A historical materialist account of the Chilean capital

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A historical materialist account of the Chilean capital control: prototype policy for whom? Susanne Soederberg Published online: 08 Feb 2011.

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Review of International Political Economy 9:3 August 2002: 490–512


A historical materialist account of the Chilean capital control: prototype policy for whom? Susanne Soederberg University of Alberta

A BS T R A C T After the tumultuous 1990s, capital controls are making a comeback. Although about 14 emerging markets have implemented capital constraints, the Chilean variant (1991–8) has drawn the most attention. Many scholars and policymakers, especially of the Keynesian variant, are quick to support country-level capital controls as a useful device to quell further socioeconomic devastation largely brought about by the speculative activities institutional investors. While this is an important concern, their analyses tend to treat capital controls as ready-made, technical policy instruments usually devoid of political and historical considerations. On the contrary, the Chilean case demonstrates that capital controls can form one moment of larger accumulation strategies from which a minority of the population benets. By examining the Chilean control through the lens of historical materialism, this essay attempts not only to provide a more rigorous and critical scrutiny but also seeks to ‘politicize’ this seemingly neutral policy. In doing so, the essay suggests that the URR was not a means to an end, but rather an integral moment of a larger class-based strategy – paradoxically named ‘growth with equity’ – that was designed to stabilize and reproduce a development model, which serves the interests of powerful transnational nancial capitals and industrial conglomerates.

1 . IN T R O D U C T IO N With the increasing volatility in the international nancial system, capital controls have become fashionable again (cf. Soederberg, 2002). Despite the fact that 14 emerging market economies have employed a variety of capital controls over the past decade (see Ariyoshi et al., 1999), the Chilean capital control (1991–8) is viewed as the most successful in averting the negative side effects of an abundance of short-term nancial ows, such as exchange rate appreciation and capital ight. The popularity of the Review of International Political Economy ISSN 0969-2290 print/ISSN 1466-4526 online © 2002 Taylor & Francis Ltd http://www.tandf.co.uk DOI: 10.1080/0969229021015069 9


SOEDERBERG: A HISTORICAL ACCOUNT OF CHILEAN CAPITAL CONTROL

Chilean control is closely tied to the country’s economic stability and strong growth – averaging around 6.5 percent annually – in the face of large levels of capital inows during the 1990s (Hojman, 1995; Aninat, 2000). The Chilean control, whose technical name is the unremunerated reserve requirement (or, URR), required all non-equity foreign capital inows to pay a one-year, non-interest-bearing deposit. Although there has been a considerable amount of literature devoted to the Chilean URR, these studies have to a large extent been dominated by economic analyses (cf. Eichengreen and Wyplosz, 1996; Ariyoshi et al., 1999; Buch, 1999; FfrenchDavis, 1998). The following quote furnished by an ofcial at the Central Bank of Chile sums up the unproblematic manner in which the URR has been understood up to now: the control is like an umbrella, which ‘you use it when it rains and close it when the rain stops’ (Valdes-Prieto, 1998 in Eichengreen, 1999). Yet precisely because of its ‘prototype status’, it is important to critically scrutinize whom the URR umbrella actually sheltered? Many economists – especially of the Keynesian variant– are quick to support country-level capital controls in emerging markets as a mechanism to quell further socio-economic devastation largely brought about by the speculative activities institutional investors. While this is an important concern, these analyses tend to treat capital controls as ready-made, technical policy instruments devoid of political and historical dimensions. But, as this essay demonstrates, the absence of an historical and political understanding of the URR has led to at least three analytical weaknesses. First, the social relations of power specic to the Chilean political economy have been excluded from the analysis. This neglect has led to the difculty in identifying various political and economic interests that are served by the URR. Second, the debates fail to acknowledge that capital controls are means to larger policy objectives, rather than ends in and of themselves. This oversight has led to a narrow understanding of the broader role played by capital controls, mainly because it fails to make the wider connection between the URR and a larger policy objective, which is usually aimed at furthering certain interests in a specic form of capital accumulation. Third, the lack of a historical perspective lead many analyses to fall short of grasping not only the continuity of Chile’s development model but also the underlying contradictions involved in reproducing it. The general disregard for history leads to a neglect of the impact past policy choices have on present contradictions and weakens the ability of the analysis to appreciate the social forces and structural conditions involved in change and continuity. By examining the Chilean control through the lens of historical materialism (cf. Gill, 1993), this essay attempts not only to provide a more 491


REVIEW OF INTERNA TIONAL POLITICAL ECONOMY

rigorous and critical scrutiny but also seeks to ‘politicize’ this seemingly neutral policy. In doing so, the essay suggests that the URR was not a means to an end, but rather an integral moment of a larger class-based strategy – paradoxically named ‘growth with equity’ – that was designed to stabilize and reproduce a development model that has been in place for more than two decades, but also which serves the interests of powerful transnational nancial capitals and industrial conglomerates. Therefore, those that uncritically celebrate the Chilean capital control as a prototype policy tool for the developing world are unwittingly abstracting from its function as part of a class-based strategy aimed at protecting an existing mode of accumulation that not only rests on high levels of social inequality, but also reproduces a mode of accumulation that is based on a growing dependence on short-term, nancial inows from which a minority of the population benets. Before proceeding with the historical materialist analysis within which we will critically evaluate the URR, it is important briey highlight the terms of the debate that the present analysis seeks to transcend. 2 . T H E D EB A T E S O N T H E C H IL EA N U R R The Chilean government views the URR as a way of dealing with huge surges of short-term capital (hot money). The URR is said to accomplish this task in that it is an indirect, price-based measure that operates as an ‘asymmetric Tobin tax’ that discriminates between capital leaving the country (capital outows) and that entering the country (capital inows). Like the Tobin tax, the URR levies fees on foreign exchange transactions in the hope of limiting speculation (Eichengreen, 1999). The ofcial objective of the Chilean URR, was, by clamping down on short-term ows, to attract longer-term capital to support currency stabilization and thereby prevent further revaluations, which would inevitably hurt rms that are dependent on export markets (Krugman, 1998; Stiglitz, 1999; Laurens and Cardoso, 1998; Nadal-De Simone and Sorsa, 1999; Ffrench-Davis, 2000). Those in favour of the URR also argued that it is able to weed out the negative effects of arbitrage capital ows (i.e. buying cheaply in one market and selling dearly in another) while harnessing their benets (Massad, 1998; Stiglitz, 1999). In doing so, the URR encourages more fruitful and stable forms of investment, such as foreign direct investments (FDI), as opposed to short-term inows (Grifth-Jones, 1996; 1999: 1). According to some sympathizers, the URR has an additional benet in that it created some breathing space for the Chilean authorities in the form of increased autonomy in monetary policy formation, so as to improve banking and nancial regulatory structures (Eichengreen, 1999). Whether the Chilean URR actually achieved these aims, however, is intensely debated. Some writers argue that URR’s goal of stemming 492



short-term capital inows seems to be negated by high differentials in real interest rates (i.e. adjusted for ination), which were raised after the control was introduced in 1991. For example, during the 1985–91 period real interest rates were hovering around 3.1 percent; however, the rate increased to 5.2 percent from 1992 to 1997. Due to this increase in interest rates, it is believed that the URR did little to deter short-term capital ows. From 1990 to 1995, for instance, short-term inows averaged 7.3 percent of the GDP, and then jumped to 11.7 percent of the GDP from 1996 to 1997 (Ariyoshi et al., 1999: 12). Using a different set of measurements than the Central Bank of Chile, Sebastian Edwards shows how short-term inows in Chile were not signicantly lower than other Latin American countries that did not implement capital controls, such as Argentina. What is more, Edwards demonstrates that Chile’s short-term debt (due within one year) was higher than Mexico, another country that did not have capital controls (Edwards, 1999). Other sceptics suggest that the majority of these inows did not seep into productive investment with the aim of diversication, but instead into speculative activities and the acquisition of existing assets (Ffrench-Davis et al., 1995). In sum, the evidence surrounding the URR is highly inconclusive (Kaminsky and Schmukler, 2001; Cohen, 2001). Although this largely technical debate helps us understand the stated objectives of the URR, it does little to shed light on either the particular social forces underpinning this policy or the relation between the URR and the larger class-based strategy of which it was a moment. In other words, since the above economic framework treats the URR as an isolated and ready-made policy mechanism, it fails to grasp that the Chilean capital control was not an end in itself, but rather a means to a larger objective. Relatedly, this ahistorical debate fails to locate the URR within the underlying contradictions of the Chilean development model or mode of accumulation. In what follows, the essay attempts to resolve these blind spots by both widening and deepening the parameters of this debate through the application of historical materialism. 3 . A N H I ST O R IC A L MA T ER I A L IST A C C OU N T O F T H E C H ILE A N D EV EL OP M EN T M O DE L In the mid-1970s, General Augusto Pinochet (1973–989) implemented one of the most radical forms – in both the speed and extent – neoliberal restructuring in the developing world, so as to assist a new emerging development model based on export promotion industrialization. In doing so, the Pinochet administration ascertained favourable conditions by lending government support to the capital operating within its boundaries, largely irrespective of the citizenship of the legal owners of this capital. During this period, macroeconomic policymaking was 493



inuenced not only by technocrats who favoured Friedman-like monetarist forms of supply-side economics (the so-called ‘Chicago Boys’), but also by a handful of powerful and rapidly expanding conglomerates, who had the economic means to adjust to pointed economic change (Silva, 1996). The conuence of these interests manifested themselves in the following two important policies, which would come to characterised Chile’s EPI development model: (1) the Foreign Investment Statute, and (2) the particular expression of nancial liberalization. In 1974 the government implemented the Foreign Investment Statute (Decree Law 600, or simply DL-600). This legislation, which remains largely unchanged today, effectively removed state supervision of the activities of foreign corporation and the sectoral destination of their resources. The DL-600, for example, granted preferential treatment to foreign investors (i.e. transnational actors) through various benets covering areas such as the guaranteed right to prot remittances, the option of holding escrow accounts outside Chile to pay interest, dividends, royalties, and to purchase raw materials (Ffrench-Davis et al., 1995). The DL-600 quickly became one of the key means through which the development model was nanced. For example, from 1975 to 1980, the Chilean economy recorded annual FDI inows of around US$188 million, most of which were heavily concentrated in the mining sector (ECLAC, 2000: 90). Also in 1974, the Central Bank of Chile created a new type of nonbank nancial institution with unregulated interest rates, namely: the nanciera. In 1975, the interest rates set by these nancial institutions increased to 178 percent (based on the annual equivalent of a 30-day interest rate in real terms), and were to remain ridiculously high until the debt crisis in 1982 (Fortín, 1985: 168). The upshot of rapid nancial deregulation was the concentration of wealth in the rentier class. By July 1981, two nancial groups (Banco Hiptecario de Chile and CruzatLarrain) were controlling 75 percent of the newly privatized social security contributions. Furthermore, social security companies were all subsidiaries of the largest groups who controlled some 71 percent of the capital and reserves of the private nancial system (Fortin, 1985: 183). Taken together, these policies resulted in a development model characterized by two growth-poles. One pole constituted a primary resource ‘export-enclave’, with little value-added to the production process and with few links to the rest of the economy. Indeed, of the total FDI entering Chile over the past decade, about 60 percent has gone into Chilean mines, especially copper. This growth-pole beneted hugely from a devalued peso, which made Chilean exports more competitive on the international market. Services (including nance) comprised the other growth-pole. This largely unproductive sector of the economy not only accounted for 494



about 80 percent of the recorded growth between 1976 and 1981, but also was comprised of speculative capital (Petras and Leiva, 1994: 32–3). The setting of high interest rates supported this growth pole, since this policy had the effect of luring short-term capital into the country. The tide began to turn in 1978 when a surge of short-term capital inows led to a revaluation of the peso, and subsequently pushed up the price of Chilean exports. The trade imbalance that ensued led to a mounting public decit, which resulted in greater nancing through foreign loans. In the attempts to stop this vicious cycle, the Chilean government implemented a URR between 1978 and 1982. The ofcial rationale for implementing this capital control, which was more stringent than its more recent counterpart, was to stem ination by keeping interest rates high (cf. Edwards, 1999). However, as in the case of the more recent version of the URR, it merely allowed the government to continue to pursue a macroeconomic policy that supported the development model through currency devaluations and high interest rates and thereby dealing with the expanding trade imbalance. Chile registered impressive levels of expansion during between 1977 and 1980, with annual GDP growth averaging 8.6 percent. However, when viewed historically, this expansion was only a recovery of the aggregate levels of activity proceeding a deep recession of 1975. Specically, Chile’s per capita GDP was only 5 percent higher than it was in 1971 (Fortín, 1985: 190–2). More important, the Chilean development model was based on a deep-seated dependency on nancial speculators, for whom the acquisition of productive businesses was merely a protable short-term manner of investing liquid resources, usually in the form of loans. It should not come as a surprise that Chile experienced high levels of foreign indebtedness throughout this period. Between 1974 and 1981, for example, 20 percent of per capita growth in Chile went to payments of interests and prots abroad (Fortín, 1985: 191). In 1982, the Chilean bubble burst as capital ows dried up and headed to safer and more protable havens, particularly the US with its mammoth increase in real interest rates (e.g. from 0.8 percent over the 1971–80 period to 11.0 percent in 1982). Like many developing countries at the time, Chile entered into a debt crisis in 1982. 4 . EM ER G IN G PO LI TI C A L C ON T R A DI C T IO NS IN R E ST R U C TU R IN G T H E D E V EL O PM EN T MO D EL Chile’s external debt was distinct from other Latin American countries in that the majority of it was private debt held mostly by banks and nancieras (Scott, 1996). The amount owing was not insignicant. For example, in December 1981, the superintendent of banking announced that nancial institutions owed US$2.5 billion – double their combined 495



capital. By 1982, national reserves had fallen by a billion dollars and the daily demand on the Central Bank of Chile was US$22 million (Martínez and Díaz, 1996: 58–9, my emphasis). The immediate problem facing the Pinochet regime was how to resuscitate the economy whilst dealing with a high debt load and less than favourable international conditions, most notably the shortage of voluntary capital ows (in the form of bank loans) to the developing world between 1982 and 1987 (FfrenchDavis et al., 1995), which was being replaced by private portfolio capital inows. The reaction of the government was to substantially increase public spending. During the period between 1983 and 1988, average government spending, as a proportion of GDP was 25.1 percent. Despite the rhetoric of scal discipline, the level of government spending (excluding public debt repayments and scal revenue) was higher under the Pinochet regime than in 1961–70 (Martínez and Díaz, 1996: 66). Moreover, to hold on to its strong support base in these unsettling times the Pinochet regime guaranteed the transfer of assets between capitals was made easier through further deregulations and privatizations. Between 1985 and 1990, this move was augmented by a debt conversion mechanism (Chapter XVIII and XIX of the Chilean Central Bank’s Compendium of Rules and International Exchange). This mechanism gave investors discounts amounting to approximately 46 percent of the value of the assets in extractive industries in logging, shing and mining- and, which were not available under the DL-600. According to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), during the period in which Chapter XIX was in force (1985–90) the Chilean government generated close to 80 percent of its total FDI ows. During the second half of the 1980s, FDI increased under the mechanism of the DL-600. Most of these inows seeped into new mining projects, which according to the ECLAC, accounted for 54 percent of DL-600 inows from 1985 to 1990 (Ffrench-Davis et al., 1995; ECLAC 2000: 91). These ownership transfers had several important and overlapping effects on the character of the accumulation regime. First, they increased the material base of already powerful nancial and transnational capitals. Second, because of the threat of investment strike or ight, these transnational interests played an enlarged role in domestic policy formation. Third, to accommodate their interests, tariffs were lowered and the real exchange rate (RER) was depreciated by about 70 percent by the end of 1985 (Laurens and Cardoso, 1998). The upshot of which was, of course, a surge in Chile’s exports. In light of the knockdown prices of Chilean assets and exports, it is unsurprising that the country’s industrial performance grew at an average of 6.7 percent a year between 1985 and 1990, compared to –1.3 percent from 1980 to 1985 (ECLAC, 2000b: 91). However, 496



as ofcial international agencies such as the Inter-American Development Bank indicate, this growth was based on a disproportionately high level of idle capacity and particularly favourable conditions for Chilean exports, especially copper (Petras and Leiva, 1994). Although the purchasing power of wages began to recover, they remained well below their 1970 level in 1989. Over the same period, indicators show that the living standards of at least 60 percent of the population swiftly deteriorated. For example, an estimated 41.2 percent of the population was living in a state of poverty while one-third were considered indigent or desperately poor with a level of income that could barely support existence (Petras and Leiva, 1994: 33–41). In fact several authors claim that indigence and poverty levels remained higher in the 1990s than in 1970 (Scott, 1996: 170–1; Schneider, 1993; Raczynski, 1999; Fazio, 2000). It should be underlined that the government spending clearly did not seep to the lower echelons of society; but rather to assist powerful bourgeoisie recovery by both direct assistance and paying off the huge debt incurred by the proigate and irresponsible nancial community. Unlike previous manifestations of discontent against the dictator, the emerging protest transcended class lines to include the working poor, middle classes – who seemed to dominate this movement – national industrial bourgeoisie, who saw General Pinochet’s deteriorating political legitimacy as a way of regaining power in relation to the larger transnational capitals. Despite their very different agendas, these classes and groups remained united in their calls for democratic reform. Notwithstanding strong nancial and political support from powerful capitalists’ interests to hold onto a dictatorial regime, Chileans voted in a September 1988 plebiscite to move towards a democratic regime, and thus a development model that favoured their economic interests. This prompted conglomerate and nancial interests to throw their support behind the next best alternative, namely: a coalition of conservative political parties. When the Conservatives were defeated by a coalition of political parties of a more centre-left position, the Concertación de Partidos por la Democracia1 (or simply, Concertación) a new symbiosis of interests transpired. It became apparent to the more conservative and pragmatic elements in the Concertación that they required the support of the powerful capitals not only to win the election, but also to carry out their mandate (cf. Silva, 1999). To this end, Concertación entered into a compromise with the powerful transnational industrial and rentier classes. The main thrust of this co-operation was that the development model would be left in tack. In 1990, a more centrist Concertación came to power, along with a new, democratically elected President Patricio Aylwin Azócar (1990–4). Because these social forces are important in understanding both the political meaning of the URR and the larger class-based strategy of which 497



the control was a moment, namely: ‘growth with equity’, it is useful to briey highlight the meaning of this new state form. Since a capitalist state is rooted in the particular social relations of production, it does not alter its nature simply because its expression of political domination has changed from a dictatorial to democratic form. Rather, this position holds that the there was a consensus within the capitalist class to seek a more inclusionary political form to safeguard the reproduction of the existing development model. Because of Pinochet’s ineffective strategies to uphold dwindling levels of political legitimacy, and the potential deleterious effect this could have on the country’s ‘business climate’, it became clear to powerful fractions that new state managers were required, not only to safeguard their own interests, but also, and more importantly, to stabilize the particular form of capital valorization in Chile. To secure the backing of these powerful class fractions, the Concertación had to convince them that it would not diverge from the neoliberal strategy, which supported the maintenance of Chile’s development model. Put differently, the change in regime did not make the inherent political and economic problems experienced by the Pinochet administration simply ‘go away’. Flowing over from the Pinochet administration, the incoming Alywin government faced the following policy problems: On the one hand, the government had to intervene into the economy in such a manner as to guarantee the reproduction of the existing development model by keeping interest rates high and the external value of the peso down. On the other hand, to maintain legitimacy, and more importantly in terms of luring portfolio inows into Chile, the semblance of political stability, the Concertación had to address its campaign promises on issues of social justice and political power to labour. 5 . PO L IT IC A L SO L U T IO N S: ‘G R O WT H WI T H E QU IT Y ’ A N D T H E U R R The subsequent ‘growth with equity’ strategy may be understood as an attempt by the Concertación government and its economic technocrats based in the Corporación de Investigaciones Económicas para América Latina (CIEPLAN), to deal with the above issues. Interestingly, this project resembled the Pinochet regime in many ways in that it sought to strengthen the existing development model by integrating Chile more deeply into the world economy. For the Alywin administration this was to be achieved, inter alia, by improved foreign access to Chile’s nancial and productive sectors through policies such as an across-the-board lowering of import tariffs from 15 to 11 percent, the granting of permission to private banks to engage in external trade nancing activities among countries other than Chile, and other deregulatory activities (cf. Petras 498



and Leiva, 1994). The major distinction between the Concertación’s strategy and Pinochet’s neoliberal dictatorship was the ‘equity’ aspect of the strategy, or the objective of reducing social polarization in Chile. Under the guise of scrupulously crafted social pacts (e.g. the ‘antipoverty’ Fund for Solidarity and Social Investment, FOSIS) and consensus building, the Concertación attempted to facilitate the reproduction of the basic class relations that characterised the Pinochet regime, rather than modify them (Petras and Leiva, 1994: 133). As noted earlier the powerful social forces represented in the Pinochet regime were present in the Concertación, and the wider government structures, such as the Senate. This meant that the interests of the rentier and industrial conglomerate classes would also make themselves heard in policy formation. For instance, although the Alywin government was well represented in the Senate, conservative political parties, such as Renovación Nacional (RN), which not only were closely tied to rentier and industrial conglomerate interests, but also wielded signicant power in the Senate. Both the RN and powerful bourgeoisie were against ceding political power to labour unions and implementing an extensive welfare programme. The fate of two signicant campaign promises made by the Concertación provides a good idea of just how much social justice meant to those in power. First, the reform of the labour code, which would effectively grant labour more power, especially in terms of wage negotiations, was substantially watered down to such a degree that labour remained as powerless as they were during dictatorial Pinochet’s regime. Second, Concertación’s proposal for a tax reform, which would have allowed the government to make good on its promises of addressing the issue of social equity by increasing corporate taxes, received a cold welcome in the Senate. The powerful bourgeoisie were able to effectively reduce the corporate tax rate from 15 to 10 percent – substantially less than the administration expected. Additional funding was subsequently scraped together through the means of regressive taxation, whereby the state raised the value-added tax reform from 16 percent to 18 percent (Silva, 1999). On a deeper level, the question of equity in Chile remains rmly rooted in nature of the existing development model, which, as we saw, reproduces high levels of social inequality through, for example, the ongoing transfer of ownership of articially devaluated rms, as well as the common feature of speculative-led economic activities as opposed to long-term investment in the productive structure. The irony of the Concertación’s ‘growth with equity’ programme is that its focus was on reproducing the existing development model largely through the high inux of capital inows, which will be discussed below. It should come as no surprise that indigence and poverty levels remained higher in the 1990s than in 1970, despite the much heralded growth rates of the ‘Chilean model’ (Scott, 1996: 170–1; Schneider, 1993; Raczynski, 1999). Drawing on 499



Table 1 Distribution of income 1987–98 Quintile

1987

1990

1992

1994

1996

1998

1st 2nd 3rd 4th 5th

4.3 7.9 11.7 19.0 57.2

4.4 8.2 12.3 18.1 56.9

4.6 8.5 12.2 18.4 56.3

4.3 8.2 12.0 18.5 56.9

4.1 8.2 11.9 19.1 56.7

4.1 8.2 11.8 19.1 56.8

Source: MIDEPLAN: Pobreza y Distribución de Ingreso en Chile 1990–1998. Santiago, 1999, quoted in Marcus Taylor, 2002 (forthcoming).

the government’s statistics, Marcus Taylor demonstrates that the bottom 60 percent of Chilean society receive under one-quarter of the national income (Table 1). Indeed, as World Bank gures reveal in 1996, Chile had one of the most unequal income distribution in the world (Drake and Jaksic, 1999). Before moving to a few technical dimensions of the ‘growth’ component of the strategy, it is important to draw attention to the changing nature in the global political economy, which was highly favourable for the incoming government. To begin with, the price of copper, one of Chile’s most important commodities increased from 1990–3. Since the government is still a major shareholder of the largest copper industry in the world, CODELCO, this price rise provided the incoming government with substantial revenue. Likewise, massive ows of capital entered the Latin American region during the early 1990s. Rather than being the effect of some rational economic explanation, such as sound macroeconomic policies, these ows occurred because of the deep recessionary period (1990 to 1994) within the OECD countries, which in turn led to relaxed monetary policies and more specically low interest rates in the OECD countries. Like most Latin American countries, Chile took advantage of this situation by increased differential yields on investment even further through high real interest rates (Grifth-Jones, 1996). There were several differences between these ows and those of the previous decades. The rst feature was their sheer size. The monthly net private capital ows entering Chile swelled from an average of US$39 million between 1988–91 to a monthly average net ow of US$970 million in 1992–5, most of which were short-term in nature (Cordoso and Goldfajn, 1997 in Aryoshi et al., 1999: 3). The second feature was that unlike the inows dominated by commercial banking that entered the country during the 1970s, the share of portfolio equity and bonds increased – to the detriment of FDI. And, characteristic of all global markets, the third feature was the decreased length of repayment on loans because of the larger shift in borrowing from securities (both bonds and equities) as opposed to syndicated loans. 500



In effect, loans were relatively shorter-term in the 1990s than in the previous decade (Laurens and Cardoso, 1998: 4). Seen from this perspective, it is understandable that concerns about speculation and, more importantly, the external value of the peso, moved into the fore of policy priorities. To reproduce the existing development model, which was dominated by a recessionary environment in OECD countries and high levels of nancial ows, it was necessary to maintain high real interest rates, particularly relative to the international exchange rates to attract investment while maintaining a stable yet competitive real exchange rate (RER) (Aryoshi et al., 1999). The outcome of setting competitively high interest rates to lure in short-term capital ows is a revaluation of the country’s currency, since it is now in demand. The government wished to prevent an exchange rate appreciation like the one experienced in the previous period of abundant capital inows (e.g., during the 1978–81 period) (Ffrench-Davis et al., 1995: 99). To maintain a healthy level of exports, the government had to mediate the value of the Chilean peso so that it did not rise too far. Several key economic policy instruments were employed by the government to ensure that the peso did not revalue, despite large inows of foreign capital. First, the government turned to the selective liberalisation of capital outows, which had the effect of drawing in more cash ows because it enhanced investor condence whilst lowering domestic asset prices (Guitián, 1997; Ariyoshi et al., 1999). Second, instead of allowing the peso to be determined by the forces of supply and demand on the international markets, or xing its value to one currency, the Aylwin administration opted for a ‘dirty oat’. Put simply, this means that the external value of the Chilean peso was to be pegged to the value of a basket of currencies of Chile’s most important trading partners (US, Japan and Germany). Third, to control revaluation the government used the method of sterilization (or, sterilized intervention), which describes a procedure whereby the Central Bank attempted to insulate the domestic money supply from foreign exchange transactions by offsetting sales or purchasing domestic assets. The latter had the (desired) effect of keeping domestic interest rates high, encouraging further capital ows. And, fourth, the Chilean authorities (re-) introduced the URR control on capital ows in the form of a 20 percent tax on foreign borrowing. Specically, the URR was applied to nancial loans, foreign-currency, and deposits. It should be mentioned that during its initial stages, loans that were tied to FDI were also subject to a reserve requirement. For example, venture capital in productive investment had to be held in Chile for a minimum of one year. Eager to signal the soundness of Chile’s nancial system, especially in light of the 1982 asco, the government subjected its banks to relatively 501



strict levels of prudential regulation, including a selective supervision of assets and required provisioning, plus restrictions and drastic penalties on operations with related parties (Laurens and Cardoso, 1998; FfrenchDavis, 2000: 208–9). The URR was also applied to investments in secondary American Deposit Receipts (ADRs). Some elaboration is needed here. There are two fundamentally different types of ADRs: (1) initial offering or primary ADRs; and (2) inows or secondary ADRs. Primary ADRs are shares placed on US stock markets and represent an opportunity for expanding the capital of rms at relatively low cost, since capital costs in international markets tend to be lower than in Chile (Agosín, 1998: 117). Secondary ADRs, which are by far the most popular from of ADRs in Chile, constitute purchases made in the local stock exchange of any existing shares of rms that have passed stringent nancial requirements, such as a certain capital and gross income minimum, and solvency classication. Most important of all, however, secondary ADRs must be placed on the US stock market. After fullling the above noted requirements, these shares are converted into ADRs tradable in the US with the benets in Chile of tax exemptions on capital gains and of access to the formal foreign exchange market. There are also ow backs. These refer to opposite operations that involve converting ADRs to shares and re-selling the latter on the local market. All such procedures rely on access to the formal foreign exchange market for converting US dollars to Chilean pesos and vice versa (Ffrench-Davis et al., 1995: 109). Thus because interest in Chilean securities increases when major price differentials arise between the local and the foreign stock exchanges as well as price/prot ratios, secondary ADRs require both a stable peso and competitive interest rates. Against this backdrop, the unlikely combination of high interest rates and a stable (devalued) peso was facilitated by the way of the URR, which justied government intervention to achieve the desired mix of interest and exchange rates.2 In other words, high interest rates drive up the external value of a country’s currency. Given the nature of Chile’s EPI, the latter scenario would be detrimental to its export sector. Yet blatant intervention into its exchange rate would send negative signals to the international nancial markets, since this move is against the spirit of neoliberalism. However, the URR – viewed here as an integral moment of the government’s ‘growth with equity’ strategy – legitimated state intervention into exchange and interest rates. Thus, in June 1991, the same month that the URR was implemented, swathes of foreign exchange entered the country. Subsequently Chile began to face the destabilizing consequence of a foreign exchange glut that made it difcult to follow a restrictive monetary policy, e.g. high interest rates. The government reacted to this situation by reversing its restraints on imports, thereby burning off excess foreign exchange that 502



beneted the wealthy who could afford to purchase foreign luxury goods. In May 1992, however, the state attempted to reap higher rewards from these ows by raising the reserve requirement from 20 to 30 percent. During this same period, a 1.2 percent stamp tax on local currency credits was extended to all foreign loans, excluding trade credits (Buch, 1999). The question which looms here is not if the URR achieved its stated objectives of attracting longer-term capital to support currency stabilization and thereby prevent further revaluations; but rather, how did it assist the government in achieving its larger goal: the reproduction of the existing development model in the face of large and potentially destabilizing short-term capital inows? Who beneted from this strategy? 7 . A C R IT IC A L A S S ES SM EN T OF T H E U R R While the URR, along with other policy instruments, did succeed in neutralizing the effects of new cash inows, particularly moderating the inevitable exchange-rate appreciation (Ffrench-Davis et al., 1995), it did little to stem the amount of these types of inows entering the country, which was, also one of its explicit aims. As mentioned at the outset of this discussion, the URR should not be viewed as a neutral policy that is an end in itself. Instead it should be assessed as a moment a larger ‘growth with equity’ objective that was aimed at overcoming the policy paradox of the Concertación administration in the wake of changing external factors in the global political economy. Seen from this angle, the URR was successful in reproducing a development strategy that favoured industrial conglomerate and rentier classes, and political elites. At rst blush it appears that Chile enjoyed steady growth rates during the 1990s. Its average per capita GDP, for example, was 5.3 over the past decade (ECLAC, 1999: 14). Nevertheless, it is important to underline that this growth was not accompanied by modest recovery in investment ratio. Overall investment, for instance, grew much less during the rst half of the 1990s than did capital inows; most of the ows corresponded to short-term bond nance, secondary stock market trading and acquisition of privatized rms. Only about one-fourth of net ows assumed the form of FDI and primary ADRs (Ffrench-Davis and Reisen, 1998: 12–13). Whereas the FDI in gross xed capital formation, in the 1985–90 was 21.5 percent, it dropped considerably to 9.2 percent from 1990 to1995 (Rasiah, 2000: 946). Moreover, the economy has grown even more dependent on natural resources as it was during the Pinochet regime. Indeed, ‘[b]rute raw materials constitute 44 percent of exports, moderately processed raw materials constitute 26 percent, and manufactured goods a modest 10 percent. Under the Concertación the rate of growth of manufactured exports plummeted from 32 percent in 1991 to 8.2 percent in 1997’ (Taylor, 2001: 19). 503



These new capital ows into the country did little to alter the nature of the development model, especially in terms of economic diversication. On the contrary, these swathes were used to prop this strategy up whilst its transnational capitals continued to raked in prots in the nancial and extractive sectors. This dominance of nancial ows over the productive sphere expressed itself in Chile’s balance of payments where the capital account (inward and outward ow of nancial capital) has increased to the detriment of its current account (imports and exports of goods and services) (see Table 2). In response to its deteriorating current account, the government sought to boost investment in the productive sphere by revising the rules pertaining to the URR in 1995. For example, the URR was to exclude FDI and rst issues of ADRs. The URR was also applied to credits after their rst rollover. Likewise, the maximum proportion of foreign investment projects that could be nanced through debt was lowered from 70 to 50 percent and the minimum amount of FDI exempted from the reserve requirement was raised. This step was necessary because trade moved to less regulated markets, such as over-the-counter (OTC) derivatives markets (Buch, 1999). Upon closer inspection, however, the nature of these capital inows sustained Chile’s accumulation strategy that has been in place since the late 1970s, and concomitantly the interests of powerful transnational nancial bourgeoisie and industrial conglomerates. ‘The concentration of wealth of Chilean conglomerates, such as the likes of Luksic and Angelini, have grown substantially through mergers and acquisitions as have many foreign transnationals and particularly Spanish owned groups in the nancial sector’ (Taylor, 2002; cf. Martínez and Díaz, 1996; Fazio, 2000). Furthermore, about 60 per of these ows were diverted into FDI within traditional sectors of resource-extraction, i.e., copper mining, pulp and paper. As in the 1980s, the majority of these FDIs represented the transfer of ownership through the re-purchase of existing assets. The remaining 40 percent went into services, especially the nancial sector (Ffrench-Davis et al., 1995; Agosín, 1998). As in the past, mining continued to be the main focus of interest for foreign investors. In the period 1990–5, when mining accounted for 58 percent of total FDI ows. Manufacturers accounted for 15 percent of total FDI ows in this period, with investments linked largely to resourceprocessing industries (agribusiness, foodstuffs, and pulp and paper), involving low-skilled labour (and thus low-paid) (ECLAC, 2000a). Two main types of short-term cash ows that entered the nancial sector from 1990 to 1994 were mutual funds and secondary ADRs. While mutual funds were organized in the major international capital markets, the issuance of ADRs was managed by a handful of large Chilean corporations. In effect this allowed for the further concentration of assets of the Chilean rentier class, while providing cheaper methods of nancing 504

505

–1414.0 –1395.0

Current account –1971.0 Capital account 3241.0

–484.5 2857.0

1990 –98.6 965.2

1991 –958.1 3134.2

1992 –2553.5 2995.9

1993 –1585.2 5293.5

1994 –1345.1 2275.5

1995

–3511.6 6665.9

1996

–3728.3 7357.2

1997

–4143.7 3180.4

1998

Source: ECLAC (1999: 14) Statistical Yearbook for Latin America and the Caribbean 1999 Edition. Santiago, Chile: Economic Commission for Latin America and the Caribbean.

1985

1980

Table 2 Balance of payments ($ millions)




than found at home due to the high interest rates. Contrary to the ofcial objectives of the URR in deterring speculative, short-term inows, the two most common types of external liabilities (e.g., ADRs and mutual funds) are relatively liquid. The upshot of which is that both forms of investment can be rapidly withdrawn from Chile through the formal foreign exchange market, if investors see t to sell their assets in the domestic market. In 1994, for instance, secondary ADR represented an additional net inow of 2 percent of the GDP, which could become a signicant source of instability (Ffrench Davis et al., 1995). As in the case of FDI generated through the DL-600 and debt swaps, mutual funds and ADRs have not led to an increase in productive capacity leading to higher wages, or economic growth; but instead in a change in the ownership of Chilean assets. Hugo Fazio (2000) argues that the dominant foreign interests in Chile are no longer US but Spanish nancial houses. The immediate consequence of which is, of course, a deeper commitment on behalf of the government to the current development model, which favours industrial and nancial transnational capitals. Capital inows dropped considerably after 1994 due to the combined effects of the Mexican currency crisis, the rise in US interest rates, and tighter nancial regulation in Chile (Agosín, 1998). Nevertheless, to lure capital ows the Chilean state still offers a plethora of incentives, such as the repatriation of capital one year after an investment, foreign investors’ guarantees of the right to prot remittances, a choice between the tax regime applicable to national corporations or a xed rate of taxation on their prots guaranteed for a certain period of time (FfrenchDavis et al., 1995). More recently, the Chilean government announced its plans to abolish the 15 percent capital gains tax levied on foreigners (Latin American Weekly Report, 30 May, 2000). As mentioned above, private inows increased, public ows to the economy, particularly infrastructure support for the private sector, have decreased substantially. In 1995, for example, public sector outows surpassed large net inows of private foreign capital (Agosín, 1998). Coupled with the revenue earned from the URR and from debt-equity swaps, the government sought to pay off its debt burden. Indeed from 1989 to 1991, the majority of public net outows took the form of debt repayments. Paradoxically as the government is maintaining its preferred debtor status by busily paying off its external debt, the private sector’s external debt rate has skyrocketed (see Table 3). The latter doubled between 1997 and 1999 and constitutes about 50 percent of Chile’s annual GDP (Taylor, 2001). The promotion of more liberalized trade of its nancial and natural resources and labour-intensive extraction processes has increased the power of nance and transnational interests during the 1990s; but this growth appears to have been sustained by large amounts of borrowing, 506



Table 3 Chile’s private external debt (1989–99) ($ millions) Year

Amount*

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

4.001 5.633 5.810 8.619 10.166 12.343 14.235 17.816 21.613 25.977 28.157

Source: Central Bank of Chile (2000)

largely through ADRs and easy access to international credit. Paradoxically, Chile’s ‘growth with equity’ strategy has not only reproduced the powerful position of transnational corporate and nancial elites, but also its Achilles’ heel, namely its vulnerable dependence on external borrowing and investment. Not surprisingly, and despite the government’s claims of a healthy economy, Chile nds itself in a structural position similar to that of the late 1970s immediately before its crash in 1982 – save, of course, for the existence of large voluntary capital inows. When these inows began to rapidly peter out with the advent of the Asian crisis in 1997, the government was pressured international circumstances to do away with the URR and begin courting over-cautious potential investors and creditors on more lucrative terms. Ironically this move came at a time when the country was not only experiencing a number of speculative attacks against the peso, but also an outow of about US$2.1 billion of capital in 1998 alone (IMF, 2000 quote in Taylor, 2002). The URR was discontinued for the same reason it was implemented, namely, to feed the paradox of the development model by removing any obstacle in place that would block capital inows, regardless of their level of volatility. Chile’s currency came under tremendous pressure in the wake of the Asian crises, due to the precipitous fall in Chilean exports. In response, the government successively reduced the deposit requirement from 30 to 0 percent in September 1998 (Laurens and Cardoso, 1998). Thus, ‘precisely at a time when currency turmoil elsewhere would suggest that a Tobin-type tax might prove particularly useful, the Chilean authorities apparently concluded that, whatever the benets of the tax, they could no longer afford to turn away foreign capital’ (Sebastian, 507



1999; Buch, 1999: 6). In this light, the ofcial justication of the URR to favour equity over debt nancing and long-term over short-term nancing fell apart. The country’s debt-ridden accumulation strategy required a steady stream of cash inows. The concern to maintain these ows was highlighted by investment strikes arising from what Irene Grabel (1999) refers to as ‘guilt by association’ which plagues all emerging market economies during panics when investors and lenders see these countries in an undifferentiated fashion. In response to this, the URR was suspended in 1998. The Chilean state set out to accommodate the need by raising interest rates to attract inows. Concurrently they slowly allowed the peso to decline in order to support exports in late 1997. The government’s response to the Asian crisis shows that the URR was itself one moment of a larger strategy aimed at Chile’s integration into the world market via development model that is based on cheap assets, labour and exports evolving around primary resource extraction and nance and services. 8 . C O N C LU SIO N The main objective of the essay has been to subject the Chilean control to a more rigorous and critical scrutiny by examining it through the lens of historical materialism. In applying this framework the essay has suggested that the URR is to be evaluated neither in isolation of political and historical considerations, nor as a policy in itself; but rather as a moment of a larger class-based strategy, paradoxically named ‘growth with equity’. In this manner the URR may be viewed as a means to reach a particular end, namely: the recreations of an accumulation regime, which has been in place since the late 1970s, and which served the interests of powerful transnational nancial interests and large manufacturing conglomerates operating in Chile. In this regard, the URR as a moment of the ‘growth with equity’ strategy has been successful in reproducing a development model that by its very nature leads to ever increasing concentration of wealth in the extractive and nancial sectors, as well as high poverty rates. Moreover, it would be stretching the truth to state what Chile’s former Minister of Finance, Eduardo Aninat, has so boldly claimed: ‘Chile at last has broke free of two long-standing economic handicaps: a highly volatile pattern of economic growth and a long history of ination’ (IMF, 2000b: 1). While the high interest rates pursued by the URR put to rest, at least temporarily, inationary problems, the Finance Minister’s understanding of stable growth should be seriously questioned, particularly in terms of which type of growth and in whose interests? In all, the Chilean experience should make its supporters hesitant to embrace country-level capital controls without addressing the underlying 508



policy paradoxes and power structures associated not only with historically developing national forms of development models, but also how these accumulation regimes are intertwined with the existing power relations in the wider global political economy. To be sure, if these concerns are left unattended, capital controls can be used as a policy device to reproduce existing power structures that are founded on income polarization as opposed to striving toward long-term economic stability and social justice. If we begin to view capital controls as a means to a larger end, then they can only be truly effective as a policy mechanism if their ends are also laudable, that is achieving economic stability and universal social justice. A C K NO W LE DG E ME N TS For their comments on an earlier version of this article I thank Benjamin J. Cohen, Adam Harmes, Paul Langley, Louis W. Pauly, Marcus E. Taylor, Fred Judson, the editors, and two anonymous referees of Review of International Political Economy. All usual disclaimers apply. N OT E S 1

2

3

4

5 6

The Tobin tax, which was rst conceived in 1978 by Nobel-prize laureate James Tobin, was conceived to fall disproportionally on transactions motivated by short-term capital movements. In doing so, ‘it would tend to drive participants with extrapolative expectations from the market, leaving the price of foreign exchange to be governed mainly by traders with stabilizing expectations (Eichengreen, 1996: 274). It should be mentioned there is far from a consensus over the URR. Economists disagree about the effectiveness of the URR’s ability to affect interest rate behaviour as well as moderate speculative capital inows (Agosín, 1998; Labán and Larraín, 1998; Edwards, 1999). According to Paul Drake and Iván Jaksic (1999), the Chilean model became famous not only because of its seeming robust economic growth and selfacclaimed reduction in poverty, but also due to its consistent application of privatization schemes as well as decentralization strategies concerning labour. The explosion of the external debt, for example, from 40 percent of GDP in 1979 to 100 percent in 1983; yearly interest payments increased from 3 percent to 10 percent of GDP. The sharp curtailment of capital inows in early 1982 amplied the problem and pushed the economy into a deep recession (Riveros, 1998). Although technically speaking the Concertación is an amalgamation of around 15 parties, it is represented by two main parties, the Partido Demócrata Cristiano (PDC) and the Partido Socialista (PS). The Aylwin government responded to the second element of the policy dilemma by implementing an ‘anti-poverty’ programme, FOSIS (Fund for Solidarity and Social Investment, Fondo de Solidaridad e Inversión Social) in 1990. As with the ‘growth with equity’ strategy, the philosophy behind the FOSIS was not to create social and political change through economic redistribution; but rather to reproduce the existing system.

509



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