The Vuskovic Plan was the basis for the

economic policy The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the e ...

of the '' Popular Unity'' (UP) government of Chilean President

Salvador Allende Salvador Guillermo Allende Gossens (, , ; 26 June 1908 – 11 September 1973) was a Chilean physician and socialist politician who served as the 28th president of Chile from 3 November 1970 until his death on 11 September 1973. He was the fir ...

. It was drafted by and named after his first Economics Minister

Pedro Vuskovic Pedro Vuskovic Bravo (February 25, 1924 – May 10, 1993) was a Chilean economist of Croatian descent, political figure, minister and author of the economic plan implemented by Salvador Allende during his government called the '' Vuskovic plan''. ...

, who had worked before with the CEPAL. Although good results were obtained in 1970,

hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...

made a comeback in 1972. By 1973, Chile was in shambles –

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

was hundreds of percents, the country had no

foreign reserves Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence ...

, and GDP was falling.

Background

The overall stated objective of Allende's Popular Unity government was to achieve a transition to

socialism Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes the e ...

by democratic means. This would involve a combined political and economic program aimed at wresting control of the economy out of the hands of business owners and placing it in the hands of the state. It would then be easier to dismantle the various institutions connected with Western

capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for Profit (economics), profit. Central characteristics of capitalism include capital accumulation, competitive markets, pric ...

. The key figure in the economic policy of Salvador Allende’s UP government was the first Minister of the Economy,

. In accordance with

Keynesian economics Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...

, he wanted to implement a massive redistribution of revenue by raising

salaries A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. F ...

and increasing public expenditure, through which the buying power of the population would increase and accordingly consumption in general. These measures would activate the idle capacity of the Chilean productive apparatus (which was relatively large) and generate a climate of prosperity. If this strategy paid off, it would have had the effect of strengthening the government’s position and allowing it to advance its revolutionary program much faster.The attitude of the Chilean newspaper El Mercurio towards the main economic policies of the Popular Unity government of Salvador Allende (1970–1973). Llewellyn, Paul Francis
/ref> The macroeconomic program was based on several key assumptions, the most important being that the manufacturing sector had ample underutilized capacity. The lack of full utilization was, in turn, attributed to two fundamental factors: the

monopolistic A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a spec ...

nature of the manufacturing industry and the structure of

income distribution In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes eco ...

. Based on this diagnosis, influenced by Keynesian ideas of support to

aggregate demand In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is ...

, it was thought that if income were redistributed toward the poorer groups through

wage A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remuner ...

increases and if prices were properly controlled, there would be a significant expansion of demand and output. This provided the theoretical basis for the belief that large fiscal deficits would not necessarily be

ary . Regarding inflation, the UP program placed blame on structural rigidities (namely, slow or no response of quantity supplied to price increases), bottlenecks, and the role of monopolistic pricing, and it played down the role of fiscal pressures and

money creation Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money creation is controlled by the central bank ...

Application

The plan considered the following economic measures as necessary: *

Nationalization Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to pri ...

of the country’s basic resources. *Nationalization of large foreign enterprises, which were seen to be draining the wealth out of the country. *

Agrarian reform Agrarian reform can refer either, narrowly, to government-initiated or government-backed redistribution of agricultural land (see land reform) or, broadly, to an overall redirection of the agrarian system of the country, which often includes land re ...

: the breaking-up of the ''

latifundios A ''latifundium'' (Latin: ''latus'', "spacious" and ''fundus'', "farm, estate") is a very extensive parcel of privately owned land. The latifundia of Roman history were great landed estates specializing in agriculture destined for export: grain, ...

'' (large landed estates) and redistribution of land to the peasants. *Transferring banks and large businesses into state property in order to obtain control over internal credit and income. *A massive redistribution of income. These measures were seen as a first phase and, in theory, would form the basis of a popular-social movement. Having gained the popular support of the masses, the government would then be in a position to make a successful transition to a socialist society. Little attention was paid to the financial sector, given the orientation of the new regime's economic technocrats toward the

import substitution Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports with domestic production.''A Comprehensive Dictionary of Economics'' p.88, ed. Nelson Brian 2009. It is based on the premise that ...

, structuralist philosophy of the CEPAL (''United Nations Economic Commission for Latin America and the Caribbean''). In fact, Allende's

Minister of Foreign Affairs A foreign affairs minister or minister of foreign affairs (less commonly minister for foreign affairs) is generally a cabinet minister in charge of a state's foreign policy and relations. The formal title of the top official varies between cou ...

and Vice President, Clodomiro Almeyda, relates in his memoirs how in the first postelection meeting of the economic team, these technocrats argued expressly and convincingly that monetary and financial management did not deserve too much attention. Alfonso Inostroza, the Central Bank president, stated in early 1971 that the main objective of the

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

was to ''"transform it into a key instrument . . . to achieve the complete mobilization of productive resources, and their allocation to those areas that the government gives priority to . . . ."'' This was consistent with the view of inflation of those espousing structuralism. US President

Richard Nixon Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was ...

had made it known that he wanted to ''"make the (Chilean) economy scream"'' and this policy was outlined in National Security Decision Memorandum (NSDM) 93 of November 1970: ''"no new bilateral economic aid commitments be undertaken with the Government of Chile (programs of a humanitarian or private social agency character will be considered on a case by case basis); existing commitments will be fulfilled but ways in which, if the U. S. desires to do so, they could be reduced, delayed or terminated should be examined... bring maximum feasible influence to bear in international financial institutions to limit credit or other financing assistance to Chile. To the extent possible, financial assistance or guarantees to US private investment in Chile would be ended, and US businesses would be made aware of the government's concern and its restrictive policies…"''

Results

The first year saw 12% industrial growth and an 8.6% increase in

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

, accompanied by major declines in

(down from 34.9% to 22.1%) and unemployment (down to 3.8%). In addition to the rise in employment, Allende also raised wages on a number of occasions throughout 1970 and 1971. These rises in wages were negated by continuing increases in prices for food. Although price rises had also been high under president

Eduardo Frei Montalva Eduardo Nicanor Frei Montalva (; 16 January 1911 – 22 January 1982) was a Chilean political leader. In his long political career, he was Minister of Public Works, president of his Christian Democratic Party, senator, President of the ...

(27% a year between 1967 and 1970), a basic basket of consumer goods rose by 120% from 190 to 421 ''escudos'' in one month alone, August 1972. In the period 1970–72, while Allende was in government, exports fell 24% and imports rose 26%, with imports of food rising an estimated 149%. However, these results were not sustainable. The price of copper took a nose-dive and production also went down, with correspondingly negative results for the economy. A commercial deficit was recorded at the end of 1971 and private investors shied away. In 1972, the Chilean economy took a turn for the worse. Exports fell, imports rose alarmingly and inflation rocketed. The falls in exports were mostly due to a fall in the price of copper, since Chile was at the mercy of international fluctuations in the value of its single most important export. As with almost half of

developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...

, more than 50 per cent of Chile's export receipts were from a single primary commodity. Adverse fluctuation in the international price of copper negatively affected the Chilean economy throughout 1971–72. The price of copper fell from a peak of $66 per ton in 1970 to only $48–9 in 1971 and 1972. In 1972 the ''escudo'' had runaway

of 140%. From December 1972 to December 1973, the inflation rate was a catastrophic 508% – an example of

. The average

Real GDP Real gross domestic product (real GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e. inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantity ...

contracted between 1971 and 1973 at an annual rate of 5.6% ("negative growth"), and the government's fiscal deficit soared while foreign reserves declined. Inflation led to the rise of

black market A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...

s in rice, beans, sugar, and flour, and a "disappearance" of such basic commodities from supermarket shelves. The government attempted to prevent this shortage by creating ''juntas de Abastecimientos y Precios'' (JAP, literally "Committees of Supply and Prices").Comienzan los problemas
, ''

La Tercera ''La Tercera'' ( es, The Third One), formerly known as ''La Tercera de la Hora'' ('the third of the hour'), is a daily newspaper published in Santiago, Chile and owned by Copesa. It is ''El Mercurio''s closest competitor. ''La Tercera'' is part o ...

'' These were local administrative units essentially functioning as

rationing Rationing is the controlled distribution of scarce resources, goods, services, or an artificial restriction of demand. Rationing controls the size of the ration, which is one's allowed portion of the resources being distributed on a particular ...

boards, designed to alleviate the chronic shortages. In addition to the hyperinflation and the fall in the value of copper, the lack of economic aid further depressed the economy. The growth in GDP went from 9% in 1971 to −1.2% in 1972, while the rate of inflation went from 22.1% the previous year to 163.4%. Vuskovic was replaced as Minister of Economy on June 17, 1972, and the Allende government announced it would default on

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

s owed to international creditors and foreign governments. Allende also froze all prices while raising salaries, but the damage was already done. Chile had entered a major recession, with hyperinflation, a negative growth in GDP, a lack of supplies and spare parts, as well as a state of general political and social disorder. His implementation of these policies led to strong opposition by landowners, some middle-class sectors, the rightist National Party, the

Roman Catholic Church The Catholic Church, also known as the Roman Catholic Church, is the largest Christian church, with 1.3 billion baptized Catholics worldwide . It is among the world's oldest and largest international institutions, and has played a ...

(which was displeased with the direction of the educational policy), and eventually the

Christian Democrats __NOTOC__ Christian democratic parties are political parties that seek to apply Christian principles to public policy. The underlying Christian democracy movement emerged in 19th-century Europe, largely under the influence of Catholic social ...

. By September 1973, inflation had reached 381.1% and the growth in GDP stood at −4.2%. Vuskovic plan's policies were used by economists

Rudi Dornbusch Rüdiger Dornbusch (June 8, 1942 – July 25, 2002) was a German economist who worked in the United States for most of his career. Early life and education Dornbusch was born in Krefeld in present-day North Rhine-Westphalia. After completing his ...

and Sebastian Edwards to coin the term

macroeconomic populism Macroeconomic populism is a term coined by Rudi Dornbusch and Sebastian Edwards in a 1990 paper. The term refers to the policies by many Latin American administrations by which government spending and real wages increase in a non-sustainable way le ...

.Dornbusch, Edwards, 1989

Fidel Castro Fidel Alejandro Castro Ruz (; ; 13 August 1926 – 25 November 2016) was a Cuban revolutionary and politician who was the leader of Cuba from 1959 to 2008, serving as the prime minister of Cuba from 1959 to 1976 and president from 1976 to 200 ...

, though friendly to Allende's government, is said to have been critical of the approach epitomized by the Vuskovic plan. “Marxism," Castro is said to have stated, "is a revolution of production," whereas "Allende's was a revolution of consumption."

References

Bibliography

*Ankie Hoogvelt (1997). ''Globalisation and the postcolonial world'', London: Macmillan. *

Alec Nove Alexander Nove, FRSE, FBA (born Aleksandr Yakovlevich Novakovsky; russian: Алекса́ндр Я́ковлевич Новако́вский; also published under Alec Nove; 24 November 1915 – 15 May 1994) was a Professor of Economics at the ...

(1986). ''Socialism, Economics and Development'', London: Allen & Unwin.

External links