Miracle of Chile

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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.^[1] At the time, Milton Friedman stated that the Chilean experiment was "comparable to the economic miracle of post-war Germany." ^[2] Some commentators have disputed this interpretation, arguing that the implementation of free market reforms was followed by massive rises in poverty and unemployment.^[3][4][5]

Contents 1 Background 1.1 Inflation under Allende 1.2 'El Ladrillo' 1.3 Nature of the reforms 1.4 Chile as a model economy 2 Immediate effects of the reforms 2.1 "First Miracle" vs. "Second Miracle" 2.2 Early 1980s recession 2.3 Post-recession period 3 Performance on economic and social indicators 3.1 Annual growth 3.2 Infant mortality and life expectancy 3.3 Social inequality and poverty rates 3.4 Wages and employment 4 Milton Friedman and Chilean economic policy 5 Long term results 5.1 Current Chilean economy 6 Bibliography 7 Additional information 7.1 See also 7.2 External links 7.3 Articles 7.4 Criticism 7.5 References

[edit] 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 ^[6], 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.^[7]

[edit] 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 150%.^[8] 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")^[9].

In 1973, due in part to a sustained US campaign against the elected government ^[10], 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."^[11]

[edit] 'El Ladrillo'

Immediately following the Chilean coup of 1973, Augusto Pinochet was made aware of a confidential economic plan known as El Ladrillo ^[12] (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 ^[13] 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 ^[12], and contained the backbone of what would later on become the Chilean neoliberal economic policy.^[13]

[edit] Nature of the reforms

Pinochet's government privatized almost every nationalized industry, from mines to factories to the 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 ^[14]. 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.

The reforms effectively wiped out the entrenched right wing industrial oligarchy^{[citation needed]}, 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.

[edit] 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"^{[citation needed]}. Opponents use Chile as an example of the failure of Friedmanite policies.^[15][16][17]

[edit] Immediate effects of the reforms

[edit] "First Miracle" vs. "Second Miracle"

Some analysts^{[citation needed]} 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^{[citation needed]} an export-led boom which brought an end to the depression.

[edit] Early 1980s recession

Chile had a strong economic recession in 1982-1983, its second in eight years (in 1975, when GDP fell by 13 per cent, industrial production plunged by 27 per cent, and unemployment shot up to 20 per cent). 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 ^[2], when market-oriented economic policies were additionally strengthened.^[18]

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 belatedly—and at the exact moment that the United States, Chile's major creditor and trading partner, was going into a major recession—that 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 ("Two Lucky People", 1998), Milton Friedman directed blame towards De Castro and the fixed exchange rate, claiming that it was contrary to the free market model.

[edit] 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.^{[citation needed]}

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.^[19]

[edit] Performance on economic and social indicators

[edit] 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 (unclear, but around 15%) 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. [1] 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^{[citation needed]}. This growth stagnated in 1997, with GDP rising by only a small margin between 1997 and 2002.^[20]

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:

The so-called "monetarist experiment" which lasted until 1982 in its pure form, has been the object of much controversy, but few have claimed it to be a success...The most conspicuous feature of the post 1973 period is that of considerable instability...no firm and consistent upward trend (to say the least).

[edit] 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

favourable infant mortality trends in Chile have not been reflective of corresponding general improvement in living conditions

He also notes that Chile had a very long tradition of public action for the improvement of living standards, which were largely maintained:

... there is little disagreement as to what caused the observed improvement in the area of child health and nutrition...It would be hard to attribute the impressively steady decline in infant mortality ... (despite several major economic recessions) ... to anything else than the maintenance of extensive public support measures

[edit] 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%."^[21][22]

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)^[23], others contend that these estimates are inaccurate, and as many as 39% of the Chilean population live in actual poverty^[24]. 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."^[25]

[edit] Wages and employment

By 1983, real salaries dropped 14% what they had been in 1970. ^[26]. Median salaries have fared even worse, 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.^[27] The Pinochet regime also saw unemployment rise to record levels that were only alleviated after a democratic government took over in 1991.^[28]

[edit] 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 Letelier^[29].

Friedman did not personally support Pinochet, though he had given some lectures advocating free market economic policies in La Universidad Católica 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 Chile’s economic policies should be; Friedman did that ^[30]. The New York Times columnist Anthony Lewis declared in 1975 that "the Chilean junta’s economic policy is based on the ideas of Milton Friedman…and his Chicago School". ^[30]

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." [2] 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." [3] 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." [4] 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 defended 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. [5]

[edit] 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 ^[31].

[edit] Current Chilean economy

See also: 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. [6]

[edit] Bibliography

• (Spanish) El Ladrillo: Bases de la Política Económica del Gobierno Militar Chileno. Santiago de Chile: june 2002, ISBN 956-7015-07-4
• BIDSTRUP, Scott. Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle", Revised 10/15/02
• 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
• SCHAEFER, Standard. Chile's Failed Economic Laboratory: an Interview with Michael Hudson. CounterPunch, October 20, 2003
• SCHATAN, Jacobo. Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp.57-77
• WINN, Peter (editor).Victims of the Chilean Miracle: Workers and Neoliberalism in the Pinochet Era, 1973-2002. Durham, NC: Duke University Press, 2004.
• UNITED STATES SENATE, Covert Action in Chile, 1963-1973, U.S. Government Printing Office Washington. D.C. 1975.

[edit] Additional information

[edit] See also

• Chicago Boys
• Chile pension system
• Economic history of Chile
• Education in Chile
• Chilean nationalization of copper
• Salvador Allende
• Chilean coup of 1973
• Joaquín Lavín
• Orlando Letelier

[edit] 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 Incorporación a la Sociedad Chilena de Historia y Geografía 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

[edit] Articles

• The Millennium Adventure - From Top to Bottom - 6 Oct 2001
• RIX, Sara E., Ph.D.Chile's Experience With The Privatization Of Social Security. , AARP Public Policy Institute, August 1995

[edit] Criticism

• BIDSTRUP, Scott. Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle", Revised 10/15/02
• Chile: the Laboratory Test
• The Nation, August 1976: The Chicago Boys In Chile: Economic Freedom's Awful Toll, by Orlando Letelier

[edit] References