sing pressure u,.pon government to e:xpand social security and ~Jel:ff.J.re ser­vices 8lready relatively advanced in Chile. A rapidly e}..-panding labor force required a fairly high level of investment if adequate employment opportuni­ties ~'Vere to be provided at vrage levels conforming to the desired Ii vins standard.

The Ch~lean economy advanced during the forties despite the obstacles noted and the fact that ca"p~~fjl. g.OOdS import s were not readily avail a., ble dur­ing ~7orld i1ar II. About lOfJi of total 01,ltput was devoted to gross dom.estic investment. Although this by no means constitutes an exceptionally high level of investment compared ~ith other underdeveloped couptries, it was something of en achievement for Chile, given the severe pressure for high consumption levels. From 1940 to 1948 the total volume of goods and services produced by Chile increased by about 24%, or by about l07b per capita, TJ.1..i.s ,~as accom­PQnied by an increase of about 7% in re~personal consumption per capita, In 1~48, the last year for l:hich careful estimates of the national income

The preliminary estimates of investment prepared by the Co:r:poracion de For.1ento are deficient in severD1 respect s and probably understate the level of investment. Cel;'ta;in components of inv·estment are ami tted, and it has not as yet been possible to develop estimates of l:':"rvestment in constant prices~ It is Susp80ted that if Grods :JationLll Product and investment were adjusted for price changes by appropriate prica indices, the ratio of investment to Gl·W would be higher. '

-l-

"- 2--

have been prepared, the total -nation.al income vras about 76 billion pesos. On a per capita basis, this amounts to 13,500 pesos, the equivalent of approxi­mately US&; 350. ',illile equiv2lent to only one-fourth of per capita incoI:Ue in the United States, Chilean per capi ta income is one of the highest in South .America, exceeded perhaps only by Argentina and Uruguay.

Chilean economic development has been supported in recent years by foreign governments and international agencies·. ]'rom 1940 through 1949 net credits (dis­bursements minus repayments) of the Export-Import Bank and the IBRD to Chile totaled $60 million. In addition, technical assistance has been provided by United Hations agencies and by the Uniteo, Sta.tes Government.

Despite the improved performance of the forties, there are several in­dications that during the past decade capi tel investment in C:hile did not make a fully satisfactory contribution to production increase, a~d that more effec­tive results could be secured.

During the 1940' s a new investment averaged about 710 of net output, after cl.lo'~Ting for maintenance expenditures, It is unlikely that the total amount of capital existing in 1940 was more than twice net output. On this aSSUu1ption during the forties, capital tTTas increasing by about 3¥~ per yea7:, while bo-ch the labor force and output were increasing by about ~27o per year·o

It is therefore surprising that net product did not expand, at a rate faster then labor force d.uring the forties, partiGularly "!Tlhen the g~nerm growth of technical krlo~'ledge is also tcjken into account. Before 193D Chile had constructed, partly with foreign c~pital, 8 substantial portion of the basic investments in transportation, corr~ication, and corillrnQOity facilities which are essential for sustained economic development. These basic facili­ties should have eased the production p:roblems of the forties. During the war, of course, effective investment was hindered by the reduced availability of ilUJ!orted capital goods. Howeve~. for the period as a whole, the fe.ilure of output to rise mor~ rapidly than the labor force at a time ~hen cDpital was increasing ~or~ rapidly than the labor force is indicative of internal weak~ ness in Chile I a development effort·.

Analysis of the growth of sorne of the major segments of the economy reveals a mixed performance and 8. need for more belanced and more integrated growth~ Agricultural proWlction has lagged, but substar!tial increases in agricultural production should be possible nrithout imposing too severe a strain on the country's capital resources, In mining, the increase in pro­duction ha$ been more favorable, and the immediate prospects for Chilefs main mineral, copj")er, are good. On the other hemd, prospects for any signi­ficant increase in Chilean nitrate production over the long term are poor. In generc·l, industrial development has been striking but a considerable fur..,. ther i~provement can be secured.

AGRIClJL'l'OBE

Alt~ough information on agricultural production is inexact, it appears tJ.1at over the past tVlenty-fi ve years agricultural production in Chile he.s not kept pace with the ri se in population. In the loore recent period, from 1940 to 1948, agricul rural production increased about 115~ cOLlpared 111Ji th a 1370 in­crease in tolJ. population and a 19% increase in nUl!1bers gainfully employed in a~riculture.Y Thus, product per person employed in agriculture declined about 6% from 1940 to 1948. Since 1948 production of crops has been declining al­though. livestock produc tion has increasea. substantially. STIile recently, parti­cularly in 1950, clifficctic factors have seriously affected agricultural produc­tion, the long-term failure of agricultural production to increase at a more rapid rate has seriously affected over&ll performance.

In general, investment over the past ten years in the agricultural sector of the economy appears to have been extreL1ely 10'7. There are indica­tions that investment may not have been sufficient even to mcintain existing capi t.Bl. It is reported, for ex.emple. that mc::ny of the older !1ri vate irriga­tion l:Vorks have not been nroperlil nlcintc.dned. At the present time about 240 millio::J pe.sos per year are being spent by the governn;ent on irrigation \Torks. In 191.~T .. 1949 there \Vas a notable increase of agricultural machinery impo!'ts, financG~ in part by the IBRD credit of $2.5 millioni in 1950 iwports of agri­cuI t'..lrc::J. machinery were again at a lo1J!.' level.

The Chilean Government in collaboration with a joint IBED-FliO group, is currently studying the elements of en agricultural development ]!ro..?;ram. It is hoped that V'lays may be found to increase agricultur[lJ. :production, both for the domestic market and for exp0rts. 1·'hich will not place an undue burden on tl'.e ca})i tal resource~ available to Chile. Preliminary studies indicate that the"('e is substantial under-utili zation of existing a.rable lands. If this de­ficiency can be corrected C't reasonable cost, not only ~'ill agriculti,lral in­corr:e be raised hut 11l0re foodstuffs and other farm products l',i11 be provided to tne grOT'lin5 urban pO·~Jul£.t ion, to dOl!lestic I:.l8llufacturing for processing, and to export markets~

The agricultural production index probably understates someTt,hat the rise in agricultural products since it excludes certain products (dairJ pro­ducts, fresh fruits. vegetables, etc.) ,.,.,hose production has shown a more favorable development.

-3-

MillING

Bet\\-een 1940 and 1943, mining production in Chile increased about 1576, a rate some1"het above the rate of increase in population. The increase in pro­duction has been accompEnied by a substantial rise in production per ~orker employed, particularly in copper. In 1949 and 1950, however, mining output declined from the 1948 level. In view of the role played by Chilean minerals, notably copper and nitrates, 8S foreign exchange earners, the prospects for mining production have special significance.

Copper

The short-term outlook for copper, 1"hich is the major source of foreign exchange receipts, is nom excellent. An agreement bet?:een the United States Gnd Chile in 1951 raised the price of Chilean copper by 3 cents per pouuu, and Chilean copper production ~ill be e;~anded_ In addition, the U.S. Congress suspended the 2 cer..ts iDport t~. Chilean copper is noT'T selling in the U.S. oarket c..t 27~ cents per pOll.'1d (25~'b over lS48 levels) and higher prices ere being -f:Jaid in ot~ler markets. J~t present cor,per is being :0roduced at an annual rate of 450,000 short tons. Production of a 500,000 - 550,000 tons per ye~, the t.:orld T"Jar II peak, could be attained \:i thin t~"JO to tl1I'ee years" Attainment of this output rate is likely both becp~se defense preparations have led to a significant rise in ,,'orld demand for copper, and because capital investments alreaC1y u..'1der way TIill enable ne'IT sulphide ore utili zation to off­set tne exliaustion of oxide ore. Construction of the Chuquicamata sulphide ore plant VIas about 40ib cOEIpleted by the end of 1950, and operations are sched~ed to begin in early 1952.

Although long-terIl production prospects are necessarily speculative, Chilean copper capacity 1ll1gJ:-lt 'l;U'ell ri se over the next t'~.Tenty-fi ve years from the c~'rent leve~ of almost 500,OCO tons to about 750,000 tons. ~his implies finding ?!ld exploiting one new big mine or a combination of mines producing well over 100,000 tons per year. The geological prospects for such discover.Y are favorable in Chile end if mede, the necessary investments are likely to be tL~dertaken by foreign mining companies.

Uitrates

Hi trate production, Ulhich suffered .iuring the war from shipping sDortages, has increased considerably since 1945, altr~ugh recently strikes have hampered the maintene.nce of output. Betmeen 1940 and 1948 production of nitrates increased about 2o;~. In the postwar neriod, farm demand for fer­tilizer, the coal stortage in Europe, and restriction of output of synthetic plants for military reasons ceeated a favorable market for Chilean ni trates·. Nevertheless, Chile mas \.lllable to supply as large an output as in the late

-4-

- 5-

twenties. lrlorld prices of nitrates in the lCJte forties increased €;reatly" but less t~lEl1 :prices in genervl.This is c continuC'tion of the dor'nVlard trend in tlle relC:ltive position of nitrate prices ~Thich begen after f'[orld ITar I ..

Iespi te a prospective high rate of increase in the t~rld demand f(}r nitrogen, the long-term outlook fOl" Chilean nitrates is not bright. Hitrate recovery by solar evaporation is being promoted in Chile - a 50,DOO-ton copacity evaporation pltnt isund.er construction., 1Jhile this l·.rill iil~1!rove Chile1s coupetitive position, techT'.icpl progress has fevored flnd "'i11 probably cont inne -GO fa.vor the [;osi tion of synthetic processes. The installation of synthetic facilities utilizing natural gas as fuel is proceeding at a ver,y rapid rate in mal1Y are&.s of the ~rorld. Gi ven the lOr:T cost of operating these fccilities, any increase in the production of Chile[1n nitrates is likely to be offset over the long term by e continuing reduction of nitrate prices relative to other prices.

Coal

Since coal is produced for the internal market, fluctuations in its output have Y:.ot be~n as ~.:erked F.S in tlle case of conper and nitrates. The increase in coal output for lj40 to 1948 apJlroximated the increase in overall mi~eral production (about 15~) .. FUrther additions to coal output are desir­able bect.use of the currer..t end prospective i::roT'Ith in demand. NL!tural resources are e·..railable for trds expansion, but substanti81 investments '""1i11 be required.

Oil

Crude oil production was begun in 1949 and rea~~ed a volllitie of cpproxi­matel] 600,000 barrels in 1950. The governLlent corporation (Ji.bP) in cbarge of all petrolel.1ITl development is planning to increase its geophysical ~lor~ and exploratory drilling. L"l the absence of domestic refinery facili tie s,_ alJ., production. is being sold to Urugtlay for processing. Construction of a sta­bilization plant and a refinery are currently under way.

INDUSTRY

Industrial production~ excluJing electricity ani building t rose about 35~& bet'''een 1940 and 1948. This represent s, t2king into account the very rapid gr01:1]t,~1 (311b) in the industriDl labor force, SOl:~e increase in product per l'"orker •. The development of industrial production has been particularly notable since the end of the 171ar, ~hen capital g'Oods cecame more freely available. In 1948 only about one-fourth of the value of raw materials (excluding fuel) used by industry t'rere of foreign origin, as compared with 369b in 1939. Industrial pro­duction since the pret:Tpr period has increased particularly in foods, metals, electrical energy, cement, glass and +,8xtiles. Substantial illvestments have be~n made in moderni zation of the cr ~on textile ind.ustry and investment in rq.yon production has put Chile in ~" posi tion to sup"01y &11 of its requirements of rqyon yarn and stable fiber. Copper fabricating facilities have been in­stalleu'i c "(,ire :factor~~ established, and, more recently, a. nev' steel mill. The Huacbipato steel mill was officially inaugurated at the end of 1950. Steel ingot proctuctiorl bee:;an in July 1950 and the mill is non operating at capeci ty - 200,000 tons annually. _:u-r expansion prograo is plemled to raise steel in­got cap3city b~l 80,000 tons and to raise the finished steel potential from 185,0(,,0 tons to about 2lt.,OOO tons. The eA-pansion :'1r06r~, l~r.dch is being sup­ported by an ~~ort-I~~ort Bar~ credit of ~lQ tUllion, a supplement to the $48 million previously e:dended for the steel mill, is designed to round out the operation C4"'1.d to improve efficiency. A credit of $1,150,000 ,",as also recently extended by the :C;xport-Ir:Tport Bbnk to eXjjand iro!1-alloy facilities, The com­pleted project should con-sti tute e. Vi: l"J.uble asset for Chile in the current period of steel shortage.

A growing pe.r~ente.ge of the national income no~ originates in the in­d.ustri~l f:'~O~'cr - 24ro in 1943 co.rrq:ared with 2Ctjb in 1940. It must be recog­ni zei, however t thrt Y'hile the rise in indu strial production has done wch to advbnce Chile's econooic development, the conditions under ~hich tllls occurred have not been such as to assure the best choice of investment opportunities. The attention of the authorities has for many years been directed to the stimulation of domestic p~oduction to substitute for imports. The government has promoted domestic manufacturing through positive financial aids, t~iff a~d exchange rate measures, import controls. and other means, so that indus­trial activity was encouraged even in uneconomic fields.

The severity of balance of payments difficulties, in large part caused by continuing domestic inflation, led the Government to encourage in­dustrial expansion in fields !Vhich even if uneconomic were import saving.

There is no question that the decline in Chile's export markets in the thirties and the structural chonge produced by the development of synthe­tic nitrates would in any case have made development of dOf.1estic manufactures

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desirable. Presumably it should also have led the Chilean economy simultan­eously to pI'omote nefl export industries. In actual fact,. however, domestic in­fIction and the industrial promotion policies associated therewith have operated to discourage production of new export products and .indiscl"irninately to encODa'age production of illiport sUbstitutes.

In 1950, for the first time since "che end of the 1!'ar, the index of i;1i lstric..t.1 production (which does not yet include the new steel mill) failed to shOT!! an inerea.se. Although this index no longer reflects the real change of industrial nroduction, the suggestion that industrial output may be slackening is disquieting in view of the very high rate of capital goods ;im­ports for industricl use during the per~od from 1947 to 1950.

COMPOS ITION OF nmSTl!f8}lT ni CHILE

Although dat~ on the composition of investment in recent years are not available in a form ~hich permits systema,tic appraisal, it is kn01m, that resi­denti;,l dwellings constitute a significant portion of total investment -- 37% in 1946 and 2170 in 1949. A bigh level of residential construction is ordi­narily associated ~ith a rapid growth in population, particularly ~hen the urban labor force is expaIlding rapidly as is the case in Chile o It seems, how­ever, that a signific~nt portion of total residential construction in Chile is of tne luxury type. Inflation, rent controls and the unavailabilit:" of many types of imported consumer goods have increasingly induced the upper incoIlle groups to construct luxury homes. Preliminary data indicate that low-cost housing expenditures of the government and social security institutes were a small percentage of total expenditures on residential housing.

llo data are available on the ccmposi t ion of commercial and industr:Lal construction. It is kn01.'ln, however t tht=l.t investment in large cOlmlercial struc­tures have been looked upon with great favor by private investors and even by official financial institutions.

Substantial inv-estments have taken place in the transport field in re­cent years. Beginning in 1947, tnere have been sUbstantial irr1!'Orts of trans­port equipment, including equipment for the .loa.ernization of Santiago's urban tranS},)ort system. AlL1ost~;, of total government investment expenditures in 1950 ''''ere for trenSDort, particularly roeds. HiE.h~'ay investments totaled nearly 1 billion ~esos in 1~50. A substantial portion of this is upon first class .lJ.ghu'DYS adCtpted to heavy freight movements on routes parallel to exist­ing railv:ay lines while the development of agricultur81 production appears to be hindered by the absence of adequate farJ-to-station roads.

There are thus lDany indications that the composition of investl.1ents in recent years has not contributed to the maximum feasible rise in productivity:_ Much of private investment activity is undertaken in those areas which consti­tute 1;he best hedge against inflation. The composi tion of investment in the government sector is not carefully revie"Ted, and the inflation has made it increasingly difficult to plan investment, as v~ll as to assure completion of projects already under way. In recent years, about one-third of total invest­ment has been undertaken directly by the government. If to this be added in­vestment financed by government agencies, including those fincnced with government-guaranteed external credits, sonething approaching half of total. investment has probably been directly subject to government control. Yet the actions of the Vhl'ious government agencies in the investment field are not integrated. The projects contemplated by the Fomento Corporation, the rJ!inistry of :fublie ~orks, the State Railvlays, the Popular Housir.g Institute, and other agencies are not being appraised as pftrt of a total investment pro­gram. Statutory limitations on the use of funds are in many cases a real

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obstacle. The removal of ~ch obstacles is de~endent on a forceful presenta­tion of the real advantages rr>hich ~'ould accrue froli1 the execution of a well­conceived overall government investment program. Such a program has not as yet been prepared but a Planning Eepartment ,~:a.s recently established in the Develop-' ment Corporation for this purpose. There 'vas also established a Comm.i ttee of hi5h-level officials to advi se upon overall development policies on the basis or the tech .. l1ical and economic studies:

OOMESTIC Fn,TANc:E AND n\f.FLATION

OVer the past ten years money supply in Chile has been increasing an­nually at a rate of from 14% to 27% per annum. The domestic price level, as measured by the co~t-of-li ving index, has been similarly rising. In each of the past-five years the increase in the price level has exceeded 15% per year. Duxing 1950 the pr:o, level rose 15% while the money supply increased 16%. The 1950 budget showed a deficit of 2.7 billion pesos. and the reduction in govern­ment deposits plus an expansion in bank credit continued the inflationary pro­cess. Strikes have hampered mci.ntenance of output at capacity in many fields in 1950. and the first part of 1951. Central bank lending to the government and to official enti ties has been expanding rapidly since the end of 1950. The ~95l budget defioit is likely to exceed the 1950 deficit since the original 1951 budget estimate indicated a deficit of about 3.5 billion pesos~

During the thirties end in the early forties the Chilean authorities &pparently sa~ many advf.ntages in e policy of monetary expansion. Given the need to mairttDin a high level of c&pital formation in order to establish a more diversified and productive economic base, the financing of investment, both government and priv€lte, by inflation nppeared to be an easy substitute for higher taxes and encouragement to the groVTth of private savings. HO'W9ver, the ensuing rise in domestic price levels. which continued after uner.lployment had been eliminated, set in motion a wage-price spiral, with the result that in recent years wage increases on a massive and regular basis cculd not be avoided. For a time the salaries of the employee class, including those in government, did not rise p~oportionately to the increase in the cost of living. In the lest tll!'O years, however, the pressure for increased salaries has been over­whelming, as reflected by substantial salery increases for Civil Service e~ ployees in 1949 and 1950~ 'Vage rates have in general kept up 11,i th the ri se in prices; in fact, bet~'gen 1940 and 1948 real wages increased by about 4%, however the race bet~en wages pndprices is still continuing.

Thus, there has been no increase in the real earnings of the Chilean worker, the ~mprovement in the position of the laboring group having been off~ set by the deterioration in the posit~on of the employee group. Since gross product per person employed has rot increased in Chile, it is not surprising that the average real earnings per person employed have not risen SignificantlY, It is only because the .gainfullY employed po~}ulation has increased more ra:pidly than the total population, CJnd the urban employed (with higher wage levels) has increased more rapidly than the rur?l. tllat these wage-price developments are nevertheless associated 1~i th a rising per capita income and consumption for the popula.t,lon. as a ~!rhole.

The economic implications of these facts are evider:.t in Chile. Given the level of labor union o;rgc;ni zation, TIhich has been fortified by inflation

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as an instrument for the protection of the VTorkers t real income, inflation is clearly no longer an effective means of raising the level of investment o

During the past decade, even though inflation l.18S gone on, the proport ion of domestic resources devoted to investment has ~lot increased. The most that can be said is that during the forties it has been possible, despite the pressure for ~gher living levels among the Clulean populace, to maintain an investment level equivalent to about lO::f~ of total output. Against this IIiUst be offset the heavy real cost of distortions in the composition of investment produced by in­flation.

The Chilean cuthorities have recognized frolll time to time that the in­flationary process, as associated with the wage-price spirol, has become in­creasingly self-defe~ting as a means of promoting economic development. Both the International Monetary Fund and the United Nations have provided, at the invitation of the Chilean Government, advice on the inflation -problem. How­ever, many of the factors leading originally to the edoption of an inflationary monetnr~r and fiscal policy ha"e ronde mociification of tili s policy extremely dif­ficult. The Chilean allthorities have been unable to secure truly equilibrating increases in taxes or sDvings, to redUce the government t s non"!"'investment ex­penditures, or to take measures in the fiscal and monetary fields t7hich would reduce }1rivate end public investment, even temporarily. They fear that such c;ction might jeopardize the execution of importvnt development project s, and mignt wso, in the face of the wage-price spiral, produce a severe unemployoent crisis. These feors are readily understandable in vie", of the absence of a well-concei ved overall development progra:J under vrhich investment and cons~­tion needs ore carefully bc~anced against aVCJileble resources, Dnd monetary, fiscnl, and wage policies are vier.ed by poli ticFl, business, and labor leaders as a means of achieving a desirable balance. rl~uch would depend upon the methods actually used to dawpen inflation during a transition period until the expecta­tions of the corJlnercial and industrial community are adjusted to the new more stable fina:ci£.l environment.

Bf:llJANCE OF PAYi,iliNTS POSI~IOH

Historical neview

Chile t S capacity to earn foreign exchange, as well as to attract foreign capital, was seriously ir.lpE ired during the thirties, both by the CYC.Ll­

cal fell in world markets and by the further development of synthetic nitrctes. Chile I s major eXfJOrts, co-oper md ni trates, are ~xtremely sensitive both in terms of production and price to fluetuations in v:orld markets e From 1929 to 1932, the v~lue of copper and nitrate exports fell from US$ 247 million to $23 million. As a result of tli~ decline in the mlume of exports, the stoppage of foreit=n capital inflovrs, and unfavorable terms of trnde, the volume of imports during tlle thirties \Vas on the average only about 60;1:> of the volume of imports during the tTt!8nties. 13eginning h~ 1931, Chile def[.illted on its foreign obliga­tions. A debt readjustwent plan '''las 8.1U1ounced in 1935. and a more permanent plan was accepted by bondholders in 1948.

During the fo~ties, Chile's foreign exchange earnings improved, but in the absence of substantiel net infloV!s of capital. imports did not regain the peak levels attained in the t~enties. Only in 1949 did a substantial net in­flo'~ of capital occur and in that year, as 1)'7e11 es in 1950, the deterioration in foreign markets reduced Chile's :Qreign exchange earnings below 1943 levels.

Copper exports increased in volume about 16/0 and nitrate exports about 20,:; between 1940 cmd 1948. Ho"'ever, ti.le rcilure of nitrate prices to increase to the same extent as Chile's import ~rices meant that the higher volume of nitrate e;Kports did not produce any increase in Chilefs capacity to iml)ort. In contrcls.!~, the increase in copper ex:!!orts led to a substantial inlprOVerJent. Tne improvement in the case of copper l'7a.s attributable. not to a rise in cop­per )rices in excess of the rise in Chile r s import prices, but to the fact that Chile VIas able to secure for domestic use a much higher percentage of the gross dollar incOIue prouuced by foreign.-ovned companies operctting in Chile" In tne late thir-lJies about 40/0 of gross copper receipts accrued to the Chilean econoIl'\Y, cOLqn:tI'ed vri th over 5010 in the late forties. This chenge VTas the re­sult of severol factors, 81!10n5 which the most i;:lIportant were the specific Chilean tax and exchange rate arrangements affecting copper, and rising domes­tic costs in Chile. In consequence, and despite the failure of copper prices abroad to rise as much as Chilean import ~r')rices, Chile was able in 1948 to buy substantially more imports for each dollDI'r s l"!orth of copper exports than in 1940. Unfortunately t part of the gain resulting from the improved copper si tua.­ti0n was offset by a reduction in Cl'.J.le t s other exports. During the wer, Chile lost its market for barley, pulses, and dried fruit in Europe and VTas unable to recover these markets after the war.

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The net improvement in Chile's foreign exchan5S earnings betwe6n 1940 and 1948 permitted total imports to increase by 11% or somewhat less than 1Mb per year on the, average. The failure of export earnings to rise at a more rapid rate and the absence of any substan~ial net capital inflow are basic factors accounting for the severity of the pressures to which the Chilean belfnce of payments has been subjected.

Direct exchange controls, originally instituted in 1931, have con­tinued throughout the last twenty yearqo In the' postwar period, they have been an effective instrument for curbing these imports considered by the Chilean authorities to be non-~essential. A prohibited list, originallyestab­lished in August 1947, was expanded in 1949. Also, from time to time, anq. particularly in 1950, exchange rates applicable to imports have been raised as a means of relieving pressure on the direct controls. These pressures have been particularly intense, since as descrroed above~ it has been difficult to l".telt the domestic inflation by curbing excess deJll?!ld at its sotU'ceo

In the face of the modest growth in Chile's export earnings, and the resulting modest gro~th in il[lPOrtS. the rise in to tal availebility of goods and services for both investment und consu~tion purposes was quite favorable. Tot""'"! ::omestic use of goods and services increased about 2410 bett'Teen 1940 snd 1943, 'while import~ increased only by 11>J. This reflects the expmsion in domestic output that took place during the period. Stnce substantial cnpital goods ill1ports were needed to provide for ti.le 8A}Jansion of domestic output, c nel since there wc.s also a substantial ;incretss in fuel imports and in imports of certain raw materials, this develop.,lent v7as possihle only because import substitutes we:..J being provided from domestic output on on increasing scale.

In 1949 a deterioration in foreign markets for copper reduced Chile's receipts from copper about US$ 25 million belo~1 the 1948 level,. A credit cf US$ 25 million 1ilaS secured from the EA"port-Import Bank, i'.ihich perrui tted Chile to maint~:;.in the nigh level of imports originally scheduled for 1949. CapiJl;al €,oocis il1l!,Jorts cor.stituted almost 331& of tote'l imnorts in 1949 as cony.ared ~ith 2~~ in 1948.

Continua.tion of the recession in foreign copper markets during part of ~950 made necessary a reduction in imports, postponed in ).949 by the loan obtained from the ~~ort~Import Bank. Total imports were 'Talued at US$ 243 million j.n 1950 compared with $304 million in l.949~ Ca~pital goods imports were reduced con.sider.ably belovl th.e :1.949 level,. but still const;i tu ted 2g,.7~b of total import s. The reduced level of import s in 1950 was offs€3t to some extent by expanded. dome~tic production of iron and steel, rayon, and crude petroleum; at the same time, tne drop in agricultural prodlXtion ;ip. 1950 create<l an addi­tional need for imports, particularly of 1Jlheat.

Short-Term Prospects • c

Chile I s short-term I=l'ospects indicate a high level of eJqJo;rt receipts. Recent developments in copper and nitrates are again raising Chile's foreign exchange earnings. If Chilean import ~rices do not continue to rise, the pro~ jected high level of export receipts should permit Chile over the next several years to maintair.i import volumes VIell above 1950 levels •.

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During t~e first five months of 1951, Chilefs official gold and foreign exchange reserves increased by $11.5 million, reaching a level of $66.4 million by the end of May. These reseI'ves provide only a small cushion for absorbing temporary reductions in foreign exchange receipts.

It is doubtful if the peak 194j level of imports ~ill be reached in the next year or two unless Chile receives substantial net foreign capital inflows. In 1949, ChUe h2d a balence of !:1ayme~ts deficit on current account of over $80 million., financed in large part by investments of the copper companies and by utilization of official credits. In 1950, the b~ance of p~jents deficit on current account was reduced to about $6 million.

Long-Term Balance of Pa;yments Prospects and Credit~orthin~ss

.Amortization pEyrnents on t~overnment debt abroad mnounted to $12.5 mil­lion in 1948t $1605 million in 1949 and $12~O million in 1950. Interest pay~ ments on these debts totaled abo~t $2.4 million in 1948, $10.7 million in 1949, and $8.6 million in 1950. At its mic1-1951 level, total gover~e~t and government­guarrmteed foreign debt ip"=!ol ves annual interest payment s of $8)'~ rnillion in 1951, the equivalent of ?Da% of balance of y)ayme:nts r~cei:pts on current account at t~e 1950 level. .An additional burd.en of $10~3 to $13Ci5 annually will arise from capite~ repayments in the period from 1951-:1.958. Interest payments 'would then, however t decline frohl $8~4 million in 1951 to $7.1 million in 1958~

It should be noted that the co!)per corJpanies are expected to make sub­stantial foreign investments 0 Over the next ten years these may amount to' at least $100 million. A part of thi s total 1"]111 accrue to the Chilean economy in the forD! of freely disposable dollar exchange.. In 1950. almcst 50}~ so ac,... crueu, tIle oalbnce toking the form of IUini~g company imports,

On the basis of present trends, the long~term prospects for Chilets foreign. exchange receipts on cU~'rent e.ccount t cOlilpared i~Tith her probable needs for foreign exchange, do not appear to leave a safe IDaJ;"gin: for any substantial addition to service upon her official debt, although the existing service level should be roooageable.

As discussed in J~he section on minin~ production, the volume of Chile's copper exports may be expected to rise by 5a;s over the ;next t ..... enty .... five years, or by about 1.6~ per year on the aver~ge. Chile's corilllland over imports re~ sulting from the increased volume of co}')per exr..orts are unlikely to rise at a faster rat~ for tWD reasons. First, copper prices re18tive to Chil~f s import prices will probably average some't··'hat be10vr current levels and may approximate the ).948 reli..i.tion~hip. Secondly. it is unlikely that Chile ryi:4l secure for domestic use a ~arger percentage of the value of copper receipts than the present proportion~ It is thus 'rJ.Illikely that over the next twenty-five years the real purchasing pO'Ner accruing to the Chilean economy from copper will increase at a faster rate than 1.616 annufllly.

In the case of nitrates, the ~ong:-te:rm prospects are even less favor­abl.e. As noted above .. any increase in production in Chile is likely to be off .... set in its effect~ on real purchasing power by a red~Gtion in nitra~e rrices relative to import prices.

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Thus, copper and nitrates together,. the former accounting for roughly 501& and the latter for 25}b of e~ort receipts (after deducting mining company o.i vidends) are unlikely to add even as much as ljb per year to Chile t·s reEll foreign exchange earnings over the next twenty-five years.,

The pro sIS ets for other exports are evpIlmore uncertain. Agricultural exports as a whole have been declining in the past ten years, as noted above. Some addi tionel sourc~~s of foreign exchange are developing; for exemplet~ crude petroleum, steel and copper manufactures. Crude. petroleu.m exports may exceed ~3 million per yeex until the refinery is completed in 1955 and then the iP1port of refined products wi:Ll fall o There is, of course., altVays the possibility that accelerated diacove~y of new wells will lead to petroleum becomdng aperma­nent export pxsoduct. Steel, exports have also developed in 1950 and 1951., al­though the steel plant was q,esigned priJl1arily to serve the domestic market ~:. Wi th e~"Pe.p.sion of capaGi ty, . steel export s !UC.y reacn $5 to $10 million annually.' The export of copper manufactures began c;iur~ng the war, a plant having been organized in 1944 with Fomento support.. By 1949, e~~orts of copper manufac­tures were v.&lued at $8.5 million.

Even if these developments are taken into account, however, ·it is un­likely that over the long term total current account receiJis vlill grow by more than 1% to 1Mb per year. Only if Chile succeeds in promoting substantial new non-traditional exports at reasonable costs can a higher rate of increase be attained.

'.'ifi th Chile's capacity to import growing over the long term by about l!% per year t approximately the same rate as in the past decade, Chile sPould be able to fulfill the import requirements assoc~ated yrith the rate of economic advance recorded in the past decade; although balance of pay.ments pressures 1'I-ould persist. The continued ~owth of output, including output of import substi tutes, at the rate of 2~o per year should cont i:que to provide for im..;. proved consumption l~vels and should produce sufficient foreign exchange to service the existing level of foreign debt, involving interest payments of about $9. million annually,

Credi ts to Chile '.~hich WOl.ld merely offset 'sch~duled amortization re- . payments on officiol d.ebt do not appea,T to be beyond Chile f s eervice capacity. provided past production performanoe continues. The continuation of P?st per­formance seews to be a reasonable assumption. ~ile some of the easiest op­portunities for increased production have already been exploited, B nonnal improvement in tecbnical eno. mEnagerial skill should provide the neces·sary off­set. Whi;Le the continuation 0'[ infle;;tion may make increasingly difficult a balanced growth of Chile's production, it is reasonable to expect that some of the external obstacles encountered by Chile during the forties, such as the wartime shortage of capital goods imrorts, pill not be present' to the same extent in the future.

Under these condi t ~ons, hov;ever, with lit tIe or no increase in output :per worker, t,i'le growth of totQl o~tput will be relatively modest. A better econorm..c perforlll~nce can be secureq only by more effective use of Chile'!s own investment resources •. · This would invo~ve changing the direction of investment. to obtain improved overal~ productj,vi ty. A net inflow of capital, from abroad

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would greatly assist such a reallocation, since it is qui.te likely that dur­ing the transition, lliltil hig~er productivity is established, improvement jn tile cor.iposi tion of investment v!ould require some increase of total done stic in­vestment. In view of the need for financial stc:;bili ty, thi s increase of invest~ ment in the tronsition period could probably not come from domestic: sources end T.vould therefore require foreign financing. In fact, in the initial stage, an increase in the total level of investment might even be associated wi th a reduction in the domestically financed con~onent. In this way. external sup­port could be provided for complementary domestic anti-~nflationarymeasures, '~Ti th a restiL tant improvement in the composition of private investment.. How­ever, forE;lign bOrrOYling on a larger scale \lIJould be ~r.!ise for Chile only if there were good prospects for substc:ntia~ly better production r-erformance o. Only then could an increased margin for debt service be secured. Until a well-conceived development program is prepared promising faster groTIth of output and on that basis a wider margin for debt qervice, the assurqption by Chile of a higher level of forei.gn debt 1~oul.d involve seriou$ risk.