Chilean (blue) and average Latin American (orange) GDP per capita (1980–2017)Chilean (orange) and average South American (blue): Rates of Growth of GDP (1971–2007)
The "Miracle of Chile" was a term used by economist Milton Friedman to describe the reorientation of the Chilean economy in the 1980s and the effects of the economic policies applied by a large group of Chilean economists who collectively came to be known as the Chicago Boys, having studied at the University of Chicago where Friedman taught. He said the "Chilean economy did very well, but more importantly, 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."[1] The junta to which Friedman refers was a military government that came to power in a 1973 coup d'état, which came to an end in 1990 after a democratic 1988 plebiscite removed Augusto Pinochet from the presidency.
The economic reforms implemented by the Chicago Boys 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 by the post-Pinochet center government of Patricio Aylwin's Christian Democrats.[2] However, the center-left government of Eduardo Frei Ruiz-Tagle also made a commitment to poverty reduction. In 1988, 48% of Chileans lived below the poverty line. By 2000 this had been reduced to 20%. A 2004 World Bank report attributed 60% of Chile's 1990's poverty reduction to economic growth, and claimed that government programs aimed at poverty alleviation accounted for the rest.[3]
Hernán Büchi, Minister of Finance under Pinochet between 1985 and 1989, wrote a book detailing the implementation process of the economic reforms during his tenure. Successive governments have continued these policies. In 2002 Chile signed an association agreement with the European Union (comprising free trade and political and cultural agreements), 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. In 2010, Chile was the first nation in South America to win membership in the Organization of Economic Cooperation and Development, an organization restricted to the world's richest countries.
Some economists (such as Nobel laureate Amartya Sen) have argued that the experience of Chile in this period indicates a failure of the economic liberalism posited by thinkers such as Friedman, claiming that there was little net economic growth from 1975 to 1982 (during the so-called "pure Monetarist experiment"). After the catastrophic banking crisis of 1982, the state controlled more of the economy than it had under the previous socialist regime, and sustained economic growth only came after the later reforms that privatized the economy, while social indicators remained poor.[4] Pinochet's dictatorship made the unpopular economic reorientation possible by repressing opposition to it. This repression included assassinations organized under Operation Condor, mass systematized torture, exile, and the international hunting of dissidents. In all, there were 40,018 victims documented, including 3,065 killed.[5] Rather than a triumph of the free market, the OECD economist Javier Santiso described this reorientation as "combining neo-liberal sutures and interventionist cures".[6]
Background
In 1972, Chile's inflation was at 150%.[7] According to Hernán Büchi, several factors such as expropriations, price controls, and protectionism caused these economic problems.[8] At the same time, the United States conducted a campaign to deepen the inflation crisis.[9] The Central Bank increased the money supply to pay for the increasing deficit. Büchi states that this increase was the primary cause for inflation.[8]
United States government documents report an antagonistic foreign economic policy toward the Allende government that was "articulated at the highest levels" during this time.[10]:33 Shortly after Salvador Allende was elected president, but before he assumed office, then-CIA-director Richard Helms met with President Richard Nixon and discussed the situation in Chile. Helms' notes from his September 15, 1970 meeting contain the indication: "Make the economy scream." A week later Ambassador Edward Korry reported telling outgoing Chilean president Eduardo Frei Montalva, through his Defense Minister, that "not a nut or bolt would be allowed to reach Chile under Allende." By late 1972, the Chilean Ministry of the Economy estimated that almost one-third of the diesel trucks at Chuquicamata Copper Mine, 30 percent of the privately owned city buses, 21 percent of all taxis, and 33 percent of state-owned buses in Chile could not operate because of the lack of spare parts or tires. In overall terms, the value of United States machinery and transport equipment exported to Chile by U.S. firms declined from $153 million in 1970 to $110 million in 1971.[10]:33
Immediately following the Chilean coup of 1973, Augusto Pinochet was made aware of a confidential economic plan known as El ladrillo[11] (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 [12] 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. The document contained the backbone of what would later on become the Chilean economic policy.[12] According to the 1975 report of a United States Senate Intelligence Committee investigation, the Chilean economic plan was prepared in collaboration with the CIA.[10]:40
The plan recommended a set of economic reforms that included deregulation and privatization. Among other reforms, they made the central bank independent, cut tariffs, privatized the state-controlled pension system,[13] 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]
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 to the nationalization of copper completed by Salvador Allende, however, private companies were allowed to explore and develop new mines.
Minister of Finance Sergio de Castro, departing from Friedman's support for free floating exchange rates, decided on a pegged 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,[14] leading Milton Friedman to criticize De Castro and the fixed exchange rate in his Memoirs ("Chapter 24: Chile", 1998).[15] Since Chilean pesoinflation continued to outpace U.S. dollar inflation, every year Chilean buying power of foreign goods increased. When the bubble finally burst in late 1982, Chile slid into a severe recession that lasted more than two years.
This deep economic recession of 1982–1983 was Chile's second in eight years. (In 1975, when GDP fell by 13 percent, industrial production plunged by 27 percent and unemployment increased to 20 percent). Additionally, inflation reached 375 percent in 1974—the highest rate in the world and almost twice the top level under Allende.[16] During the 1982–1983 recession, real economic output declined by 19%, with most of the recovery and subsequent growth taking place after Pinochet left office, when market-oriented economic policies were additionally strengthened.[2]
Starting in 1985, with Hernán Büchi as Minister of Finance, 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. Büchi wrote about his experience during this period in his book La transformación económica de Chile: el modelo del progreso. 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.[17]
Free trade agreements
Successive Chilean governments have actively pursued trade-liberalizing agreements. The process began in the 1970s, when Pinochet cut tariffs on imports to 10%. Prior to that, Chile had been one of the most protectionist economies in the world, ranking 71 out of 72 in a 1975 Cato Institute and Fraser Institute annual report.[18] 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 Mercosur—Argentina, Brazil, Paraguay, and Uruguay—went 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 (Chile, Singapore, New Zealand, and Brunei) 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.[19]
Performance on economic and social indicators
GDP per capita in Chile and Latin America (1950-2010)
Amartya Sen, in his book Hunger and Public Action, 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).
Unemployment in Chile and South America (1980–1990).
Wages decreased by 8%.[20][when?] Family allowances in 1989 were 28% of what they had been in 1970 and the budgets for education, health and housing had dropped by over 20% on average[20]
Nobel laureate and economist Gary Becker states that "Chile's annual growth in per capita real income from 1985 to 1996 averaged a remarkable 5 percent, far above the rest of Latin America."[21] Since then the economy has averaged 3% annual growth in GDP.[22] Becker also said, in 1997, that Chile had become "an economic role model for the whole underdeveloped world".[23]Margaret Thatcher declared that Pinochet’s regime had turned Chile "from chaotic collectivism into the model economy of Latin America" whereas George H. W. Bush asserted that "Chile's record of economic accomplishment is a lesson for Latin America on the power of the free market. Nowhere among the nations of this continent has the pace of free‐market reform gone farther, faster than right here in Chile".[23]
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.[24]Infant mortality rate in Chile fell from 76.1 per 1000 to 22.6 per 1000 from 1970 to 1985.[22] In 1988, the military government passed a law making all abortion illegal. As of July 19, 2017,[25] legislation permitting abortion under limited circumstances (if the pregnancy endangers the life of the woman, if the fetus is not viable, or if the pregnancy resulted from rape) was passed.[26]
However, Sen claims that this improvement was not because of "free-market" policies but because of active public and state intervention. Chile had a very long tradition of public action for the improvement of childcare, which were largely maintained after the Pinochet coup:
... 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
Nevertheless, according to libertarian writer Axel Kaiser:[23]
In short, thanks to the free‐market reforms introduced by the Chicago Boys and maintained by the democratic regimes that came later, Chile became the most prosperous country in Latin America, which mostly benefitted the poorest members of the population.
Performance on economic indicators in comparison to those of other Chilean presidencies:[27]
Presidency
Alessandri (1959–64)
Frei-Montalva (1965–70)
Allende (1971–73)
Pinochet (1974–89)
Aylwin (1990–93)
Frei Ruiz-Tagle (1994–99)
Lagos (2000)
Economic growth (% of GDP)
3.7
4.0
1.2
2.9
7.7
5.6
5.4
Growth rate of exports
6.2
2.3
-4.2
10.6
9.6
9.4
7.5
Rate of unemployment (Workers in job creation programs counted as unemployed)
5.2
5.9
4.7
18.1
7.3
7.4
10.0
Real wages (1970 = 100)
62.2
84.2
89.7
81.9
99.8
123.4
134.4
Rate of inflation
26.6
26.3
293.8
79.9
17.7
6.1
4.5
Milton Friedman
Milton Friedman gave some lectures advocating free market economic policies at the Universidad Católica 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 Chile's economic policies should be, which he also did.[28] 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 junta's economic policy is based on the ideas of Milton Friedman…and his Chicago School".[28]
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 noted 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.[29]
Democracy
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."[29] Friedman stated 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."[30] Friedman 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."[29]
According to the 2015 Index of Economic Freedom (of the Heritage Foundation, Fraser Institute and WSJ), Chile's economy is the 7th freest.[31] Chile is ranked 1st out of 29 countries in the Americas and has been a regional leader for over a decade. Chile's annual GDP growth was 3.2% in 2008 and had averaged 4.8% from 2004 to 2008.[22]
The percent of total income earned by the richest 20% of the Chilean population in 2020 was 51.6%, while the percent of total income earned by the poorest 20% of the Chilean population was 5.5%, with the middle 60% of the population earning 42.9% of total income.[22] Chile's Gini index (measure of income distribution) was 44.9 in 2020, compared to 24.7 of Denmark (most equally distributed) and 74.3 of Namibia (most unequally distributed). Chile's inequality as measured by the Gini coefficient has generally been decreasing since 1990.[22]
The territory of Chile has been populated since at least 3000 BC. By the 16th century, Spanish conquistadors began to colonize the region of present-day Chile, and the territory was a colony between 1540 and 1818, when it gained independence from Spain. The country's economic development was successively marked by the export of first agricultural produce, then saltpeter and later copper. The wealth of raw materials led to an economic upturn, but also led to dependency, and even wars with neighboring states. Chile was governed during most of its first 150 years of independence by different forms of restricted government, where the electorate was carefully vetted and controlled by an elite.
The economy of Chile is a market economy and high-income economy as ranked by the World Bank. The country is considered one of South America's most prosperous nations, leading the region in competitiveness, income per capita, globalization, economic freedom, and low perception of corruption. Although Chile has high economic inequality, as measured by the Gini index, it is close to the regional mean.
Milton Friedman was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy. With George Stigler, Friedman was among the intellectual leaders of the Chicago school of economics, a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago that rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations. Several students, young professors and academics who were recruited or mentored by Friedman at Chicago went on to become leading economists, including Gary Becker, Robert Fogel, and Robert Lucas Jr.
The Chicago Boys were a group of Chilean economists prominent around the 1970s and 1980s, the majority of whom were educated at the Department of Economics of the University of Chicago under Milton Friedman and Arnold Harberger, or at its affiliate in the economics department at the Pontifical Catholic University of Chile. After they finished their studies and returned to Latin America, they adopted positions in numerous South American governments including the military dictatorship of Chile (1973–1990), as economic advisors. Many of them reached the highest positions within those governments. Ronald Reagan and Margaret Thatcher were influenced by Chile's policies and economic reforms.
Neoliberalism, also neo-liberalism, is a term used to signify the late-20th century political reappearance of 19th-century ideas associated with free-market capitalism, which had fallen into decline following the Second World War. The term has multiple, competing definitions, and is often used pejoratively. In scholarly use, the term is frequently undefined or used to characterize a vast variety of phenomena.
The Washington Consensus is a set of ten economic policy prescriptions considered to constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank and United States Department of the Treasury. The term was first used in 1989 by English economist John Williamson. The prescriptions encompassed free-market promoting policies such as trade liberalization, privatization and finance liberalization. They also entailed fiscal and monetary policies intended to minimize fiscal deficits and minimize inflation.
In economics, shock therapy is a group of policies intended to be implemented simultaneously in order to liberalize the economy, including liberalization of all prices, privatization, trade liberalization, and stabilization via tight monetary policies and fiscal policies. In the case of post-Communist states, it was implemented in order to transition from a command economy to a market economy.
An authoritarian military dictatorship ruled Chile for seventeen years, between 11 September 1973 and 11 March 1990. The dictatorship was established after the democratically elected socialist government of Salvador Allende was overthrown in a coup d'état backed by the United States on 11 September 1973. During this time, the country was ruled by a military junta headed by General Augusto Pinochet. The military used the breakdown of democracy and the economic crisis that took place during Allende's presidency to justify its seizure of power. The dictatorship presented its mission as a "national reconstruction". The coup was the result of multiple forces, including pressure from conservative groups, certain political parties, union strikes and other domestic unrest, as well as international factors.
Arnold Carl Harberger is an American economist. His approach to the teaching and practice of economics is to emphasize the use of analytical tools that are directly applicable to real-world issues. His influence on academic economics is reflected in part by the widespread use of the term "Harberger triangle" to refer to the standard graphical depiction of the efficiency cost of distortions of competitive equilibrium. His influence on the practice of economic policy is manifested by the high positions attained by his followers in national agencies such as central banks and ministries of finance, and in international agencies such as the World Bank.
The economy of Chile has shifted substantially over time from the heterogeneous economies of the diverse indigenous peoples to an early husbandry-oriented economy and finally to one of raw material export and a large service sector. Chile's recent economic history has been the focus of an extensive debate, as it pioneered neoliberal economic policies.
The Vuskovic Plan was the basis for the economic policy of the Popular Unity (UP) government of Chilean President Salvador Allende. It was drafted by and named after his first Economics Minister Pedro Vuskovic, who had worked before with the CEPAL. Although good results were obtained in 1970, hyperinflation made a comeback in 1972. By 1973, Chile was in shambles – inflation was hundreds of percents, the country had no foreign reserves, and GDP was falling.
Hernán Alberto Büchi Buc is a Chilean economist who served as minister of finance of the Pinochet government. In 1989 he ran unsuccessfully for president with support of Chilean right-wing parties.
Augusto José Ramón Pinochet Ugarte was a Chilean military officer and politician who served as Chile's head of state under various titles from 1973 to 1990, first as the leader of the Military Junta of Chile from 1973 to 1981, being declared President of the Republic by the junta in 1974 and thus becoming the de facto dictator of Chile, and from 1981 to 1990 as de jure president after a new constitution which confirmed him in the office was approved by a referendum in 1980. His rule remains the longest of any Chilean leader.
After World War II, many countries adopted policies of economic liberalization in order to stimulate their economies.
The Crisis of 1982 was a major economic crisis suffered in Chile during the military government of Chile (1973–1990). Chile's GDP fell 14.3%, and unemployment rose to 23.7%.
The Pacific Pumas are a political and economic grouping of countries along Latin America’s Pacific coast that includes Chile, Colombia, Mexico and Peru. The term references the four larger Pacific Latin American emerging markets that share common trends of positive growth, stable macroeconomic foundations, improved governance and an openness to global integration.
David I. Meiselman was an American economist. Among his contributions to the field of economics are his work on the term structure of interest rates, the foundation today of the implementation of monetary policy by major central banks, and his work with Milton Friedman on the impact of monetary policy on the performance of the economy and inflation.
Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics is a 2012 book by barrister Daniel Stedman Jones, in which the author traces the intellectual development and political rise of neoliberalism in the United States and the United Kingdom. Originally a PhD thesis, the author adapted it into a book.
Chile joined the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD), the founding branch of the World Bank Group, on December 31, 1945.
Chile is an original member of the IMF, joining the organization on December 31, 1945. The IMF would have a strong influence over the economy of Chile through the post-World War Two era of the 20th century, especially during the dictatorship of Augusto Pinochet.
1 2 3 Select Committee to Study Governmental Operations with Respect to Intelligence Activities, United States Senate (1975). Covert Action in Chile 1963–1973(PDF). Washington, DC: U.S. Government Printing Office. Archived from the original(PDF) on 2013-07-06. Retrieved 14 July 2013. Another goal, achieved in part through work done at the opposition research organization before the coup, was to help the new government organize and implement new policies. Project files record that CIA collaborators were involved in preparing an initial overall economic plan which has served as the basis for the Junta's most important economic decisions.
↑ Miller, Terry; Holmes, Kim R.; Roberts, James M.; Kim, Anthony B. (2010). "Chile". 2010 Index of Economic Freedom. New York: The Wall Street Journal & The Heritage Foundation. Retrieved 2 October 2010.
Sources
This article incorporates public domain material from Covert Action in Chile 1963—1973(PDF). Select Committee to Study Governmental Operations with Respect to Intelligence Activities, United States Senate. Retrieved 24 November 2019.
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