ECONOMY History of Chile

Part II: The Chicago Boys – The Implementation of Neoliberalism

In this second part of Chile Today’s Chicago Boys series the way this group shaped the economy during the military dictatorship comes to light. How did Pinochet’s reign enable them to implement their policies? What major changes did they make?

Read Part I of the Chicago Boys Series here

The 1973 coup d’état was the culmination of a bubbling political environment in Chile. The country was divided. Many were in favor of Allende’s socialist policies, but a substantial part, especially the upper and upper-middle classes, backed by the US, wanted a change in leadership.

According to ex-CIA agent Jack Devine, who was in Santiago at the time, the US became aware of an imminent military takeover only on September 9. The CIA was not directly responsible, but, just as in Indonesia for example, contributed to destabilize the sociopolitical environment, which set the stage for the coup.

Salvador Allende rejected safe passage out of the country because he correctly figured it was a ploy. After offering safe passage to Allende, Peter Kornbluh writes, Pinochet “is heard to laugh and swear ‘that plane will never land.’” Allende took another way out: he died in government palace La Moneda during a fight with government troops. That same day, the three branches of the military plus the Carabinero police leadership established a new government in the form of a military junta.

Leadership was meant to rotate among the heads of each entity, but Augusto Pinochet recognized first-mover advantage and claimed his branch, the Army, had the right to go first. This way he established his personal power and pushed his fellow coup plotters aside.

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“The Brick” — A Savior for the Chilean Economy?

The Chicago Boys seized this moment and presented the new rulers with a document of economic policies dubbed “El Ladrillo”, or “The Brick,” because it was as heavy.

The document begins with the economists’ analysis of the issues the Chilean economy faced over previous decades. They narrowed the issues down to:

  1. Low growth rate
  2. Exaggerated statism (the belief that the state should control economic and social policies)
  3. Shortage of productive employment
  4. Inflation
  5. Lack of agricultural progress
  6. Extreme poverty conditions in important segments of the population

Through the Brick they wanted to solve all these issues. Specifically, they sought to create “the ability to eradicate extreme poverty” and establish “a high and stable economic development rate over time within a truly democratic regime.”

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The Boys and the Government

For the economists, import substitution – the preferred model of economic development at the time – was ineffective. They felt privileging domestic production was inhibiting the economy, as the country could not access the benefits of the global market. By opening Chile to international trade, the government would encourage economic competition with the aim to benefit the consumer and improve the quality of goods.

To tackle inflation and slow economic growth, the Chicago Boys suggested austerity which would prevent the need to print money and thus bring down inflation. 

They also took aim at the social benefits system at the time, which they saw as too bureaucratic and inefficient. Money, they said, should go directly to programs, not the bureaucracy administering these programs.

In sum, the proposals targeted government involvement, prioritized austerity, and fostered greater engagement in global trade.

The military junta had scarce knowledge of socio-economic politics, but deferred to the ‘experts’ because they came from a prestigious US university and promised to inhibit left politics.

Pinochet’s administration appointed several Chicago Boys as advisers to government ministers and many also served as Central Bank governors, propelling them into the elite of the country.

According to the Constitution, the Central Bank functions autonomously. It should ensure the stability of the peso and regulate national payment services. Still, its board and governor are appointed by the president, exposing its independence as a sham and allowing leaders to get away with decisions that affect everyone but which they don’t need to justify.

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Privatizations

A most influential decision the Chicago Boys took at the time concerns privatizations, especially of key industries like steel, electricity, telecommunications and the pensions system.

Brazilian economist Eliana Cardoso wrote that “the case for privatization is twofold: It enables governments both to unload loss-leading companies and to bolster efforts to rationalize economic relations.” Additionally, “the privatization process was originally designed to return those companies seized by the government to their deprived owners.” 

But in Chile this process lasted throughout the dictatorship and followed different motives at times.

The end of a first privatization wave came in 1980 with major reforms to the pension system. José Piñera, elder brother of President Sebastian Piñera, spearheaded the reform which transformed the government-run former pay-as-you-go system into an individualized system run by private corporations and investment funds.

While the AFP system has created poverty pensions for most workers – not only those earning minimum wage – it generated massive returns for its administrators. According to a report by major pension companies to the financial market watchdog, combined profits from January to September 2019 reached US$ 551 million (CLP$ 418 billion). Today, the pension system is a major catalyst for public outrage and major factor in the social uprising, with the “No+AFP” movement also able to organize mass events.

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Cynically, in 1980 the ministers knew that they were going to leave and began to distribute the state enterprises among the friends of the regime,” economist Andrés Solimano told Radio U Chile. He suggested influential ministers sold industries to friends and relatives to maintain their power, influence and wealth. This also happened in post-Cold War Europe and Russia. State enterprises were snatched up by well-connected persons in the 1990s, giving rise to kleptocracies.

But privatizations were not the most important solution to Chile’s economic problems. Rather, Cardoso writes, privatization was meant to diversify ownership and not concentrate it in similar social circles. Yet the repeated emergence of kleptocracies in differing social contexts exposes the weakness of that argument and some naivete among those who still promote mass privatizations.

Short-term Capitalism

According to the Chicago School, a paralyzed economy should be subjected to drastic changes to get it back up and running.

One method to achieve this, and which Friedman advocated, is focusing on short-term profits. In theory, through prioritizing short-term gains, a business is able to optimize its management and reduce spending, meaning that the company can be more successful and profitable long-term. The Chicago Boys aimed to apply this concept to Chile’s government, running it in the way they thought a business should be run.

To further manifest neoliberalism the Chicago Boys abolished high import taxes that Chile had put in place to encourage domestic production. This led to a large and rapid influx of  foreign corporations and capital.

Suddenly, Chilean consumers could choose to buy from a wide range of foreign-made cars, electrical goods and more, which also came at cheaper prices.

As a side effect, however, the unemployment rate exploded from 5% on average between 1960 and 1973 to 15% in 1974. Chilean businesses struggled to compete with the international companies that produced more efficiently and were often also subsidized.

Under neoliberalism, this pain is part of the short-term side effects resulting from economic restructuring. It would subside as long-term economic stability emerged. The challenge would be to implement these policies without inciting public anger and anxiety.

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A piece in The Guardian spells out the consequences. Neoliberalism “redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency.”

Therefore, the government that aims to function like a business values citizens that spend the most and inject more money into the economy. Conversely, if an individual’s contribution, through labor for example, is deemed inefficient, it will be valued less.

But what works in business, does not necessarily work for a society. Hence, the implementation of these ideas created an environment which benefited the wealthy at the expense of the poor. Some theorists even argue that’s the purpose of neoliberalism. They see its implementation as a counter-revolution to sustain capitalist power relations and therefore the system, which faced severe challenges especially in the 1970s.

“Shock Therapy”

To foster a drastic shift, the government needed a solution to make the public swallow the policies.

In “The Shock Doctrine”, Naomi Klein argues that neoliberal free market policies are purposefully implemented during socioeconomic crisis, subjecting a nation to “shock therapy.” 

In the case of Chile, Klein claims the push toward neoliberal values was possible during the aftermath of the 1973 coup. Following the installation of the junta, the country was extremely divided and this was exacerbated by the fear tactics the military employed and learned from studying Nazi population-control measures like ‘Night and Fog,’ under which the disappearances took place.

Thousands of citizens forcibly disappeared, were tortured and killed, and often smeared in the media afterwards. This hostility created intense unease in society and the trauma the violence created cannot be underestimated. Although hard numbers are difficult to obtain, historian Steve Stern writes that between 100,000 and 400,000 citizens have been tortured. Taking even the lowest figure translates into an inescapable state presence for the population, just as the Chicago Boys engineered a state retreat from the economy.

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As a result of this repression, the public focused less on economic changes, making it easier to push them through. This fusion of violence and economic restructuring lingers as many Chileans still equate neoliberal policies with state repression under Pinochet.

Vlado Mirosevic, a founder of the Liberal Party of Chile, wrote in El Dinamo that, “with the support of the military that repressed, murdered and instilled fear in society, the neoliberals promoted their radical reforms without any social opposition.”

He claims the Chicago Boys used the authoritarian regime to implement their ideas because “this group of economists has little attachment to democracy, ” even though the Chicago Boys explicitly committed in their manifesto to “eradicate extreme poverty.”

Regardless of the Chicago Boys’ intentions, they had their policies implemented effectively. Social instability, fear tactics, and political polarization prevented too much awareness and criticism of the policies that deeply transformed the country and would have been impossible to implement in a democracy.

In Part III of this series, the aftermath the Chicago Boys’ policies and how they affected Chile more deeply comes into focus.  

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