Macroeconomic Stability and Income Inequality in Chile

Arturo's task, as President Aylwin's advisor, is to devise a strategy to reduce income inequality rapidly without sacrificing the macroeconomic gains of the military regime.

A country of islanders. Chile, a country stretching along 2600 miles of the Pacific coast of South America, is abundantly endowed with natural resources. It is the world's largest producer and exporter of copper: It produces 24 percent of world output of copper ore and CODELCO, the state-owned copper corporation, holds about 20 percent of the world's known copper reserves.

There are also substantial deposits of nitrates and of iron. Arable land is appropriate for the production of fruits, vegetables and wine, while there are as well substantial forested areas for timber exploitation. With a population of just over 13 million, its resources in these areas have been in excess of the domestic needs. Chile has as a consequence been oriented from the beginning toward foreign trade and international markets. As political scientist Federico Gil states, "the Chilean people ... are in reality islanders". This international dependence is heightened by the relative shortage of crude oil deposits within Chile.

The Pinochet-era economic reforms.

Policies changed dramatically under the military government of General Augusto Pinochet. The military regime had three main economic objectives: (i) liberalization of the economy to increase the role of markets, (ii) privatization to return firms to the private sector and restructure the public sector, and (iii) stabilization of inflation and avoidance of a balance of payments crisis.

Adapted: Conway, P and Warnock, F (1997), Economic Management Training Conference, Economic Development Institute

QUESTION 2 (25)

2.1 Chile is abundantly endowed with natural resources. Are natural resources a necessary or sufficient condition for economic growth? Discuss. (15)

2.2 You are the Economic Advisor to the Chilean government under the Ministry of Industry and Economic Development; using information in the article submit suggestions about how the balance of trade and the current account respectively, can be turned into surplus. Make FIVE (5) suggestions in this regard and explain how they might serve to improve the balance of payments (BOP) position of Chile. (10)