In 1981, by all visible measures, this was a rich country.
That was the height of the so-called Chilean economic miracle wrought by a group of free-market economists who gained sway early in the now-12-year-old military regime of Gen. Augusto Pinochet Ugarte.
But the miracle vanished in 1982 after the international economy turned against Chile (as it did against many other Latin American countries).
Today, the Chilean economy is reeling from three years of recession, with only a brief respite of growth last year. Through it all, the country has been a model debtor, making its bank payments on time for the past two years. The banks, in turn, have reduced the amount they're demanding from Chile this year by 75 percent.
But even these reduced debt payments represent a serious obstacle to Chile's economic development. After making its foreign payments, the country has little left over to invest in new projects that would produce growth and employment.
Its exports have the lowest buying power in all of Latin America, and its $20 billion foreign debt translates into the highest per capita load in the region.
Chile has taken harsh measures in an attempt to return to prosperity's path, and its foreign lenders have moved to reduce the yearly burden of repaying the debt. There are optimists such as central bank President Enrique Sequel who believe that Chile has taken the proper steps and is poised for a major economic rebound next year. But many observers think the international economic cards are stacked against the country.
"What Chile needs is a major war somewhere that will boost demand for copper," said one Santiago-based foreign bank official. "Short of that, it faces slow growth, stagnation, for the foreseeable future."
Chile must cope with depressed export prices, little hope of big bank loans, moderate foreign investment at best and low domestic savings.
It made changes in its tax laws to induce investment by wealthy Chileans and companies. But like most developing countries, Chile must import many parts and capital goods to grow. For that, it needs dollars, and dollars are hard to come by.
Its major exports, of which copper accounts for about half, are depressed in price, with little relief on the horizon.
Chile has made a major push to expand its exports of fruits and vegetables. But export successes have been offset by low prices for minerals -- including copper -- and paper products.
"In the last four years, the country's export volume rose 25 percent," but prices fell 25 percent, according to Ernesto Ajala, vice chairman of Cia. Manufacturera de Papeles y Cartones, Chile's most important forest products company.
Chile's foreign creditors were willing lenders in the late 1970s, and they have postponed principal repayments and lent the country some of the dollars it needed to pay interest.
Last month, in a complicated arrangement that involved a World Bank guarantee, Chile's bank creditors agreed to lend the country $1.085 billion.
Chile's interest bill this year will be about $2 billion, however. An additional $2 billion in principal payments was deferred. Chile has other sources of foreign funds -- including a projected $700 million trade surplus, lending from official institutions such as the International Monetary Fund and the World Bank.
But after it pays its interest, there will be little left over to make meaningful new investments in its economy that could provide the growth needed to cut into unemployment or raise real incomes.
When Chile borrowed abroad so freely from 1977 to 1981, it failed to use enough of the funds to build export-oriented industries that would produce the dollars it now so desperately needs.
Instead, Chileans spent much of their borrowings on consumer goods and internal projects that produce no foreign exchange, according to Ricardo Ffrench-Davis, an economist with the Chilean think tank Cieplan.
The 8 percent growth rates it achieved in the late 1970s seem ancient history. The government loosened fiscal and monetary policies to produce some growth last year, but quickly had to clamp down because imports rose too fast.
"The increase in the economic happiness of the people will be zero" for the next five years, according to Alvaro Vial, director of the government's statistics agency.
And the economic happiness of many Chileans is already nonexistent:
*Unemployment is about 13 percent, and another 5 percent of its workers fill subsistence-wage government jobs that provide barely enough income "to buy bread and tea," according to Juaquin Lavin, business editor of El Mercurio, Santiago's leading newspaper.
*Nearly 65 percent of all Chileans exist on a salary of less than 20,000 pesos a month -- about $120.
*A school lunch program, supported by the United States, is the margin against starvation for about one-third of the nation's children, according to a U.S. executive based here. "These kids lose weight over the weekend," the executive said.
Few Chileans anticipated today's economic crisis five years ago, including the government, businessmen, consumers and the foreign bankers who readily made loans to this tiny nation of 11 million that hugs a narrow span of mountainous land on the Pacific Coast of South America.
In 1981, the economy was in the fourth year of substantial growth.
Employment was high. Inflation, by Latin American standards, was low. Imported luxury goods such as video recorders and color television sets abounded. The dollar was cheap, a major reason inflation was low in an economy in which foreign-made goods account for one-quarter of total sales.
The year before, the citizenry endorsed a constitution that assured Pinochet's power until 1989 and gave the junta the authority to nominate his successor, which many assumed would be Pinochet himself.
"That constitution would never be approved today," according to a leading Chilean businessman. "It was a vote for prosperity, not military rule per se."
But in hindsight, it is clear that prosperity was built on Chile's ability to borrow abroad, not on improvement in the buying power of its exports, according to Alvaro Donoso, a former government official who now is a professor at the University of Chile.
When Chile no longer could borrow abroad, its economy -- based on a mountain of internal debt and a cheap U.S. dollar -- fell apart.
In part, Chile was the victim of changing international economic trends:
*The depressed dollar began to recover in 1980.
*International inflation, which had kept commodity prices rising, began to retreat.
*The low interest rates of the late 1970s vanished, to be replaced by the highest interest rates of the century.
*A worldwide recession depressed demand for the commodities Chile exported. At the same time that the world was finding substitutes for copper, worldwide copper production was expanding.
If international conditions weren't bad enough, many of the policies adopted by Chile in its free-market experiments exacerbated the country's crisis.
Chile waited too long to lower its exchange rate, maintaining a fiction that the relative size of the dollar debts it was accumulating were low.
The artificially high exchange rate (maintained at 39 pesos to the dollar from 1979 until mid-1982) encouraged imports the nation no longer could afford from its export earnings.
The high dollar also made it difficult for Chilean industry to compete with lower-priced foreign goods.
The free-market-oriented economists permitted the private sector to build up huge dollar debts without ensuring that enough of the funds flowed to projects that would produce additional export earnings.
Alejandro Foxley, another economist with Cieplan, said the government also removed import restrictions too suddenly -- exposing once-heavily-protected industries to full international competition at a time when the overvalued peso already favored foreign goods.
The government economists were convinced in 1979 that Chile's prices were in competitive balance with the rest of the world. By fixing the exchange rate, they hoped to ensure price stability, according to a U.S. bank official here.
Wage rates would have to fall if Chile's prices got out of line. Workers would have less money to spend on imports, and export prices would fall in line with wage costs.
According to the model, the economy would make corrections.
But wage rates did not fall when the dollar recovered. Imports' prices remained low. And Chilean exports generated diminishing real foreign income.
Chile borrowed in 1980 and 1981, and that borrowing masked the underlying trends, according to Donoso. Speculation against the peso mounted.
In the middle of 1982, the government overcame its resistance to a devaluation. It moved swiftly to take the types of economic medicine designed to enable it to live within its means once again.
The devaluation was designed to make its exports more competitive and its imports more expensive. The government resisted most of the temptation to prop up the economy by spending money freely and running the printing press to finance the government deficit.
The Chilean economic teams -- dubbed the Chicago Boys because so many of them were educated at the laissez-faire-oriented monetarist economics department at the University of Chicago -- corrected some of their policies without abandoning their fundamental faith in the free market and a balanced budget, according to an official of a major foreign bank based here.
The new policies knocked the pins out of the economy. The gross national product fell almost 15 percent in 1982. The pile of debt that was peso-cheap in 1981 became appallingly expensive in 1982.
As part of the free-market experiment, many of the clamps on banks were removed. Banks lent freely to companies and consumers -- often borrowing from foreign banks to augment meager peso savings. Private companies also borrowed dollars and exchanged them for pesos.
A former top government official said the growing foreign debt caused little concern because it was incurred by the private sector and repayment was not the responsibility of the government. When the economy collapsed, many businesses -- weakened in an era of cheap dollars -- could not pay their loans.
A banking crisis ensued. In early 1983, only days after Chile signed an agreement with the IMF to pump some desperately needed funds into the country, depositors launched a run on Chile's banks.
The government was forced to pump money into the banks to prevent failures. The money supply expanded rapidly, and it was not until the following September that Chile got its economic targets back on the track it had agreed to with the IMF.
Since then, Chile has been a model debtor country. It has followed austere economic policies and, at considerable internal costs, has paid its admittedly reduced debt burden on time.
The Chilean government learned, however, that in the eyes of international banks, there is no such thing as a dollar loan to a private company based in a country in economic crisis. Chile has been pressured into assuming responsibility for repayment of many of the loans made to the private sector.
What Chile has to show for its flirtation with broad-based affluence is a foreign debt equal to the value of its yearly economic output, color television sets and memories, according to a U.S. bank official.
Enrique Sequel, president of Chile's central bank, has a more optimistic assessment. He said that changes in Chile's tax laws will encourage private domestic savings that will replace some lost foreign investment.
Sequel also said that Chile has gained increased access to loans from the Inter-American Development Bank that will provide desperately needed capital that no longer will come from the banks.
Foreign investment also will rise as Chile seeks to encourage it and as foreign companies move to take advantage of the country's resources.
There will be a $300 million methanol plant in the southern part of the country. A gold mine is being developed in the north.
Furthermore, he said, Chile's budget remains in near balance despite the heavy recession. If the United States does not move to further protectionism and if the international economy outside the United States revives, Chile's economic policies will enable it to grow rapidly with a reasonable inflation rate, Ajala agreed. The overvalued peso hurt many industries, but those that survived are more efficient and better able to compete, the paper executive said.
Some of those industries, such as textiles, are reviving. But other analysts are less certain. "You can't turn on the export faucet overnight," a foreign executive said.
Chile's exports aren't diversified enough and its terms of trade are too terrible to present much hope for near-term growth rates that will cut heavily into unemployment, the executive said.
Chile's saving grace is that its population is stable, according to this official, who explained, "There is not the all-consuming need to engender growth to provide jobs for an exploding population like there is in Mexico and Brazil."
Nevertheless, economic discontent appears to be growing. And the Pinochet government is facing a major political crisis.
Early this month, government prosecutors implicated a dozen members of the national police force in the murder of three communists last March.
The head of the police was forced to resign from the junta (only the second such resignation in the dozen years since it ousted Salvador Allende in a coup).
Demonstrations have become increasingly violent.
Few Chileans or foreigners in Chile think Pinochet is seriously threatened by the discontent. But one banker pointed out that many of his clients are concerned about making long-term investments in Chile because they fear the political aftermath when Pinochet leaves office.
"Instead of working to provide for a peaceful transition in 1989, he appears to be trying to cook up an economic recovery two years from now that will assure his re-election," according to a Chilean observer.
"If he fails, you can write liberal foreign investment laws until they come out your ears and it won't make a difference in 1989," the business executive said.