Miracle or Misery? The accomplishments of the Chicago Boys in Chile 1960-1990 Written by: J. Garst College ID: S1267108 Supervisor: Dr. L.J. Touwen University: Leiden University Contents List of Tables ............................................................................................................................................. 3 List of Figures ........................................................................................................................................... 4 1 – Introduction ...................................................................................................................................... 5 1.1 Theoretical background .......................................................................................................................... 6 1.2 Historiographical overview ................................................................................................................... 8 1.3 Sources and method................................................................................................................................ 12 1.4 Layout .............................................................................................................................................................. 12 2 – A Time of Turbulence ................................................................................................................. 14 2.1 Growth, copper, and inequality ........................................................................................................ 14 2.2 Chile’s presidential era 1925-73 ...................................................................................................... 19 2.3 La revolución en libertad 1964-70 .................................................................................................. 20 2.4 La vía chilena al socialismo 1970-73 ............................................................................................ 22 3 – Bringing Chicago to Chile ........................................................................................................ 26 3.1 The Chicago School of Economics ................................................................................................... 26 3.2 The Quest for an Alternate Modernity .......................................................................................... 31 3.3 The Coup and its Aftermath ................................................................................................................ 36 4 – Restructuring Chile ..................................................................................................................... 39 4.1 Growth ............................................................................................................................................................. 39 4.2 Inflation .......................................................................................................................................................... 51 4.3 Trade ................................................................................................................................................................ 58 4.4 Privatization ................................................................................................................................................. 66 5 – Conclusion ........................................................................................................................................ 72 Epilogue - The Concertación Governments 1990-2010 ................................................. 75 Literature ................................................................................................................................................... 77 Articles ..................................................................................................................................................................... 77 Monographies ...................................................................................................................................................... 78 Internet Sources ................................................................................................................................................ 79 2 List of Tables • Table 2.1: Industrial Origin of Gross Domestic Product in Chile 16 • Table 2.2: Distribution of Income in Chile 18 • Table 4.1: GDP per capita in Chile 42 • Table 4.2: Growth GDP per capita in Latin American Countries / World Average 43 • Table 4.3: Total foreign loans and total public foreign loans 44 • Table 4.4: Growth GDP per capita in Chile 46 • Table 4.5: Distribution of income in Chile 49 • Table 4.6: GINI Coefficient of Latin American Countries 50 • Table 4.7: Monetary Base Chile in January of Each Year 53 • Table 4.8: Real Exchange Rate Chile 54 • Table 4.9: Annual GDP Deflator of Latin American Countries / World Average 56 • Table 4.10: Trade - Annual Averages of Latin American Countries (1974-81) 60 • Table 4.11: Trade - Annual Averages of Latin American Countries (1982-89) 62 • Table 4.12: Trade - Annual Averages of Latin American Countries (1974-89) 63 3 List of Figures • Figure 2.1: Annual Growth GDP per Capita in Chile 15 • Figure 4.1: Gross Domestic Product of Chile 41 • Figure 4.2: Gross Domestic Product of Chile 45 • Figure 4.3: Share of GDP per Sector in Chile 46 • Figure 4.4: Total Output per Sector in Chile 47 • Figure 4.5: Total Output of Agriculture in Chile 48 • Figure 4.6: GDP Deflator of Latin American Countries 51 • Figure 4.7: Nominal Exchange Rate 52 • Figure 4.8: Nominal Exchange Rate 55 • Figure 4.9: Annual GDP Deflator Chile and World Average 57 • Figure 4.10: Annual GDP Deflator Chile and World Average 57 • Figure 4.11: Imports, Exports and the Balance of Payments of Chile 59 • Figure 4.12: Imports, Exports and the Balance of Payments of Chile 61 • Figure 4.13: Imports per Sector in Chile 63 • Figure 4.14: Exports per Sector in Chile 64 • Figure 4.15: Manufactured Imports and Exports in Chile as a Share of GDP 65 • Figure 4.16: Total Factor Productivity in Chile 70 4 1 – Introduction “What few citizens knew, and what officials could not admit, was that the “Chilean miracle” was partly an illusion. Built on unrealistic economic assumptions and a fragile edifice of debt, high interest rates, and speculation, it was highly susceptible to world market downturns and excessively dependent on the fortunes of a few conglomerates whose intricate financial activities were virtually unsupervised.”1 More than forty years have passed since the Pinochet Regime in Chile started monetarist reforms of the kind that are now being termed ‘neoliberal’. The group of economists that led these reforms were called ‘the Chicago Boys’, because many of them had studied at the University of Chicago. The neoliberalism of the Chicago School of Economics inspired them to pursue political careers during the high tide of economic structuralism. The 1973 coup opened to them a window of opportunity to decisively change the structure of the Chilean economy. The Pinochet Regime became a sixteen year long socio-economic experiment, starting several years before Margaret Thatcher and Ronald Reagan could crown these ideas a new political standard. The effects of the reforms of these Chicago-schooled economists have given rise to great controversy, which exists up to this day. Although the Regime came to an end after a majority of the Chilean people voted ‘no’ in a plebiscite on Pinochet in 1989, the basic neoliberal structures of society were kept in place. The Chilean economy has performed remarkably well since the 1990s, so well, that it is fashionable to talk about a ‘Chilean miracle’. This economic boom has been ascribed to the reforms by the Chicago economists during the Pinochet Era. Their policies are said to have ‘modernized’ the Chilean economy in such a way that would make an enduring prosperity possible in the first place. Other authors have emphasized the shaky foundations on which the reforms were built and point to the vulnerability regarding price fluctuations, the high unemployment number and the recession of 1982. According to them, the Pinochet period resembled a period of stagnation, only in the 1990s to be followed by significant economic growth. The purpose of this thesis is specifically to answer the question: ‘what have been the outcomes of the policy measures taken by the Chicago economists during the Pinochet Era?’ To answer this question, I focus on four criteria: economic growth, inflation, export stimulation and privatization. These criteria are based on the goals that the Chicago economists set out to accomplish in Chile. Shifts or alterations that I may find, are put into perspective by drawing a comparison with the period before the Pinochet Era: this broadens the period under research from about 1960 to 1990. 1 P. Constable and A. Valenzuela, A Nation of Enemies: Chile under Pinochet (New York 1991) 193-194. 5 1.1 Theoretical background Throughout the twentieth century a dividing line can be drawn between the supporters of a free market and those that defend intervention by a state. This issue has gained such weight, that it apparently compels us to choose sides: somehow, it is hard to approach this subject neutrally. The neoliberal ideology of the Chicago economists comprised the rebirth of a point of view that had been in demise since the late nineteenth century on and had, since the Great Depression, virtually lost its control over economic policy.