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Chile (blue) and average South America (orange) GDP per Capita (1945-2003).
Chile (blue) and average South America (orange) GDP per Capita (1945-2003). Chile, officially the Republic of Chile ( Spanish:) is a country in South America occupying a long and narrow Coastal strip wedged between the South America is a Continent of the Americas, situated entirely in the Western Hemisphere and mostly in the Southern Hemisphere, with a

The "Miracle of Chile" is a term coined by Milton Friedman to describe the Augusto Pinochet's support for liberal economic reforms in Chile carried out by the "Chicago Boys. Milton Friedman (July 31 1912 November 16 2006 was an American Nobel Laureate Economist and Public intellectual. Augusto José Ramón Pinochet Ugarte (November Economic liberalism is the Economic component of Classical liberalism. Chile, officially the Republic of Chile ( Spanish:) is a country in South America occupying a long and narrow Coastal strip wedged between the The Chicago Boys (c 1970s were a group of about 25 young Chilean economists who trained at the University of Chicago under Milton Friedman " Implemented economic model had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. These market-oriented economic policies were continued and strengthened after Pinochet stepped down. [1] At the time, Milton Friedman stated that the Chilean experiment was "comparable to the economic miracle of post-war Germany. Milton Friedman (July 31 1912 November 16 2006 was an American Nobel Laureate Economist and Public intellectual. " [2] Some commentators have disputed this interpretation, arguing that the implementation of free market reforms was followed by massive rises in poverty and unemployment. A free market is a Market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers [3][4][5]

Contents

Background

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. An economist is an expert in the Social science of Economics. The Chicago Boys (c 1970s were a group of about 25 young Chilean economists who trained at the University of Chicago under Milton Friedman Deregulation, a term which gained widespread currency in the period 1970-2000 can be seen as a process by which governments remove reduce or simplify Restrictions on Business Privatization is the incidence or process of transferring ownership of business from the Public sector (government to the Private sector (business Among others, they privatized the pension system [6], state industries, and banks, and reduced taxes. A pension is a steady income given to a person upon Retirement, typically in the form of a guaranteed annuity. For other uses of this term see Industry (disambiguation An industry (from Latin industrius, "diligent industrious" A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Pinochet's stated aim was to "make Chile not a nation of proletarians, but a nation of entrepreneurs. The proletariat (from Latin la ''proles'' "offspring" is a term used to identify a lower Social class; a member of such a class is proletarian An entrepreneur is a person who has possession over a company enterprise, or Venture, and assumes significant accountability for the inherent risks and the outcome [7]

Inflation under Allende

In 1972, during the second full year of Allende's government (and prior to the coup that brought Pinochet to power), inflation in Chile was running at 150%. Augusto José Ramón Pinochet Ugarte (November [8] A range of factors led to increased inflation in Chile, such as fixed prices on essential goods, a multiple exchange rate and US opposition to the elected government (their stated goal was to "make the [Chilean] economy scream")[9].

In 1973, due in part to a sustained US campaign against the elected government [10], the Chilean population were critically short on many food and consumer items. Chilean economist Jacobo Schatan writes, "It was clear that the scarcity had been manipulated for political reasons, to create a climate favourable to both the coup and, subsequently, the total change of the economic system. "[11]

'El Ladrillo'

Immediately following the Chilean coup of 1973, Augusto Pinochet was made aware of a confidential economic plan known as El Ladrillo [12] (literally, "the brick"), so called because the report was "as thick as a brick". The Chilean coup d'état of 1973 is a landmark in the History of Chile and the Russo-American Cold War. Augusto José Ramón Pinochet Ugarte (November The plan had been quietly prepared in May 1973 [13] 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. Salvador Isabelino Allende Gossens (June 26 1908 – September 11 1973 was President of Chile from November 1970 until his death during the coup d'état of The Chicago Boys (c 1970s were a group of about 25 young Chilean economists who trained at the University of Chicago under Milton Friedman The University of Chicago is a Private university located principally in the Hyde Park neighborhood 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 [12], and contained the backbone of what would later on become the Chilean neoliberal economic policy. Originally coined by its critics and opponents " neoliberalism " is a label referring to the recent reemergence of Economic liberalism or Classical liberalism [13]

Nature of the reforms

Pinochet's government privatized almost every nationalized industry, from mines to factories to the pension system. Privatization is the incidence or process of transferring ownership of business from the Public sector (government to the Private sector (business The Pension System -Spanish Sistema Previsional - refers to old-age disability and survivor pensions for workers in Chile 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 [14]. Foreign direct investment ( FDI) in its classic definition is defined as a company from one country making a physical investment into building a factory in another country A trade barrier is a general term that describes any government policy or regulation that restricts International trade. In Economics, an import is any good (eg a Commodity) or Service brought into one country from another country in a legitimate fashion The main copper company, Codelco, remained in government hands due the nationalization of copper completed by Salvador Allende, however, private companies were allowed to explore and develop new mines. CODELCO ( Co rporación Nacional del Co bre de Chile or in English the National Copper Corporation of Chile is the Chilean State owned copper mining The nationalization of the Chilean copper industry commonly described as the ''Chilenización del cobre'' or Chileanisation of copper was the progressive process by which the Salvador Isabelino Allende Gossens (June 26 1908 – September 11 1973 was President of Chile from November 1970 until his death during the coup d'état of Copper resources were, however, declared "inalienable" by the 1980 Constitution. The current Political Constitution of the Republic of Chile, approved by Chilean voters in a tightly controlled Plebiscite on September 11 1980

The reforms effectively wiped out the entrenched right wing industrial oligarchy, which depended on strict trade protections and subsidies in order to maintain their economic (and therefore political) power. Only one of the free market recommendations of El Ladrillo was not implemented: a floating exchange rate. Floating rate may also refer to a Floating interest rate applied to a Loan or other lending product 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. A fixed exchange rate, sometimes called a pegged exchange rate, is a type of Exchange rate regime wherein a Currency 's value is matched to the value of In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos inflation outpaced the U. In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time 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. A recession is a contraction phase of the Business cycle. The U

Chile as a model economy

Supporters of Friedman's liberal economic views argue that subsequent events in Chile have vindicated his free market philosophy. They claim that Chile's economy is "noticeably stronger and more advanced than those of other Latin American nations". Opponents use Chile as an example of the failure of Friedmanite policies. [15][16][17]

Immediate effects of the reforms

"First Miracle" vs. "Second Miracle"

Some analysts 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 (see below), and the "Second Miracle" (1985-89), which occurred after the devaluation initiated an export-led boom which brought an end to the depression. Originally coined by its critics and opponents " neoliberalism " is a label referring to the recent reemergence of Economic liberalism or Classical liberalism

Early 1980s recession

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 [2], when market-oriented economic policies were additionally strengthened. [18]

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 occurs when a person is available to work and currently seeking work but the person is without work. 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 directed blame towards De Castro and the fixed exchange rate, claiming that it was contrary to the free market model.

Post-recession period

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. [19]

Performance on economic and social indicators

Annual growth

From the beginning of the reforms of the Chicago Boys in 1975 through 1986, 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. The Chicago Boys (c 1970s were a group of about 25 young Chilean economists who trained at the University of Chicago under Milton Friedman 8% to 14%. Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. [1] Since then the economy has averaged 7-percent annual growth, raising per capita income for Chile's 16-million citizens to more than $10,000 and creating a thriving middle class. Per capita is a Latin phrase meaning for each head with Per meaning 'through' or 'by' This growth stagnated in 1997, with GDP rising by only a small margin between 1997 and 2002. [20]

Amartya Sen, in his book Hunger and Public Action (1989) examines the performance of Chile in various economic and social indicators. Amartya Kumar Sen CH (Hon (অমর্ত্য কুমার সেন Ômorto Kumar Shen) (born 3 November 1933) is an Indian 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).

Infant mortality and life expectancy

Infant mortality rate in Chile fell from 82. Infant mortality is defined as the number of deaths of Infants (one year of age or younger per 1000 live births 2 per 1000 to 19. 5 per 1000 from 1970-85. Life expectancy at birth increased from 64. Life expectancy is the average number of years of life remaining at a given age 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

Social inequality and poverty rates

Chilean economist Jacobo Schatan found that "in 1996 the average per capita income of the top 5% was about 100 times larger than the average for the poorest 5%. "[21][22]

Today, while some sources state that only 14% percent of the population lives below the poverty line (compared with 31 percent in Brazil and 62 percent in Bolivia)[23], others contend that these estimates are inaccurate, and as many as 39% of the Chilean population live in actual poverty[24]. The poverty threshold, or poverty line, is the minimum level of Income deemed necessary to achieve an adequate Standard of living in a given country |utc_offset = -2 to -4 |time_zone_DST = BRST |utc_offset_DST = -2 to -5 |cctld The Republic of Bolivia (República de Bolivia) named after Simón Bolívar, is a Landlocked country in central South America. Jacobo Schatan has criticised the methodology used to asses poverty in Chile, writing that "the real figures for poverty would be between double and more than double the official figures. "[25]

Wages and employment

By 1983, real salaries dropped 14% what they had been in 1970. [26]. 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, a pattern that is reflected in consumption trends. [27] The Pinochet regime also saw unemployment rise to record levels that were only alleviated after a democratic government took over in 1991. [28]

Milton Friedman and Chilean economic policy

Milton Friedman advocated releasing price controls and replacing undeveloped countries' command-based economies with laissez-faire free market capitalism, even if it meant using quick reforms that Jeffrey Sachs would refer to as "shock therapy. Jeffrey David Sachs (born November 5, 1954, in Detroit Michigan) is an American Economist and Director of the Earth Institute In Economics, shock therapy refers to the sudden release of price and currency controls withdrawal of state subsidies and immediate trade liberalization within a country usually " In the case of Chile, these reforms where instituted in the wake of a violent coup, and Friedman's name has been strongly linked to the coup in Chile by critics such as exiled Chilean Foreign Affairs Minister Orlando Letelier[29].

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 [30]. 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". [30]

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. " [2] 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. Adam Smith ( baptised 16 June 1723 – 17 July 1790) was a Scottish moral philosopher and a pioneer of Political economy. 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. A military junta is a government ruled by a committee of military leaders " [3] 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. " [4] 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. Chile has a dynamic market-oriented economy characterized by a high level of foreign trade 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.

Some people have criticized Friedman for assisting the Pinochet government with economic reforms, pointing to the brutal tactics used by that regime. Friedman has defended 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. Talk People's Republic of China) PEOPLE'S REPUBLIC OF CHINA ARTICLE GUIDELINES See also Kingdom of Yugoslavia, Socialist Federal Republic of Yugoslavia, Federal Republic of Yugoslavia Yugoslavia ( Serbo-Croatian [5]

Long term results

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 [31]. The Communist Party of China ( CPC) ( also known as the Chinese Communist Party ( CCP) is the founding and ruling political party of the Boris Nikolayevich Yeltsin () (1 February 1931 23 April 2007 was the first President of the Russian Federation, serving from 1991 to 1999 Eastern Europe is a general term that refers to the Geopolitical region encompassing the easternmost part of the European continent.

Current Chilean economy

See also: Economy of Chile

According to the 2007 Index of Economic Freedom, Chile is the world's 11th "most free" economy today. Chile has a dynamic market-oriented economy characterized by a high level of foreign trade Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. The Index of Economic Freedom is a series of 10 economic measurements created by the Wall Street Journal and The Heritage Foundation to measure the degree of Economic freedom 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. [6]

Bibliography

Additional information

See also

External links

Articles

Criticism

References

  1. ^ Thomas M. Dollars & Sense is a Magazine dedicated to providing Left-wing perspectives on Economics. Leonard. Encyclopedia Of The Developing World. Routledge. ISBN 1579583881 p. 322
  2. ^ 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
  3. ^ Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. 'Development and Society', 30(2) pp. 57-77
  4. ^ Bidstrup, Scott (2002) Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"
  5. ^ Klein, N. (2007) Shock Doctrine: The Rise of Disaster Capitalism
  6. ^ RIX, Sara E., Ph.D.Chile's Experience With The Privatization Of Social Security. , AARP Public Policy Institute, August 1995
  7. ^ BBC NEWS | Americas | Pinochet's rule: Repression and economic success
  8. ^ BBC NEWS | Americas | Pinochet's rule: Repression and economic success
  9. ^ p. 60 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp. 57-77
  10. ^ United States Senate Report (1975) "Covert Action in Chile, 1963-1973" U. S. Government Printing Office Washington. D. C.
  11. ^ p. 60 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp. 57-77
  12. ^ a b (Spanish)El Ladrillo: Bases de la Política Económica del Gobierno Militar Chileno. Santiago de Chile: june 2002, ISBN 956-7015-07-4
  13. ^ a b >(Spanish) VILLAROEL, Gilberto. La herencia de los "Chicago boys". Santiago do Chile: BBC Mundo.com - América Latina, 10/12/2006.
  14. ^ Fact|date=November 2007
  15. ^ Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. 'Development and Society', 30(2) pp. 57-77
  16. ^ Bidstrup, Scott (2002) Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"
  17. ^ Klein, N. (2007) Shock Doctrine: The Rise of Disaster Capitalism
  18. ^ Thomas M. Leonard. Encyclopedia Of The Developing World. Routledge. ISBN 1579583881 p. 322
  19. ^ Chile: Successes and Failures in Poverty Eradication. World Bank
  20. ^ Cypher, James. (2004) Is Chile a neoliberal success? Dollars & Sense, September-October 2004
  21. ^ p. 60 of Schatan, J. (2001) "Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. " Development and Society, 30(2) pp. 57-77
  22. ^ p. 144-148 of Schatan, J. (1998) "El Saqueo de America Latina. " LOM Ediciones, Santiago de Chile.
  23. ^ Country Comparison > Population below poverty line
  24. ^ UDI acusa al Gobierno de falsear cifras de pobreza en Chile
  25. ^ p. 76 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp. 57-77
  26. ^ Elton Rayack, Not so Free to Choose, p. 69
  27. ^ Hudson, Rex (ed. ) (1994) Chile: A Country Study, Chapter 2: The Society and Its Environment, Federal Research Division (U. S. ), Library of Congress
  28. ^ Hudson, Rex (ed. ) (1994) Chile: A Country Study, Chapter 2: The Society and Its Environment, Federal Research Division (U. S. ), Library of Congress
  29. ^ Letelier, Orlando (1976) "The Chicago Boys In Chile", The Nation, 28th August
  30. ^ 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.
  31. ^ SCHAEFER, Standard. Chile's Failed Economic Laboratory: an Interview with Michael Hudson. CounterPunch, October 20, 2003
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