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  similar extent. The only capital goods purchases that have increased since 1970 are vehicles and transport equipment financed under supplier credits, mainly from France. Brazil. and Argentina.Allende has been able to postpone import restrictions only by using up Chile's large foreign reserves and damaging the country’s international credit rating. Chile incurred a record balance-of-payments deﬁcit of some $300 million in 1971 and probably will go about $250 million into the red in 1972 (see Table 3). By year's end, its net foreign reserves will stand at an estimated negative $210 million. compared with a positive $343 million at the end of 1970. Balance-of-payments deterioration would have been even more severe had Chile not stopped payments on most of its long-term foreign debt and on its short-term debts to US banks in late 1971. Because of non-payment on debt, plus drawings on Western long-term credits still in the pipeline, on Communist project loans, and on short-term commercial credits from new Western suppliers intent on replacing the United States in the Chilean market, Santiago actually had a substantial net capital inflow in 1972.

The Demand Side: A Consumption Spree

Two main factors have fueled the sharp increase in demand since Allende's election: massive public sector deficits and a major income redistribution favoring the lower classes, who have spent as never before in 1971, overall consumption of goods and services (government and personal consumption) expanded by l5%-20% in real terms (see Figure 5). This sharp jump was possible because of an 8% increase in GDP, rising imports, a sharp drop in ﬁxed investment, and a rapid drawdown of business inventories. Even the official data show that private fixed investment plummeted by 55%-60% in I971. Although government expenditures on low-income housing, agrarian reform projects, and other investments increased markedly, total fixed capital formation declined - perhaps by as much as 15% instead of the 5%-10% officially estimated. At only 9%-10% of gross national product in 1971. Chile's investment rate probably was Latin America's lowest. Stock drawdowns, on which no official figures are available, were probably sufficient to cause a drop in overall investment on the order of 35%-45%. Because economic expansion slowed and business inventories and foreign exchange reserves already had been largely depleted, 