Vuskovic Plan - Background

Background

The overall stated objective of Allende's Popular Unity government was to achieve a transition to socialism 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. The key figure in the economic policy of Salvador Allende’s UP government was the first Minister of the Economy, Pedro Vuskovic. In accordance with Keynesian economics, he wanted to implement a massive redistribution of revenue by raising salaries 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 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 nature of the manufacturing industry and the structure of income distribution. Based on this diagnosis, influenced by Keynesian ideas of support to aggregate demand, it was thought that if income were redistributed toward the poorer groups through wage 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 inflationary. 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.