2—
The Turn Toward Radic  al Economic Policies

The new stabilization policies of the 1970s in Latin America were characterized by being applied by authoritarian military governments that emphasized a deep transformation of the economy and social and political institutions in order to solve the economic problems, inflation being the one given the highest priority.

In this chapter, we will explore some of the factors that may explain these changes. The changes are twofold. One is an initial turn toward economic orthodoxy, not necessarily a radical one, that accompanied the change in political regime. The existence of large disequilibria in most markets accentuated by ill-conceived populist policies provided a fertile ground for a reactive approach to economic policy that almost necessarily reflected a higher degree of orthodoxy. This entailed an enlarged role for the market, a higher priority for fiscal discipline, and a move toward the elimination of restrictions on foreign trade.

But this was not the only change. If a comparison is made of economic stabilization policies by right-wing military regimes in the 1960s and the 1970s, one will observe a noticeable radicalization in the policies of these regimes in an orthodox and conservative direction. How can this turn toward more radical policies be explained?

First I will deal with the conditions for the emergence of right-wing authoritarian regimes and hence of orthodox poli-

cies and then enumerate the factors behind the radicalization of economic policies in the 1970s and 1980s. Then I will illustrate the mild, rather heterodox, policies of the 1960s by describing some features of Brazilian policies. A third section picks up the previous themes in an attempt to provide a reasonable hypothesis as to why the economic policies evolved in the 1970s in a more radical conservative direction. Finally, I will deal with the way changes in the international economy influenced these events.

Change in Political Regime

There is widespread agreement that no single cause can explain the change in political regime and in economic policies that several Latin American countries have undergone since the 1960s. The turn toward political authoritarianism and economic orthodoxy began with Brazil in 1964 and was followed by Argentina in 1966. It received new impetus in the 1970s with Chile, Uruguay, and again with Argentina, which in 1976 initiated a new phase of political and economic changes in a conservative direction under an authoritarian regime.^[1]

Recent literature that explores the origin of political authoritarianism stresses a mixture of economic and political factors behind the change in regime. A slowing down of economic growth accompanied by increased inflation and economic instability leads to a crisis of confidence in the economic system both by key domestic actors (workers, businessmen) as well as

[1] For an illuminating analysis of this phenomenon, see G. O'Donnell, Modernization and Bureaucratic Authoritarianism (Institute of International Studies, University of California, Berkeley, 1973); J. Linz and A. Stepan, eds., The Breakdown of Democratic Regimes in Latin America (Johns Hopkins University Press, 1978); and D. Collier, ed., The New Authoritarianism in Latin America (Princeton University Press, 1979).

by foreign investors. To the extent that the countries choose to pursue and perhaps accentuate the same economic policies that led to the slowdown, the crisis is aggravated. Political factors are also present. The mobilization of popular groups and the strength of labor organizations create a pervading feeling of threat to business groups and eventually to the military as well. An open, competitive political system allows these conflicting forces to clash until a generalized political stalemate and crisis develop.^[2]

Conditions are ripe then for a regime, a coalition, or a policy change or for all of them to occur simultaneously, in which case the authoritarian regime emerges. The new regime represents a new coalition of the military and the more internationalized sector of the business community. It also represents a new approach to economic policies as a response to the inherited economic crisis. The questions that now arise are why this economic crisis developed and what were the factors behind it. We shall now explore these in more detail.

It is no mystery that import substitution industrialization (ISI) had run into trouble by the mid-1960s in those countries in Latin America that had most consistently followed these policies in the postwar period. As Hirschman has convincingly argued, the problem was not so much that of a supposed exhaustion of ISI but rather that the mechanisms used to promote it had run their course and were proving to be an expensive and inefficient way of pushing ISI strategies.^[3]

Relative prices had been extensively used as a means of financing industrialization in Latin America. High protection for industry vis-à-vis agriculture, an overvalued domestic cur-

[2] D. Collier, "The Bureaucratic-Authoritarian Model: Synthesis and Priorities for Future Research," and R. Kaufman, "Industrial Change and Authoritarian Rule in Latin America," both in Collier, New Authoritarianism .

[3] A. Hirschman, "The Political Economy of Import-Substituting Industrialization in Latin America," in his A Bias for Hope (Yale University Press, 1971).

rency, and import controls made it possible to transfer resources away from the primary sectors to manufacturing. The policies led to periodic balance of payments problems, and inflation became a permanent feature. Through inflationary public expenditures the government was able to take command over resources without resorting to taxation. These resources were then used to finance industrial projects or the provision of infrastructure and social services required by the rapid process of industrialization.

As balance of payments problems become more recurrent, thus preventing the economy from fully using its productive capacity, inflation accelerates. In the face of slower growth and higher inflation, redistributive problems acquire enhanced importance. Antagonistic and mutually inconsistent redistributive objectives by various social groups substitute for the less conflictive global development goals. Whatever one group is going to gain, another one must lose. The economy enters more and more into a zero-sum situation where the various social and economic groups perceive the others as a treat. The political system is strained, and social conflict escalates.^[4]

At this point a revision of conventional policies was urgently needed in order to increase efficiency, stimulate growth, reduce economic instability, and enhance the possibilities of an equitable distribution of income. A more significant use of market signals as resource allocation criteria, a realistic exchange rate that would allow balanced external accounts, and a more consistent effort toward export growth were obviously needed, as well as doses of fiscal and monetary restraint on the part of government.

A few countries in Latin America in the 1960s like Colombia and Venezuela were able to move in the required direction without changes in their political system. Chile initiated that

[4] A. Hirschman, "The Turn to Authoritarianism in Latin America and the Search for Its Economic Determinants," in Collier, New Authoritarianism .

process under the Frei administration, but it was not continued under Allende. Other countries like Brazil and Argentina suffered a breakdown of the political regime instead and embarked on what was at the time a profound revision of economic policies. It was thought that orthodox stabilization measures were required in order to solve the economic problems.

In sum, in the 1960s several countries in Latin America were facing severe economic problems and social and political tensions. These phenomena were not as serious as they were to become in the 1970s. Even so, partly as a result of economic problems and partly out of a political crisis, some countries like Brazil in 1964 and Argentina in 1960, after a military coup, attempted to turn their economic policies toward orthodoxy. The Brazilian experiment lasted only three years and evolved by 1967 toward a mixed package with strong heterodox components. The Argentinian stabilization policy of 1967 was never a case of pure orthodoxy but a mild blend of partial orthodoxy and "desarrollismo." By contrast, similarly authoritarian governments in Chile after 1973, Uruguay after 1974, and Argentina after 1976 followed a more radical course in their policies.

We believe that this is related to four concurrent factors. One was the existence of a much larger disequilibrium in the economy when the new experiments were initiated in the 1970s as compared with the 1960s. Second was the presence of a deeper, more extended political crisis than had been the case in the 1960s. Third was that the degree of threat posed by the populist or socialist coalition that anteceded the military regimes in the 1970s was perceived as being much greater than previously. The fourth originates in the changes that were occurring in the international economy.

It is our contention that in the 1970s most of these factors worked in the direction of reinforcing the feeling of the military

that a very serious emergency was being faced and that it required tough solutions. Considerations about the cost of the policies in terms of output losses, unemployment, or regressive social impact became secondary.

Given this climate, it is not surprising that a more radical course was followed particularly when one compares equivalent cases in the 1960s, such as the Brazilian policies after 1964 or the economic stabilization scheme of Argentina between 1967 and 1970.

In contrast to the more radical versions of the 1970s, the 1960s policies look more pragmatic. They seem to have been less influenced by ideological fervor and adjusted more flexibly to the particular conditions or constraints faced by the economies at the time. At the same time, the policy design was more responsive to possible negative side effects of the policies such as recessionary tendencies. Before returning to the more recent cases, we shall illustrate this argument by drawing on the Brazilian economic policies after 1964.

Brazilian Policies After 1964 Revisited

Brazilian economic policies after the military coup of 1964 represented a turn toward orthodoxy.^[5] Reductions in the fiscal deficit, in the expansion of money supply, and in real wages became a high priority, as well as the elimination of extended subsidies and nonmarket restrictions to trade. A gradual reduction of external tariffs was part of the orthodox

[5] See A. Foxley, "Stabilization Policies and Stagflation: The Cases of Brazil and Chile," in A. Foxley and L. Whitehead, eds., Economic Stabilization in Latin America: Political Dimensions (Pergamon, 1980). Detailed references to studies on Brazilian economic policies, on which my own comparative study was based, are given in Foxley's article.

policy package, as well as a liberalization of regulations affecting foreign investment. However, from the beginning the stabilization policy had some nonorthodox components. Price controls and credit incentives were used in order to curb inflationary pressures. The government took an active role in order to sustain an acceptable level of economic activity. Public investment was used as a countercyclical instrument. Opening up to trade—a typical component of orthodox economic programs—was pursued in a gradual manner so that high unemployment would be avoided. Even monetary and fiscal policy, after a first phase that lasted up to 1967, became mildly expansionary. This proved to be consistent with a reduction in the rate of inflation and high gross domestic product (GDP) growth rates.

Heterodox components in Brazilian policies reflected an early recognition of some structural constraints that were present in the Brazilian economy. Adapting the policies to these constraints was essential to the success of the policies. Let us illustrate this with two examples: trade policies and investment policy.

The structural constraint affecting the external sector was the low relative importance of external vis-à-vis domestic demand. The constraint affecting the level of economic activity was the traditionally high share of total investment performed by the public sector. We will discuss the importance of both factors.

If exports represent a low share of total output, a policy of rapid and drastic opening up of the economy to trade may imply losses in production and employment in the import substitution sectors that will be much higher than any conceivable expansion originating in exports. Even if exports do grow very rapidly, as was the case in Brazil, their relative share in GDP cannot compensate for the output loss elsewhere in the economy.

On the other hand, the reallocation of resources away from import substitution industries and toward the export sector is a slow process. It requires capacity expansions in the export activities. It also requires that the necessary complementary investment in infrastructure be forthcoming. This process takes more time than the fall in output and employment in the import substituting sectors. Thus, an almost unavoidable effect of rapid tariff reduction is to generate a large recession in the economy. If this is accompanied by contractionary fiscal and monetary policies, these negative effects will be reinforced.

What the previous reasoning implies is not that the shift to the new policies would not be possible. Given the relative size of the external sector and provided the government has some preference for less recession and unemployment, what it means is that a better transition path is a slow one. And this was the course followed by Brazil in the 1960s. The opening up to foreign trade through tariff reductions took place in Brazil only in the fourth year of the stabilization policy. During 1967, the tariff reform which, in any case, was quite moderate (see Table 1) was implemented by bringing tariffs down to an average of 41%. In addition, tariff reductions were not uniform. Internal production of durable and nondurable consumer goods continued to enjoy a high degree of protection after the reform. Average nominal tariffs in these sectors were reduced only to 116% and 56%, respectively, at their lowest point (in 1967). What these figures indicate is that Brazilian industry was allowed to adapt gradually to the new conditions without severe repercussions in industrial production.

On the other hand, the development pattern pursued by Brazil, consistent with these tariff reductions, represented an effort to pursue a balanced growth of industry oriented to the domestic sector and toward exports. It consisted in taking advantage of the existing capacity to expand the durable goods sector, construction activities, the capital goods sector—all

mainly oriented to the domestic market—and exports. This pattern can be observed in Table 2. What it meant in practice was that the strategy of gradually opening up the economy did not result in large output losses or high unemployment because of the compensating role played by the expansion of industry oriented to the domestic market. A reasonable balance was achieved between stabilization goals, opening up to trade objectives, and high employment. The consequences of its alternative radical counterpart will be observed in the next chapters dealing with the Chilean case.

A second constraint facing policymakers, besides the high importance of domestic vis-à-vis external demand, was the predominant role played by public investment in Brazil. This was recognized, and in fact public investment played a significant countercyclical role. This was another sign of a movement away from rigid orthodoxy in the Brazilian case. The share of

public investment in the total had been historically high. It was likely that private investment would go down during the stabilization phase, as in fact it did. Instead of retreating and leaving the investment function to the private sector as the more radical version of orthodoxy in the 1970s would dictate, the public sector stepped in and increased its programs.

In fact, during the first phase of the stabilization program, the government was faced with a difficult option: either it waited for the domestic private sector to gain confidence and invest or the government would take an active role, providing the resources and undertaking the new projects needed to stimulate the economy out of the recession. It is clear from Table 3 that the option taken was the last one. It can be seen that public investment played an important role from the very beginning of the stabilization program. Government investment rose 7.9% and that of state enterprises 70.5% during 1965. This trend was maintained in the following years, with the exception of 1966, when fiscal balance became a high priority goal.

In sum, flexibility and early recognition of structural constraints were features of the post-1964 Brazilian economic policies. These characteristics explain the low doses of orthodoxy in the stabilization package and the relatively mild economic recession that accompanied it. An equivalent stabilization experience in Argentina between 1967 and 1970 during the military government of Onganía shows similar features.

Why the Economic Policies Are More Radical in the 1970s and 1980s

Why was this not so in Chile and Argentina in the 1970s and 1980s? As was suggested before, several factors were present that pushed in the direction of more radical and rigid orthodox policies. These were related to (1) the mag-

nitude of the inherited economic disequilibria, (2) the intensity of the political stalemate and crisis, (3) the degree of threat to existing institutions as perceived by the private sector, which, in turn, was a function of the depth of the transformation of the economy and society in a socialist direction, and (4) the effect of changes in the international economy.

The initial economic conditions in Argentina and Chile in the 1970s were much worse than any comparable situation in the 1960s. Inflation in Argentina was running at monthly rates close to 30% in 1976 whereas a decade earlier, when Onganía took power, that had been the rate of inflation for the whole year. Indeed, things had turned for the worse after the 1960s in Argentina. The Chilean economy was in no better shape during 1973. Yearly inflation was also at the three-digit level, markets were seriously disrupted, generalized scarcity of basic goods coexisted with extended black markets, and production was falling.

It would be navie to explain this drastic economic deterioration in Argentina and Chile as simply a result of wrong economic policies although these certainly played a significant role. Monetary, fiscal, and wage expansion coexisting with controlled prices, negative real interest rates, and fixed exchange rates could not but generate large sectoral imbalances that would be ultimately reflected in rampaging inflation, the breakdown of large parts of the productive system, and a generalized scarcity of essential goods.

In a sense, these inadequate policies reflected, at least in part, a rather desperate attempt to rescue political and economic experiments that had sought to solve the old problems of slower growth, higher inflation, and distributive contradictions from a radical populist and socialist perspective.^[6] After a long succession of the most diverse economic-political formu-

[6] Kaufman has stressed this point in his excellent comparative study "Industrial Change."

las that had been attempted in Argentina and Chile in the 1950s and 1960s in order to break the economic deadlock and political immobility, the Perón and Allende governments were showing the enormous failure of yet two more experiments.

But this time the economic crisis had been concurrent with a deep crisis in the political system. Political participation was on the rise. The popular sectors had been establishing a powerful claim on resources in the form of increased income shares and enlarged access to public services, housing, and property ownership. They were also pressing for increased access to and influence over political institutions, the media, the universities, and various means of cultural expression.

This "threatening" presence of the masses resulted in a rapidly escalating social conflict that generalized to all levels of political and social activities. The private sector reacted by withdrawing resources for investment. The more radical the schemes pushed by the government, the larger the withdrawal. Since the economy was in disarray and not growing, it was increasingly difficult to meet the needs of redistributing income and increased capital accumulation without resorting to more drastic (and more antagonistic) redistributive policies—like expropriation of assets—or to the easier expedient of more inflation. These processes eventually led to the breakdown of the political and institutional system and gave way to new authoritarian regimes.

The new military governments imposed a rigid and drastic economic program as a reaction to "economic chaos." It constituted a complete reversal of previous policies, and its objective was not only to bring the economy back to equilibrium but also to discipline the economic and social groups until they adhered to a new rationality.

At this point the main task of the policymakers was to make the policy package a credible one. To achieve this, the government had to apply—with no vacillation or concessions—the

policy that had been decided upon as the best one to deal with the situation. One must go all the way with the orthodox economic package, irrespective of how the situation evolves or how the policies affect the population. The most clear example of this approach is provided by the Chilean stabilization policies after 1973, as will be illustrated in the next chapters.

What are the most critical problems as perceived by policymakers at this stage? One is the balance of payments deficit and the other is low investment. For both problems to be solved without resorting to active government intervention—something radical orthodoxy will try to avoid—it becomes essential to restore the confidence of the business community and international financial centers. They will provide badly needed capital that will finance the trade deficit and raise investment.

In order to restore the confidence of these groups and make the economic program credible as a long-term solution to the country's problems, the new policies must conform to certain rules. These rules of "sound economic management" are perfectly codified by the international financial community, including the International Monetary Fund (IMF), large private international banks, and business groups. They consist of reducing the rate of expansion in money supply, eliminating the fiscal deficit, devaluing domestic currency, deregulating prices and private sector activities, and opening up the economy to free trade. Given such an explicit codification of what constitutes sound policies, the restoration of confidence requires strictly abiding by them. In doing so, the economic policies acquire a distinct orthodox flavor.

Why do they also become more radical in a political sense? The depth of the transformation of the economy in a noncapitalist direction previous to the crisis forces a new dimension into the orthodox policies. If there was expropriation of assets and land in the previous economic scheme, the new policies will almost certainly seek not only to reverse the trend but to pro-

ceed to privatize as many public enterprises and public sector activities as possible. Dismantling the public sector may seem the most effective way to ensure that the socialist "threat" will not be repeated. More generally, it is likely that the deeper the previous transformation, the greater the emphasis will be in the new economic policies on long-term transformation in the opposite direction. In these cases, the orthodox short-term stabilization scheme will be indissolubly married to a radical, long-term conservative project. Again the Chilean case provides the best example of this.^[7]

Finally, a political factor is again important in explaining the radical nature of the policies. After the coup, the destruction of most institutions that regulated political participation within the previous democratic framework creates the space necessary for the state to act with a substantial amount of autonomy regarding civil society. This autonomy expresses itself not only with respect to those groups in the opposition but also in relation to large segments of groups sympathetic to the regime, like white-collar workers, independent producers, small farmers, etc. The state need not be responsive to their demands or complaints. It has power. So it has time and "space," given the disarticulation of civil society, to undertake whatever changes are needed in order to infuse a "new rationality" into economic and political behavior. The state is the nation, and those in power (the military, the technocrats, and those few enlightened businessmen) are the depository of the new rationality. They must proceed without compromising to make it work. Once the economic program has been defined, they must stick to it. Recession, unemployment, and bankruptcies are indeed healthy signs that the medicine is being administered after all.^[8]

[7] See ibid.

[8] G. O'Donnell, Antecedentes para el Estudio del Estado Burocrático-Autoritario (provisional title), unpubl. ms. O'Donnell's ideas have been very influential on my own concerning topics covered in this section.

In sum, the turn toward radical orthodox policies in the 1970s seems to have been influenced by a number of new factors: an intensification of economic imbalances as a result of objective problems in the industrialization strategy and inadequate economic policies; a deepening of the crisis in the political system, influenced by a larger participation of popular groups in decision making and the threat that this process implied to the business sector; a crisis of confidence in the economic and political formulas that had been attempted and the need to restore the confidence of such key groups as foreign capitalists and domestic business groups by turning toward internationally codified "rational economic policies"; and, given the severity of institutional breakdown that accompanied the regime and policy change, a higher degree of autonomy of the state vis-à-vis civil society that allowed the government to attempt bold and radical experiments within the framework of monetarist ideas.

Changes in the International Economy:
Effects on the Nature of Economic Policies in the 1960s and 1970s

We have so far discussed the influence of domestic economic and political factors on stabilization policies. It is now time to refer to changes in the world economy and their effects on policy choice in the 1960s and 1970s.

The world economy in the 1960s passed through a period of sustained growth, expanded trade, and relatively orderly international financial flows. The industrialized countries' economies expanded at an average rate close to 5% per annum, as can be seen in Table 4. The growth of world trade was even more impressive, expanding at a rate of 9% a year between

1965 and 1973. This allowed for a rapid increase of developing countries' exports, which grew at 6.4% a year during the same period.

The unprecedented boom in the international economy made it possible for some developing countries—particularly in Asia and a few in Latin America—to take full advantage of expanded trade, embarking on outward-looking, export-oriented development strategies, which by the early 1970s were often acclaimed as "success stories," showing the way for other developing economies to follow.

Events in the international economy in the 1970s were less favorable. Beginning with the U.S. balance of payments problems and the dollar crisis in 1971 and followed by the upsurge in food and oil prices in 1973–1974 and the subsequent disarray in international finances, the decade was characterized by high world inflation, frequent price shocks, slower growth rates for industrialized countries, higher unemployment, unstable balance of payments for most countries, and more limited trade opportunities. Growth rates in the developed world decreased to an average of 3.4% per year. The volume of world trade increased 4% a year, less than one-half of what had been

achieved in the previous decade. The exports of less developed countries (LDC) grew only 3.6% a year after the oil crisis as compared with 6.4% in the previous eight-year period.

These negative trends were the natural consequence of world recession, exchange rate and balance of payments instability, and increased protectionist measures undertaken by the industrialized countries. The protectionist trend expanded from sectors such as clothing and textiles to footwear and steel. The effect on developing countries' exports was almost immediate. The World Bank has estimated that, as a result of this policy, the exports of LDCs in these four sectors decreased in volume as early as 1977.^[9]

Perhaps even more important from the point of view of our topic, the world economy was subject in the 1970s to periodic and unexpected external shocks originating mainly, but not exclusively, in the unstable prices of some key commodities. Given this new, highly volatile international environment, the national economies had to adjust to a whole new set of parameters, including much higher international inflationary pressures and stagflationary trends both at home and abroad.

How did these international events affect the course of domestic economic policies, particularly stabilization, in the context of the Latin American economies? During the 1960s, the relative importance of external inflation, as compared with internal inflationary pressures, was much lower than in the 1970s. The sources of inflation were quite predictable: either excess demand due to expansionary government policies and high propensities to consume or cost-push factors originating mainly in the administered-price sector of the economy. It was accepted that these pressures could be reinforced by inflationary expectations. But, on the whole, the debate centered on which of these two sets of factors was the predominant

[9] World Bank, World Development Report (Oxford University Press, 1979).

cause behind the price increases. Fiscal-monetary discipline was one course of action. Acting directly over costs and expectations was an alternative policy course. But in practice the stabilization effort, while emphasizing one or the other, usually ended up producing a mixed policy package, with ingredients from both. In the 1970s, the international component in domestic inflation was much larger. It was going to significantly alter the normal functioning of the domestic economy. The search for adequate policies to deal with this new phenomenon would not exclude the more radical versions of monetarist-conservative doctrines.

As has been previously suggested, another factor influencing policy choice was the rate of expansion in world trade, which was very significant in the 1960s. Countries soon recognized that significant advantages could be gained from international trade so that cautiously, given inherited import substitution biases, the countries moved in the direction of fewer trade restrictions. This was the case in both Argentina in 1967 and Brazil in 1964. But, more important, export promotion was to become a key feature of the stabilization program. Export expansion would help in checking recessionary tendencies induced by the stabilization policies. It would also make higher growth rates possible after the recession was over.

During the 1970s the situation was rapidly changing. Policymakers were subject to two different and, on the surface, opposite forces. One originated in the appeal of successful trade-oriented development stories of the 1960s. Some newly industrialized countries in Asia and Latin America had been able to grow rapidly and to keep inflation under control by pursuing outward and market-oriented economic policies. The inclination to pursue the same course and thus repeat the "success stories" during the 1970s was almost irresistible.

But a countervailing force resulted, generated not by ideology or past experience but by new facts and signals emanating

from the international economy. Suddenly, the same countries in the north that had been pressing for lower tariffs were limiting the access of Latin American exports to their domestic markets. The industrialized economies were facing recession and large unemployment. On the other hand, there was no predictable course for international prices. The cost of raw materials was subject to wide fluctuations and supply disruptions. And, above all, international inflation rates had gone up sharply, making stability conditions in the domestic economy all the more difficult to obtain.

These factors pushed in the direction of more cautious policies, at least insofar as the external sector and the opening up to trade strategies were concerned. After all, a relatively obvious response to increased inflationary shocks from abroad was not to expose the economy domestically to the full impact of the multiple external shocks. And, indeed, some countries like Brazil and Colombia attempted to pursue such a course.

Other countries did not react in this manner. Latin America, faced with three-digit inflation in the early 1970s, attempted simultaneously to eliminate inflation through orthodox instruments and to open up the economy to free trade and free capital movements. Why was this risky path followed? A part of the answer has just been suggested. The excitement with the successful stories of the 1960s had not faded. The emergence of right-wing authoritarian regimes, in all the Southern Cone countries, created the unique political opportunity to emulate those experiences, something that had not been possible previously given conflicting group interests and ideologies.

Another factor influencing the choice of uncompromising radical stabilization policies was the deterioration in trade suffered by some countries in the 1970s. For example, although Brazil had not experienced marked fluctuations in trade during the 1960s, Chile faced a significant deterioration particularly in 1975 as a result of the oil crisis. This deterioration led to a loss

of income compared with the rest of the world equivalent to 5.6% of the GDP in Chile in 1975. An external shock of this magnitude had the effect of rapidly persuading economic policymakers and the military of the advantages of a drastic contractionary shock that would allow the economy to reduce the demand for imports, thus overcoming balance of payments difficulties. This was the beginning, in early 1975, of the strict orthodox policies that were to persist in Chile long after the external crisis was over.

The impact of the crisis in the developed countries had an additional indirect effect in policy choice in Latin America. The very severe disarray in the international economy had resulted, as mentioned above, in a rapid worsening of the economic situation in most industrialized countries. Policymakers, using the conventional economic tools, had not been able to solve the stagflation or unemployment problem. A possible explanation would be that this was due to the new nature of inflation in the 1970s and that, consequently, new ways had to be found and new types of policies devised in order to deal with the problem effectively.

An alternative explanation—and one that became rapidly popular with the military and the right-wing coalitions supporting them in Latin America—was that the policies failed because they were not drastic enough. If fiscal discipline, monetary contraction, and free trade were applied consistently for a sufficiently long period of time, inflation and recession would be curbed. The crisis in the national economies was as much a result of changes in the world economy as it was of a secular mismanagement of domestic economic policies. In this sense, the crisis in the international economy had been the detonator of accumulated inefficiencies and misconceived policies. The policy failures originated not only in inadequate prescriptions in the technical sense. They also had to do with not being tough

enough in disciplining workers and producers alike through market-oriented, financially sound deflationary policies.

When external shocks and domestic mismanagement worsened the situation to its limit, conditions were ripe to deal with the crisis not through mild, gradualist approaches but rather through a drastic reversal of previous trends and policies.