Economy Under Repairs

Chile, the "shoestring country" that U.S. children learn about from their fourth-grade geography books, is in the toils of a silent and hopeful revolution, no less tense and dramatic for being economic rather than political. The astonishing evidence is that a 40-year-old inflation, moving with express-train acceleration, has been braked to a stop since January. The significance is that Chile, while the world of economists and traders watches with interest and hope, is scrapping outmoded government controls and veering toward a free economy.

The abrupt change from familiar controls to chancy freedom might be no great trick for a South American dictatorship, ruled by decree; but in democratic Chile the reform is going ahead by vote of Congress, which is convinced that austerity is what the people want. One politico, who at first opposed the change, admitted last week, "We underestimated the civic conscience of our people.''

People & President. The 6,400,000 people of Chile--a mixture of Basque and Catalan stock, with some blend of the original Araucanian Indians--have demonstrable courage and energy. Though outnumbered in an 1879-83 war with Peru and Bolivia, they easily grabbed the copper and nitrate riches of the rainless northern deserts, thus completed the process of making their country so long (2,600 mi.) that if it were magically moved it could serve as a land bridge from Boston to Belfast. Chileans are 90% literate and obstinately democratic, but by a quirk they have elected as their President a man who was once their dictator: General Carlos Ibanez del Campo.

President Ibanez, at 78, is still stern, upright and tempestuous. The son of a wealthy landowner, he early learned to sit a horse and boss his father's peons. The landowning politicians of Chile's 19th century-- Conservatives who disputed for power with equally conservative Liberals-- molded his beliefs to the right. The Chilean cavalry gave him a passion for humorless order; Chileans say that once, for reasons of pure esthetic tidiness, he made a tall clarinetist in a military band trade instruments with a short trombonist.

Conservatism and orderliness led Ibanez, in 1925, to take part in an army revolt against Chile's first reform-minded liberal President, Arturo Alessandri. Making himself dictator, he borrowed $300 million abroad, touched off a period of prosperity, then saw his regime collapse in 1931 with the Depression. The experience soured Chile on dictatorship, but did not discourage Ibanez. He tried three more revolutions, including a 1939 Putsch copied after that of the Nazis. All failed, and Ibanez finally decided, in 1952, to try the ballot box. His lonely, military stiffness, his speeches barked out like parade-ground orders, and his earnest promises to cut the cost of living, appealed to Chileans tired of the older parties. He won easily.

Paternal & Popular. But if Chileans variously feared or anticipated a dictator, what they got was a law-respecting President, in deep economic trouble from the start. Ibanez worked his way through 17 Cabinet shuffles involving 58 Ministers. Congress insistently opposed his legislative programs, which, though never A B C clear, proposed some type of reform of the economic controls he inherited.

The system of controls had three main features. One was taxes and exchange-rate penalties totaling 85% of the operating income of the U.S.-owned copper companies, which produce half of Chile's incoming dollars. Another was subsidies, through preferential exchange rates, for vital imported foods, raw materials and fuels. (Thus, in effect, the highly productive copper industry subsidized much of the nation's food.) The third feature was a law giving most workers automatic pay increases proportional to each year's increase in prices.

The system was paternal and fairly popular. It did not stop the government's printing-press inflation, which reached 15% to 25% a year; in fact, automatic pay increases made inflation almost pleasant for a good many people. But the machinery was dangerously balanced, and geared high enough to run wild with any real inflationary surge. When world copper prices dropped sharply after the fighting ended in Korea, the surge came. The government compounded it by printing money to continue the subsidies. Labor's escalator clause reinforced the trend. Prices rose 72% by the end of 1954. Ibanez thereupon sent Congress what proved to be the unheralded first step in a bold policy of economic repairs.

A New Deal. Ibanez asked for a "new deal" for the copper companies: lower taxes, which would encourage them to produce so much more that Chile's income from copper would eventually rise. Congress acted. The bill that it passed left total taxes for the companies (notably the Anaconda Co. and Kennecott Copper Corp.) at 75% for present production, but, like an income tax in reverse, it progressively lowers taxes to 50% of operating income when production is doubled.

Already the companies are pouring an initial $56 million into new and old mines, and taking aim on doubled production. Moreover, the will to act shown by Congress gave hope that other fetters on the economy could be untied. The U.S. economic consulting firm of Klein & Saks was hired last August.

The advice, expectably, was hard to take. Klein & Saks proposed price ceilings and a wage freeze that would hold labor's automatic 1956 advance to just half of the 90% rise in the cost of living during 1955. But the success of the new deal for copper had impressed Congress. The bill went through the Chamber of Deputies.

Close Vote. On a sultry afternoon last January it reached the Senate. After heated debate came the vote: 23-23. Next day, on Ibanez' pleading, bedridden conservative Senator Eduardo Cruz-Coke came to the Senate wrapped in a wool dressing gown, ghostly pale, and leaning on the arms of friends. His vote was si.

Leaders of the 1,500,000-man Chilean Labor Federation called a general strike. But with Congress for once backing him, ex-Dictator Ibanez refused to bow to pressure. He jailed the union leaders and some of Chile's 40,000 Communists, declared a state of siege. The strike petered out.

Inflation since then has been held to a trifling 1% rise, and Ibanez' program has gone right ahead. A fortnight ago the peso was set free to seek its own value (TIME, April 23). The newest Klein & Saks recommendation, an antitrust law, went to Congress last week.

Next Reform. The Ibanez reforms are not free from peril, though considerably less frightening than the destructive inflation cycle. The first effect of freeing the peso was to devalue it (from the official rate of 300 per dollar to a current 460). That puts heavy strain on the ceiling prices of imported goods, and the whole program is in deep trouble if price ceilings give way. Sure that they will, Labor Federation Leader Clotario Blest, blinking tired eyes in the sunny patio of Santiago's Central Jail, says: "The heart of the matter is that only the little guy will have to tighten his belt."

But the President's experts insist that they do not propose to liquidate inflation by squeezing the country's rotos (broken ones). They are confident that plenty of copper dollars, from new investment and current near-record prices (45-c- a lb.) plus a $75 million currency stabilization loan from the U.S., will bolster the peso. And to hold the price line against changeover shocks, the government gave temporary direct subsidies for vital imported goods, and raised living allowances under the social-security system for 3,000,000 rotos.

Says Ibanez, who has two years left in his term: "Now if the parties continue to give me their support, as I believe they will, we will go ahead until we reach our final aim: total recovery of my country."

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