# Intelligence Memorandum: Allende's Chile: The Widening Supply-Demand Gap

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Secret
Directorate of Intelligence
Intelligence Memorandum
Allende's Chile: The Widening Supply-Demand Gap
Secret
ER IM 72-175
December 1972
Directorate of Intelligence
December 1972
INTELLIGENCE MEMORANDUM
ALLENDE'S CHILE:
THE WIDENING SUPPLY-DEMAND GAP
SUMMARY AND CONCLUSIONS
* To many observers, Chile under Allende has seemed like a profligate who frittered away an inheritance on a two-year binge. This consumption spree has cost the country some $550 million in foreign reserves, a large part of its material inventories, a serious deterioration in productive capacity, and a drying up of most foreign credits. In the process, Allende has used economic levers to radically alter Chile's power structure in an attempt to make his socialist revolution irreversible. Although his policies have created massive government deficits and excess consumer demand, they also have markedly increased the state's economic power and have redistributed income, thereby eroding the opposition's economic base.
* Some sobering realities, however, recent have become apparent, foreshadowing the lean days to come. Although the government can justifiably claim that per capita gross domestic product (GDP) and consumption are higher in 1972 than in 1970, by most other measures the economy already is far worse off than when Allende launched his revolution of "meat pies and red wine." Output in most sectors is now stagnating or declining, foreign reserves are heavily in the red and copper earning down, food stocks and manufacturer's inventories are virtually exhausted, and distribution snarls are chronic. Demand, however, continues to rise sharply, fueled by wage increases, ever-larger government deficits, and a mind-boggling rise in money supply. As a result, even government-controlled prices have jumped almost 75% in the last three months, while shortages abound and the black market have become far more a way of life than ever before.
* This does not necessarily mean that Allende will get his comeuppance in the March 1973 congressional elections. Economists may wring their hands and the foreign press may view with alarm, but the fact remains that many Chileans are better off than before. Furthermore, many people are delighted with the leveling of incomes at the elite's expense. The shortages common in recent months have affected Allende's low-income constituency, but the living standards of the upper and middle classes have been hit much harder. Moreover, people with extra money in their pockets for the first time probably have not yet begun to worry much about the lack of things to buy. In fact, Allende's actions have encountered little effective resistance except when they have threatened to cut deeply into middle-class interests. The month-long strike that nearly paralyzed the economy in October was triggered by independent truckers and small retail merchants, who were later joined by professionals and larger entrepreneurs. Although violence flared intermittently (see the photograph), Allende was supported by the military in his efforts to get the economy moving again. The subsequent entry of the military into key cabinet posts - while opposed by Allende's more radical coalition partners - promises to lessen turmoil in the crucial months ahead.
* During the three months preceding the elections, Allende should be able to stave off belt-tightening measures. He has already gone much farther than many expected in liquidating Chile's assets to satisfy consumers and almost certainly will continue to give their demands priority. He can keep imports high by running Chile's net foreign reserves further into the red and by increasing commercial arrears. Also, some emergency hard-currency assistance may be forthcoming from Communist countries, although it probably will fall far short of the requests currently being made of Moscow. Allende will be helped by the election's opportune timing. Although agricultural output in crop year 1972/73 probably will be down about 10% from the preceding year's dismal performance, February-March is the harvest season's peak and food supplies will therefore be at their most plentiful. Moreover, the summer vacation doldrums between now and March will give Allende time to ease industrial supply problems that were substantially worsened by the recent strike.
* Although Allende can postpone the impact of plummeting investment, stagnating output. and spiraling demand until March, Chile will face grave economic problems later. Foreign reserves will be exhausted and borrowing capabilities limited, thus, only sharply increased copper prices or a bail-out decision by Moscow will keep import capacity from falling. If import constraints are necessary, some impact on supplies or foodstuffs and industrial inputs seems unavoidable because imports of capital goods (other than those ﬁnanced by foreign credits) and of manufactured consumer items already are small. Even though Allende's long-heralded year of sacrifice will begin in 1973, investment will remain depressed and output is likely to stagnate or decline. If the regime continues its reckless budget and wage policies in the face of contracting resources, Chile's market system will move further along the road to destruction. Runaway inﬂation, rationing, or some combination of the two may not be far off.