A year into the world's recession, a sad kind of free enterprise reigns on the broad avenues and pedestrian malls of this once-booming South American capital.

Each afternoon, the sidewalks in front of the slick boutiques and banks built by Chile's economic "miracle" of the 1970s are packed with dozens of men and their families, hawking toys, soap and pencils in a clamorous mobile market.

Now and then, a team of green-suited Chilean police appears, and the illegal merchants scoop up their trinkets on their blankets and vanish.

"But we always just go to the next corner or the next block," said an ad-hoc soap salesman. "There are too many people on the street to control it."

Chile now abounds with the classic scenes of depression, only two years after its economy was described as the fastest growing in Latin America. Then, the country seemed to be bursting with economic health, and its strict application of monetarist, free-market economic policy was viewed as a model success by American conservatives and neighboring governments.

But that was before the United States and Western Europe plunged into recession, sending shock waves into Chile's deliberately unprotected market. Now, with its thousands of desperate unemployed and bankrupt banks and industries, the military-ruled nation has become a model crisis victim--showing how quickly South America's dependent economies can be sunk by trouble in the developed world.

Though unemployment, high interest rates, and failing industries have plagued the United States and dozens of other countries, probably no region has been hit harder in the last year than Latin America. The economies of a score of countries like Chile rise and fall on the prices of a few products or a slight shift in interest rates on foreign loans.

In the last year, industrial production in this country of 11 million people has dropped 22 percent and more than 800 firms have gone broke. The government of Gen. Augusto Pinochet estimates that 23 percent of the work force is unemployed--more than twice the U.S. rate. Counts including underemployed persons like the irregular street sellers put the figure closer to 40 percent.

Here, as throughout the continent, there is little to cushion the social collapse of recession: no weekly dole from the government, no food stamps. In the ranks of the unemployed, increasingly there appears to be little hope. Leon Vilarin, the head of the national truck drivers' union, said, "228 of our members are in jail for debts, and 11 have committed suicide. An economic crisis has become a moral crisis because people are losing everything."

The severity of Chile's problems has shaken the tight authoritarian hold of Pinochet in recent months and caused some of the government's stongest supporters to conclude that unregulated trade, pricing and investment measures leave a developing country too vulnerable. "This was a utopian model," said Luis Correa Prieto, the president of the Chamber of Commerce. "While things went well in the world, it was easy. But it was almost too beautiful, and now we are finding out what happens on the other side."

Pinochet and his "Chicago boys," the government technicians who include alumni of the conservative-oriented economics program at the University of Chicago, insist they will stick to their program. But many businessmen and foreign analysts say that even the government finally is edging away from the policies that have made Chile's economy one of the most closely watched and analyzed in Latin America.

In recent weeks, as Pinochet has launched a new team of economic ministers for the third time in eight months, the government has begun intervening more in an economy that it had said should be ruled only by the laws of the marketplace.

A special exchange rate is being offered to banks and businesses staggering under huge foreign debts, and a new government jobs program and the offer of more than $220 million in low-interest loans to business also have been announced.

Government officials, who call the measures "adjustments" to their seven-year-old policies -- which had focused on the once-rampant inflation -- agree that Chile has been left highly vulnerable to shifting world conditions.

"Unfortunately, the world recession exists, and it has struck us hard," said Pinochet Sept. 11, the ninth anniversary of his violent coup against Socialist president Salvador Allende. He added that he still intended Chile's economy to be "fully integrated into the rest of the world."

The most serious external problem for Chile has been the falling price of copper, a primary product that like tin in Bolivia, silver and copper in Peru, or oil in Venezuela and Ecuador, is the foundation of much of the economy. In recent months, the price of copper has dropped to its lowest level in 30 years as industries using it in developed countries have slowed production. Chile loses $22 million annually with every cent of descent.

While the price of copper has fallen, the value of imported finished goods -- imported in uncontrolled and ever-increasing amounts until this year -- have remained the same or grown more expensive because of the Chilean peso's decline against the dollar.

The result has been a sharp decline in all economic activity related to or dependent on imports, even as the dropping export earnings have had their own depressing effect.

Meanwhile, the recession has tightened international credit markets that the military government has depended on to finance the restructuring of the economy and the massive flow of imports, which have ranged from arms and automobiles to color televisions and even dog food.

Partly for this reason, Chile, whose foreign debt is the highest per capita in the world, will have to spend $550 million of its $2.9 billion in reserves to meet upcoming payments, Economy Minister Rolf Luders said recently.

The slumping world prices and payments problems have set off economic chain reactions in a host of South American countries, but economists here say that the impact on Chile has been greatly increased as more of the economy has become dependent on metals traders in London or the prime rate of banks in New York, instead of local production and consumption.

Officials concede that the crisis has been worsened here by the fixing of the peso exchange rate for the dollar for three years to fight inflation. The result was a propping up of prices for Chilean products abroad and an effective subsidy for imports; in one case, consumers found local butter underpriced by that imported from Ireland.

This imbalance, combined with import duties already cut to a bare minimum by the government, drove hundreds of firms here out of business before the government in June allowed the peso to fall in value against the dollar.

Government officials say that as the United States and West Europe recover from recession, Chile's economy will swing up. But opposition economists and a growing number of businessmen are doubtful, saying that the destruction of the country's productive capacity has been so great that there will be little to rebuild.

The Chileans waiting on the street corners, meanwhile, say there is little time left for relief. "The patience of the people is not infinite," said Vilarin, whose union has turned from support to strong criticism of the government. "And there are those who will prefer a gunshot to starving to death."