How imports of toothpaste squeeze Chile's economy

Toothpaste - it's a good example of why Chile has been plunged into deep economic recession. For the past seven years, under the country's free-market economic policies, Chileans could buy just about any brand of United States-manufactured toothpaste at prices that were competitive with locally manufactured paste.

Drugstore shelves were - and still are - full of the familiar names: Crest, Aquafresh, Gleem, Pepsodent, Colgate. Only the latter is produced locally.

According to economists in the Ministry of Economy, US-made toothpaste in 1981 alone cost importers $2.5 million in foreign exchange.

In itself, that sum is not much. But toothpaste has to be seen as part of an import tidal wave of more than 3,000 consumer products, other than food, that surged into Chile in 1981. Ranging from television sets to paper towels, from automobiles to envelopes, most fall under the category of luxury items.

Many of these products, moreover, could be manufactured locally. In 1981 the total import bill for such items came to just over $2 billion, roughly equivalent to Chile's net trade deficit for the year - imports running $2 billion more than exports.

''That imbalance was the result of toothpaste and a lot of other imports,'' says a banker for the Banco de Chile. ''We simply went pell-mell down the road of free-market theories without any caution. Only after the bubble burst and we went into a financial tailspin, partly because we imported too much, did we apply the brakes on imports.

''But that, of course, is hindsight. After all, when we adopted free-market theories, they were a strong wind for Chile. We had long been mired in protectionism. The free market looked inviting.''

The free-market concept, using the theories of University of Chicago economist Milton Friedman, under whom many leading Chilean economists had studied, was embraced by Chile's military leadership soon after it seized power in 1973. In those days, the Friedman-trained economists became known locally as the ''Chicago Boys.''

Businessmen and economists tend to agree that the free-market approach worked fairly well at first. It was a major factor in bringing inflation down from a staggering 500 percent yearly in 1973 to a mere 10 percent in 1981.

Moreover, it helped spawn an export jag in the 1970s which helped pay for the increased imports. Chile in those years sold everything from raspberries to prefabricated housing - boosting the nontraditional exports to the point where in dollar volume they came to equal earnings from copper, Chile's traditional major export.

Although there were some clouds on the economic horizon, the free-market appoach seemed to many Chileans, including the military strong man, Gen. Augusto Pinochet Ugarte, to be the key to ''permanent prosperity,'' as he put it on more than one occasion.

Those words seem hollow now.

The current economic recession, said by some to be the worst since the depression of the early 1930s, includes a whopping $17 billion foreign debt, a continuing although narrow trade gap, numerous business bankruptcies, and several major bank failures.

Ironically, one aspect of the free market - letting the currency flow to its market level - was shunned for years by the Pinochet government. Then in 1982, the government suddenly reversed signals and devalued the Chilean peso by almost 90 percent in relation to the dollar, letting it move from 39 to almost 80. That in turn, hastened many bankruptcies, and foreign debt contracted by private borrowers doubled overnight in peso terms.

Economy Minister Carlos Francisco Caceres says the free-market approach is ''currently under discussion. We will have to look at the past decade and study it carefully.''

Among Chileans outside the government, there are calls for a total rejection of the free-market approach. ''The picture today is one of bleakness and uncertainty,'' says Andres Zaldivar Larrain, a leader of Chile's important Christian Democratic Party, which is, after 10 years in limbo, beginning to flex its muscle. Christian Democratic leaders scent the prospect of political gain from the economic turmoil now facing Chile.

In fact, the recent decision by the Pinochet government to conduct a dialogue with the political parties, thus giving them new vigor, stems from economic trouble.

Protests against government policies began anew in May when the copper workers staged a strike for pay and other benefits. Subsequent demonstrations against economic policies and evidence that many of Chile's poor, the unemployed and underemployed, are virtually starving have rallied a sizable portion of the nation's 12 million people against the government.

There is debate over the size of the opposition. But there can be no doubt that General Pinochet's support has dwindled in the past three months.

Government economists, meanwhile, are grappling with the economic dilemmas.

In the first instance, they have cut off imports of toothpaste and many other foreign products, both to cut the trade imbalance and to stimulate local industry. This has already brought imports in 1983 almost in line with exports.

Economy Minister Caceres suggests that by next year exports will net Chile a major favorable trade balance, perhaps in the neighborhood of $500 million. That would be a significant turnaround from the $2 billion deficit in 1981.

Equally important, and linked to the export-import picture, has been Chile's efforts to rationalize its total foreign debt of $17 billion, which after Panama and Venezuela is the third largest per capita foreign debt in Latin America.

Part of Chile's difficulty in making payments results from the bank failures. Both the Banco de Chile and the Banco Santiago, two of the most powerful banks here, were on the verge of going belly up earlier this year. To keep them solvent, the government pumped in $2 billion. Then there was less money to service the foreign loans.

The International Monetary Fund and more than 20 consortia of about 600 foreign banks, to which much of the debt is owed, have agreed to a postponed repayment schedule for $3.6 billion in principal due this year. They also lent Chile $1.3 billion more to help pay off some $2 billion in interest due this year. Whether all this will be enough remains to be seen.