Documents menu

Chile's Rich

By S. Rosenfeld and J. L. Marre, NACLA Report on the Americas
May/June 1997

With an estimated net worth of $2.3 billion, Anacleto Angelini is the richest man in Chile.1 He controls Grupo Angelini, the second largest of the grupos - or conglomerates - that now dominate the Chilean economy. The economic restructuring of the past 20 years has transferred national wealth and power to a small number of these Chilean grupos and their transnational partners. The top six grupos now own more than 20% of Chile's capital stock.2 From 1990 to 1995, the total assets of the top six grupos grew from an equivalent of 54.2% of GDP to 55.8%. The Angelini empire alone accounts for 5% of Chile's exports.

Angelini emigrated to Chile from Italy after World War II, and amassed a medium-size fortune in the fish, forest and construction industries. His empire expanded rapidly after the 1973 coup led by General Augusto Pinochet, benefiting from the military dictatorship's privatization fever. It now stretches from fishing companies in the north, including the nation's largest, Pesquera Iquique Guanaye S.A., to Celulosa Arauco y Constitucion, the giant forest-products company in southern Chile. His holdings include numerous investment companies, business-services companies, Chile's largest insurance company, Cruz del Sur, and the nation's fourth- largest pension-fund administration company, AFP Summa S.A.

In the energy sector, Angelini controls Cocar, the coal mining company which sells coal to Chilgener, the second largest electric company in Chile, in which Angelini himself is a major shareholder. He also owns hydroelectric plants, petroleum and natural-gas production and distribution companies, a chain of home-appliance stores, a tourism company and a broad range of agriculture, livestock and real estate interests. In the forest industry, Angelini controls forest-plantation management companies, logging companies, saw mills, pulp plants, and even the ports from which the forest products are exported.3

The radical redistribution of national wealth to a few conglomerates like Grupo Angelini coincides with a decline in the percentage of national income going to wages, from 42.7% in 1970 (just before Salvador Allende's Popular Unity government) to 33.9% in 1993.4 It also coincides with an overall rise in poverty. In 1994, 28.4% of Chileans lived in poverty, compared to 17% in 1970.5 (The poverty rate peaked at 45% in 1987, toward the end of the dictatorship, when a significant part of the middle class had fallen into poverty.) Poverty in Chile used to be synonymous with rural landlessness or urban joblessness. Today, the masses of Chile's poor are no longer "marginal" to the national economy, but central to the workings of the country's free-market economic model. They are low-paid, temporary workers in the formal sector of the economy. Chile's traditional industries like textile, garment and shoe production collapsed under import pressure when the dictatorship's neoliberal policymakers opened the economy in the mid-1970's.

Many industrial workers lost their decent-paying union jobs in that period, settling for lower-paid and unstable processing jobs in the fishing, forest and fruit-export sectors.

Low wages now mean that even a job in the formal sector is no guarantee of escape from poverty. The free-market model has also hollowed out the country's middle class. Historically, Chile's middle class grew along with the expansion of the state. When state and state-enterprise employment was drastically reduced during the dictatorship, and wages for teachers and other remaining state-sector workers declined, the traditional middle class became impoverished and insecure. At the same time, a new middle and upper-middle class of professionals emerged in connection with the boom in finance and services. And above the professionals were the fabulously wealthy owners of the country's new conglomerates.

The transition to democracy in 1990 brought a consolidation of, rather than a challenge to, the free-market model.

Chile's governing coalition, the Concertacion (led by the Christian Democrats in the center, with the Party for Democracy and the Socialist Party to its left), claims its economic program will bring "Growth with Equity." The Concertacion's formula for Growth with Equity has been to embrace the free-market, export-oriented economic model implemented during the dictatorship, but also pay significanltly more attention to poverty and social policy than the dictatorship ever did. In pursuit of freer trade, the Concertacion has reduced import tariffs, privatized many remaining state-owned enterprises, and aggressively pursued bilateral and multilateral free- trade agreements, including entrance into NAFTA.

The transnationalization of the Chilean economy has also intensified since 1990. The Concertacion's commitment to free trade and privatization, together with the political stability since the transition, has translated into increased foreign investment. International investment in Chile rose from $1.5 billion in 1990 to $2.8 billion in 1993, and then skyrocketed to $4.3 billion in 1995. Chilean investment abroad also shot up, financed by Chile's private pension-fund system and "yanquee bonds" - corporate bonds sold on Wall Street. Growth has boomed at an average annual rate greater than 7% since 1985 - by far the highest in Latin America.

Single-digit inflation, moderate unemployment officially in the 5-6% range, and a vibrant export sector make Chile's macroeconomic performance the envy of every finance minister in Latin America.

So the Chilean economy works, but it does not work for everyone. In fact, Chile's much-touted "jaguar" economy may be less like the wild cat and more like the British automobile - a symbol of both luxury and unreliability. In 1970, Chile was well known for its public health and education systems, had a substantial professional middle class and a stable working class, and significant comparative advantages in natural resources. But free-market reforms were used to radically concentrate wealth and power in the hands of a few, destroy labor's bargaining power by undermining its base in traditional industry and the state, and strip away existing social guarantees.

The ongoing processes that perpetuate the concentration of wealth in Chile are largely the result of the neoliberal revolution in economic policy implemented during the Pinochet dictatorship by a group of Chilean economists who had studied with free-market proselytizers Milton Friedman, Frederick von Hayek and Arnold Harberger at the University of Chicago. In the 1950s, the University of Chicago developed a "special relationship" with the Catholic University in Chile. A systematic approach to "ideological transfer" was supported by the Rockefeller and Ford Foundations, and the U.S.

Information Agency.6 University of Chicago professors, most notably Harberger, taught at the Catholic Univeristy in Chile, and Chilean economics students were given scholarships to study economics at the University of Chicago, where some of them developed an intense sense of mission, arrogance, and belief that for every problem there is a free-market solution. Many of the Chicago-trained Chileans, such as Rolf Luders, Alvaro Bardon and Sergio de Castro, returned to the Catholic University to become economics professors, shaping a new generation of economists in the Chicago model.

Sympathetic Chilean businessmen collaborated with the "Chicago Boys," as they came to be known, in the design of a free-market economic program for Chile.

The Chicago Boys believed that the threat of socialism in Chile was linked to political and economic institutions dating back to the 1920s and 1930s. They blamed the 1925 Constitution, the political party system and state-centered import substitution industrialization (ISI) policies for the growing role of the state in the Chilean economy. They believed that only a radical opening of the economy to international competition and a reduction of the role of the state and politics in society would "free" the economy and liberate Chile from the threat of Marxism. By 1965, the Chicago Boys controlled the Catholic University's school of economics. By 1975, two years after the military coup, the Chicago Boys convinced General Pinochet of their beliefs, and displaced the nationalist sector of the right, which sought a resurrection of traditional agriculture and industry. Sergio de Castro became Minister of the Economy in April 1975, and the neoliberal counterrevolution in Chile began.

The Chicago Boys began their experiment by unilaterally opening the Chilean economy to international trade.

Traditional industry fell into ruin under the pressure of international competition, and in 1975 GDP dropped 14%.

Chile's traditional elites, still reeling from the agrarian reforms of the 1960s and the interventions of the Popular Unity government, were devastated by the opening up of the economy.

The Chicago Boys used the economic crisis of 1975 as an opportunity to restucture the economy to their liking. From 1975 to 1981, the "strategic" banks and industries that were nationalized under Allende were privatized to a small number of grupos, owned and run by the Chicago Boys and their supporters in the business community. The new grupos became the new driving force in the Chilean economy. They combined banks, financial and other service companies and natural- resource export industries like fruit, forests and fish into huge conglomerates. Before the Chicago Boys, Chile's traditional economic grupos were family affairs, based in large landholdings, commerce and traditional industries such as clothing and shoes. Many of the new grupos emerged in the late 1960s out of the relationships among the Chicago Boys and the big businessmen who had backed them since the 1950s.

Unlike their debt-shy predecessors, many of the new grupos started with few assets, relying on easy petrodollar loans and the privatization of the banks for capital. While the traditional grupos sought majority ownership, the new ones built their empires through leveraging small, controlling shares of interrelated companies. Ultimately, most of the traditional grupos regrouped to participate in the booming finance and export sectors. The heavily indebted grupos made speculative real estate and other investments. Incestuous and highly unregulated relationships between the grupos and their own banks left the Chilean economy extremely vulnerable.

In the late 1970s and early 1980s, the Chicago Boys were flying high. As the economy zipped along, a "miracle" was declared, and the dictatorship began to implement its ambitious project to permanently remake Chilean politics, economics and culture. The so-called "Seven Moderizations" included a new constitution, the "regionalization" and decentralization of the state, the privatization of state- owned industry and services, a new system of labor law, and the municipalization and privatization of state-run health, education and social-security systems.

But when Mexico declared an international debt-service moratorium, and the international bankers stopped providing new money to roll over bad loans, Chile's speculative bubble burst. The economy collapsed, and GDP again plummeted 14%.

The grupos fell apart. Bankrupt companies defaulted to their banks, which defaulted to the Central Bank, and the Chilean state once again became the owner of most of the Chilean economy.

Like the economic collapse of 1974-75, the 1982-83 depression provided the Chicago Boys with another opportunity to restructure the economy. In 1985, a new stage of privatization began - this time, the historic state enterprises, including the electricity and telecommunications companies, were put on the block. International capital got the upper hand, using debt-for-equity swaps to pick up dominant positions in profitable state enterprises. Foreign investors, including many U.S. banks and mutual funds, such as Citicorp, Morgan Guarantee Trust Co. of New York, the Bank of New York, Bankers Trust, the Emerging Markets Chile Fund, the Chile Fund, and the Spanish bank Santander were major players.

The history of the Chilean oil company, COPEC, is illustrative. COPEC was privatized in 1976 to the Grupo Cruzat-Larrain, then the largest conglomerate in Chile, and the main beneficiary of the first round of privatizations during the dictatorship. With the further privatization of major state-run industries, COPEC in turn acquired a diverse collection of finance, forestry, fishing, commerce and mining companies. In the 1982-83 debt crisis, Cruzat-Larrain went belly-up. COPEC and many other companies financed or owned by Cruzat-Larrain and the Banco de Santiago (of which COPEC owned 50%) were taken over by the state. The Pinochet dictatorship became the not-so-proud owner of the largest private enterprise in Chile - which it held on to for four years.

In 1986, Grupo Angelini acquired COPEC at bargain-basement prices in the dictatorship's second round of privatizations.

Angelini bought his share of COPEC at half price, four days before the public auction to reprivatize the shares of the oil company.7 The Angelini Group then canceled part of COPEC's foreign debt through a $164 million debt-equity swap, in which the New Zealand forest-products giant, Carter Holt Harvey, got a 30% share of the company. According to Maximo Pacheco, Carter Holt Harvey's vice president in Chile and an important player in the Christian Democratic Party, CHH's initial $164 million debt-swap investment is now worth $2 billion.8

Through the reprivatizations, the grupos were put back together, and the national wealth was again concentrated in a few private hands. Chile's newly privatized pension-fund system - together with transnational financial capital - helped provide the grupos with the resources they needed to pay for reprivatization. This allowed the dictatorship to shore up its economic and political projects against pressure from the nationalist right based in traditional agriculture and industry, which wanted to break with neoliberal policies, and the center and left opposition movements, which also wanted a break with neoliberalism and demanded a return to democracy.9

Key to this new concentration of wealth was the privatization of workers' pension funds. The privatization of Chile's social-security system has put workers' savings under the control of a few U.S.-based insurance companies and Chilean grupos, which have used the funds to rebuild their bankrupt empires. The forced savings of Chilean workers are a key factor behind the country's remarkably high national savings rate of 30% of GDP. These savings have funded the investment which has fueled Chile's economic boom - and given a few pension fund administration companies significant control over the Chilean economy.

At the time of Chile's pension-fund privatization, the country had an intergenerational transfer system, in which the contributions of current workers paid for current retirees. It was a complicated system with 35 separate funds, or cajas, and 150 different plans according to job category and employer. Doctors, teachers, state workers, municipal employees and railroad workers each had their own cajas, most of which were overseen by the state and run by tripartite boards with representatives of workers, employers and the government. Pensions varied dramatically according to each group's political weight. Breaking up the old cajas which had evolved hand-in-hand with labor unions and professional associations, the AFP system undermined the existing class- based organizations and identities - except in the case of the Armed Forces and police, whose cajas were never privatized.

The average monthly pension for Armed Forces retirees is higher than the averages in the rest of the state-run and AFP systems. The average monthly pension for retirees in the state system is $204.63 per month, compared to $271.30 for the AFPs, and $608.27 for the Armed Forces.

When the AFP system began, the old cajas, except the Armed Forces and the police, were consolidated under the administration of a state-run agency, and the old system was closed to new entrants. All new entrants to the workforce must affiliate with an AFP - assuming they have a work contract, and that their employer actually passes their deductions on to the AFP. Those who entered the workforce before privatization were given the choice of staying in the state-run fund, or switching to an AFP.

Under the new private pension system, run by pension-fund administration companies (AFPs), the size of an individual pension is determined by how much a worker has saved, plus the interest he or she has earned. The state pays a "recognition bond" to everyone who switches from the state to the AFP system, representing their years of pension contributions to the state, plus 4% interest and adjusted for inflation. Affiliates must automatically deposit 10% of their wages in the AFP of their choice. An additional charge averaging 3% is levied to cover life and disability insurance, plus the administration costs and earnings of the AFP. At the time of the big switch, workers were bombarded with major publicity campaigns, as AFPs fought for market share by promising higher pensions and encouraging workers to switch brands. Twenty-five percent of affiliates change AFPs each year, despite the fact that, thus far, the AFPs have quite similar rates of return. Job instability and poverty wages make it impossible for many workers to earn a pension.

Thirty-nine percent of the workforce does not make monthly pension payments. Among the lowest income quintile, 55% cannot make payments.10 The only recourse for those who don't accumulate 20 years of savings in an AFP is the state subsidy for the elderly poor - $51 a month in 1997.

The AFP system taken as a whole has so far been extraordinarily profitable, averaging a 12.3% annual return since 1981, although a negative 2.5% return in 1995 - largely due to a drop in the price of energy stocks - caused some concern about the risk inherent in the new system. The costs of publicity and sales, along with the profits taken by the AFPs, make the AFP system much more costly than the former state-run system - eating up 16.7% of affiliates' contributions, compared to less than 5% under the old system, and making the rate of return on individual pension accounts significantly lower than the overall rate. Even proponents of the AFP system expect the long-term average rate of return to settle around 6%. The rush of pension-fund money into the stock market has driven up stock prices, further driving up the AFP's annual returns. It is unclear what will happen to stock values, and therefore the values of workers' pensions, when the AFPs start selling off large amounts of stock to pay for pensions in decades to come.11

In contrast the state pension system, with its $4.1 billion annual budget, is expected to run huge annual deficits for the next 40 years. This is because the state got stuck with all existing pensions, the pensions of the workers who stayed in the state system, the public-assistance pensions for the needy, as well as the state-guaranteed minimum pension for those who fail to accumulate enough money in their AFP plan upon retirement. The AFP system, by contrast, has so far accumulated few pensioners.12 [See Table 2.] During the 1982-83 financial crisis, the AFPs went bankrupt along with the grupos, and fell into state custody.

Subsequently the social security system was reprivatized, and Citicorp and Aetna gained control of most of the pension-fund system. A few Chilean grupos - Abumohor-Saieh, Luksic, Matte and Angelini - also got an important share.13 At first, the AFPs mostly bought government debt, including the "recognition bonds." After the 1982 debt crisis, workers' AFP savings provided the capital which the bankrupt conglomerates used to rebuild their empires, buying up shares in the 1984- 85 reprivatization of the economy. Starting in 1985, the AFPs began buying shares in the major state enterprises that were being privatized, especially in energy, telecommunications and other highly profitable sectors. By 1994, AFP investments made up 70% of institutional investment in the Chilean stock market, pumping in $2 billion a year in new funds.14

AFP investments must meet the state's criteria for diversification and risk, although the regulations are being loosened as the AFPs accumulate increasing sums. To deal with this tremendous flow of money, a new capital-markets law was approved by Congress, loosening the regulations on investments by AFPs, insurance companies and banks. AFPs are now allowed to invest 37% of their assets in the stock market, up from 30%. In addition, the limit on investment abroad has been raised from 6% to 9%, and AFPs were allowed to invest in non-Chilean stocks - rather than just bonds - in 30 countries.15 These changes allowed the Chilean grupos to put together larger investments in Peru, Argentina, Colombia and elsewhere, at times taking advantage of privatization processes in those countries as well.

Chile's incomparable macroeconomic performance has produced an "if it ain't broke, don't fix it" complacency among most of Chiles political leaders. The Concertacion has pursued limited redistributive reforms, and successfully negotiated a progressive tax hike soon after the transition to democracy.

But the government rejects reforms that would make the labor market less "flexible," and the overall thrust of its program is to promote economic growth, and wait for the benefits to trickle down.

With such a recipe, it is unclear where its proposed "Growth with Equity" is supposed to come from. As one Socialist Party economist recently put it: "The intellectual who proposes redistributive policies is treated as if he were antiquated and obsessed, proposing policies that failed in the past. The idea now is we have to privatize everything, we have to stimulate private enterprise, and hopefully we will all be entrepreneurs!" Neoliberal ideology has become so pervasive, even among part of the left, that major reforms to the free- market model are automatically rejected as "populist" and inflationary.

Many other factors also operate to stifle debate. The institutions of "protected democracy" put in place by the dictatorship, including the 1980 Constitution, have created a political stalemate. The Pinochet-era "designated senators," who represent institutions (like the military) instead of electoral districts, tip the balance of congressional power in favor of the right, despite the Concertacion's ample majorities at the ballot box.16 The priority placed on stability after the trauma of the dictatorship, as well as a reserve of fear and perhaps self-blame among some leaders of the left, are also factors. The international financial community's support for free trade, and the seeming lack of alternative models also contribute to the current climate of national consensus.

General Pinochet's upcoming retirement as Commander-in-Chief of the Army, and the possiblity of future constitutional reform could lubricate Chile's political system. Conflict within the Concertacion at the beginning of the Frei administration, expressed as a debate between prioritizing the "political agenda" (the Socialist Party's demand for constitutional reform) or the "socio-economic agenda" (President Frei's emphasis on economic growth and the modernization of the state) may resurface in the year 2000, around the likely presidential candidacy of Ricardo Lagos.

Lagos, the Party for Democracy and Socialist Party's challenger to the Christian Democrats for the leadership of the Concertacion and the nation, has a market-oriented economic agenda, but would probably push for greater political and redistributive reforms, and take a harder line toward the military than the Christian Democrats. In the meantime, workers in the state sector will continue to strike for better wages, while those without the capacity to strike will continue to struggle to survive as they develop new strategies to regain lost rights.

Notes Rosenfeld

1. Punto Final (Santiago), January 1997, p. 10.

2. Luis Riffo Perez and Francisco Ruiz Aburto, Estudio sobre la concentracion empresarial en Chile (Santiago: Centro de Estudios Sociales (CESOC) and Biblioteca del Congreso Nacional, 1996), p. 18.

3. Mapa Actual de la Extrema Riqueza: Grupo Angelini, Working Paper #3, (Santiago: Centro de Estudios Nacionales de Desarrollo Alternativo (CENDA), December 1996); Moody's Investors Service, Inc., New York, 1995.

4. Central Bank of Chile, Balance de sies anos de las politicas sociales, 1990-1996 (Santiago: Ministry of Planning and Cooperation (MIDEPLAN), 1996), p 78, tables 21 and 22.

5. 1994 data from the 1994 Survey of National Socio-economic Characterization (Encuesta CASEN), (Santiago: MIDEPLAN, 1995); 1970 data from the UN Economic Comittee on Latin America (ECLA), Division of Statistics and Projections.

6. Juan Gabriel Valdes, Pinochet's Economists: The Chicago School in Chile (Cambridge, England: Cambridge University Press, 1995).

7. Punto Final (Santiago), January 1997, p. 10.

8. Punto Final (Santiago), January 1997, p.10.

9. Patricio Rozas and Gustavo Marin, 1988: El "Mapa de la extrema riqueza" 10 anos despues (Santiago: Centro de Estudios Sociales(CESOC) and PRIES-Cono Sur, 1989).

10. CASEN 1992, cited in Pagina Economica de los Trabajadores (Santiago: Programa de Economia del Trabajo (PET)) No. 131, May 1994.

11. Jaime Ruiz Tagle, El nuevo sistema de pensiones en Chile. Una evaluacion provisoria (1981-1996), Material de Discusion No. 13 (Santiago: Programa de Economia del Trabajo (PET), January 1996), P 6-7.

12. Instituto de Normalizacion Previsional, Statistics Section, March 1997; Superintendent of the AFPs, Department of Research, March 1997.

13. Mario Marcel and Alberto Arenas, Reformas a la seguridad social en Chile, Monograph Series #5 (Washington, D.C.: Interamerican Development Bank, 1991), p. 31.

14. Country Commercial Guide Chile, (Santiago: U.S. Embassy in Chile, 1995) FY95, NTIS, p. 47.

15. 1995 National Trade Data Bank Market Reports, International Market Insights, June 12, 1995.

16. The designated senators include two ex-judges of the Supreme Court, designated by the Supreme Court; one ex- Comptroller, designated by the Supreme Court; four ex- commanders-in-chief of the Armed Forces and Carabineros, designated by the National Security Council; one ex-rector of a university, designated by the President; one ex-minister designated by the President. Ex-presidents who served six or more years in office become senators-for-life, thus excluding the first president after the 1990 transition, Patricio Aylwin, who was elected to a four-year term. Pinochet could become a senator-for-life after he steps down as commander- in-chief of the Army.