Develop a written document or comparative chart where you mention the differences between the Capital Market and the Chilean Economy until 1973 and the Capital Market and the Chilean Economy from 1974. Compare the differences and explain 3 of them in depth. Emphasize your structure and rely on examples.

Supporting text:

THE CHILEAN CAPITAL MARKET

In order to analyze the Chilean capital market, it is necessary to distinguish two different historical periods:

Until 1973: mixed economy scheme, with increasing State intervention.

Since 1974: social market economy scheme.

CHARACTERISTICS OF THE CHILEAN ECONOMY AND CAPITAL MARKET UP TO 1973

The mixed economy scheme appeared after the world crisis of 1929 and is characterized by the following elements:

a) Private ownership in general of the means of production although subject to the control of the Condition. With the passing of time, the State was incorporated into business activity by buying existing companies or by creating new ones.

b) The State assumed a very active role in the economy, not only as a regulator and inspector of economic activity, but also as a planner, producer and investor. The growing participation of the State in the economy meant higher fiscal spending, without adequate financing, which generated strong inflationary pressures. In an effort to control this problem, serious distortions were introduced in the economic system, such as: price controls, subsidies, franchises, levies, legal, tax and regulatory discrimination, among others.

c) Economy closed to foreign trade, based on an import substitution scheme with a protectionist policy for domestic industry, through strong import restrictions via tariff mechanisms. The exchange rate, in general, was undervalued, as it was used more as an instrument of inflation control than as an instrument of foreign trade. Exports are mainly based on copper.

d) Growth was low, below the Latin American average, due to an inefficient allocation of resources and relatively low investment rates. The capital market was very small at this time and grew at a slower pace than the economy and with a growing participation of the state sector.

The factors that affected the development of the capital market were:

a) Interest rate: the interest rate was set semi-annually by the Central Bank. This fixing of interest rates, together with the high inflationary levels in force, determined negative real values for the interest rate. The latter also supported the tax burden, the burden of financial regulation and the growing inefficiency of financial intermediaries. In this sense, financial intermediation only served to transfer a subsidy from savers to credit users.

b) Inflation: high inflation rates, together with the legal non-existence of readjustment, except for certain state savings mechanisms, together with low interest rates, discourage saving in the medium and long term, inducing savers to abandon the capital market towards more profitable alternatives that offer protection against currency devaluation. The State concentrated most of the financial savings in the hands of its institutions.

c) Tax and regulatory framework: in general, the current tax and regulatory framework tended to repress the development of the Chilean securities market and to discriminate in favor of the State and against the private sector. Among the provisions that most affected the capital market, it is worth highlighting the prohibition of issuing indexed securities, the obligation for all services and state companies to manage their funds through the State Bank, the requirement for insurance companies to establish their technical reserves with state securities, the prohibition of banks to give credit for the purchase of shares, etc.

d) Generally statizing economy: where the state played a fundamental role, discouraging the entry of foreign capital

CHANGES IN THE CHILEAN ECONOMY AND CAPITAL MARKET FROM 1974

To face the economic crisis in which the country was in 1974, it was taken a series of short-term measures and a global economic policy diametrically different from the one that had been applied in previous decades was defined.

The bases of this new economic policy were:

a) Opening to the outside: the country must produce those goods in which they have comparative advantages. For this purpose, there is a liberalization of foreign trade and a way to eliminate tariff barriers, tariff reduction and a realistic policy of determining the exchange rate.

b) Reduction of the public sector and structuring of a private economy in which the State plays a subsidiary role, developing only those economic activities that the private sector is not in a position to assume.

c) Elimination of distortions in the economy through:

Free prices, subject to external competition, which will be indicators of abundance or scarcity and a mechanism for the correct allocation of resources.

Elimination of discrimination and franchises.

Fair taxation.

d) Capital market development: the development of an efficient capital market of an adequate size to that of the economy, which stimulates savings and contributes to an optimal allocation of resources, was fundamentally considered.

Regarding the capital market, as of 1974, the following policies were implemented:

a) Interest rate liberalization: this is of vital importance so that they reflect the relative scarcity of savings and allocate this resource among the most widely used alternatives. convenient. The setting of interest rates below their equilibrium level in the market has as a consequence a punishment to the saver, which restricts their savings below the socially desirable level, at the same time, it is necessary to look for mechanisms other than price to assign the price. credit among all claimants, which requires the establishment and maintenance of a series of controls, all of which makes intermediation more expensive and makes this process very inefficient.

b) Reduction of reserve requirements from levels of 80% for demand deposits and 40% for time deposits to levels comparable with those of the countries with greater financial development.

c) Privatization and authorization to create new banks and financial institutions.

d) Possibility of applying indexation to operations or terms longer than 90 days in order to encourage savings in the medium and long term. In addition, that part corresponding to the readjustment is no longer considered as income for tax purposes, which eliminates the obligation to pay taxes on fictitious profits, the product only of the maintenance of the purchasing power of the currency. A basic indexing unit called the Development Unit (UF) was established, linked to the Consumer Price Index, which fluctuates daily. In general, all obligations and instruments over 90 days are expressed in UF or are readjusted accordingly. This has allowed savers to keep the purchasing power of their savings constant and to agree on real interest rates.

e) Elimination of the norms on quantitative control of credit in national currency and establishment of reserve requirements as a credit regulation norm, which means that all financial institutions determine their volume of operations subject to the same restrictions: reserve requirements and debt to equity ratio.

f) Creation of the bases of an open market operations system by the Central Bank, in order to transform it into an effective monetary management tool. This would allow, in an adequate period, to replace, at least partially, the reserve requirement rate as an element of monetary control, allowing financial institutions to increase their volume of loans without increasing their debt-to-capital ratio. These operations, exclusive to the Central Bank, consist of the purchase or sale of financial instruments in order to control the monetary mass of the economy. The Central Bank sells instruments, generally of its own issuance, when it wants to withdraw money from the economy and buys when it wants to inject liquidity into the economy.

g) Opening to external credit and raising the quantitative margins for external indebtedness, which has made it possible to equalize the treatment of the financial system to the rest of the private sector and foreign banks, which had no quantitative restriction to enter capital.

h) Elimination of the difference in the terms of the operations allowed for the different financial institutions. This encourages competition between the different financial institutions, expanding the field of action of each one of them, allowing specialization according to efficiency and not to legal norms.

i) Tax reform that introduces the concept of monetary correction and that eliminates the existing tax discrimination between equivalent financial instruments. In addition, incentives to retain profits by public limited companies to the detriment of dividend distribution were eliminated.

j) Authorization to commercial banks and financial companies to maintain demand and time savings accounts.

k) New regulation in the securities market aimed at making it more efficient and competitive. The new economic scheme applied beginning in 1974 and the great growth experienced by the Chilean financial market, made it necessary to modify the existing, very old and obsolete legal framework (the legislation on public limited companies and securities of 1931).

Liberalization of broker commissions.

Creation of new intermediaries (securities agents).

Better provisions for the issuance of instruments by companies.

New attributions to the controlling bodies.

New legislation, Superintendency of Securities.

Mutual funds.

Stock markets.

Anonymous Societies.

New pension regime.