ECONOMY History of Chile

Part III: The Chicago Boys — Chile’s Economy and the Uprising

The final part of Chile Today’s Chicago Boys series illuminates the ongoing effects of Pinochet’s economic policies. Chile has been called Latin America’s “success story” — but is it really? And do the Chicago Boys’ ideas still have an outsized, or even negative, influence?

Following the implementation of the Chicago Boys’ policies, Chile experienced both economic and sociopolitical uncertainty. The policies did not all work as planned and much of society suffered violent repression coming from the dictatorship.

This situation linked neoliberalism and dictatorship. And the drastic shift in both spheres also translated into sustained suffering for many Chileans.

But inflation dropped from 508% in 1973 to 9.5% in 1981. Additionally, while GDP contracted at 13% in 1975, only two years later it grew by 10%.

But this explosive growth would collapse with the onset of the Latin American debt crisis.

Economic History Post-Coup

Deep economic crisis befell Chile in 1982. GDP contracted 14.3% and unemployment shot to 23.7%. 

Economists said many factors, including high interest rates and pegging the Chilean peso to the dollar, contributed to this recession. 

Minister of Finance between 1976-1982, Sergio de Castro, favored the exchange rate pegged to the dollar, implementing the policy in June 1979 at 39 pesos. He saw this as a measure to curb runaway inflation.

A currency peg, or fixed exchange rate, is used to stabilize the exchange rate between countries and ensure long-term security and predictability between the currencies. This practice benefits imports, as large companies do not need to worry about dramatic shifts in exchange rates, so they can keep costs low. 

By implementing the currency peg, de Castro, a Chicago Boy, diverged from Friedman, who favored a flexible exchange rate which changes frequently because it obeys demand and supply

Only in September 1999, the Chilean peso was detached and floated independent of the dollar.

After the 1982 recession and the policy changes it forced, including massive nationalizations and offloading bank’s debt onto taxpayers, however, sustained and high growth kicked in, making Chile’s one of the fastest growing economies in the world.

From 1986 to 2005, annual per capita growth averaged 4.8%, compared to a global average of 1.4%. Thus, many countries in the region still take Chile’s economic policies as role models to be followed to create growth.

Chile’s 2019 economic freedom score is 75.4, ranking 18th in the world and the only Latin American country in the Top 30. The score is calculated by influential US-based liberal-conservative think tank The Heritage Foundation, whose sponsors include wealthy individuals and corporationsw. Economic freedom, according to the Index of Economic Freedom website, “is the fundamental right of every human to control his or her own labor and property.” In a completely economically free country, individuals would take whatever economic decisions they desire, a belief strongly advocated by Milton Friedman.

But while the Chicago Boys’ policies have achieved Friedman’s vision of economic freedom on the surface at least, the sociopolitical environment remains less than successful. 

Indebtedness in Chile: It’s All About Switching the “Bicycle”

Economic Inequality

Chile operates under a 45-hour work week. According to the 2018 OECD ranking of average annual hours worked, Chile came in 6th place globally with an average of 1941 working hours a year.

Over the last few months, Chileans have pushed to reduce the working week to 40 hours. The campaign cites countries such as Germany and Sweden as examples that Chile should follow. These two countries have less intensive work weeks, but still maintain a high level of productivity.

Studies have confirmed the link between longer working hours and higher levels of stress and poor mental health symptoms. Although the bill has taken important hurdles, it remains under debate and implementation is uncertain.

In addition to long working hours, the majority of Chileans earn below the average monthly income. According to the national statistics institute, in 2018, the average monthly income across Chile was CLP $573,964 (USD $738). However, 70% of employees earn less than or equal this amount.

These statistics suggest that amount of work hours does not necessarily equate to rising income. This, among other things, is a great source of public outrage. Only few employees enjoy the economic fruits of labor, but even most of the high earners are subject to productivity targets and threats of instant dismissal, turning Friedman’s and the Chicago Boys’ freedom into utopianism.

Luigi Zingales, a finance professor at the University of Chicago’s Booth School of Business, told daily La Tercerca that only a small elite group benefits from economic freedom in Chile.

Zingales said, “the country’s income is managed by a select minority which is not giving many opportunities to the rest. If you work hard, it means that you should succeed in Chile. But it’s not like that, and that is frustrating.

Dismissing a link between economic and political inequality, he added, “I’m not against people who become rich as a result of their success, on the contrary I want more people to become rich. I don’t see a problem with the existence of many billionaires, as long as it does not also translate to the accumulation of political power.”

But economic inequality has long been a trigger for social movements which campaign for greater equality, and it has certainly fueled the current crisis.

Public Outrage and Social Movements

Chile’s protest and social movements have gained global notoriety. Massive student protests particularly have been organized frequently for nearly 20 years now. According to researchers such as Peter Cummings “this activism grows out of a generational shift.”

Cummings wrote that “in the eyes of the students, Chile did not have a lack of wealth and resources, just a lack of fair distribution.” Students, witnessing but remaining excluded from the economic prosperity around them, united under the fight against inequality.

The shift from public outrage to social movements and protests occurred, Cummings wrote, because “first, unlike their predecessors, students of the post-Pinochet generation did not fear that protest action would destabilize Chilean democracy. Second, ‘la generación sin miedo’ (the fearless generation) became a collective identity that united students and motivated them to take protest action.”

But despite a long history of protest, public outrage has never been more articulated than in the wave that emerged over the last month. Students calling on fellow citizens to evade metro fares many see now as abusive kicked off a mass movement against daily inequality. 

After public pressure pushed the government toward the edge, the Piñera administration announced on November 15 a referendum, scheduled for April, on potentially drafting a new constitution. The current one was written during Pinochet’s dictatorship. Citizens older than 20 years will vote if a new constitution should be written and who would write it.

President Piñera has also sought to appease the public by establishing a guaranteed minimum income of CLP $350,000 (USD $450) a month for workers between 18 and 65 years of age. 

The government now also seeks to improve the privatized pension system by increasing certain allowances, and it froze electricity bills.

A “Success Story”?

Despite the public outrage, Chile’s image as Latin America’s “success story” still stands. Many experts have defended ‘the model’ following recent protests. Some economists even celebrate the neoliberal policies more openly than before, citing them as the reason for the economic boom.

Ian Vásquez, director of the neoliberal think tank Cato Institute’s Center for Global Liberty and Prosperity, wrote that claims to neoliberal policies as root cause of Chile’s inequality “are difficult to square with the facts.” Citing indexes which reflect the country’s progress, “Chile’s improvement on the whole range of indicators of well-being—e.g., maternal mortality, access to proper sanitation, etc.—is impressive.”

Vásquez also cited a Harvard Study, which “found that from 1990 to 2015, the income of the poorest 10% of Chileans increased by 439%, while that of the top 10% went up by only 208%.” These statistics show that inequality in Chile has been falling for 25 years.

Notably, Vásquez highlights Chile’s Human Development Index (HDI) as a demonstration of how the Chilean economy has contributed to wellbeing. The HDI, according to the UN Development Programme, was created to illustrate that “people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.” It combines measurements of the average national income, level of education and life expectancy.

Chile’s HDI, even when adjusted for inequality, is the highest in Latin America and is ranked 44th internationally. These indexes cannot be dismissed out of hand and although economic inequality is an issue, Chile is succeeding in many other aspects.

Similarly, The Economist maintains that “Despite its flaws, Chile is a success story.” It cites consistently low inflation, falling poverty rates and reasonably high income per person as proof. 

The flaws in the system The Economist identifies are not stemming from policies or the system but from an elite that has manipulated the system for its own benefit. Education would serve as case in point: “Access to university has expanded, but students graduate with high debts, only to discover that the best jobs go to people with family connections.” The sense of unfairness many Chileans feel is not based on illusions but the reality they confront every day. 

The Economist does not link these and other issues like frequent price fixing to neoliberal policies, but to governmental incompetence in implementing and regulating them. The Chilean model, according to The Economist, is not broken but needs some fixing.

Slowing Growth

Ironically, the Chicago Boys’ policies were meant to spur growth, but the public outrage in reaction to the still high inequality is now doing the opposite.

On November 1, the Metropolitan Region said that reconstruction just in the capital will cost around CLP $12.6 billion (US$ 16 million). Considering the protests that ensued after that date, the cost should be much higher now.

In the Central Bank’s economic expectations survey, published on November 12, projected growth expectations for the remainder of 2019 were lowered to 1.9%. For next year, the bank expects growth of 2.3%, down from at least 3%. So the protests will continue to affect the economy for some time.

Negative results also reflect in falling exports. According to the Department of Trade Information, foreign sales dropped 37% in October year-on-year. Avocado exports fell 44%, bottled wine 42%, and salmon 30%.

The value of the peso also fell. The value of the dollar began to increase rapidly from October 22, culminating in a record high of CLP$ 801.83 to US$ 1 on November 15. Although the value fell to around CLP $770 to the dollar, it remains high and impacts export profits and foreign financing. And the central bank predicts another rise. 

How to Move Forward?

Looking at all these factors, just blaming the Chicago Boys looks simplistic, while they also can’t escape criticism. The way their policies were implemented during the dictatorship, maintained, and even saved although they caused hardship, contributed to public anger. Just focusing on economic growth won’t cut it when the numbers add up on paper but not in the purse of many citizens.

With Chile in its present state of turmoil and uncertainty, what can be done?

Noam Chomsky said “the lingering effects of the Chicago Boys’ ultraneoliberal economic disaster have to be replaced by at least social democratic programs if not more.”

The situation in Chile makes deep change necessary and inevitable. Neoliberal thought has served as the foundation for the Chilean economy for over 45 years. Nevertheless, the government now faces the task of solving the issues that have been boiling as a result of economic management for decades.


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