The Economic Consequences of Salvador Allende's Governance in Chile

Salvador Allende's government devastated Chile's economy, leading to widespread poverty and inflation in just three years.

### The Disastrous Economic Policies of Salvador Allende in Chile
* 💰 Salvador Allende's government in Chile (1970-1973) implemented a series of economic policies that led to **rapid nationalization, extensive state control, and massive public spending**.
* 📊 By 1973, nearly **40% of Chile's non-agricultural GDP was in the hands of the state**, with some sectors like **mining and utilities completely nationalized**.
* 💸 The government's public spending increased from **41% to 56% of GDP** in just two years, with significant boosts to **public salaries and pensions** to create a **clientelistic network**.
* 📉 These policies resulted in unsustainable public deficits, reaching **31% of GDP in 1973**, which were primarily financed through money creation, leading to **hyperinflation**.
* 🌾 Agricultural production suffered, with wheat production dropping to **747,000 tons by 1973**, causing **food shortages** and **increased reliance on imports**.
* 📈 Inflation skyrocketed, reaching **260% in 1972** and over **600% in 1973**, while real wages plummeted by **nearly 50%** during Allende's last two years in office.
* 🏭 Price controls were implemented, causing widespread shortages and further damaging the economy by **disrupting supply chains**.
* 🇻🇪 The economic policies of Allende are compared to later Venezuelan governments, with the author arguing that just as no one would whitewash the economic failures of **Chávez and Maduro** in Venezuela, the same standard should apply to **Allende's government** in Chile.

Salvador Allende governed Chile from 1970 to 1973, and during that period, he devastated the Chilean economy and ruined the lives of millions of his fellow citizens. Let us look back: on September 11, 2023, we marked the 50th anniversary of Pinochet's coup d'état against Salvador Allende, a coup that effectively ended nearly three years of Allende's government. This violent conclusion to Allende's presidency at the hands of a military coup gave way to a dictatorship that lasted nearly two decades. 

Many confuse the mistake of believing that to criticize Pinochet's dictatorship, one must whitewash Allende's government. They think that if one opposes military dictatorships, they must necessarily be complacent with the actions of the governments that ended as a result of a military coup. But evidently, this is an argumentative fallacy. One can oppose military dictatorships, criticize Pinochet's regime, and also recognize that Allende's government, which preceded that dictatorship, was a disastrous government. 

Salvador Allende presided over the Republic of Chile from November 3, 1970, until September 11, 1973—almost three years that we could well describe as a disastrous triennium for Chilean society. Throughout those three years, Allende attempted to implement the so-called Chilean path to socialism, an economic policy that consisted of the progressive nationalization of the economy and the gradual takeover by

The state of most of the productive structure of the country ended up impoverishing Chilean society. First, the Chilean state under the government of Salvador Allende progressively absorbed the economy of the country. In 1965, only 15% of Chile's non-agricultural GDP was in the hands of the state. By 1973, after Salvador Allende's three-year government, nearly 40% of all Chilean production was in the hands of the state through its public enterprises, and in many sectors, that percentage was close to 100%. Specifically, in mining, 85% of production was developed by public companies, while in 1965, it was only 13%. The financial sector was also 85% state-owned, and transportation and communications were at 70%, compared to 11% to 23% in 1965. In 1973, utilities such as electricity and gas were 100% developed by public companies, whereas in 1965, it was only 25%. Meanwhile, the percentage of industrial production through public companies was around 40%, roughly in line with the overall non-agricultural production. However, in 1965, only 3% of industrial production was in the hands of or developed by public companies. Therefore, the progressive takeover of the Chilean industry by the state was truly rapid. As I mentioned, the previous figures refer to national non-agricultural production, which does not mean that Salvador Allende

seventy-three, Chile produced only 740 thousand tons of wheat. This decline in agricultural production led to significant food shortages and increased reliance on imports. The consequences of nationalization policies were felt across various sectors, but the agricultural sector experienced the most severe impacts, highlighting the challenges of state control over the economy.

Only 747,000 tons of wheat, and while Chile's production stagnated or collapsed, especially in the years 1972 and 1973, what was the Chilean government of Salvador Allende doing? It was increasing public spending to clientelize society. In 1970, public spending by the Chilean state represented 41% of GDP. Just two years later, after only two years of Salvador Allende's government, the weight of that public spending on GDP had risen to 56%. This means that in 1972, public spending accounted for more than half of the Chilean economy and had increased by 15 percentage points of GDP—mind you, in just two years. 

What were the budget items that increased by 15 percentage points of GDP during those two years, 1971 and 1972? Essentially, two items of current expenditure: public salaries and public pensions. What Salvador Allende did, therefore, was to increase payments to officials and pensioners to create a structure of clientelistic networks that would be loyal to this new socialist state of Chile. It was, ultimately, an attempt to buy the support of hundreds of thousands of Chileans in the construction of a new socialist regime. 

Now, how did Salvador Allende finance all this extraordinary increase in public spending? Did he massively raise taxes to cover an increase in public spending of 15 percentage points of GDP? No, all that brutal increase in public spending occurred at a time when

was starting to crumble as a consequence of the nationalization policies of Salvador Allende's government. All this brutal increase in public spending resulted in a deficit. In 1971, the public deficit of the Chilean state was 15% of GDP; a year later, in 1972, it was 25% of GDP; and in 1973, the public deficit reached 31% of GDP. These were absolutely unmanageable public deficits for an economy of the size and credibility of Chile's economy at that time. To put it into perspective, the Spanish economy in 2012 was on the verge of collapse, if it weren't for the salvific intervention of the European Central Bank, because in 2009 it had a deficit of 11% of GDP, in 2010 a deficit of 9% of GDP, and in 2011 a deficit of 10% of GDP. In other words, in three years, the Spanish economy had a deficit of about 30% of GDP. The Spanish economy in 2011, with the euro and within the European Union, was on the brink of collapse due to a public deficit of approximately 30 points of GDP in three years. Meanwhile, we are saying that Salvador Allende's Chile had a public deficit of 70 points of GDP in three years. And worst of all, Salvador Allende decided to finance practically this entire gigantic public deficit through the creation of money, meaning that instead of issuing public debt

I couldn't do it because the magnitude of that deficit in Chile was unfinanceable by the markets. Instead of issuing public debt in the markets, he decided to start the printing press. This unleashed massive inflation within Chile. While in 1971 the inflation rate was at 22%, a comparatively low rate compared to what was to come, in 1972 the inflation rate skyrocketed to 260 percent. This means that prices practically quadrupled in one year. By 1973, the official inflation rate exceeded 600 percent, multiplying nearly seven times compared to the previous year. In just two years, prices in Chile multiplied by 25. This massive inflation evidently plunged real wages in the country. After the first year of Allende's government, in which real wages increased by 22% due to the rise in budget spending on public payrolls and regulations, in the following two years of Allende's government, 1972 and 1973, real wages plummeted by nearly 50 percent. The net result of Allende's three years in office was a decline in real wages, with an erosion of the purchasing power of Chilean workers by 33%. In 1973, the real wage of Chileans was, on average, 33% lower than before Allende's government. All of this, according to the...

Official statistics show that the real economic situation in Chile was actually much worse. To control inflation, Salvador Allende did not think to stop printing money and cut public spending. What Allende did to try to combat the inflation he had created was to establish price controls, imposing maximum prices on almost all production in Chile. The private sector was prevented from selling above the legally fixed price, and the public sector, which we should not forget already produced 40% of Chile's GDP, was forced to sell below cost. The difference between the production cost and the selling price was subsidized by the state. In 1973, 10% of Chile's GDP, according to the state budget, had to go to compensate public companies for the losses incurred by forcing them to sell their production below cost. As I said, most prices in Chile were regulated by law, and even so, those regulated prices multiplied by 25. These regulated prices were below the prices that emptied the market, meaning that Chilean society faced a widespread scarcity of practically all products in 1972 and especially in 1973. The shortages in the country were massive. Even if a Chilean wanted to pay those astronomical regulated prices to buy the products they needed, those products were not available in stores or were difficult to find in the black market, or they simply could not be found at all.

And the prices in the black market were up to ten times the official regulated prices. Therefore, the figures for inflation and the decline in real wages that I previously provided do not represent or express the entirety of the impoverishment that Chilean workers experienced. It is not just that they were paying 25 times more for products in 1973 than in 1970; in many cases, paying 25 times more meant that there were no products available to buy. They either paid 250 times more or could not buy anything at all. Moreover, those price controls that generated massive shortages within the Chilean economy ended up undermining it. If Chilean industries needed to import some industrial input to continue producing, since it was illegal to sell those industrial inputs in Chile above a certain price, foreign exporters simply stopped selling to Chile. Consequently, many industries were left without the inputs they needed to keep producing as a result of the price-fixing policy, which was a terrible remedy to counteract the inflation that Allende himself had generated by spending much more than he received and monetizing that deficit through public printing. Ultimately, to draw a parallel with more recent events, the economic policy implemented by Salvador Allende during his three years of misgovernment in Chile was very similar to the economic policy later applied in Venezuela by both Hugo Chávez and Nicolás Maduro—a policy consisting of

nationalizations and massive expropriations within the economy, consisting of a brutal increase in public spending financed by deficits and, in turn, financed by the printing of money and the establishment of widespread price controls as a way not to eradicate inflation but to hide it, generating shortages and sinking the economy. This Bolivarian economic model lasted 15 years before collapsing in Venezuela because Chávez had the good fortune to coexist with 15 years of high oil prices, which allowed him to finance many of the excesses of his economic policy. Salvador Allende did not have the same luck; the main natural resource of Chile, copper, plummeted in price internationally in 1972, so Salvador Allende did not even have the opportunity to compensate for the absurdity that was his economic policy with the foreign currency inflows from copper exports. Just as the Bolivarian path to socialism devastated the Venezuelan economy, the Chilean path to socialism under Salvador Allende ruined the Chilean economy in just three years. Similarly, if there were to be a coup in Venezuela in the future, no one with two fingers of common sense, no one with two fingers of intellectual honesty, would think for a moment to whitewash the results of the horrific Bolivarian economic policy. No one would dare to say that Maduro was an exceptional leader who raised the living standards of Venezuelans.

In the same way that no one would think to whitewash the results of the Chávez and Maduro governments in Venezuela in order to criticize the dictatorship of Pinochet, no one with a modicum of honesty should think to whitewash the horrifying results of Salvador Allende's economic policy. During the years 1971, 1972, and 1973, it was an ominous triennium during which Allende's push towards socialism massively impoverished Chileans.

Cómo Salvador Allende empobreció a los chilenos

Juan Ramón Rallo

Salvador Allende governed Chile from 1970 to 1973, implementing a controversial socialist economic policy that led to the state's control of nearly 40% of the country's production by 1973.

His government's rapid nationalization efforts resulted in significant state ownership in key sectors, such as mining, finance, and utilities.

Allende's presidency ended with a military coup led by Pinochet on September 11, 1973, which marked the beginning of a nearly two-decade-long dictatorship.

Salvador Allende's Impact on Chile's Economy

Chile's wheat production plummeted to 740,000 tons by 1973, leading to food shortages and increased imports.

Salvador Allende's government responded by raising public spending from 41% to 56% of GDP in just two years, primarily through increased public salaries and pensions.

This strategy aimed to create clientelistic networks for loyalty to the socialist state, but the funding for the spending increase did not come from raised taxes.

The Economic Impact of Salvador Allende's Policies in Chile

Salvador Allende's government implemented nationalization policies that led to a brutal increase in public spending, resulting in a public deficit that soared from 15% of GDP in 1971 to 31% in 1973.

Allende's decision to finance the deficit through money creation triggered massive inflation, with rates jumping from 22% in 1971 to over 600% by 1973.

As a result, real wages in Chile plummeted by nearly 50% during Allende's last two years in office, eroding the purchasing power of workers by 33%.

Salvador Allende's Economic Policies in Chile

Salvador Allende's attempts to control inflation in Chile involved establishing price controls and subsidizing public companies, which led to widespread product shortages.

Despite regulated prices, the cost of goods multiplied, and many products were unavailable, driving people to the black market.

Allende's price-fixing policies ultimately undermined the economy and led to a decline in industrial production, drawing parallels to later economic policies in Venezuela.

The Impact of Socialism on Venezuela and Chile

The Bolivarian economic model in Venezuela, characterized by nationalizations, expropriations, and public spending financed by deficits and money printing, lasted 15 years before collapsing, aided by high oil prices.

In contrast, Salvador Allende's socialist policies in Chile faced a plummeting copper price, leading to the country's economic ruin in just three years.

Both cases illustrate the devastating effects of extreme socialist policies on their respective economies, with no justification for whitewashing the outcomes of their leaders.