Pinochet’s “Chicago Boys”

1. Economic Miracle or Social Misery? Pinochet’s “Chicago Boys” Major Eric D. Trismen 4 March 2009 NS 3041

2. Overview • Overview • The Early Years • The “Chile Project” • Early Economic Policies • The Allende Years • The Vuskovic Plan • Vuskovic Plan Results • Pinochet Grabs Power • El Ladrillo • Economic Downturn and Recovery” • Social Impacts • Long-term Consequences • Conclusion • Questions

3. The Early Years • Albion Patterson and the IIAA • Paraguay • Need for economists “above politics” • 1953 Transfer to Chile • Director of AID • Human Capital • Importance of education Valdés, Juan Gabriel (1995), Pinochet's Economists: The Chicago School of Economics in Chile, Cambridge, Cambridge University Press.

4. The “Chile Project” • Failures and success at the Chilean Universities • Universidad de Chile • “Leftwing” economists • 1954: Universidad Católica • Economics, not agriculture • Balance • 1956: The “Chile Project” • 26 Economists were trained • Permanent relationship with the University of Chicago Valdés, Juan Gabriel (1995), Pinochet's Economists: The Chicago School of Economics in Chile, Cambridge, Cambridge University Press.

5. Early Economic Policies • Traditional government control of the economy and the failure of ISI… • Moderate growth, fiscal and external imbalances, chronic inflation and persistent inequality • President Ibáñez (1952-58) • Inflation: annual rate of increase in consumer prices increased from 18% to 86% • President Allesandri (1958-64) • Emphasis is short-term stabilization measures • President Frei (1964-1970) • Limited success Ffrench-Davis, Ricardo (2002), Economic Reforms in Chile: From Dictatorship to Democracy, Ann Arbor, The University of Michigan Press.

6. The Allende Years • First Popularly Elected Marxist president • Goal: Socialism via democratic means • Five pillars • Pedro Vuskovic • Business Degree: Universidad de Chile • 3 Nov 1970: Minister of Economic Affairs Friedland, Jonathan, “World Business: How It Works---The Master Plan: Two decades ago, Chile gave the World a privatization model That many would one day follow,” The Wall Street Journal, 2 Oct 1995.

7. The Vuskovic Plan • The Vuskovic Plan • Keynesian economics • Redistribution of revenue • Increased salaries and public expenditures • Price controls and money creation • Increased buying power and consumption would activate the idle capacity of the Chilean productive apparatus and generate prosperity… Solimano, Andres (2008), ”Three Decades of Neo-liberal Economics in Chile: Achievements, Failures and Dilemmas.”

8. Vuskovic Plan Results • First year success • 12% industrial growth • 8.6% increase in GDP • Major decrease in unemployment (3.8%) • Decrease in inflation (from 34.9% to 22.1%) • Results proved to be unsustainable • Copper prices plummeted • Productivity and investment decreased Hoogvelt, Anke (1997). Globalisation and the postcolonial world, London: Macmillan. Nove, Alec (1986). Socialism, Economics and Development, London: Allen & Unwin. Friedland, Jonathan, “World Business: How It Works---The Master Plan: Two decades ago, Chile gave the World a privatization model That many would one day follow,” The Wall Street Journal, 2 Oct 1995.

9. Vuskovic Plan Results (cont’d) • Economic chaos • Exports fell 24%, imports climbed 26% and inflation skyrocketed…cost of consumer goods increased 120% • 500+% inflation rate in Sep 1973 • U.S. economic embargo • GDP: 9% in 1971 to –4.2% in Sep 1973 • Black market on basic consumables: inflation and price controls Hoogvelt, Anke (1997). Globalisation and the postcolonial world, London: Macmillan. Nove, Alec (1986). Socialism, Economics and Development, London: Allen & Unwin. Friedland, Jonathan, “World Business: How It Works---The Master Plan: Two decades ago, Chile gave the World a privatization model That many would one day follow,” The Wall Street Journal, 2 Oct 1995.

10. Vuskovic Plan Results (cont’d) • Vuskovic replaced in June 1972, but the damage was done… • Allende defaults on debts to international creditors • General political and social disorder • Disgruntled landowners, middle class, and the Catholic Church • This helped to pave the way for the military coup: 11 Sep 1973

11. Pinochet Grabs Power • Military control of the economy? NO! • May 1973: El Ladrillois secretly prepared • Espoused free-market, neoliberal and fiscally conservative policies • Stark contrast to Allende’s expansionist  and centrally-planned economic programs

12. El Ladrillo in Action • The principle reforms included: • Abolition of price controls • Import liberalization • Financial market deregulation • Reduction of the public sector • The return of expropriated property and businesses • Privatization of traditional public enterprises • Suppression of labor unions Ffrench-Davis, Ricardo (2002), Economic Reforms in Chile: From Dictatorship to Democracy, Ann Arbor, The University of Michigan Press.

13. El Ladrillo (cont’d) • Import duties were reduced from 92% to 10% in 1977 • All import restrictions were eliminated by 1976… • Foreign investors allowed unrestricted import of capital • “Shock treatment”—government spending reduced from 40% of GDP in ‘73 to 26% in ‘79…government employment slashed in half But… Valdés, Juan Gabriel (1995), Pinochet's Economists: The Chicago School of Economics in Chile, Cambridge, Cambridge University Press.

14. Economic Downturn… …success was only partially achieved • 1980: Inflation still at 35% • Ups and downs in economic growth • 8% growth rates in GDP in 1977 and 1979 • 15% decline in 1975 • Average GDP growth for ‘74-’81: barely 2.6% • 1982 debt crisis hits Chile the hardest • Copper prices plummeted • GDP fell by 15% • Unemployment hit 30% Valdés, Juan Gabriel (1995), Pinochet's Economists: The Chicago School of Economics in Chile, Cambridge, Cambridge University Press.

15. ..and Economic Recovery • Pinochet: New Minister of Economics • Introduced a floating exchange rate • Reinstated restrictions on the movement of capital • Introduced banking legislation • Reduced corporate tax rates • Inflation dropped to 10% per year • GDP growth of 5.9% from 1984-90 • Diversified exports: Fruits, veggies and wine

16. Social Impact • Model economy…but at a human cost • Wages decreased 8% between 1970-80 • Family allowances in 1989 were 28% of what they were in 1970 • The budgets for education, health and housing dropped by over 20% • Increased military spending further limited social spending (120% increase between ‘74 and ‘79) • High unemployment/worsening income distribution • Brutality of the dictatorship Sznajder, M. (1996). "Dilemmas of economic and political modernisation in Chile: A jaguar that wants to be a puma", Third World Quarterly. Petras, J., & Vieux, S. (1990). "The Chilean 'Economic Miracle"': An Empirical Critique", Critical Sociology

17. Long Term Consequences • Neoliberal success story of the region • ARG, MEX, PER, BOL and COL followed example • Low inflation • Good credit • Steady growth • Diversified exports • All Chileans benefited to some extent • “Pioneering country, major success story” • Democratic leaders in 1990 maintained neoliberal policies, with an emphasis to social programs • The “Chilean Miracle”—was it worth the cost? Chasteen, John (2006). Born in Blood and Fire, Chael Hill, University of North Carolina Press Beckerr, Gary. “Latin America Owes a Lot to Its ‘Chicago Boys,’” Business Week, 9 June 1997.

18. Conclusion • Overview • The Early Years • The “Chile Project” • Early Economic Policies • The Allende Years • The Vuskovic Plan • Vuskovic Plan Results • Pinochet Grabs Power • El Ladrillo • Economic Downturn and Recovery” • Social Impacts • Long-term Consequences • Conclusion • Questions

19. Questions?