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Miracle of Chile
The "Miracle of Chile" is a term coined by Milton Friedman to describe the Augusto Pinochet's support for liberal economic reforms in Chile carried out by the "Chicago Boys." Implemented economic model had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. These market-oriented economic policies were continued and strengthened after Pinochet stepped down.Thomas M. Leonard. Encyclopedia Of The Developing World. Routledge. ISBN 1579583881 p. 322 At the time, Milton Friedman stated that the Chilean experiment was "comparable to the economic miracle of post-war Germany." 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 Some commentators have disputed this interpretation, arguing that the implementation of free market reforms was followed by massive rises in poverty and unemployment.Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. 'Development and Society', 30(2) pp.57-77 Bidstrup, Scott (2002) Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"
Background
Pinochet, under the advice of a group of Chilean economists who had mostly studied at the University of Chicago Department of Economics (the Chicago Boys), implemented 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."
Inflation under Allende
In 1972, during the second full year of Allende's government (and prior to the coup that brought Pinochet to power), inflation in Chile was running at 140%. A range of factors led to increased inflation in Chile, such as fixed prices on essential goods, a multiple exchange rate and US opposition to the elected government (their stated goal was to "make the [Chilean] economy scream")p.60 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp.57-77.
In 1973, due in part to a sustained US campaign against the elected government United States Senate Report (1975) "Covert Action in Chile, 1963-1973" U.S. Government Printing Office Washington. D.C., the Chilean population were critically short on many food and consumer items. Chilean economist Jacobo Schatan writes, "It was clear that the scarcity had been manipulated for political reasons, to create a climate favourable to both the coup and, subsequently, the total change of the economic system."p.60 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp.57-77
'El Ladrillo'
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 which were called by the press, at that time, the Chicago Boys, because they were predominantly alumni of the University of Chicago. This document, El Ladrillo, was made available to the offices of the Chilean Armed Forces Generals on the very day after the coup, September 12th, 1973 El Ladrillo: Bases de la Politica Economica del Gobierno Militar Chileno. Santiago de Chile: june 2002, ISBN 956-7015-07-4, and contained the backbone of what would later on become the Chilean neoliberal economic policy.> VILLAROEL, Gilberto. La herencia de los "Chicago boys". Santiago do Chile: BBC Mundo.com - America Latina, 10/12/2006.
Nature of the reforms
Pinochet's government privatized almost every nationalized industry, from mines to factories to pension system. He 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 established by Salvador Allende, however, private companies were allowed to explore and develop new mines.
The reforms were coherent and drastic. They effectively wiped out the entrenched right wing industrial oligarchy, which depended on strict trade protections and subsidies in order to maintain their economic (and therefore political) power. Only one of the free market recommendations of El Ladrillo was not implemented: a floating exchange rate. 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 as a model economy
Supporters of Friedman's liberal economic views argue that subsequent events in Chile have vindicated his free market philosophy. They claim that Chile's economy is "noticeably stronger and more advanced than those of other Latin American nations". Opponents use Chile as an example of the failure of Friedmanite policies.Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. 'Development and Society', 30(2) pp.57-77 Bidstrup, Scott (2002) Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"
Immediate effects of the reforms
"First Miracle" vs. "Second Miracle"
Some analysts divide the neoliberal economic experiments of Chile in two distinct phases: the "First Miracle" (1973- 82), that ended when the fixed exchange rate policy failed and led to the depression of 1982 (see below), and the "Second Miracle" (1985-89), which occurred after the devaluation initiated an export-led boom which brought an end to the depression.
Early 1980s recession
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.Thomas M. Leonard. Encyclopedia Of The Developing World. Routledge. ISBN 1579583881 p. 322
Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. However, this devaluation was done so incompetently and belatedlyand at the exact moment that the United States, Chile's major creditor and trading partner, was going into a major recessionthat it led to a fall in Chile's GDP of 20% during 1982 and 1983, resulting in widespread unemployment and the collapse of the financial sector. Unemployment spiked to 30 percent. Around 50 percent of the population fell below the poverty line. Extreme poverty affected 30 percent of the population. In his Memoirs , Milton Friedman directed blame towards De Castro and the fixed exchange rate, claiming that it was contrary to the free market model.
Post-recession period
Following the 1983 implosion, the Pinochet dictatorship did not abandon the free-market reforms of El Ladrillo. Though the recession had huge social and political costs to the junta, during 1983 and 1984, the government maintained a free-market, hands-off approach to the economy, refusing to reinstate tariffs or other trade barriers, and allowing major Chilean industries to fail, rather than propping them up artificially by means of subsidies or other preferential treatment.
Starting in 1985, the focus of economic policies shifted toward financial solvency and economic growth. Exports grew rapidly and unemployment went down. On the poverty front, however, results were less successful. People living below the poverty line still represented 45 percent of the population in 1987. Chile: Successes and Failures in Poverty Eradication. World Bank
Performance on economic and social indicators
Annual growth
From the beginning of the reforms of the Chicago Boys in 1975 through 1986, there was almost no growth in per-capita GDP, a decline in per capita consumption and an (overall) increase in unemployment from 4.8% to 14%. 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
Amartya Sen, in his book Hunger and Public Action (1989) examines the performance of Chile in various economic and social indicators. He finds, from a survey of the literature on the field:
Infant mortality and life expectancy
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. However, life expectancy at age 1 remained virtually constant at 68.6 years in the same period. He finds that
He also notes that Chile had a very long tradition of public action for the improvement of living standards, which were largely maintained:
Social inequality and poverty rates
Chilean economist Jacobo Schatan found that "in 1996 the average per capita income of the top 5% was about 100 times larger than the average for the poorest 5%."p.60 of Schatan, J. (2001) "Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism." Development and Society, 30(2) pp.57-77p.144-148 of Schatan, J. (1998) "El Saqueo de America Latina." LOM Ediciones, Santiago de Chile.
Today, while some sources state that only 14% percent of the population lives below the poverty line (compared with 31 percent in Brazil and 62 percent in Bolivia) Country Comparison > Population below poverty line, others contend that these estimates are innaccurate, and as many as 39% of the Chilean population live in actual poverty. Jacobo Schatan has criticised the methodology used to asses poverty in Chile, writing that "the real figures for poverty would be between double and more than double the official figures."p.76 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp.57-77
Wages and employment
Real salaries (mean) have declined by 10% in 1986-1993 (?) and by 18% from what they were during the Allende administration in overall relative terms. Median salaries have fared even worse 1986-1993 (?) declining by 30% over the same period, signalling a transfer of wealth from the poor and middle class to the rich, a pattern that is reflected in consumption trends.Hudson, Rex (ed.) (1994) Chile: A Country Study, Chapter 2: The Society and Its Environment, Federal Research Division (U.S.), Library of Congress The Pinochet regime also saw unemployment rise to record levels that were only alleviated after a democratic government took over in 1991.Hudson, Rex (ed.) (1994) Chile: A Country Study, Chapter 2: The Society and Its Environment, Federal Research Division (U.S.), Library of Congress
Milton Friedman and Chilean economic policy
Milton Friedman advocated releasing price controls and replacing undeveloped countries' command-based economies with laissez-faire free market capitalism, even if it meant using quick reforms that Jeffrey Sachs would refer to as "shock therapy." In the case of Chile, these reforms where instituted in the wake of a violent coup, and Friedman's name has been strongly linked to the coup in Chile by critics such as exiled Chilean Foreign Affairs Minister Orlando LetelierLetelier, Orlando (1976) "The Chicago Boys In Chile", The Nation, 28th August.
Friedman did not personally support Pinochet, though he had given some lectures advocating free market economic policies in La Universidad Catolica de Chile and 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; Friedman did that 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.. The New York Times columnist Anthony Lewis declared in 1975 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, 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 claimed favorable economic results of economic liberalization in that economy. Detractors claim that the Chilean economy went into serious decline between 1973 and 1983. Supporters point out that this economic downturn was not confined to Chile but was a Latin American phenomenon; Chile being the first nation in the region to recover.
Some people have criticized Friedman for assisting the Pinochet government with economic reforms, pointing to the brutal tactics used by that regime. Friedman has defend himself against such criticisms, stating that he had given nearly similar speeches and promoted the same policies in China and Yugoslavia, and pointing 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.
Long term results
The experience of Chile in the 1970s and 1980s, and especially the export of the Chilean pension model by former Labor Minister Jose Pinera, has influenced the policies of the Communist Party of China and has been invoked as a model by economic reformers in other countries, such as Boris Yeltsin in Russia and almost all Eastern European post-Communist societies SCHAEFER, Standard. ''Chile's Failed Economic Laboratory: an Interview with Michael Hudson.CounterPunch, October 20, 2003.
Current Chilean economy
See Economy of Chile''According to the 2007 Index of Economic Freedom, Chile is the world's 11th "most free" economy today. 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. [*]
Bibliography
COLLIER, Simon and Sater, William F. A History of Chile, 1808-2002, New York and London, Cambridge University Press, 2004.
CONSTABLE, Pamela and Valenzuela, Arturo. A Nation of Enemies: Chile Under Pinochet. New York, W. W. Norton & Company, 1993.
KANGAS, Steve ''The Chicago boys and the Chilean 'economic miracle.
PALEY, Julia. Marketing Democracy: Power and Social Movements in Post-Dictatorship Chile. University of California Press, 2001
SCHATAN, Jacobo. Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism.Development and Society, 30(2) pp.57-77
UNITED STATES SENATE, Covert Action in Chile, 1963-1973, U.S. Government Printing Office Washington. D.C. 1975.
Additional information
See also
Chicago Boys
Salvador Allende
Chilean coup of 1973
Joaquin Lavin
Orlando Letelier
External links
Unemployment Protection in Chile, Wayne Vroman, August 2003
Jeffery Sachs interviews various economists about the "Miracle of Chile" from PBS.org
Is Chile a Neoliberal Success? by economist Jim Cypher in Dollars & Sense magazine
Discurso de Incorporacion a la Sociedad Chilena de Historia y Geografia del prof. Luis A. Riveros (Incorporation Discourse to Chilean Society of History by Professor Luis Riveros)made by a Chilean economist and former principal of Universidad de Chile about Chilean economic history
Tinker Bell, Pinochet and The Fairy Tale Miracle of Chile by journalist and University of Chicago alumnus (finance) Greg Palast
Articles
The Millennium Adventure - From Top to Bottom - 6 Oct 2001
Analisis economico de los gobiernos chilenos 1964-2000 - by a Chilean undergraduate student Daniel Neira - as an introduction to Chilean economy in perspective
Criticism
The Road from Serfdom: Milton Friedman and the Economics of Empire
References
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