By Yufeng Liu
When Dr. Milton Friedman, the winner of 1976 Nobel Prize in economics, was asked, in an interview, whether he thought the Chilean economy had done quite well, he answered:
“Oh, very well. Extremely well. 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.”
The “very well” and “extremely well” thing (by the way, if being in his shoes, I would probably say something like prodigious, fabulous, tremendous, or stupendous to show off a PhD’s excellency in the English language) to which Mr. Friedman referred was the “Miracle of Chile,” a term coined by himself to describe the fiscal achievements brought by his students from the Department of Economics of the University of Chicago, or “Chicago boys,” during the period of Chilean military junta under Augusto Pinochet’s dictatorship. However, Friedman’s words sound especially hypocritical when the world has no choice but to face the recent news of ongoing unrest in today’s Chile. The most beloved child of his Chicago school, the free society and free markets of Chile are now facing the most emergent threat absurdly caused by a slight increase in metro fares.
Someone remarks somewhere, unreliably but interestingly, that all great world-historic events appear with farcical beginnings, if you compare how impressive their outcomes are with how absurd their causes were: the Hong Kong protests and the scum who murdered his GF in Taiwan, the Quebec independence movement and the Russian Tsar’s Prussophile in 1762, and the French Revolution and the gossips about the Marie Atoinette’s private life and her diamond necklace. Started earlier this month, Chile fell into continuous chaos and unrest throughout the country, and the initial cause of the protest was, unsurprisingly absurd, a rise in the metro fares. It is, as many media already recognized, the largest and most serious crisis after the end of Pinochet’s military dictatorship in 1990. Such a change less than one euro in value leads to the falling apart of the prodigious, fabulous, tremendous, and stupendous “very well” and “extremely well” Chilean miracle.
Let’s start with something more personal: on my last French language class, we were asked to make some random sentences in French, and I said, attempting to fully exploit my French language skill, « L’examen économique est terrible. Je déteste la question du capitalisme. Je dois justifier le capitalisme pour la question. » So bad as my French is the myth of “capitalism bringing long-term economic growth and making everyone better off,” which becomes a question in our recent economic midterm requiring us to defend such myth. In this article I don’t aim to be an apologist or a “communist theologian” – termed by Benjamin – of metaphysics, millennialism and grand narratives but instead, the actual focus is what is going on in Chile these days as well as the economic situation of lovely Chile, and how it again proves what Karl Marx underlines about the fundamental flaws of capitalism.
Typical Capitalism, or economic liberalism, cannot be separated from the sacred faith in private ownership, price system, free market and free trade. Specifically focusing on the technical effect of price and market rather than philosophical and moral issues, the modern neoliberal economists distinguished themselves from 18th and 19th century classical economic thinkers. Friedman had drawn a clear continuity from the classical economic liberalism of Adam Smith’s time to his Chicago school and Chicago theory when he amusingly mentioned it was in practice in the 19th century Great Britain and United States, implying an orthodoxy lineage from the economic philosophy of classical liberals to that of Thatcher, Reagan, and Pinochet. Under such philosophy, as an opposite to the nationalization and welfare state doctrine popular among social democratic governments in the West during the postwar decades, privatization, liberalization of economy and deregulation of market would lead to a more perfect allocation of resources and overall economic efficiency, because, as Hayek noted, “prices … embod[ies] more information than we directly have.”
What Pinochet’s junta had done, following such holy doctrine, was simply to liberalize the capital account to accelerate “hot money” capital flows, implement an austerity to combat against the hyperinflation, and privatize the state-owned enterprises that were established in Allende’s years. Concluded by Friedman, such economic policies led to the “Miracle of Chile”, the observed long-term growth in Chilean GDP per capita which outpaced the average growth rate of Latin America and the decreasing proportion of population living below the poverty line, given the background that during and immediately after the Allende’s years Chile was suffered from hyperinflation and economic stagnation. More noticeably, emphasized by Friedman, the economic liberalization reforms ultimately brought Chile an end to Pinochet’s dictatorship and later, democratization:
“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.”
“So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society.”
Let’s do exactly the same thing as what we have to do when we are forced to compose a dissertation: try to find paradoxes and therefore propose problématique. I will ask, first, economically speaking 1) were the outcome and legacy of the liberalization reforms effectively “the best economic success”, and second, politically speaking, 2) has the post-Pinochet Chile transformed into a democratic and free society.
Through the lens of academic economists, that being said, to reasonably ignore the 1500-2000 forced disappearance, tortures and capital punishment applied on the “commies,” the 2% of population going into exile, and the magnificent helicopter tours under the regime implemented liberalization on a disciplinary economic basis, the myth of miracle is pretty vulnerable. The anonymous economist(s) Pseudoerasmus had written a concise piece of refutation, claiming that “there was no ‘Chilean Miracle’.” I conclude his arguments against the myth of miracle in the following points:
- Pinochet’s first austerity programme from 1973 to 1975 was necessary in reversing the hyperinflation, but meanwhile the rise of copper prices had also contributed to the success of austerity – the dramatically low copper prices had also been a factor of the economic failure of Allende.
- However, the initial liberalization of capital account resulted in speculation and real estate bubble in the late 1970s, making Chile face the severe debt crisis in the early 1980s, which, together with the austerity, erased the economic recovery of 1973–82.
- The trend output growth was little changed, which means, the growth observed was during in the 1980s was more about recovery from recession, “closing the output gaps that [Pinochet] he himself created.”
- Chile was close to the neoliberal paradigm and has grown in absolute terms, but “the actually existing Chile is no closer to convergence with the rich countries than it was in 1930,” and the only thing one could confidently say is that Chile has reversed its relative decline.
With the research done by Stephanie Rosenfeld, we have two extra points:
- Chile’s recovery from the debt crisis was different from and more successful than other Latin American countries because private companies, not the government, held most of most of Chile’s foreign debt, meaning “the government was not legally responsible for repayment,” which was “an important source of bargaining power as the government entered negotiations with the IMF over the conditions attached to new loans to help pay back the old.”
- After the wake of debt crisis, the IMF imposed on many other Latin American countries almost the same neoliberal reform package – liberalization of capital account and privatization of state-owned enterprises – as Chile had done before the crisis, which was already proven incapable of preventing Chile “from accumulating one of the highest per capita debts in South America.”
In short, we cannot observe what we expect from a miracle in economic development, a sharp increase in the trend of growth or a unexpected, dramatic economic development, such as the cases of the Asian tigers or the post-war West Germany, during the years of so-called “Chilean Miracle.” It was a recovery from disaster and recession, reversing the bad outcomes of mismanagement and incompetence, something better than completely disappointing drawback but still far away from what worthies celebrating for.
Quod Caesaris Caesari. The answer to the second problem is obviously more about value judgement. The central question to do such judgement is, in terms of economics, given the factual growth rate in GDP per capita, which is arguably but generally equivalent to what we call an economic development, whether the social welfare, individual’s well-being, and prospect of national economy had been improved or not. Pseudoerasmus already gives an economic perspective of evaluating the social impact of the miracle: comparing Chile with its neighbors Argentine and Uruguay, during the 2000s, it is true that Chile has the highest GDP per capita, but meanwhile a set of facts should not be overlooked:
- All the three countries are middle-income countries with GDP per capita being over $20,000, and the gap between Chile and Argentine & Uruguay is relatively small.
- Chileans work longer hours than Argentines: in 2014, the average annual working time of Chileans is approximately 1,990 hours, while that of Argentines is 1,780. Ten years before, the gap of average annual working time is over 500 hours.
- Argentina has also higher productivity levels than Chile: the GDP (PPP) per working hour and the Total Factor Productivity level of Argentine are both considerably higher than Chile’s.
- Uruguay, despite having a lower GDP per capita, has a higher mean income than Chile at every quintile of the income distribution, except the top.
At the cost of civilians’ blood and tear during the period of military junta, Chileans had not received what they deserved, the progress in general welfare – at least the average Chilean population, those who relies on wages, or proletariats in a broader definition. Due to the neoliberal doctrines, Chile also failed to establish a mature social security system. Until the 2008 reform, Chilean social security had still been run by private sector pension funds, under which the majority of population can hardly effectively benefit from it because the average working class is generally not able to regularly contribute a high amount of money, and many of them even cannot achieve the minimum criteria of keeping contributing for 20 years. As the World Bank observed, such a social security system was largely running at the expense of low-income or occasionally unemployed population. After the 2008 reform, however, it still faces lots of problems and discontents, and is unpopular especially among the middle- and low-income population: in the 2010s, most of protests in Chile were caused or partially caused by issues regarding pension, and in the ongoing crisis in Chile recent days, the privatized social security is also an institution many widely protest against.
In regard to the national economy, the legacy of neoliberalism brings Chile more problems too. Chilean economy, until today, heavily relies on copper mining: approximately 1/10 of Chile’s GDP is contributed by a single state-owned copper mining company Corporación Nacional del Cobre de Chile (Codelco), that being said, in times of low copper prices or global economic recession, the Chilean economy would be especially vulnerable, which is the case during the 2008 crisis. Since mid-2018, the international copper prices appear to fall again, also partially contributing to the current discontent within Chilean society. How farcical it is: in a country overwhelmingly relying on the raw-material production of a single state-owned company, there’s no such a public national social security system common in those typical welfare state with many sectors nationalized, but rather academic economists attribute its economic development to privatization advocated by neoliberal apologists!
It is quite a weird phenomenon that, under economically liberal authoritarian regimes, those who are either in authority or lacked conscience would advocate for the economic development as well as social stability, a prerequisite of the former, and see actual social problems those who are suffering a form of “necessary sacrifice,” but when the economic situation doesn’t fit in their great expectation, they would start to deny the fact that everything is not going so well as they expected. What’s more laughable, they are always able to find something to blame on: they blame the nationalization for causing stagnation but actually relies on it; when what they had proposed doesn’t work satisfactorily, they would put their blames on those who point out this cruel but obvious fact, that the whole system is increasingly problematic and needs to be changed. When the death tolls sharply increase in the riots and chaos, one thing is clear: you should deal with the actual troubles, rather than dealing with those who express dissenting opinions and protest against the problems.