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Crisis Measures Expected to Cost Jobs

By Gustavo Gonzalez, IPS
26 September 1998

SANTIAGO, Sep 24 (IPS) - Measures adopted by Chile's government to ease the impact of the international financial crisis on the South American country are likely to cost jobs, several experts said here this week.

The measures include severe cuts in government spending and the lowering of gross domestic product (GDP) growth targets.

The new estimates place unemployment figures for next year at about 10 percent, which would represent the highest rate in the country since the foreign debt crisis in 1992, when recession pushed joblessness to 30 percent.

Until last week, academic and business circles were estimating that the unemployment figure could increase to 9 percent in 1999 as a result of the impact of the international crisis on economic activity. But the tightening of the adjustment measures imposed last week by the Central Bank will imply greater restrictions, smaller GDP growth, and higher unemployment.

In July, 6.7 percent of the labour force was jobless, according to the latest statistics available. However, the employment situation clearly worsened in August when there was a strong decline on the stock market.

Last week, the Central Bank increased interest rates from 8.4 to 14 percent, and eliminated the 10-percent bank insurance (guaranteed deposits) for external credit, with the purpose of containing the rise of the dollar.

The bank's measures are aimed at slashing inflation to 4.5-5.0 percent by the end of the year, which requires a greater cooling down of the economy in order to contain consumption and reduce public and private spending.

Economic Affairs Minister Eduardo Aninat had predicted a 2.8- percent increase in expenditure next year over 1998, but now, it is likely to be two percent.

The right-wing opposition and some business groups argue that public spending and salaries should be frozen next year at their 1998 levels. This, they say, is the only way of avoiding a bigger unemployment crisis.

For this year, the government estimates GDP growth of 5.0 to 5.5 percent, as against 7.0 percent in 1997. For 1999, it estimates that growth will be 3.8 percent.

Economists Patricio Mujica, of the University of Chile, and George Lever, of the Chamber of Commerce of Santiago, feel that Chile's economy will grow by only three percent next year, given the new scenario created by the new Central Bank measures.

Tomas Flores, an analyst at the Liberty and Development Institute, estimates that GDP will grow by 2.0 to 3.0 percent next year, while Jorge Desormeaux of the Catholic University, is even more pessimistic and does not rule out an increase limited to between 1.0 and 2.0 percent.

"Undoubtedly, the problem of unemployment will intensify and we will approach the 10-percent range (in 1999)," says Flores. Desormeaux, meanwhile, estimates that unemployment will reach 9.5 percent at the start of the second semester of next year.

Lever, on the other hand, predicts that the average unemployment rate in 1999 will be about 7.7 percent, though there will be months in which it will be higher, especially drng the third quarter, when unemployment rates will hit nine percent.

The issue of job protection looks set to be one of the most controversial in the virtual social contract that the Frei government hopes to achieve with unions and business groups in order to confront the international crisis.

The proposal to freeze public spending and salaries at the same time will undoubtedly be resisted by the unions, which believe it will place the burden of the crisis on workers.

Government circles, too, are anything but enthusiastic about keeping public spending at the same level as this year since new investments on the social front, such as health care, housing and education, are viewed as indispensable.