Nova workboard

a blog from young economists at Nova SBE

“El Ladrillo” – When Chicago Boys Took Over

When Augusto Pinochet deposed Salvador Allende, back in 1973, Chile was in a severe situation, facing a lack of foreign-exchange reserves and falling GDP, mainly due to protectionist policies. Successive government deficits were financed by increasing the money supply, which led to surreal inflation levels (in 1973 it reached 150%). Conveniently enough, shortly after the coup that empowered him as Chile´s President, Pinochet was informed about a confidential plan which had been drawn by a group of Chilean economists opposing to Allende´s socialist government. Many of these economists were alumni from the University of Chicago and followers of Milton Friedman´s liberal convictions, and thus were named by the press as “The Chicago Boys”. The so-called “El Ladrillo” was a plan aiming to recover the Chilean economy by following an implementation plan structured into 3 distinct phases.

The first round, which lasted from 1974 to 1983, focused mainly on welcoming foreign investment by eliminating trade barriers (for instance, cutting import tariffs to 10%). This contributed to a boost in competitiveness, as Chilean companies were forced to deal with foreign competitors. Privatizations were promoted (banking system, pensions, state companies), as well as a general deregulation and reduced taxes. Inflation stabilization was, obviously, a priority. Pinochet´s goal was, by all means, to “make Chile not a nation of proletarians, but a nation of entrepreneurs”.

However Sergio De Castro, then Minister of Finance and one of the Chicago Boys, diverged from his “master” (Friedman) opinion and defined a pegged exchange rate system (39 pesos per dollar), in 1979, while also maintaining the copper industry in public hands. The pegged system is pointed as one of origins behind the crisis between 1982 and 1983, (higher inflation than the dollar combined with a bubble sustained by loans in dollars) which also led to a cooling in the neo-liberal fever, verified in the late 70´s, and, thus, to a more moderate approach.

From 1985 on the focus shifted to financial solvency and economic growth, with successful results in unemployment levels. Poverty, on the other hand, was still a massive problem, with almost half of Chile´s population below the poverty line.

The third, and last, round was carried on after the end of the Pinochet regime and aimed to fight poverty. The government was successful in doing so, by decreasing the number of Chileans living below the poverty line from approximately 40% to 20% (60% of this reduction was attained through economic growth stemming from neo-liberal reforms, while 40% are due  to social policies carried out by the government).

Capitalism and even Milton Friedman himself are often accused of having promoted poverty and social inequalities in Chile. It is true that the system advocated by the Chicago Boys may lead to greater inequalities in terms of income distribution, while enhancing economic growth and big capital inflows. However, I prefer to think that the lack of social cohesion verified in Chile was mainly due to the dark side of the dictatorship imposed by Pinochet, with proliferating corruption and no respect for human rights, and not that much about tax designing issues or abolition of trade barriers. This is corroborated by the results Chile ended up obtaining after the departure of Pinochet (1990). Chile has experienced solid economic growth and is the 3rd economy of Latin America. On the other hand, Chile´s Gini Index is considerably high (52% in 2009). This data confirms the traditional belief about libertarian oriented economies (healthy growth, but incentives to inequality).

One important point might be that the connection between Pinochet and Friedman´s ideas is sometimes exaggerated in an unfair way. Friedman stated: “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.” 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.”

This idea has some beauty in it, but, nevertheless, it´s more likely that the end of Pinochet´s regime had to do with mass rebellions and Chile´s strong democratic tradition than with a form of capitalism intimately linked to the deposing regime and the features of inequality it promoted.

Bernardo Branco Gonçalves

771

Advertisements

Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.