Contents - Previous - Next

This is the old United Nations University website. Visit the new site at http://unu.edu

Economic policies and their effect on the food buying capacity of the urban poor

A evolution of the food buying capacity of the urban poor between 1968 and 1976

A preliminary analysis of the variations in the ICCA index shows four different periods in its evolution. The first corresponds to a moderate improvement in buying capacity during the last term of the government of President Frei, which includes the first quarter of 1968 through the third quarter of 1970.

This is followed by a second period of rapid, strong growth that manifests itself at the beginning of the government of President Allende, until the third quarter of 1972. During this period, the buying capacity improved by 25 per cent compared to the previous period, and by 37 per cent compared to the basic period.

The third period denotes an opposite trend, shown by a loss of 37 per cent in buying capacity between the third and fourth quarters of 1972. This loss was never recuperated in any of the remaining quarters during President Allende's administration until the abrupt end of his government in the third quarter of 1973.

The fourth and last period comprises that of the government of the military junta that took over beginning in the final quarter of 1973 and remains until the end of the period of analysis. Doubtless, prices and income played a key role in these opposing tendencies. How do these variables affect improvement or decline in the buying capacity of the poor? To answer this question, it is necessary to analyze carefully the manifestations of these variables in the periods analyzed.

B. Economic Policies of the Period 1968 - 1970

This period from the first quarter of 1968 through the third quarter of 1970 included the last three years of President Frei's government. During this period, the income policy for the urban poor was developed within a framework of income redistribution that tended to favour the farm workers by improving their access to various services such as education, health, and welfare up to levels directed toward minimizing the income differences between the farmers and urban populations.

For the urban workers, income policy was channelled mainly through wages. A collective annual negotiation system between the unionized workers and their employers was established. The aim of this system was to recover the loss of buying power caused by inflation revealed in increases of about 105 per cent in the IGA (food spending index) and of about 77 per cent in the consumer price index. The latter pointed to an increment of 28 per cent to 35 per cent in inflation per annum within the 1968 - 1970 period. This contributed greatly to the deterioration of real wages, especially for the poorest segment of the urban population.

For workers who were not allowed to form unions, such as civil servants or those who had no negotiating leverage, a general readjustment law was applied. This was compulsory for the public and private sectors that fixed the minimum rates of wage increases. These levels were determined by analysis of monthly variations in the consumer price index (9). The result of this policy, as observed in the evolution of the ICCA, was positive. It produced an increase of some 9 per cent in wages over the increase in the cost of the recommended food ration.

However, this number overestimates the improvement in the food buying capacity of the poor, as the trend in food purchases was opposite to the rise in wages. The situation was worsened by the increase in open unemployment. Although they are important, the effects of increased unemployment have not been quantified in the ICCA because of the methodological difficulties this would entail. As a matter of fact, the unemployment rate was 5 per cent in 1968 and 8 per cent in 1970 (10), which means 115,000 unemployed in addition to the 150,000 already known to be unemployed in 1968.

Due to the slow absorption of these unemployed by the private sector, a large part of the responsibility for generating joblessness can be ascribed to the Government. The inflationary pressures drove it to reduce public spending, particularly its construction programme that used a large number of unskilled labourers. This reduced the number of houses built by the public sector from 33,000 in 1968 to 6,000 in 1970, causing the increase in unemployment (9).

The price policy in this period was an attempt to provide an adequate supply of basic products to the population in order to ensure price stability. This task was mainly undertaken by the ECA, "Empresa de Comercio Agricola" (Agricultural Trading Enterprise), that has buying power both nationally and abroad. This provided relative stability in the prices of the basic foods for this period (Table 7, Appendix).

The end of President Frei's term in office showed a slight improvement in the food buying capacity of the poor. The ICCA rose 9 per cent, but this would be a partial overestimation of improvement because it would not include the loss of income caused by unemployment that increased very rapidly in the 1968 - 1970 period. Most of the credit for this improvement can be attributed to the income policy that kept prices relatively stable between 1968 and 1970.

C. Economic Policies from 1970 until 1972

This discussion encompasses the period from the fourth quarter of 1970 until the third quarter of 1972, the first years of President Allende's administration. The income and price policies applied during this administration were part of a far-reaching policy that included a set of basic transformations in the economy. Land reform was accelerated, a Social Property Area was formed that was preponderant in industry and commerce, and the banking system was nationalized, as were the copper and iron mines. All of these factors brought a process of growing democratization by guaranteeing the participation in politics of the larger majorities of the population.

Within this total framework, the goal of the short-term policy was to improve substantially the income of all workers. The objective was to stimulate the economy through increased demand for goods and services, thus increasing production as well as income and employment levels.

The basis for the short-term policy was the existence of a large, idle production capacity ( 1 1 ) and tendencies toward a depression that grew worse beginning in 1967, at which time the per capita GNP did not grow at all.

The decision to improve workers' income levels was in response both to a need for a redistribution of the overall income in accord with social trends, and to the fact that this is a central element in any short-term economic stimulation policy.

In order to accomplish these goals, the administration designed a payment policy that would raise the level of wages above the increase in the cost of living. The consequence of this was that between the last quarter of 1970 and the third quarter in 1972 the wage index rose 35 per cent above the rise in the consumer price index and 10 per cent above the increase in price of the recommended food basket.

In addition to this payment policy, and with the same objective, a price policy was designed that would prevent a reversal in the improvement in income. This policy was applied differently at the producer and consumer levels.

At the consumer level, the policy imposed a strict control on the maximum prices allowed by the Ministry of Economy. This ministry fixed retail prices in general, and wholesale prices in some cases. The price policy was effected through the direct participation of the Government in the distribution and commercialization at the wholesale level. This affected only the producers.

Government action pursued three basic objectives:

- To ensure an adequate supply of basic products.
- To eliminate the unnecessary intermediaries and transfer the improvement (through prices) to producers and consumers as well.
- To improve the prices at the wholesale and retail levels to ensure a stable, adequate market for all basic items.

The Consejo de Comercialización de Abstecimientos e Industrialización (Supply Marketing and Industrialization Council) was created to achieve these goals. This council began co-ordinating all of the distribution and marketing activities undertaken by Government enterprises. The creation of vertical enterprises was promoted through this council. The means used were the fusion of those already in existence, plus the creation of those that might be necessary for an adequate production and commercialization of the main agricultural items.

The results of these actions toward the end of 1972 can be better analyzed if trading is broken down by items such as grains, meat, poultry, fish, and basic supplies. The ECA bought 15 per cent of the wheat produced and 100 per cent of all wheat imports. It also bought 4 per cent of the national bean production, 8 per cent of the potatoes, 15 per cent of the chick peas, and 5 per cent of the wool (12). Compared to its function in 1970, the ECA increased its buying power on the national market by 33 per cent.

The restructuring of the SCA (Sociedad Constructora Agropecuaria, or Agricultural Construction Society) allowed increased utilization of existing slaughterhouses from 25 per cent to 75 per cent, and commercialized between 75 and 80 per cent of all beef, 60 per cent of all pork products, and 20 per cent of all lamb (12).

In 1971, the Empresa Nacional Avicola (ENAVI-National Poultry Enterprise) was also created. It controlled 30 per cent of the poultry slaughterhouses and 50 per cent of the production of food. In the fresh fish market, through the reformulation of the activities of an already existing enterprise called Sociedad de Terminales Pesqueros, (SOTEPES-Fish Terminal Society), the wholesale commercialization of 100 per cent of all haddock was achieved, and the corresponding percentages were 70 per cent for shellfish and 5 per cent for fresh-water fish from the central regions of the country (12).

In relation to the general supply market, the Empresa Distribuidora Nacional (DINAC -National Distributing Enterprise) absorbed the personnel and the infrastructure of a bankrupt company, and other wholesale companies were subsequently absorbed. In this period, DINAC came to control 35 per cent of the national production of sugar, 27 per cent of the noodles, 25 per cent of the oil, 20 per cent of the rice, 13 per cent of the flour, 75 per cent of the canned fish, and 20 per cent of the canned fruit and vegetables (12).

When the pricing trends for this period are analyzed, except for sugar all the products that are major sources of calories showed a relative drop in price (Table 7, Appendix). These, in close correspondence with the increase or constancy in the prices for the main protein-supplying foods, indicate the tendency toward a growing concentration of demand for products considered "superior goods" as a result of improved income, and this led to a relative scarcity of these products. The relative decrease in the prices of calorie-supplying products permitted an increase in income and in the food buying capacity of the poor.

A rise in prices of protein products compared to the high calorie foods was not a predictable phenomenon in the income redistribution process, but when an important percentage of the population is still undernourished, such a distribution process can cause an inverse effect, or at least hold the prices of calorie products steady. The reason for the decrease in the prices of calorie can be attributed mainly to an adequate combination of a retail price policy with a wholesale price policy, in addition to the administration's active participation.

In this analysis of income, the evolution of the unemployment rate as a consequence of the economic stimulation policy should not be overlooked. In this evolution, an accelerated increase in employment is observed. The unemployment rate dropped to levels never attained during the previous decade. From an unemployment level of 7.5 per cent in 1970, rates of 3 per cent were attained in the middle of 1972. This meant that 50,000 new jobs had been generated in the greater Santiago area alone. The percentage of those absorbed by commodity production activities was 81 per cent (13). The Government's activity was essential for this increased employment. It began a massive construction programme, going from 6,000 houses in 1970 to 76,000 in 1971 and 17,000 in each of the first three quarters of 1972 (10).

This improvement in the employment situation reinforced the tendency toward increased food buying capacity, which reached the highest levels of the whole period analyzed, up to 37 per cent as compared to the basic period in the first quarter of 1971.

D. Economic Policies, 1972 - 1973

The period discussed here includes the fourth quarter of 1972 through the third quarter of 1973, President Allende's last year in office.

The application of the short-term economic policy stimulated the economy at all levels. In 1971, the GNP reached a rate of increase of 8.5 per cent compared to 1970. This, too, had never been surpassed in previous decades, but such a rate can be sustained only when financial conditions exist that allow the generation of investments. This must occur once the step of "utilization of the idle production capacity" has been achieved, and must operate appropriately with an active foreign trade, in order to be able to compensate for partial scarcities that arise while the sale of scarce products is augmented.

The Government was not prepared for any of these conditions. Due to the lack of flexibility in production of internal items in greatest demand, especially food, and to rare or non-existing investment by the private sector, it was confronted with an acute inflationary process that reached 314 per cent in the period discussed here.

Even though the payments policy attempted to recover the loss of buying power, the raises could not sustain the same level as in the previous period, thereby causing a decline in salaries, and a 37 per cent decrease in food buying power compared to the the level in the third quarter of 1972. However, this decline was not counteracted by a higher unemployment rate, which stayed the same as in 1972 (3 to 3.5 per cent).

Short supplies were responsible for an active black market that extended over all essential products. The latter could not be controlled by the popular organizations at the neighbourhood level, which were called Juntas de Abastacimiento y Precios (JAP, Supply and Prices Groups) created to reduce speculation.

Lastly, to all these problems were added those caused by the political opposition, which worsened the internal supply problems by paralyzing the transport of goods. This exacerbated the acute pressure of inflation, and the deterioration of the food buying capacity of the poor. This situation prevailed until 11 September 1973, when Salvador Allende's Government was overthrown by a military junta.

E. Economic Policias, 1973 - 1976

Under the Government of the junta, from the fourth quarter of 1973 until the fourth quarter of 1976, the price and income policy was directed toward three high-priority goals to stabilize the economy. These objectives included:

- The elimination of the very high rate of inflation, which officially reached 508 per cent in 1973, by cutting back on demand and public spending.
- The rapid return to equilibrium in the balance of payments through the support of exports.
- Withdrawal of the Government from economic activities, thereby permitting the largest share of participation in the economy by the private sector.

The policy of reducing demand was carried out by freeing all price controls. This uncovered all of the inflationary pressures that had not been apparent until the end of 1973. The black market was then eliminated because the products were channelled through normal mechanisms and any price levels that had been set during black market days became official.

This policy, combined with devaluation and the restrictive income policy, drastically reduced demand in both private and public sectors. The freeing-up of all kinds of basic food commodities increased the price of some products by 300 per cent toward the end of 1973 (Table 7, Appendix). Prices for products like meat, sugar, and oil rose 129, 200, and 379 per cent, respectively, between 1973 and 1974. The price of some products like beans and eggs decreased somewhat. In 1974, price controls were still in effect for bread and noodles and they remained at the same price, but the cost of milk increased by 100 per cent.

Between 1975 and 1976, costs varied by product, although there were increases similar to those of 1973 - 1974. The cost of milk, eggs, and oil remained at the level of the previous year, while there were large increases in the price of products like beans (72 per cent), bread (176 per cent), and noodles (255 per cent). Cost reductions were seen in meat ( - 14 per cent) and sugar ( - 43 per cent).

To counteract these sharp price fluctuations, an exchange rate policy to devalue the currency was put into effect (700,490, and 165 per cent in 1974, 1975, and 1976, respectively), and the economy was opened to foreign competition. Both devaluation and an increase in international prices (which underwent considerable changes during this period) were reflected in the extraordinary rise of internal prices.

Another means for reducing demand was to maintain wages at the December 1973 level by increasing the latter only by the same proportion as the rise in the consumer price index (IPC). During this entire period, the wage level increased 44 times, while the IPC increased 42 times. Had the IPC reflected the true situation, it would have improved income, but it was not effective because this index underestimated inflation by 46 per cent in 1973 (14).

As far as food was concerned, the IPC underestimated inflation by 56 per cent for 37 basic food items.* As a result, the adjustment of income and the consumer price index produced a decline of 49 per cent in the food buying capacity for the last quarter of 1973 compared to the preceding quarter. The level rose by 18 per cent in the beginning of 1974, but fell again to stabilize at 55 to 60 per cent of purchasing power in the base period, until the end of 1976. During 1975 and 1976, the loss of buying capacity practically eliminated the inflationary pressures that had existed at the end of 1973 because of demand, and reduced inflation to manageable levels.

The loss in food buying capacity during these three years was accompanied by rising unemployment caused by reductions in public spending and the non-participation of the Government in economic activity.

The unemployment rate, which had been 3.5 per cent in the first quarter of 1973, doubled to 7 per cent in December of that year, increased to 10 per cent by the end of 1974, accelerated in 1975, and reached 19.8 per cent in March of 1976 (15). For greater Santiago alone, the total number of unemployed amounted to 257,000 people in March of 1976. Among these,173,000 lost their jobs during the period between the fourth quarter of 1973 and the first quarter of 1976 (15). To this total must be added 170,000 persons in the Government's Minimum Employment Plan, started in 1975. These people received a minimum monthly sum of US$40, plus a basic food package for heads of households with more than five people.

The fact that both indices use the same prices and weights for food items clearly shows that the IPC cannot be used to measure true inflation (Table 8, Appendix).

In brief, the loss of income caused by restricted wages, increased food prices, and rising unemployment, especially among the poor, led to the conclusion that even the deterioration indicated by the ICCA underestimated the true magnitude of the problem of reverse income distribution during the period analyzed.

The food buying capacity index and trends in the nutritional situation of the urban poor in Chile

The hypothesis to be confirmed in this section is that the ICCA appropriately reflects the evolution of the nutritional condition of the poor urban population between 1968 and 1976. In order to do so, the trends shown by the ICCA were combined with other indicators of nutritional status, such as food availability (or apparent consumption), the infant death rate, and the nutritional status of children under six years of age.

A. Apparent Consumption, or Food Availability

In order to analyze the evolution of apparent consumption, the information had to be translated in terms of nutrients. For this purpose, we used a study (16) that included the basic products (wheat, potatoes, oil, sugar, meat, and milk) that, in 1970, furnished 80 per cent of the total dietary protein and calories. With this information for the period 1968 - 1976, a linear regression was carried out to 100 per cent of availability of the nutrients, as shown in table D. The analysis of the data indicates a trend toward an improvement in the availability of calories and protein between the years 1968 and 1972, in agreement with the evolution of the ICCA during those years, and then a

TABLE D.Domestic Nutrient Availability, Chile 1968 - 1976

Source: From calculations supplied by the report from Terra Institute A Research Report. A summary of conditions of basic food supply in Chile. Report to the "Consejo Nacional pare la Alimentacion" (National Nutrition Council). Table A-12, 1978. decline of 2 per cent in apparent consumption in 1973 and 1974, and of 13 per cent and 10 per cent in 1975 and 1976, respectively.

The decline in the 1975 - 1976 period manifests itself more seriously in the poor population because this was the period when the cost of basic food products rose sharply. This situation was partly brought about by the lower incomes of this segment of the population. The poor were forced to demand less expensive products, and as even these were not readily available, prices inevitably rose and led to a reduction in the food buying capacity of the poor.

It can be deduced from this that the evolution of food availability was displaced in parallel with the ICCA, and therefore, the apparent consumption figures tend to underestimate the true decrease in food consumption suffered by the economically disadvantaged in the period from 1974 - 1976.

B. The Infant Death Rate (TMI: Tasa Mortalidad Infantil)

It has long been known that the infant death rate (TMI) and malnutrition are interrelated (17). Between 1968 and 1976, the TMI showed a continuous decrease from 83.5 to 54.7 per 1,000 live-born infants. Does this indicate an improvement in living conditions and nutritional status? A more detailed analysis of the relation between the parallel displacement of the birth rate with the TMI supports the opposite view (Table 9, Appendix). The reasons for this are that it is well known that a child has a smaller probability of dying at birth if the mother is between 20 and 35 years old, if there are no more than four children in the family, and if the interval between pregnancies is at least 24 months (18).

Those three characteristics are closely related to the family-planning programme in effect in Chile since 1960. The decrease in the birth rate thus explains the decline in the TMI (19) more accurately than the claim that it was related to improved living conditions among the poor. This is even more obvious when considering that in the period 1974 1976 there were no such improvements, as determined by a large group of social and economic indicators.

C. Nutritional Status of the Population

Unfortunately, there is no reliable comparative information on nutritional status for the entire period from 1968 to 1976. The only information obtainable was for the years 1975, 1976, and 1977, as determined by anthropometric measurements of children under six years of age, who were seen on a regular basis between April and October of each year by the National Health Service (90 per cent of the total). The scale used corresponds to the relationship between weight, height, and age according to the method of Sempe. However, data for 1977 had to be discarded as they could not be compared with data from the preceding years because of an administrative decision by the Ministry of Health to modify the growth assessment method in accordance with the method used in Colombia. This was done in some Health Zones of the country, only to revert to the original model in the second semester of 1977. This biases the information and precludes its comparison with figures for the years 1975 and 1976 in the analysis of trends.

The information supplied by the Ministry of Health indicates rates of 15.5 per cent and 15.9 per cent of total malnutrition among children under six in 1975 and 1976, respectively. However, these numbers underestimate the total number of cases of malnutrition by 9 points and severe malnutrition by 2.2 points (21). For instance, in a clinic of the Santiago Province, the total number of cases of malnutrition registered in the statistics corresponds to 24.4 per cent of the total number of children under six years of age who were seen. But, if the same guidelines used in a special study conducted by the National Nutrition Council (CNAN) are applied, the total amount of malnutrition is 33.4 per cent, or 9 points above the clinic figures. The true rate of malnutrition is then underestimated by 37 per cent.

At any rate, a complete analysis of the numbers provided by the Ministry of Health for these years leads to the following conclusions.

1. Total malnutrition increased by 2.6 per cent between 1975 and 1976 (Table 10, Append ix).

2. The average age of undernourished children increased between 1975 and 1976. Malnutrition in infants between ) and 5 months of age decreased by 8.9 per cent in this period (increase in breast-feeding7). The number of infants malnourished between 6 and 11 months of age increased by 3.5 per cent, and cases of malnutrition among 12 and 13-month-old babies increased by 2.1 per cent, and increased in children between 2 and 5 years old by 4.8 per cent. This clearly indicates a trend toward an increased incidence of malnutrition among infants once they are weaned, a period coinciding with the time when they are exposed to a deteriorating and unsanitary environment and poor socio-economic surroundings (Table 10, Appendix).

3. It is also noteworthy that severe malnutrition was observed in 13 per cent of the children studied, and moderate malnutrition in 7 per cent, both reflecting increases, while cases with milder forms of malnutrition decreased by 5 per cent. All of this shows that the condition of the already undernourished was growing worse.

These three factors are critical evidence of deterioration in the average nutritional status during 1975 and 1976, and correspond to the period when the ICCA reached its lowest levels.

To summarize the results of the preceding analysis, it can be concluded that by analyzing separately the trends of three indicators such as per capita food availability, infant death rate, and nutritional status, and comparing these trends, especially food availability and nutritional status, with figures from the ICCA confirms the hypothesis that this index accurately reflects the trends in nutritional status of the urban poor.

Conclusions

Three questions introduced at the beginning of this paper have been answered. In the first instance, a method for analyzing nutritional status was proposed. This determined the necessity for the creation of an ICCA for the urban poor, incorporating the effects of the economic variable that have the most impact on nutritional status in this segment of the population (prices and income). A few of the imperfections of the method will be corrected when an investigation conducted by the author and Dr. Sergio Valiente of INTA, with the collaboration of the United Nations University, is concluded at the end of 1979. The impact of other social and economic variables, such as nutrition knowledge, family size, age of children, and age and education of the mother, etc., will also be assessed. But the limitations of the method do not invalidate the general tendency shown by the ICCA.

In Chile, between 1968 and 1976, the urban poor attained a significant improvement in their nutritional status until the end of 1972, only to have it decline seriously and even reach levels lower than those of 1968. There is little doubt about the importance of economic policies and the activity of the public sector in the evolution of this situation.

The analysis demonstrates that there are two important guidelines for the design of nutritional goals.

1. The first derives from the fact that there is clear evidence for a relationship between improved nutritional status and economic policies that favour a redistribution of income. In this kind of situation, such redistributive policies could be effective in the long run if all the short-term objectives and the material and social restrictions of each country are taken into account. These would determine whether the objectives of redistribution would be diluted over time. Adequately designed economic policies must consider the fact that an ongoing process of income redistribution would run into the active opposition of the social sectors who would finance them. This must be included in the analysis of the possible difficulties. Moreover, in the analysis of the material difficulties, those must be taken into consideration for both short-term goals, and the fact that the results of the policy must be compatible with other macroeconomic variables.

2. The second important fact is that, in a setting such as Chile, the spontaneous behaviour of economic variables influenced only by market forces has a clearly regressive effect on nutritional status, and it can be seen that the poor have no other negotiating strength than to reduce their food purchases or buy less nutritious food.

Thus, the economy as a whole must be oriented toward, and actively regulated by, the public sector, as the principle of a secondary role on the part of the government in economic activity is incompatible with improvement in the nutritional status of the population. Even though the administration may attempt to prevent further deterioration through active plans for nutrition intervention, the effects of such actions are in no way comparable to the general effects of what happens with other socio-economic variables. For instance, an increase of 1 per cent in the rate of unemployment caused a 60 per cent reduction in income in 12,000 households in the greater Santiago area in 1 977.

Therefore, the immediate concern about the decline in nutritional status in the recent past urges us to give this problem maximum priority, and to undertake simultaneously decisive efforts to structure development strategies that will not worsen the existing poverty, and that will improve the living conditions of the poorer sectors in developing countries.

Acknowledgement

This paper was written with the help of Rolando Chateauneuf, an economist, and Sergio Valiente, a physician.

Contents - Previous - Next