Chile and Venezuela

Business Elites, the State and Economic Change in Chile-Eduardo Silva State-Business Relationship

No policy design, no matter how correct will elicit the desired response from capitalists.

If relationship is too “cozy” the result will be collusion and corruption.

“Interaction between business people and state officials is crucial for investment and production because it influences private sectors confidence to commit resources.”

Three Periods of Chilean Political and Economic HistoryRadical Neoliberalism (1975-1982)Pragmatic Neoliberalism (1983-1988)Networks in Democratic Chile (1990- 1994)

Radical Neoliberalism (1975-1982)

Radical Neoliberalism came after the overthrow of the socialist Salvador Allende in 1973.

Chiles military government implemented a neoclassical economic restructuring program in which policy makers replaced state intervention with market incentives. This was done because policymakers believed that

the market allocated resources better than bureaucrats.

Policies Draconian economic stabilization programs (shock

therapy). Rapid, thorough liberalization of capital markets,

prices and trade with little regard for their effects on industrial and agricultural sectors.

Fixed exchange rate in 1979. Privatization of health insurance and pensions.

Economic Change During Period

External debt rose from $5.8 billion to $15.7 billion.

Industry’s share of Gross National Product declined from 24.6% to 21%.

Share of agriculture dropped from 8.2% to 7.5%.

Economic depression was result in 1982GDP shrank by 14%.Unemployment was between 25% and 30%.

Neoliberal Economic ResultsDamaging Policies“Highly autonomous state over insulated ideology

rigid technocrats with organic links to a narrow range of business interests operating outside the confines of business peak associations.”

Harmful policies are too skewed for healthy economic growth.

PinochetGave ministers unconditional backing

Shielded them from unpopular reaction to economic policies.

Policy makers had links to international conglomerates which resulted in privileged access to policy makers.

Policy makers known as “Chicago Boys” because a number of them attended the University of Chicago.

Pragmatic Neoliberalism (1983-1988) Economy began to recover in 1984

Policy makers in financial institutions still preferred neutral policy instruments.

Acknowledged that state also had duty to intervene in market

To stabilize prices and boost domestic production. Real exchange rate remained high. Interest rates were reasonable. Agriculture and mining activities were protected from unfair

external competition as well as incentives to export.

CPC and Industrialist association threatened to join political unless economic policy change.

Pinochet got rid of the “Chicago Boys”. Interaction between more adaptable

policymakers and a much broader spectrum of business interests. The result was a more flexible approach to policy

making that gave rise to pragmatic neoliberalism. Policy orientation in which the market provides signals

for allocation of resources.

Networks in Democratic Chile (1990-1994) Concertacion de Partidos por la Democracia.

Promised not to tamper with the general economic model-pragmatic neoliberalism.

Paid more attention to social equity than did the military government.

Authorities and Capitalists Policy makers set up an agenda for incremental changes. Businesses set up commissions to review issues.

Policy makers review reports before making decisions.

The Chilean Case in Light of the East Asian Experience

Karl Fields-states that played an important role in shaping the economy, carried out aggressive industrial policies, and in some cases favored enterprise.To promote efficiency, bureaucrats attach

performance criteria to industrial subsidies.

In Chile, negotiation with encompassing peak associations functions better for processes of neoliberal reform than the dealings with multisectoral conglomerates.

In Asia, beaurocrats engaged in the design and implementation of industrial policy dealt directly with such conglomerates.

Chile and the East Asian Cases

Chile took a liberal path to economic development, while a number of East Asian countries have opted for industrial policies that require more direct state intervention in the economy.

Business community learned how to communicate with policy makers. Business organizations developed technical expertise in their

research departments in order to speak a common technical language with professional technocratic policymakers.

Before this communication, government officials tended to ignore business leaders because they were seen as defending parochial interests in ignorance of wider economic consequences.

Relationship of top policy makers to business elites.

Bureaucrats should be highly autonomous from pressure groups in order to formulate industrial policy but not isolated from contact with the nations largest conglomerates on intersectional encompassing business associations.

Contact with multisectoral conglomerates provides a window into policy design that cuts across economic sectors.

Furnishes potential allies in policy implementation-firms with investment capacity that can shift resources more easily than companies dependent on the health of a single economic sector.

Historical View of Business-State Relations: Columbia, Peru, and Venezuela Compared.

Columbia

Example of where the nature of the export economy explains the generation of rather successful institutional development.

Developed Coffee Federation of Columbia. Coffee became increasingly important.

Rapid expansion of warehousing, financing and services.

Ability to command political influence was crucial. The role of coffee in business of ports and financial

institutions was also crucial.

Reasons for Success

Absence of foreigners in production. Exports were locally controlled.

The regional diffusion of coffee, plus its production characteristics and its local control, led to remarkably wide stimulus to industrialization, the consolidation of a number regional centers of industry an with that consolidation, regional elites.

Small, stable, oligarcical political system in which the members spoke freely to one another.

Venezuela

Mono-EconomyAbundance and fast growth of the source of

foreign exchange over several decades, driven by foreign investment that for many years was seen as completely essential.

Industrial sector grew, despite the 1939 Treaty of Commercial Reciprocity with the United State, which committed Venezuela to forgoing tariffs on 50% of imports in return for quota access for oil to the United States market.

Abundance of oil allowed Chile to operate using oil as a bargaining tool.

1970’s Oil Boom

Result Explosion of fiscal revenue. Pronounced overvaluation. Profound political economy effects. The availability of funds led to an explosion of state

organizations. Power of the executive grew with the concentration of

revenue, and parties and congress were weakend.

Peru

Export history dominated by a diversity of products and has been fast growing in expansion periods of the world economy.

Private sector dealt with foreigners in Peru.Foreign capital built railroads, provided the

know-how and the contacts marketing and technological improvement

Trouble in Peru

• Fear of mass mobilization lead to initiative changes.• 1930 and 1945-1948

• The Peruvian model broke down in the 1960’s when a period of easy supply-side expansion came to an end and the next stage of expansion demanded more in terms of entrepreneurship and management than the system could provide.

• The politics of the model broke down with growing discontent with the oligarchic system and the division of the spoils.

• The result of this change was a change from a low-level relationship between business and government into a strong and antagonistic relationship.

Discussion Questions

1. In the case of Chile, what were some of the downfalls of the radical neoliberalism?

2.Can you compare or contrast the Chilean models to those of the East Asian nations?

3.Columbia and Venezuela both had one main export, coffee and oil, do you think a nation can prosper when the nations economy is based on one chief export?