History of Chile NATIONAL

Part I: The Chicago Boys — How They Became Influential

Chile is still experiencing an enormous social uprising. One of the biggest topics that have emerged in its wake is social inequality. Chile Today takes a look at a group of economists known as the “Chicago Boys,” who are considered the architects of Chile’s current economy — and crisis.  

The “Chicago Boys” are a group of Chilean economists who studied at the University of Chicago just as neoliberal thought started to emerge. 

Many blame this group for large parts of Chile’s current socioeconomic malaise, most significantly the inequality.

According to the World Bank, Chile ranked in 2017 among the top 30 countries with the worst GINI index, at 0.46. The GINI index reflects wealth distribution and 0 represents complete economic equality while 1 means total economic inequality.

Regionally, Chile is the 11th most unequal of 20 Latin American countries. Countries with a worse GINI index include Venezuela, Guatemala, Mexico, Costa Rica, and Brazil. Still, the numbers apparently don’t reflect the life experiences of many Chileans who face constant price hikes and a sense of injustice when they see elites being let off the hook after committing massive theft. 

The notion that the Chicago Boys are to blame this economic and related social inequality stems from many members of the group having worked as economic advisers to Augusto Pinochet, encouraging him to implement their neoliberal policies. These policies have been legally consolidated through the 1980 Constitution, which has been modified but largely accepted by all governments that followed.

Hence, even if Chicago Boys inventions like privatized healthcare and pensions aren’t specified in the Constitution, it still sets the parameters to change them.

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Chileans to Chicago

The Chicago Boys participated in a university exchange program which sought to spread U.S.-backed social schools of thought, especially in Economics.

In 1956 the University of Chicago and the Pontifical Catholic University of Chile (UC) signed an agreement to allow Chilean economics students to study in Chicago. From 1946 to 1961, the university’s Economics department was headed by Theodore W. Schultz, who in 1979 also won the Economics Nobel Prize (awarded by a private financial institution). Arnold Harberger said in an interview in 2000 that Schultz “was interested in economic growth and in the role, in particular, of technical assistance in bringing it about.”

The US foreign aid program’s head, Albion Patterson, encouraged Schultz around 1953 to take his ideas to Chile specifically.

Schultz’s ideas were of great interest to the U.S. government which, according to economists Bruce Caldwell and Leonidas Montes, “was in reaction to the success of this intellectual program and its theoretical framework, plus the strong influence of Marxist ideas within certain academic circles, that the ‘Chile Project,’ the cradle of the ‘Chicago Boys,’ was begun.”

In foreign policy, neoliberal thought was seen as ideological bulwark against Soviet communism, so despite their reservations against the state, neoliberals benefited strongly from state support.

At that time, Carlos Ibáñez del Campo served a second term (1952–1958) as Chile’s president. Although he ran as an Independent, many socialists supported him because he repealed a law that had banned the Communist party. 

As Ibañez del Campo’s term ended, economic growth in Chile had slowed and the US government wanted to see how Schultz’s ideas could be put into practice and aid struggling countries. And so Patterson approached Chile’s premier universities, UC and University of Chile, to offer the exchange program.

UC’s Economics faculty wrote five years ago that “the agreement was meant to be signed with the University of Chile, but Dean Luis Escobar Cerda refused to do so for internal policy reasons.”

Therefore, in Harberger’s words, “the Catholic University was very eager in accepting [Patterson’s agreement],” because it would elevate the level of education in its Economics department.

As a result, several Chilean students could study Economics in Chicago under Milton Friedman and Arnold Harberger.

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Neoliberal Thought

Both economists became known for their libertarian views and unrepentant defense of what they called ‘free-market capitalism.’ Their Chilean students adopted and ingested these ideas developed within the Chicago School.

Neoliberalism, according to Friedman, is an adaptation of 19th century liberalism, inspired by laissez-faire economics and based on free-market principles. Friedman, however, also deviates from laissez-faire economics.

Broadly, proponents of laissez-faire belief an economy works best with as little government involvement as possible. This position is a reinterpretation of English philosopher Adam Smith’s argument that individuals innately wish to benefit themselves. Hence, neoliberals think the government should let individuals pursue their self-interest, which then would lead to balanced markets and a blossoming economy.

Friedman focuses especially on the individual and the consequences of self-interest for freedom and growth.

He also argued that economic freedom influences political power.Viewed as a means to the end of political freedom, economic arrangements are essential because of the effect which they have on the concentration or the deconcentration of power,” he wrote. Through economic choices, the population of a country can influence the political environment. If people do not economically invest in a political idea, it has no power.

Parting from pure laissez-faire, Friedman sees government as necessary. Government should regulate and impose rules so the market doesn’t spiral out of control, or is being abandoned. The market is used as an enabling tool for the individual to achieve political freedom. A free market, Friedman said, “provides for cooperation without coercion” so a country can best achieve a flourishing economy without political repression. 

Neoliberalism, he said, enables “the kind of economic organization that provides economic freedom directly, namely, organization of economic activities through a largely free market and private enterprise, in short through competitive capitalism, also a necessary though not a sufficient condition for political freedom.”

Economic freedom and political freedom are inevitably tied together. The person who is economically free is thus politically free. This idea drove the Chicago Boys’ economic reforms in Chile.

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Allende’s Reforms

Salvador Allende became president in November 1970. He sought to implement a more socialist system, including the nationalization of some industries, notably banking and copper mining. 

But first Allende deepened a land reform which began under the previous president, Eduardo Frei, and was controversial among large estate (hacienda) owners. The government bought farmland and wanted to redistribute it to the poor to eliminate a large class divide.

Yet, the reform backfired. Peasants became angry as the policy didn’t give them ownership of the land as they had wished, but replaced the previous private owners with state owners. Additionally, Allende’s opponents criticized the reform for infringing on the rights of landowners. 

José Piñera, elder brother of President Sebastián Piñera and a minister from 1978 to 1981, called the reform an “unfair exercise of political power” that “would have destroyed wealth” if the military junta hadn’t stepped in.

He claimed that the reform was based on the mistaken assumption that “the relationship between people and wealth is arbitrary enough that the state can, at will, assign owners to a property without altering the value of its wealth.”

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As one of the Chicago Boys, José Piñera advocated for the free market and neoliberal policies, and on that basis spearheaded the creation of Chile’s privatized pension system (AFP). 

Besides agrarian reform, Allende completed the nationalization of the copper industry. This move created Codelco, the state-owned mining company, which is the world’s largest copper producer. Highly profitable, it earned almost CLP$1.5 trillion (US$2 billion) and represented 15% of Chilean exports in 2018.

US Schemes to Exploit the Class Divide

Chile’s three main copper mines, Chuquicamata, El Salvador, and El Teniente, were owned by US corporations and Allende pledged to nationalize these mines.

For the US government this represented a breach of international business relationships, which also extended to sectors like telecommunications. Geopolitically, it feared the spread of communism and identified socialism as a system with a high probability of turning into communism. Foreign policy hawks like Henry Kissinger feared Chile’s brand of socialism could succeed and provide an example for other countries, which would diminish global US influence.

The Nixon administration then got even more involved in Chile than previous administrations and encouraged a shift away from socialist society. Several Chilean entities, like the Christian Democratic Party and the military, had received US funding since the 1950s, and Nixon extended these efforts to media conglomerates. The Edwards family, for example, is a member of Chile’s traditional oligarchy. Apart from financial interests that were threatened under Allende, it also owns El Mercurio newspaper, which was kept afloat by CIA funding in the 1970s and became a main distributor of propaganda.

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The Role of the Media in Chilean Society

According to declassified documents, the CIA supported multiple groups of coup plotters in 1970 and provided weapons to one of them “to strengthen and encourage civilian and military opponents [and prevent Allende] from assuming power.” 

But the attempts failed, and the CIA ceased aiding plotters. Instead, it ramped up foreign pressure. That same year, Nixon demanded to “make the [Chilean] economy scream,” and assigned Kissinger to oversee “the covert efforts to keep Allende from being inaugurated.”

Failing that effort, another declassified document reveals how, following Allende’s inauguration, the US orchestrated economic warfare to push international banks to refuse loans to the Allende government, isolating and destabilizing Chile’s economy. This tactic, apart from nurturing the military and key media, helped foster an environment conducive to military takeover.

The economic turmoil, coupled with middle-class anxiety about socialism, resulted in a business strike in the summer of 1973. Shopowners, truck drivers, and other economic agents that normally distribute goods stopped working, further aggravating discontent. Although many citizens organized into associations to collectively distribute food, anger accumulated and in hindsight a social explosion seemed inevitable.

This explosion materialized on September 11, 1973.

Enter the Chicago Boys

In the run-up to the coup, the Chicago Boys started writing an economic proposal for the next government. They were concerned about both economic instability and Allende’s policies which ran against what they learned.

The group had no knowledge of who’d emerge as leader, but they saw their program as common sense and wanted to offer it to whichever government would follow Allende.

Once the dust settled, and Pinochet won an intra-junta power struggle, the blank page the coup created had to be filled. The dictator and the libertarians shared a disdain for socialism, the former out of opportunism, the latter out of conviction. And both sought to re-engineer society to prevent collectivist ideas taking hold ever again.

This gave the Chicago Boys the opportunity to present their ideas.

Part II of this series focuses on the implementation of neoliberal policies.

 

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