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Miracle of Chile
The "Miracle of Chile" was a term used by free market Nobel Prize winning economist Milton Friedman to describe liberal and free market reorientation of the economy of Chile in the 1980s, 1990s, and 2000s, and the purported benefits of his style of economic liberalism. He said the "Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." [25] Other economists (such as Amartya Sen) have argued that the experience of Chile in this period rather demonstrate the failure of Friedman-style economic liberalism, claiming that there was little net economic growth from 1975-1983 (during the "pure Monetarist experiment") with sustained economic growth only coming after later reforms, and social indicators remain poor.
In 1973, inflation in Chile was hundreds of percents, the country had no foreign reserves, and GDP was falling. The economic reforms were originally drafted by Chilean economists known as the "Chicago Boys" because many of them had studied at the University of Chicago. The plan had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. The first reforms were implemented in three rounds - 1974-1983, 1985, and 1990. The reforms were continued and strengthened after 1990.Thomas M. Leonard. Encyclopedia Of The Developing World. Routledge. ISBN 1579583881 p. 322 Successive governments have continued these policies. In 2002 Chile signed an association agreement with the European Union , in 2003, an extensive free trade agreement with the United States, and in 2004 with South Korea, expecting a boom in import and export of local produce and becoming a regional trade-hub. Continuing the coalition's free-trade strategy, in August 2006 President Bachelet promulgated a free trade agreement with the People's Republic of China (signed under the previous administration of Ricardo Lagos), the first Chinese free-trade agreement with a Latin American nation; similar deals with Japan and India were promulgated in August 2007.
Background
In 1972 inflation in Chile was running at 150% A range of factors led to economic problems in Chile, such as expropriations, price controls and protectionism. This lead to a deficit, which was handled by a large increase in money supply, which in turn resulted in extreme inflation.
Immediately following the Chilean coup of 1973, Augusto Pinochet was made aware of a confidential economic plan known as El Ladrillo El Ladrillo: Bases de la Politica Economica del Gobierno Militar Chileno. Santiago de Chile: june 2002, ISBN 956-7015-07-4 , so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 > VILLAROEL, Gilberto. La herencia de los "Chicago boys". Santiago do Chile: BBC Mundo.com - America Latina, 10/12/2006. by economists who opposed Salvador Allende's government, with the help from a group of economists the press were calling the Chicago Boys, because they were predominantly alumni of the University of Chicago. This document contained the backbone of what would later on become the Chilean economic policy> VILLAROEL, Gilberto. La herencia de los "Chicago boys". Santiago do Chile: BBC Mundo.com - America Latina, 10/12/2006., recommending a set of economic reforms that included deregulation and privatization. Among others, they privatized the pension system , state industries, and banks, and reduced taxes. Pinochet's stated aim was to "make Chile not a nation of proletarians, but a nation of entrepreneurs.
Reforms
The first reforms were implemented in three rounds - 1974-1983, 1985, and 1990.
The government welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business. The main copper company, Codelco, remained in government hands due the nationalization of copper completed by Salvador Allende, however, private companies were allowed to explore and develop new mines. Copper resources were, however, declared "inalienable" by the 1980 Constitution.
Minister of Finance Sergio de Castro, departing from Friedman's well-known support for flexible exchange rates, decided on a fixed exchange rate of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos inflation outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe recession that lasted more than two years.
Chile had a strong economic recession in 1982-1983, its second in eight years . Real economic output declined by 19% just in 1982 and 1983 and most of the recovery and subsequent growth took place after Pinochet left office BELLO, Walden Bello and KELLY, John. The IMF and Chile A Parting of Ways? International Finance, The Multinational Monitor, April 1983, Volume 4, Number 4, when market-oriented economic policies were additionally strengthened.
In his Memoirs , Milton Friedman criticized De Castro and the fixed exchange rate.
Starting in 1985, the focus of economic policies shifted toward financial solvency and economic growth. Exports grew rapidly and unemployment went down, however, poverty still represented a significant problem, with 45 percent of Chile's population below the poverty line in 1987. In 1990, the newly elected Patricio Aylwin government undertook a program of growth with equity, emphasizing both continued economic liberalization and poverty reduction. Between 1990 and 2000, poverty was reduced from 40 percent of the population to 20 percent. 60 percent of this reduction can be attributed to GDP growth, with the remaining 40 percent attributable social policies. Chile: Successes and Failures in Poverty Eradication. World Bank
Free trade agreements
Successive Chilean governments have actively pursued trade-liberalizing agreements. During the 1990s, Chile signed free trade agreements (FTA) with Canada, Mexico, and Central America. Chile also concluded preferential trade agreements with Venezuela, Colombia, and Ecuador. An association agreement with MercosurArgentina, Brazil, Paraguay, and Uruguaywent into effect in October 1996. Continuing its export-oriented development strategy, Chile completed landmark free trade agreements in 2002 with the European Union and South Korea. Chile, as a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. To that end, it has signed trade agreements in recent years with New Zealand, Singapore, Brunei, India, China, and most recently Japan. In 2007, Chile held trade negotiations with Australia, Thailand, Malaysia, and China. In 2008, Chile hopes to conclude an FTA with Australia, and finalize an expanded agreement (covering trade in services and investment) with China. The P4 also plan to expand ties through adding a finance and investment chapter to the existing P4 agreement. Chile's trade talks with Malaysia and Thailand are also scheduled to continue in 2008.
Performance on economic and social indicators
Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. [*] Since then the economy has averaged 7-percent annual growth, raising per capita income for Chile's 16-million citizens to more than $10,000 and creating a thriving middle class. This growth stagnated in 1997, with GDP rising by only a small margin between 1997 and 2002.Cypher, James. (2004) Is Chile a neoliberal success? Dollars & Sense, September-October 2004
Developments were very positive with regards to infant mortality and life expectancy - infant mortality rate fell so much that Chile achieved the lowest level of infant mortality in Latin America in the 1980s. Infant mortality rate in Chile fell from 82.2 per 1000 to 19.5 per 1000 from 1970-85. Life expectancy at birth increased from 64.8 years to 68.3 years in the same period and life expectancy at age 1 remained about constant at 68.6 years in the same period.
The economic policies, maintained consistently since the 1980s, have contributed to steady growth and reduced poverty rates by over half. Only 14% percent of the population lives below the poverty line
Milton Friedman
Milton Friedman has sometimes been accused for involvement with the Pinochet Government. However, Friedman did not personally support Pinochet, though he had given some lectures advocating free market economic policies in La Universidad Catolica de Chile. In 1975, two years after the coup, he met with Pinochet for 45 minutes, where the general "indicated very little indeed about his own or the government's feeling" and the president asked Friedman to write him a letter laying out what he thought Chiles economic policies should be, which he also did. DOHERTY, Brian. ''The Life and Times of Milton Friedman: Remembering the 20th century's most influential libertarian.'' Reason Magazine, March 2007 Print Edition Friedman's 21 April 1975 letter may be found in Milton and Rose Friedman's Two Lucky People and in an online Chilean newspaper. To stop inflation, Friedman proposed reduction of government deficits that had increased in the past years and a flat commitment by government that after six months it will no longer finance government spending by creating money. He proposed relief of cases of real hardship among poorest classes. In October 1975 the New York Times columnist Anthony Lewis declared that "the Chilean juntas economic policy is based on the ideas of Milton Friedmanand his Chicago School".
Commenting on his statement about the "Miracle", Friedman says that "the emphasis of that talk was that free markets would undermine political centralization and political control." Friedman claimed that "The real miracle in Chile was not that those economic reforms worked so well, but because that's what Adam Smith said they would do. Chile is by all odds the best economic success story in Latin America today. The real miracle is that a military junta was willing to let them do it." [*] He says the "Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." The term Miracle of Chile is also commonly used to refer to the favorable economic results of economic liberalization in that economy.
Friedman has wondered why some have attacked him for giving a lecture in Chile: "I must say, it's such a wonderful example of a double standard, because I had spent time in Yugoslavia, which was a communist country. I later gave a series of lectures in China. When I came back from communist China, I wrote a letter to the Stanford Daily newspaper in which I said, '"It's curious. I gave exactly the same lectures in China that I gave in Chile. I have had many demonstrations against me for what I said in Chile. Nobody has made any objections to what I said in China. How come?". He points out that his visit was unrelated to the political side of the regime and that during his visit to Chile he even stated that following his economic liberalization advice would help bring political freedom and the downfall of the regime.
Current Chilean economy
According to the 2008 Index of Economic Freedom (a list created by the conservative Heritage Foundation and Wall Street Journal), Chile is the world's 8th most free economy today and 11th most free in the 2009 Index of Economic Freedom.. Chile is ranked 3rd out of 29 countries in the Americas and has been a regional leader for over a decade. Chile had GDP growth of 6.1% in 2004, and has averaged a 4.0% annual increase in GDP over the last five years for which data is available. [*]
See also
Chicago Boys
Chile pension system
Economic history of Chile
Economy of Chile
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This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article Miracle of Chile
