Miracle of Chile

From Wikipedia, the free encyclopedia

Jump to: navigation, search
It has been suggested that this article or section be merged into Economy of Chile. (Discuss)

The "Miracle of Chile" is a phrase coined by Milton Friedman in 1982 to describe the liberal, economic reforms implemented in Chile under the dictatorship of General Augusto Pinochet. At that time Milton Friedman made a memorable statement that the Chilean experiment was "comparable to the economic miracle of post-war Germany." [1]

Contents

[edit] Background

Immediately following the Chilean coup of 1973, Pinochet was made aware of a confidential economic plan known as El Ladrillo [2] (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 [3] 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 [2], and contained the backbone of what would later on become the Chilean neoliberal economic policy.[3]

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 [4]. 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". [4]

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." [1] 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." [2] 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." [3] 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.

[edit] Two miracles?

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, 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.

Led by young, free-market policy makers, 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. [5]

The reforms were coherent[citation needed] and drastic. They also 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. Since the free trade reforms were implemented in the mid 1970's, the economy has averaged 7-percent annual growth[citation needed], raising per capita income for Chile's 16-million citizens to more than $10,000—making them the most prosperous people in South America--and creating a thriving middle class. Today; only 14% percent of the population lives below the poverty line, compared, for example, with 31 percent in Brazil and 62 percent in Bolivia [6]. At this pace, Chile, within a generation, will become Latin America's most prosperous nation.[7]

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.

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 strongly criticized De Castro for this monumental mistake, making clear that it was contrary to the free market model.

Remarkably, 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.[8]

Former President 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 [9], state industries, and banks, and reduced taxes. Pinochet's aim was to "make Chile not a nation of proletarians, but a nation of entrepreneurs." 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.

Supporters of Friedman's view argue that subsequent events in Chile have vindicated his free market philosophy: Chile's economy is noticeably stronger and more advanced than those of other Latin American nations. Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. [4] On the other hand, from the beginning of the reforms of the Chicago Boys in 1973 through 1986, there was no economic growth. Real salaries (mean) have declined by 10% since 1986 and by 18% from what they were during the Allende administration in overall relative terms. 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. While Allende was in power, less than 20% of the country lived in relative poverty; by 1990 40% lived in relative poverty. That figure has remained largely constant since. [10]

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 [1] While enacting certain changes, the four successive civilian administrations that followed Pinochet, including that of current Socialist president Michelle Bachelet have not done much to dismantle the changes.

Some people have criticized Friedman for assisting the Pinochet government with economic reforms. 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. [5]

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. [11]

[edit] Performance in some economic and social indicators

[edit] Economic indicators

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).

From the period 1973-1985, 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%.

Similarly, Manuel Castells relies on several economic indicators in his book Globalización, desarrollo y democracia: Chile en el contexto mundial to attribute the Chilean economic growth to reforms undertaken during the democratic government rather than during the dictatorship. [6]

[edit] Social Indicators

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] Long term results

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. [7]

[edit] Bibliography

[edit] Additional information

[edit] See also

[edit] External links

[edit] Articles

[edit] Criticism

[edit] References

  1. ^ a b 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
  2. ^ a b (Spanish)El Ladrillo: Bases de la Política Económica del Gobierno Militar Chileno. Santiago de Chile: june 2002, ISBN 956-7015-07-4
  3. ^ a b >(Spanish) VILLAROEL, Gilberto. La herencia de los "Chicago boys". Santiago do Chile: BBC Mundo.com - América Latina, 10/12/2006.
  4. ^ a b 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.
  5. ^ Fact|date=November 2007
  6. ^ Country Comparison > Population below poverty line
  7. ^ Kandell, Jonathan. Chile's Driving Force. Smithsonian. Nov 2006, Vol. 37, Issue 8.
  8. ^ Chile: Successes and Failures in Poverty Eradication. World Bank
  9. ^ RIX, Sara E., Ph.D.Chile's Experience With The Privatization Of Social Security. , AARP Public Policy Institute, August 1995
  10. ^ Fact|date=September 2007
  11. ^ SCHAEFER, Standard. Chile's Failed Economic Laboratory: an Interview with Michael Hudson. CounterPunch, October 20, 2003
de:Wunder von Chile

es:Milagro de Chile fi:Chilen ihme fr:Miracle chilien pl:Chilijski cud

Retrieved from "http://india.smashits.com/wikipedia/Miracle_of_Chile"
Views
Personal tools

Toolbox