ECONOMIC DEVELOPMENT, EXTERNAL DEBT, AND INFLATION IN CHILE
High levels of external debt have plagued most developing countries over the past 20 years. Chile has not been an exception to this state of affairs (The World Bank, 1993, p. 168). Chile has, however, acted with greater effectiveness than have some other developing countries to moderate the potentially devastating relationship between external debt and gross domestic product (Ahmadu, Bascomb, Heiman, van Duyn, 1992, pp. 19-33).
The reduction of external debt as a proportion of gross domestic product has caused an increase flow of private investment funds into Chile (Biesada, 1992, pp. 56, 58). While foreign investment capital is welcomed by developing countries, the massive influx into Chile has been too great for the economy to adsorb. As a consequence, Chile's inflation control plan is threatened, and the country's central bank has revalued the peso by five-percent. In turn, the revaluation threatens the exports that have enabled Chile to reduce the level of the country's external debt relative to gross domestic product. Chilean economic planners, thus, find themselves on the horns of a dilemma. An external deficit develops for a country when the claims of foreign entities on the country's economy exceed the claims of entities in that country on the economies of other countries. A country's external debt is comprised of loans to both government and private sector organizations in the country. Loans to government entities involve sovereign risk, while loans to all other entities involve enterprise risk.
Loans involved in a country's external debt are extended by other governments, by international organizations (primarily the International Monetary Fund and The World Bank), and by private sector lenders in other countries (primarily banks, but also by investors who buy bonds and other debt obligations). The Internation...