Silent Revolution: An Early Export from Pinochet’s Chile.
When I was a student in London, I used to have my breakfast in a little cafe in Islington. The owner of the place was a matured-aged Spanish woman who usually chat with me before charging the bill. One morning we started to talk about Chile, where I came from. When the conversation finally shifted to the economy, she told me in a confessional voice: “you are going to excuse me, but I think countries like Spain and Latin America (sic) need strong-handed leaders to prosper”. As I didn’t say anything, she felt embarrassed and turned back to the counter. She was talking about general Pinochet.
I admit she got me by surprise. It had been long time since someone outside Chile openly declares his or her support to the Pinochet regime. The general has been an infamous figure, constantly remembered by the crimes against humanity committed by his government. I have came across with so many people who the only thing they know about Chile is Pinochet, and the only thing they know abut Pinochet is that he is an evil man. But when I returned to my newspaper, suddenly her confession didn’t sound so odd after all. I was reading the business section.
True, the political means used by Pinochet are broadly criticized and only very few conservative politicians who might secretly fancy men in uniform would support his methods. Economically, however, the Pinochet regime is another story. The general and his team of young economists trained in Chicago have been broadly admired and acclaimed, from most extreme right-wing think-tanks to publications like the New York Times, The Economist, Time magazine, Newsweek and Financial Times.
The IMF and the World Bank use to recommend developing countries to do the very same the Pinochet regime did. Reforms such as low tariffs, privatization, and deregulation are usually portrayed as the natural path to development and prosperity, a solution-pack of blank economics for the undeveloped world. Yet a closer look to the origins of this magic formula portrays a story in which fierce ideological politics play an important role.
During the 1950s the University of Chicago was developing a radical approach to economic theory. The approach was based on the views of American economist Milton Friedman, who opposed the socially conscious economics that had dominated Western governments after the Great Depression of 1929. Friedman rejected the principles of Keynesian economics –the economic theoretical mainstream at the time– which considers the state could intervene in the market to correct negative social consequences the rough business of laissez-faire could provoke, such as unemployment, poverty and inequality. Under Keynesian-inspired policies, the state has a role in generating demand through state borrowing and spending. It is entitled to subsidize particular sectors of the industry, redistribute resources, and monopolise public services such as health and education.
Friedman, on the contrary, believed the state’s role should be relegated to guarantee and protect private property in order to extend the reach and usefulness of the market. His doctrine was based in the belief that economic benefit could best be optimized if the individual has the autonomy to pursue his or her own self-interest, and was started to be known as monetarism.
The school of Chicago became the alma mater of individualistic market economy, with its economists showing an extreme faithfulness in classical and neoclassical economic beliefs, themes and concepts. “They emphasize the usefulness and relevance of the neo-classical economic theory, equate the actual and the ideal market, see and apply economics in to every nook and cranny of life”, said economist H. Laurence Miller.
At an early stage, the main challenge monetarism had to face was its application. During the 1950s and 1960s most Western democracies –the US included– were enjoying the post-war wave of economic growth and social wellbeing through the welfare state model. Friedman’s philosophy didn’t have significant influence on policy-makers. Yet his ideas started to be heard and disseminate through conservatives and right wing supporters around the world, providing new inspiration and theoretical ground for counter-revolution advocates.
In 1955 American advisers tried to persuade Chile to apply an early version of Chicago’s monetarism but, as the Chilean government was encouraging domestic industrialization, the offer was refused. Then the University of Chicago School of Business set up an academic agreement with Chile’s Catholic University in which the American university sent professors to do research and accepted Chilean graduate students into their postgraduate courses. Tuition and expenses were covered by a system of scholarships provided by the US Government and the Ford Foundation.
By the early 1970s, most of the Chilean students who benefited from the scholarships were sons of the Chilean right. In their study about Chilean economy, authors Constable and Valenzuela described them as “middle and upper-class students at the Catholic University in the 1950s and 1960s, who shared a conservative religious background, a visceral rejection of socialism, and a contempt for Chile’s freewheeling, mass democracy”. Once in the US, they rapidly adopt the Chicago School of Economics’ theoretical line and became faithful advocates of Milton Friedman’s economic beliefs. They were starting to be known as “Chicago boys”.
Back in Chile, the Chicago boys remained teaching inside the Catholic University and could not exercise major influence. Their theories weren’t in tune with the consensus-and-development policy of the Christian Democrat government.
In 1970, Chilean electorate went further to the left. Socialist candidate Salvador Allende won the presidential elections and became the first socialist to be democratically elected in the Western hemisphere.
The US government shrank its aid to Chile and pressured multilateral lending institutions such as the World Bank and the Inter-American Development Bank to do so. As a result, Chile’s foreign reserves plunged from $400 million in 1970 to $13 million in 1972. In an effort to redistribute resources to the poorer sectors of Chilean society, Allende increased nationalization of Chilean copper mines and foreign-owned companies, and took further the land reform started in the previous government. These actions deeply antagonized Chilean business community and right wing, and made Washington take steeper measures against Allende.
The CIA and American Embassy in Santiago helped the opposition to produce social unrest, financing union strikes (the transport’s strike provoke shortage of foodstuff and essential goods all along the country) and supporting local right-wing terrorist groups. A report of the US senate accounts $7 million channelled to anti-Allende groups and 1.6 million to keep the Chilean right-wing conservative newspaper, El Mercurio, afloat from bankruptcy.
At the same time Allende’s administration were failing to control its most radical members and Chilean society sank into violence, uncertainty and economic stagnation. Partly sabotage, partly Allende’s administration economic mistakes, inflation rose to 900% for the year 1973, the black market rate was thirty times the official rate, and government’s budget deficit reached 24.7% of the GDP.
The plotting against Allende came to an end in September 1973 when general Pinochet lead a violent coup d’etat and seized power. Once in office, Pinochet decided to give the economic management of the country to the Chicago Boys. For first time in economic history a group of Milton Friedman disciples had an opportunity to influence governmental policy and put their theories into practice. As they were deeply involved with the campaign against Allende, they already have a complete programme aiming to re-structure the economy and to reverse Allende’s social reforms.
On April 1975 Pinochet’s finance minister announced a plan of ‘shock treatment’ for the economy. The Chicago boys implemented drastic monetarist measures which included liberalization of international trade, deregulation of the market, privatization of state-owned companies and public services, and an almost 50% reduction in public spending.
Although the Chicago boys thought the market would automatically provide prosperity and Chileans would become entrepreneurs due to lack of social or welfare protection, the consequences of the shock treatment were dramatic. Between 1975 and 1979 the GNP decreased 13% -the greatest loss since the 1930s, purchasing power dropped to 40% of the 1970 level, unemployment peaked to 20% and industrial production decreased 28%. Many companies were exposed overnight to foreign competition and went bankrupt while a dismantled welfare state was unable to provide social benefits. Only soup kitchens run by the Catholic Church salved people from starvation.
Chilean people found themselves with no other alternative than to accept those economic policies. The military regime closed the congress, banned political parties, prohibited labour unions and professional associations, and introduced a curfew where everybody had to remain at home after eight o clock. Schools, universities and the media were intervened by the army. About 4000 civilians were killed (of which 1000 are missing until today), and many more were tortured and forced into exile. In a Gestapo-like fashion, the government security forces broke into many Chilean homes and seized thousands of men and women, many of whom are still missing. Torture practices included electricity on genitals, teeth and nails extraction, and gang rape.
Thanks to the repression, the Chicago boys found themselves enjoying laboratory conditions for their monetarist experiment. Their policies were implemented without having to face neither legal opposition nor public scrutiny -let alone competition from other economic policies.
In March 1975, Friedman visited Santiago to support his former disciples, holding conferences along with Chicago professor Arnold Harberger and talking privately with Pinochet. In an interview given to Newsweek (January 1982), Friedman praised him because the general had “supported a fully free-market economy as a matter of principle” and described what has happened in Chile as an “economic miracle”.
Friedman was not alone in his rush to praise the work of the Chicago boys. After the crisis of 1976, Chilean economy started to recover, growing at 6.8% in 1978, and rapidly gained international attention. Time magazine described the Chicago boy’s performance as ‘An Odd Free Market Success’ (14/1/1980). In June 1987, journalist Shirley Christian wrote in the New York Times a favourable article reporting the success of the Chicago boys over inflation, exports growth and foreign investment.
Friedman’s monetarist ideas also started to inspire conservatives who would become economic advisors of Ronald Reagan and Margaret Thatcher. Some of them were keen to import a similar Chilean-style monetarist revolution to their own countries. Journalist Andy Beckett reports in his book Pinochet in Piccadilly (Faber, 2002) how economist Alan Walters, Friedman’s friend and one of the masterminds behind Thatcherism, often travelled to Santiago to meet Pinochet and the Chicago boys. “It was very exciting”, Walters told Beckett, “the great experiment in liberal economics”. Alvaro Bardon, Chicago boy and president of the Chilean central bank during the Pinochet regime accounts, “after the 1970s came a new fashion of liberal economics that has increasingly become economic rule. But we started it here much before Margaret Thatcher”.
Unfortunately for most Chileans, Pinochet’s liberal experiment could mean a matter of life-or-death. Even as late as 1985 to disagree with the Chicago boys’ policies was risky business. When they released a new social security plan in which pensions were to be administrated by private investment companies, Tucapel Jiménez, president of Chile’s public employee’s union was sceptical about the scheme. The new pension fund companies offered him big-cash bonuses (a private bank even offered him a management job) in exchange of publicizing his membership. But, although Jiménez had supported Pinochet’s coup, he was also committed to his role as union leader. He rejected the offers and publicly opposed the new scheme. One week later he was found dead with five shots in the head.
During his government, Pinochet introduced structural changes aimed to change Chilean society by large and forever. The regime reduced the budget for the National Health Service, while private health care was encouraged and subsidized. Private pension funds replaced the state pension system. Public schools and universities dramatically lost funding –subjects like sociology or politics were banned for having ‘subversive’ ideas. At the same time, the government gave tax exemptions and subsidies to private universities, most of them owned by business conglomerates of the Chilean right. In 1980, Pinochet epitomized these alterations in the country’s laws and institutions introducing a new Constitution.
Joaquin Lavín, a young Chicago boy who later will be presidential candidate of the Chilean right, wrote a book praising the economic and political transformations made by the general. The book, entitled Chile: A Quiet Revolution, was published by a regime’s publishing house and distributed by Chilean embassies abroad. After celebrating business development throughout the country, Lavín argued in his book that children in Santiago slums were “more creative” than those in higher income zones. “Most of the time a six-year-old child from La Pincoya [a low-income district] must strive for his own food and clothing, and solve his daily needs for himself. This makes him much more creative”
Economically though, despite condescending views about Pinochet and the publicity of the Chicago boys’ experiment, the performance of the regime is not as successful as it has been portrayed. Proponents of the Chilean ‘economic miracle’ use to focus their analysis on the stages of prosperity without taking into account the stages of depression. The strong growths of 1977-79 and 1986-89 are in fact recoveries from previous depression-like economic constrictions. “The magnitude of the 1982 decline”, says Chilean economist Juan Gabriel Valdés, “was key to the strength of the ensuing recovery; moreover, economic growth rates of 7-10% between 1986 and 1989 failed to compensate fully for the plunge in GNP of 17% in 1975 and 14% in 1982”
The average growth rate for the whole period of the Pinochet regime is 2.1%. When he left office in 1989, after 17 years of ‘economic miracle’, real wages were less than in 1973, unemployment was at 28% and nearly half of Chilean population (40%) was under the poverty line according the UN standards, and income inequality was at its worst since 40 years.
After Pinochet was defeated in an election of 1989, democracy was re-established and three successive governments from the centre-left coalition opposed to Pinochet has been in office until today. Ironically, the most sustainable economic growth Chile has experienced came with democracy, where the coalition’s governments reverted many of the most extreme Chicago boy’s policies. One of the first measures of the new administration was a tax increase to finance 2.3 billion public spending programs. In its edition of September 1991, The Economist reported how new President Patricio Alwyn almost doubled the minimum wage from $51 to $94 per month and initiated a scheme to restore the country’s worn out infrastructure -a sewage system for Santiago and improvements in roads and highways. Figures of the Chilean central bank show the economy grew by 10.4% in 1992, the largest growth rate reported in twenty-seven years. Inflation declined from 18.7% to 12.7% in 1992.
The Chilean monetarist experiment didn’t succeed in the way it has been publicized, yet is still not difficult to find advocates inside and outside of Chile. The monetarist claims of politicall neutrality seem to have an ideological flavour quite appealing for business conglomerates and conservative politicians around the world.
Chilean economist Alejandro Foxley observed in 1983 that the rules of sound economic management “are perfectly codified by the international financial community, including the IMF, large private international banks and business groups. They consist of reducing the rate of expansion in money supply, eliminating the fiscal deficit, devaluating domestic currency, deregulating prices and private sector activities, and opening up the economy to free trade. Given such an explicit codification of what constitutes sound policies, the restoration of confidence requires strictly abiding by them. In doing so, the economic policies acquire distinct orthodox flavour”.
Outside Chile, as many of Friedman’s monetarist ideas have become part of the current economic orthodoxy, the most virtuous Chicago boys are now world-class economic authorities. Some of them have returned to their alma-mater to become professors of economy or filling posts inside monetarists universities and think-tanks, others were recruited by the World Bank and the IMF, and others have built-up a career as private consultants and economic advisors. Ex-Pinochet’s finance minister Hernan Büchi along with labour minister Jose Piñera and debt negotiator Hernan Somerville, have been advising Eastern European countries on issues such as privatization, deregulation of the market and liberalization of trade. At least 25 leading economists from the former Soviet Union, reported the Financial Times, had been sought Büchi’s advice on the regime’s economic model. That may suggests the Chicago boy’s silent revolution nowadays is more silent –or louder- than it has ever been.
Por: Diana — 2007-11-23
brilliant!gracias