Foreign Relations of the United States, 1952–1954, The American Republics, Volume IV

725.00/5–1254

Memorandum by the Director of the Office of South American Affairs (Atwood) to the Assistant Secretary of State for Inter-American Affairs (Holland)¹

confidential

[Washington,] May 12, 1954.

Subject:

• The Situation in Chile

It is almost impossible to talk with any one familiar with the situation in Chile without getting a very gloomy picture. There appear to be no hopeful signs on the horizon as political and economic problems multiply, with no effective program to combat them. Chileans apparently feel that when conditions appear to be hopeless the US will step in and provide the necessary assistance.

Political

After a demagogic election campaign in 1952 in which Ibañez and his supporters promised to curb the inflation and end graft and corruption, Ibañez was elected by a 47% plurality in a 4-way race. The popular vote was largely a repudiation of the organized political parties which had ruled for more than a decade in various coalitions whose backbone was the Radical Party. In November 1952 Ibañez was inaugurated and tried to form an effective Cabinet composed partly of old cronies who had served with him during his first administration (1927–31), and partly of the extremist or independent splinter parties which had rallied around him. As it became obvious that no one could implement the wild campaign promises which had been made, and as it proved to be impossible to weld into a harmonious political coalition the various extremist groups of both the right and left, a series of internal quarrels broke out which led to almost continuous cabinet changes, with each new grouping apparently weaker than its predecessor. Ibañez failed to achieve unity or to exercise the strong leadership which the voters had hoped for and his administration thus far has been characterized by the absence of political leadership—almost by the absence of effective government. This situation is especially grave in Chile, which has averaged about 20 political parties recently, with none representing as much as 20% of the popular vote. Congress accurately reflects this fragmentization and Ibañez has failed to develop the sort of coalition Cabinet which would provide even a temporary majority. In the March 1953 Congressional elections the various Ibañez groups won about half the seats of the Chamber of Deputies, but only ⅓ of the Senate. With the fourth new cabinet already in disrepute and torn by internecine ideological battles, there is talk of the creation of a really competent cabinet of qualified technicians, non-political or with a broadened political base, to cope with the mounting economic problems. There is also a report that Ibañez has decided to dismiss Congress and rule by decree, either alone or in a Junta, with the support of the armed forces. The military holds the balance of power but for the past 20 years it has been non-political and has developed a tradition of non-interference.

Economic Situation

Since 1940 Chile has followed a program emphasizing industrialization at the expense of agricultural production. Socialist or frankly Marxist economic theories have been in the ascendency and have left their mark in increasing government controls over the economy. The Ibañez regime has strengthened the trend toward a centrally directed economy by the creation of INACO (a state trading corporation patterned after the Argentine IAPI), a Ministry of Mines, and a State Bank. There have been efforts to take over the Central Bank, the steel industry, the nitrate industry, and to make the copper industry subservient to the needs of the government. Controls over prices and foreign-exchange rates have been intensified and the government is now trying to pass an “Economic Crimes” bill to force compliance with administrative regulations under threat of heavy fines or imprisonment. Fortunately, lack of control over Congress has prevented the adoption of the more extreme economic projects and the political parties in favor of a sounder economy continue to frustrate them.

With the tapering off of the shortages and high prices brought about by the fighting in Korea, the Chilean economy has started to run downhill and deficits in the national and foreign-exchange budgets have mounted. The national budget in 1952 was 29 billion pesos; in 1953—47 billion; and for 1954 it is 62 billion. With no corresponding increase in productivity, the natural result has been inflation, which in 1953 amounted to 56%. The 1953 foreign-exchange budget included a $70 million deficit which was to come from future receipts. However, the 1954 budget, instead of taking up the slack, shows a gap of $98 million, with estimated expenditures at $390 million as compared with estimated receipts of $292 million, and almost all of the missing funds in dollars. To make matters worse, $20 millions of the latter sum is to come from anticipated loans. Exchange difficulties have led Chile to resort more and more to barter or compensation agreements with other countries, Argentina, Germany, etc. and have turned Chile’s emphasis toward the soft-currency areas at the expense of dollar trade. Recently, even copper has been sold out of the dollar area and this, together with artificial exchange controls, has intensified the present balance of payments difficulties so that Chile may have to default on its debt service next month. In June payments of 5½ million come due. Our Embassy reported on May 4 that dollar balances in the Central Bank were below 5 million. Over $10 million is owed for oil imports and the companies threaten to cease shipment of fuel.

The accelerated inflation (14% in the first 3 months of 1954) has been accompanied by insistent demands for wage increases for labor, both private and public, to which the government has almost invariably yielded. At the end of 1953, to avoid a general strike threatened by the school teachers, the government granted an annual bonus to all its employees. The money for this payment had to be borrowed or printed. Mounting labor costs, higher costs of production, higher prices, and greater currency circulation have kept the inflationary cycle going, with the government either unable or unwilling to call a halt. The fluctuations in the curb rate of exchange and the reported flight of capital indicate loss of confidence in Chile’s currency.

Copper

Under present legislation, the American copper producers provide about 50% of government revenues and about 65% of all foreign exchange under a complicated tax system which keeps the cost of production artificially high and taxes away 80 to 90% of the total earnings, as follows:

(a) 3% import duty on mining supplies.

(b) Cost of production returned at 19.37 pesos to the dollar as compared with the bank rate of 110 and the euro rate of over 300.

(c) The “overprice” or spread between about 24 cents and the sales price of about 29 cents goes entirely to the government.

(d) Income tax of 60%.

In addition, the Central Bank has been placed in control of sales of copper, the government has engaged in price fixing, and other laws interfere with control over the industry by the American mine owners. Small wonder that production has increased everywhere in the world except Chile.

When Chile’s artificial price of 35½ cents broke down and unsold surpluses accumulated, the US was requested to buy 100,000 tons for the stockpile as part of Chile’s program to curb inflation, return the copper industry to a competitive basis, and strengthen the economy. After months of fruitless negotiation the US decided to buy the copper, partly with the hope that this would enable Chile to strengthen its economy and enact new copper legislation which, though it embodies several undesirable features, would also provide:

(a) a single tax on income, starting at 75% and decreasing as production is stepped up.

(b) a non-discriminatory exchange rate (now 110 pesos, though this is artificial).

(c) sales at world prices.

(d) return to the companies of control over sales.

Apart from this legislation, which was introduced in the Chamber of Deputies March 2, with no progress so far, Chile renewed its pledge not to sell to the Soviet bloc and promised to adopt the IC/DV control system to prevent transshipments to iron-curtain countries. To Chile’s credit, it should be stated that despite the political difficulties caused by this promise, so far its record of compliance has been quite good. However, the question of sales to the Soviets remains a leading political issue and we can anticipate periodic threats.

Chile’s surplus is still over 50,000 tons and production has been curtailed correspondingly. Last month sales exceeded production for the first time in almost a year and the prospects for the copper industry in general are improving. However, it remains to be seen whether Chile will get its full share of the market.

Nitrate

The nitrate and iodine industry is the second largest producer of foreign exchange but Chile’s natural product no longer enjoys the monopoly it once had. Synthetic production has been stepped up throughout the world, frequently with the aid of Marshall Plan funds or Eximbank loans. Chile’s nitrates, burdened with high taxes, artificial exchange rates and antiquated methods of production, cannot compete freely with synthetics. Nitrate is politically important in that the northern provinces live almost exclusively on this and the copper industry.

US Private Investment

In addition to heavy investments in copper and nitrate, US capital is found in iron mines, the steel mill, industry, sales, and in electric power. American and Foreign Power has an investment in Chile of almost $100,000,000 but its operations are hampered by government competition in generating power, inadequate sales rates, artificial exchange rates, and lack of dollars for the remittance of earnings. With difficulties experienced by almost all US investors in Chile, it is understandable that new investments have fallen to a small trickle.

Agriculture

Agricultural production has been falling off in Chile for many reasons, including:

(a) Emphasis on industrialization.

(b) The semi-feudal status of agricultural labor.

(c) Government price controls.

(d) Inadequate rainfall or irrigation.

(e) Lack of capital investment in machinery and other means of improving production.

(f) Inadequate roads and distribution system.

(g) Lack of land conservation.

(h) Inadequate use of fertilizers.

As one result, Chile has switched from a net exporter of wheat to an importer of sizeable quantities—about 250,000 tons for 1954. Shortages of beef, sugar, dairy products and edible oils further complicate the picture and cause a heavy drain on foreign exchange availabilities. Chile’s current balance of payments situation has led to speculation that there may be no funds for food imports later this year and Chile may face a food shortage and perhaps some actual starvation. This is a ridiculous situation for a country with agricultural prospects as good as Chile’s. Rehabilitation of agricultural production is the major target in Chile. The FAO/IBRD study² calls for increased production of 38% over an eight-year period with an investment of about $280,000,000, about ⅓ in foreign currency. Chile has been preparing detailed plans for the implementation of this report for the past year but none of the projects is complete.

Our FOA program in Chile lists increased agricultural production as its chief objective but progress through the Servicio operation takes a long time, especially in the absence of capital investment. Within the limits of the program we are attempting to improve soil conservation methods, improve the livestock and dairy industry, develop hardier strains of wheat, improve irrigation, etc. Through CARE some dried milk has been distributed in Chile but there has not been any large-scale program involving the use of US agricultural surpluses. After stockpile objectives are revised and funds set aside for this purpose, it may be possible to exchange agricultural products for copper or other strategic materials from Chile. If actual starvation threatens Chile, the US would probably make a grant of foodstuffs, as it has in other areas of the world.

Loans

The Eximbank has extended to Chile loans of about $138,000,000 and the IBRD about $37,500,000. In addition, Chile has drawn its gold tranche of 12½ millions from the IMF and it borrowed 12½ million from the National City Bank. There are also short term commercial debts to be paid and balances due under compensation agreements. Total reserves have dropped in the year March 31, 1953–54, from $115 to $81 million, with almost $42 million in gold. Many close observers feel that Chile is about loaned up and requests for further loans would not be approved readily. The IMF and the two banks would be likely to defer any consideration of loans until the inflation has been curbed. Chile would be interested in the following:

Eximbank	(a) A line of credit of $100,000,000 for economic development,
	(b) $14 million for the nitrate industry.
IBRD	(a) Agricultural loans, up to $100,000,000.
	(b) $17 million for modernization of coal mines.
	(c) $25 to 35 million for rehabilitation of railroads.
IMF	Additional drawing of $12½ million.

However, none of these is a likelihood under the present circumstances and Chile may have to sell off some of its gold reserves to meet necessary payments this year.

General

No country in Latin America has had more friendly cooperation or more economic assistance (on a per capita basis) from the US than Chile. Despite this, anti-US sentiment runs quite high and many people in responsible positions really believe that Chile is being exploited by the US or by US private capital. While striving to preserve such goodwill as we still have, we should make it clear to Chile that for continued economic development it will have to rely primarily on its own resources and on its willingness to permit competitive and profitable operation of Chilean industries and on its ability to attract new capital investment. Any further US measures of assistance to Chile should come only after visible signs of progress in combatting inflation and strengthening the economy, probably by a reversal of the economic policy which now prevails. Except in case of a need for emergency food or if US national interest should dictate, the US should not even discuss any measures of assistance to Chile until copper legislation is enacted in accordance with the promises of the administration and preferably not until there is some evidence of economic responsibility on the part of the government.

1. Drafted by Mr. Barall.
2. See footnote 2, p. 734.