NOVEMBER 1995 · VOLUME 16 · NUMBER 11
B O O K N O T E S
Chile's Free-Market Miracle:
A Second Look
By Joseph Collins and John Lear
Oakland, CA: Food First Books, 1995
311 pp., $15.95
Reviewed by Andrew Wheat
CHICAGO NOVELIST NELSON ALGREN is said to have found himself in a skyscraper elevator with the Chilean ambassador earlier this century. As the floors glided by, Algren felt the need to speak but didn't know what to say. At last, he asked the foreign dignitary, "So, what does it feel like to be from such a long, skinny country?"
A literati ascending Chicago's Sears Tower with the Chilean ambassador today might ask, "So, what does it feel like to be part of the Chilean miracle?" Economists, business executives and journalists routinely heap praise on Chile's "economic miracle" without knowing much more about Chile than Algren did.
Chile's Free-Market Miracle: A Second Look by Joseph Collins and John Lear is another fine Food First book that goes beyond the aggregate statistics tabulated by the University of "Chicago Boys" who ran the authoritarian economy of General-For-Life Augusto Pinochet's Chile until 1990. Collins and Lear reveal who benefitted from Chile's "miracle" and at what costs to most Chileans. Going into print around the time that Mexico's heralded economy went into a tailspin, Chile's Free-Market Miracle is a timely reminder of how even near-textbook cases of neo-liberal economic policies occasionally produce booming macro-economic statistics, but at unsustainable costs to the environment and populace.
In 1973, the Chilean military overthrew the democratically elected but politically weak Socialist Popular Unity coalition and assassinated its leader, President Salvador Allende Gossens, and thousands of his followers. In the wake of the blood bath, it took the disciples of free-market University of Chicago professor Milton Friedman almost two years to sell the military regime on their doctrine. But once the military surrendered to the Chicago Boys, they received extraordinary powers to impose their will on Chile's economy. "Starting in 1975, Chile was turned into a laboratory for free marketers," Collins and Lear observe.
The Chicago Boys' policies resemble the big business Contract with America that Republicans in the U.S. House of Representatives are pushing. The key differences are that Pinochet and the Chicago Boys inherited a more interventionist state and, freed from the need to win elections, they were able to be much more ruthless. As Collins and Lear discuss in detail, the Chicago Boys rolled back import duties, deregulated industry, phased out limits on foreign investment, auctioned off government-owned enterprises at a fraction of their value, freed the prices of basic necessities and privatized such government services as parks, prisons, utilities, schools, health care and pensions.
Such were the policies that spawned Chile's "miracle." In 1990, when Patricio Aylwin took office as the first democratically elected president in 17 years, Chile was posting strong economic growth, an export boom and relatively low inflation and high levels of foreign investment. These are the macro-economic indicators that miracle-touters trumpet in Chile and abroad. But they ignore the more troubling undercurrents of Chile's economy.
The authors point out that the Pinochet years were not a long sustained economic boom. The Chicago Boys ran crisis management during two recessions. While the first one, in 1975, arguably struck before their policies could work their magic, the 1982 Chilean recession cannot be so dismissed. Indeed, 1989, when Pinochet allowed voters to go to the polls for the first time, marked the first time in his tenure that per capita economic output reached 1970 levels. Chile's "miracles," the authors conclude, are best understood as "recoveries from depression-like collapses that can be attributed in large part to the free-market model."
A weakness of the book is that it covers the macroeconomic accomplishments of the Pinochet years too briefly. While the authors clearly targeted this accessible book at a general audience, many readers, especially skeptical ones, would welcome a more detailed economic account of what the "miracle" did accomplish -- albeit if only for the rich and powerful.
What Collins and Lear do best is expose the miracle's curse. Consider a few of
the figures that are so often omitted from discussions of Chile's miracle:
* The percentage of Chileans living in poverty doubled from 20 percent to 41 percent between 1970 and 1990;
* The percentage of Chileans living without adequate housing increased from 27 percent to 40 percent from 1972 to 1988;
* In the last decade of Pinochet rule, the richest 10 percent of Chileans increased their share of national income from 37 percent to 47 percent, as the middle class watched its share contract from 23 percent to 18 percent;
* Chile's foreign debt rose from $5 billion to $21 billion, one of the world's highest per capita burdens.
A striking aspect of Chile's free-market experiment is that although Pinochet and the Chicago Boys were willing to shred the social safety net and plunder public assets to extremes that would be unthinkable for a democratically accountable government, they repeatedly directed the big, bad government to intervene on behalf of their constituencies: the repressive "security" forces and the wealthy.
A few examples of this free-market heresy include:
* The government's socialization of $16 billion in bad debt, most of it borrowed by private industry;
* When Pinochet privatized Chile's state-administered health and pension programs, allowing private providers to set service charges, cherry pick the best clients and exclude the rest, the armed forces were kept in the loving arms of special state-run programs;
* Though government spending was slashed, Pinochet's Constitution forbids the military budget from dipping below its inflation-adjusted 1989 level, which exceeded the housing, health and education budgets combined; and
* Military personnel, unlike other government employees, are guaranteed annual cost-of-living salary adjustments;
The ultimate irony was that the Chicago Boys, preached Milton Friedman's "Free To Choose" doctrine under an extremely interventionist, authoritarian regime. "A taunt repeatedly hurled at the Chicago Boys over the many years of iron-fisted rule," the authors observe, "was, 'If consumers have the freedom to choose what to buy or not to buy, why can't they have the same freedom with respect to political alternatives?' " The answer is obvious: Pinochet and the Chicago Boys waged war on the income and security of most Chileans, who threw the bums out the first chance they got.
Another criticism the authors make is that the Chicago Boys were only able to balance the budget by holding one-time fire sales of government assets, thereby mortgaging the country's future. Multinationals were delighted to participate, making out like banditos. "Virtually every dynamic facet of the Chilean economy is now solidly under the influence, if not the outright control, of multinational corporations," Collins and Lear write.
An example of this liquidation was the sale of public companies. These assets were sold to multinationals and to relatives and cronies of the Pinochet regime at about half of their value. Multinationals further subsidized these acquisitions through "debt swaps." In the mid-1980s, corporations could relieve international banks of excess Latin American debt by buying outstanding Chilean loans for 30 percent of their face value and turning around and applying 100 percent of their face value to the purchase of the state enterprises being privatized. Pinochet sold the telephone and utility monopolies without establishing any regulatory oversight. Between 1981 and 1985, electric rates outstripped inflation by 45 percent and telephone rates rose 64 percent faster than inflation.
The Pinochet regime also mined natural resources such as fish and forests. From 1965 to 1973, the state development corporation helped finance lumber processing facilities to spawn competition with the dominant Matte conglomerate. The state also undertook extensive reforestation projects with Monterey pine, an imported species that took 16 to 20 years to mature -- just in time for Pinochet's chain saws. Pinochet sold off state saw mill operations and shredded restrictions on exports of low-value raw logs and wood chips, the latter of which found a ready market in European and Japanese paper mills.
Chile's Matte and Angelini conglomerates (Angelini working with New Zealand-based Carter Holt Harvey) bought 40 percent of Chile's tree plantations and 63 percent of the wood processing industry. Other multinationals acquiring significant shares include Shell, the Saudi Bin Mahfouz group and Japan's Marubeni. As in other sectors, the Chilean government showed little interest in regulating logging on public land. In fact, the government forestry corporation, Conaf, had an incentive to promote clear cutting: it received a dollar for every ton of wood chips multinationals exported.
But perhaps the defining policy of the Chicago Boys' years was their labor legislation. Government regulatory interferences with the free association of workers were dramatically increased in the Labor Code of 1979. This code strengthened the already strong hand of capital in an economy that averaged 20 percent unemployment and dipped to just 18 percent in the miracle's boom years.
In the late 1970s, even some multinationals "were squeamish about investing in a country that restricted worker organization by force rather than law," the authors write, and the AFL-CIO was threatening a boycott of Chilean goods. The new labor code allowed employers to fire workers individually or en masse for "business necessities." It also denied seasonal and temporary workers, who are the bulk of the country's agriculture, forestry and construction workers, the right to organize.
With this legal backing, employers took advantage of the 1982 recession to declare bankruptcy, lay off senior workers and rehire them at entry-level wages. Meanwhile, once the government privatized its pension and health programs, many employers stopped contributing, leaving employees to shoulder the entire burden.
The Chicago Boys' policies were a declaration of total class war that only appear to be a miracle to the ruling elite or to the ignorant. Chile's Free-Market Miracle raises important warning flags as pell-mell privatization is being pursued around the world. It should be required reading for impressionable economic students -- especially those at the University of Chicago -- and for anyone else who might find himself or herself riding a skyscraper elevator with the ambassador from that long skinny country with a "miracle" economy.