Vuskovic plan
Encyclopedia
The Vuskovic Plan was the basis for the economic policy
of the Popular Unity
(UP) government of Chilean President
Salvador Allende
. It was drafted by and named after his first Economics Minister Pedro Vuskovic
, who had worked before with the CEPAL. Although good results were obtained in 1970, hyperinflation
made a come-back in 1972. By 1973, Chile was in shambles - inflation
was hundreds of percents, the country had no foreign reserves, and GDP was falling
.
government was to achieve a transition to socialism
by democratic means. This would involve a combined political and economic program aimed at wresting control of the economy out of the hands of business owners and placing it in the hands of the state. It would then be easier to dismantle the various institutions connected with Western capitalism
. The key figure in the economic policy of Salvador Allende’s UP government was the first Minister of the Economy, Pedro Vuskovic
. In accordance with Keynesian economics
, he wanted to implement a massive redistribution of revenue by raising salaries and increasing public expenditure, through which the buying power of the population would increase and accordingly consumption in general. These measures would activate the idle capacity of the Chilean productive apparatus (which was relatively large) and generate a climate of prosperity. If this strategy paid off, it would have had the effect of strengthening the government’s position and allowing it to advance its revolutionary program much faster.
The macroeconomic program was based on several key assumptions, the most important being that the manufacturing sector had ample underutilized capacity. The lack of full utilization was, in turn, attributed to two fundamental factors: the monopolistic nature of the manufacturing industry and the structure of income distribution
. Based on this diagnosis, influenced by Keynesian ideas of support to aggregate demand
, it was thought that if income were redistributed toward the poorer groups through wage
increases and if prices were properly controlled
, there would be a significant expansion of demand and output. This provided the theoretical basis for the belief that large fiscal deficits would not necessarily be inflation
ary . Regarding inflation, the UP program placed blame on structural rigidities (namely, slow or no response of quantity supplied to price increases), bottlenecks, and the role of monopolistic pricing, and it played down the role of fiscal pressures and money creation
.
Little attention was paid to the financial sector, given the orientation of the new regime's economic technocrats toward the import substitution
, structuralist philosophy of the CEPAL (United Nations Economic Commission for Latin America and the Caribbean). In fact, Allende's Minister of Foreign Affairs and Vice President, Clodomiro Almeyda
, relates in his memoirs how in the first postelection meeting of the economic team, these technocrats argued expressly and convincingly that monetary and financial management did not deserve too much attention. Alfonso Inostroza, the Central Bank president, stated in early 1971 that the main objective of the monetary policy
was to "transform it into a key instrument . . . to achieve the complete mobilization of productive resources, and their allocation to those areas that the government gives priority to . . . ." This was consistent with the view of inflation of those espousing structuralism.
US President Richard Nixon
had made it known that he wanted to "make the (Chilean) economy scream" and this policy was outlined in National Security Decision Memorandum (NSDM) 93 of November 1970: "All new bilateral foreign assistance was to be stopped, although disbursements would continue under loans made previously. The US would use its predominant position in international financial institutions to dry up the flow of new multilateral credit or other financial assistance. To the extent possible, financial assistance or guarantees to US private investment in Chile would be ended, and US businesses would be made aware of the government's concern and its restrictive policies…"
, accompanied by major declines in inflation
(down from 34.9% to 22.1%) and unemployment (down to 3.8%). In addition to the rise in employment, Allende also raised wages on a number of occasions throughout 1970 and 1971. These rises in wages were negated by continuing increases in prices for food. Although price rises had also been high under president Eduardo Frei Montalva
(27% a year between 1967 and 1970), a basic basket of consumer goods rose by 120% from 190 to 421 escudos
in one month alone, August 1972. In the period 1970-72, while Allende was in government, exports fell 24% and imports rose 26%, with imports of food rising an estimated 149% . Although nominal wages were rising, there was not a commensurate increase in the standard of living for the Chilean population.
However, these results were not sustainable. The price of copper took a nose-dive and production also went down, with correspondingly negative results for the economy. A commercial deficit was recorded at the end of 1971 and private investors shied away. In 1972, the Chilean economy took a turn for the worse. Exports fell, imports rose alarmingly and inflation rocketed. The falls in exports were mostly due to a fall in the price of copper, since Chile was at the mercy of international fluctuations in the value of its single most important export. As with almost half of developing countries, more than 50 per cent of Chile's export receipts were from a single primary commodity . Adverse fluctuation in the international price of copper negatively affected the Chilean economy throughout 1971-72. The price of copper fell from a peak of $66 per ton in 1970 to only $48–9 in 1971 and 1972 .
The US economic embargo began to take effect. In 1972 the escudo had runaway inflation
of 140%. From December 1972 to December 1973, the inflation rate was a catastrophic 508% - an example of hyperinflation
. The average Real GDP
contracted between 1971 and 1973 at an annual rate of 5.6% ("negative growth"), and the government's fiscal deficit soared while foreign reserves declined . Inflation led to the rise of black markets in rice, beans, sugar, and flour, and a "disappearance" of such basic commodities from supermarket shelves. The government attempted to prevent this shortage by creating juntas de Abastecimientos y Precios
.
In addition to the hyperinflation and the fall in the value of copper, the lack of economic aid further depressed the economy. The growth in GDP went from 9% in 1971 to –1.2% in 1972, while the rate of inflation went from 22.1% the previous year to 163.4%. Vuskovic
was replaced as Minister of Economy on June 17, 1972, and the Allende government announced it would default on debt
s owed to international creditors and foreign governments. Allende also froze all prices while raising salaries, but the damage was already done. Chile had entered a major recession, with hyperinflation, a negative growth in GDP, a lack of supplies and spare parts, as well as a state of general political and social disorder. His implementation of these policies led to strong opposition by landowners, some middle-class sectors, the rightist National Party
, the Roman Catholic Church
(which was displeased with the direction of the educational policy), and eventually the Christian Democrats. By September 1973, inflation had reached 381.1% and the growth in GDP stood at -4.2% .
Economic policy
Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy.Such policies are often...
of the Popular Unity
Popular Unity
Unidad Popular was a coalition of left wing, socialist and communist political parties in Chile that stood behind the successful candidacy of Salvador Allende for the 1970 Chilean presidential election....
(UP) government of Chilean President
Chile under Allende
Salvador Allende was the president of Chile from 1970 until 1973, and head of the Popular Unity government; he was the first Marxist ever to be elected to the national presidency of a democracy...
Salvador Allende
Salvador Allende
Salvador Allende Gossens was a Chilean physician and politician who is generally considered the first democratically elected Marxist to become president of a country in Latin America....
. It was drafted by and named after his first Economics Minister Pedro Vuskovic
Pedro Vuskovic
Pedro Vuskovic Bravo was a Chilean economist of Croatian descent, political figure, minister and author of the economic plan implemented by Salvador Allende during his government.-Life:...
, who had worked before with the CEPAL. Although good results were obtained in 1970, hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
made a come-back in 1972. By 1973, Chile was in shambles - inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
was hundreds of percents, the country had no foreign reserves, and GDP was falling
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
.
Background
The overall stated objective of Allende's Popular UnityPopular Unity
Unidad Popular was a coalition of left wing, socialist and communist political parties in Chile that stood behind the successful candidacy of Salvador Allende for the 1970 Chilean presidential election....
government was to achieve a transition to socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
by democratic means. This would involve a combined political and economic program aimed at wresting control of the economy out of the hands of business owners and placing it in the hands of the state. It would then be easier to dismantle the various institutions connected with Western capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
. The key figure in the economic policy of Salvador Allende’s UP government was the first Minister of the Economy, Pedro Vuskovic
Pedro Vuskovic
Pedro Vuskovic Bravo was a Chilean economist of Croatian descent, political figure, minister and author of the economic plan implemented by Salvador Allende during his government.-Life:...
. In accordance with Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
, he wanted to implement a massive redistribution of revenue by raising salaries and increasing public expenditure, through which the buying power of the population would increase and accordingly consumption in general. These measures would activate the idle capacity of the Chilean productive apparatus (which was relatively large) and generate a climate of prosperity. If this strategy paid off, it would have had the effect of strengthening the government’s position and allowing it to advance its revolutionary program much faster.
The macroeconomic program was based on several key assumptions, the most important being that the manufacturing sector had ample underutilized capacity. The lack of full utilization was, in turn, attributed to two fundamental factors: the monopolistic nature of the manufacturing industry and the structure of income distribution
Income distribution
In economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
. Based on this diagnosis, influenced by Keynesian ideas of support to aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
, it was thought that if income were redistributed toward the poorer groups through wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
increases and if prices were properly controlled
Incomes policy
Incomes policies in economics are economy-wide wage and price controls, most commonly instituted as a response to inflation, and usually below market level.Incomes policies have often been resorted to during wartime...
, there would be a significant expansion of demand and output. This provided the theoretical basis for the belief that large fiscal deficits would not necessarily be inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
ary . Regarding inflation, the UP program placed blame on structural rigidities (namely, slow or no response of quantity supplied to price increases), bottlenecks, and the role of monopolistic pricing, and it played down the role of fiscal pressures and money creation
Money creation
In economics, money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy by purchasing financial assets or lending money...
.
Application
The plan considered the following economic measures as necessary:- NationalizationNationalizationNationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
of the country’s basic resources. - Nationalization of large foreign enterprises, which were seen to be draining the wealth out of the country.
- Agrarian reformAgrarian reformAgrarian reform can refer either, narrowly, to government-initiated or government-backed redistribution of agricultural land or, broadly, to an overall redirection of the agrarian system of the country, which often includes land reform measures. Agrarian reform can include credit measures,...
: the breaking-up of the latifundios (large landed estates) and redistribution of land to the peasants. - Transferring banks and large businesses into state property in order to obtain control over internal credit and income.
- A massive redistribution of income. These measures were seen as a first phase and, in theory, would form the basis of a popular-social movement. Having gained the popular support of the masses, the government would then be in a position to make a successful transition to a socialist society.
Little attention was paid to the financial sector, given the orientation of the new regime's economic technocrats toward the import substitution
Import substitution
Import substitution industrialization or "Import-substituting Industrialization" is a trade and economic policy that advocates replacing imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of...
, structuralist philosophy of the CEPAL (United Nations Economic Commission for Latin America and the Caribbean). In fact, Allende's Minister of Foreign Affairs and Vice President, Clodomiro Almeyda
Clodomiro Almeyda
Clodomiro Almeyda Medina was a Chilean politician. A leading member of the Socialist Party, served as Minister of Foreign Affairs of Chile from 1970 to 1973 during the Presidency of Salvador Allende....
, relates in his memoirs how in the first postelection meeting of the economic team, these technocrats argued expressly and convincingly that monetary and financial management did not deserve too much attention. Alfonso Inostroza, the Central Bank president, stated in early 1971 that the main objective of the monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
was to "transform it into a key instrument . . . to achieve the complete mobilization of productive resources, and their allocation to those areas that the government gives priority to . . . ." This was consistent with the view of inflation of those espousing structuralism.
US President Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
had made it known that he wanted to "make the (Chilean) economy scream" and this policy was outlined in National Security Decision Memorandum (NSDM) 93 of November 1970: "All new bilateral foreign assistance was to be stopped, although disbursements would continue under loans made previously. The US would use its predominant position in international financial institutions to dry up the flow of new multilateral credit or other financial assistance. To the extent possible, financial assistance or guarantees to US private investment in Chile would be ended, and US businesses would be made aware of the government's concern and its restrictive policies…"
Results
The first year saw 12% industrial growth and an 8.6% increase in GDPGross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
, accompanied by major declines in inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
(down from 34.9% to 22.1%) and unemployment (down to 3.8%). In addition to the rise in employment, Allende also raised wages on a number of occasions throughout 1970 and 1971. These rises in wages were negated by continuing increases in prices for food. Although price rises had also been high under president Eduardo Frei Montalva
Eduardo Frei Montalva
Eduardo Frei Montalva was a Chilean political leader of world stature. In his long political career, he was Minister of Public Works, president of his Christian Democratic Party, senator, President of the Senate, and president of Chile from 1964 to 1970...
(27% a year between 1967 and 1970), a basic basket of consumer goods rose by 120% from 190 to 421 escudos
Chilean escudo
The escudo was the currency of Chile between 1960 and 1975, divided into 100 centésimos. It replaced the peso at a rate of 1 escudo = 1000 pesos and was itself replaced by a new peso, at a rate of 1 peso = 1000 escudos...
in one month alone, August 1972. In the period 1970-72, while Allende was in government, exports fell 24% and imports rose 26%, with imports of food rising an estimated 149% . Although nominal wages were rising, there was not a commensurate increase in the standard of living for the Chilean population.
However, these results were not sustainable. The price of copper took a nose-dive and production also went down, with correspondingly negative results for the economy. A commercial deficit was recorded at the end of 1971 and private investors shied away. In 1972, the Chilean economy took a turn for the worse. Exports fell, imports rose alarmingly and inflation rocketed. The falls in exports were mostly due to a fall in the price of copper, since Chile was at the mercy of international fluctuations in the value of its single most important export. As with almost half of developing countries, more than 50 per cent of Chile's export receipts were from a single primary commodity . Adverse fluctuation in the international price of copper negatively affected the Chilean economy throughout 1971-72. The price of copper fell from a peak of $66 per ton in 1970 to only $48–9 in 1971 and 1972 .
The US economic embargo began to take effect. In 1972 the escudo had runaway inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
of 140%. From December 1972 to December 1973, the inflation rate was a catastrophic 508% - an example of hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
. The average Real GDP
Real GDP
Real Gross Domestic Product is a macroeconomic measure of the value of output economy adjusted for price changes . The adjustment transforms the money-value measure, called nominal GDP, into an index for quantity of total output...
contracted between 1971 and 1973 at an annual rate of 5.6% ("negative growth"), and the government's fiscal deficit soared while foreign reserves declined . Inflation led to the rise of black markets in rice, beans, sugar, and flour, and a "disappearance" of such basic commodities from supermarket shelves. The government attempted to prevent this shortage by creating juntas de Abastecimientos y Precios
Juntas de Abastecimientos y Precios
Juntas de Abastecimientos y Precios fueron unidades administrativas locales en Chile creadas a finales de 1972. Estas juntas utilizaron cartolas de abastecimiento, supuestamente con el fin de aliviar la escasez de alimentos y la especulación que había en ese entonces, también se encargaban de...
.
In addition to the hyperinflation and the fall in the value of copper, the lack of economic aid further depressed the economy. The growth in GDP went from 9% in 1971 to –1.2% in 1972, while the rate of inflation went from 22.1% the previous year to 163.4%. Vuskovic
Pedro Vuskovic
Pedro Vuskovic Bravo was a Chilean economist of Croatian descent, political figure, minister and author of the economic plan implemented by Salvador Allende during his government.-Life:...
was replaced as Minister of Economy on June 17, 1972, and the Allende government announced it would default on debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
s owed to international creditors and foreign governments. Allende also froze all prices while raising salaries, but the damage was already done. Chile had entered a major recession, with hyperinflation, a negative growth in GDP, a lack of supplies and spare parts, as well as a state of general political and social disorder. His implementation of these policies led to strong opposition by landowners, some middle-class sectors, the rightist National Party
National Party (Chile) (1966-1973)
See also National Party .The National Party of Chile was a Chilean political party formed by the union of the United Conservative Party, the United Liberal Party and the Partido Acción Nacional .It represented...
, the Roman Catholic Church
Roman Catholic Church
The Catholic Church, also known as the Roman Catholic Church, is the world's largest Christian church, with over a billion members. Led by the Pope, it defines its mission as spreading the gospel of Jesus Christ, administering the sacraments and exercising charity...
(which was displeased with the direction of the educational policy), and eventually the Christian Democrats. By September 1973, inflation had reached 381.1% and the growth in GDP stood at -4.2% .
See also
- Chile under AllendeChile under AllendeSalvador Allende was the president of Chile from 1970 until 1973, and head of the Popular Unity government; he was the first Marxist ever to be elected to the national presidency of a democracy...
- Economic history of ChileEconomic history of ChileThe economy of Chile has shifted substantially over time from the subsistence agriculture practised by its indigenous peoples to an early husbandry-oriented economy and finally to one of mining and agriculture. Chile started to industrialize in the 1930s with the creation of CORFO that established...
- Chilean nationalization of copperChilean nationalization of copperThe nationalization of the Chilean copper industry commonly described as the Chilenización del cobre or "Chileanisation of copper," was the progressive process by which the Chilean government acquired control of the major foreign-owned section of the Chilean copper mining industry. It involved the...
- Salvador AllendeSalvador AllendeSalvador Allende Gossens was a Chilean physician and politician who is generally considered the first democratically elected Marxist to become president of a country in Latin America....
- Miracle of ChileMiracle of ChileThe "Miracle of Chile" was a term used by free market Nobel Prize winning economist Milton Friedman to describe liberal and free market reorientation of the economy of Chile in the 1980s, 1990s and the purported benefits of his style of economic liberalism...
- Project CybersynProject CybersynProject Cybersyn was a Chilean attempt at real-time computer-controlled planned economy in the years 1970–1973 . It was essentially a network of telex machines that linked factories with a single computer centre in Santiago, which controlled them using principles of cybernetics...