Miracle of Chile
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Removing merger tag. Result was keep [[Miracle of Chile]] separate, see [[Talk:Economy of Chile#MERGE with "Miracle"?|talk]].
[[Image:Chile GDP.jpg|thumb|right|320px|[[Chile]] (blue) and average [[South America]] (orange) [[GDP]] per Capita (1945-2003).]]
The "'''Miracle of Chile'''" is a term coined by [[Milton Friedman]] to describe the [[Augusto Pinochet]]'s support for [[Economic liberalism|liberal economic]] reforms in [[Chile]] carried out by the "[[Chicago Boys]]." Implemented economic model had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. These market-oriented economic policies were continued and strengthened after Pinochet stepped down.<ref>Thomas M. Leonard. ''Encyclopedia Of The Developing World.'' Routledge. ISBN 1579583881 p. 322</ref> At the time, [[Milton Friedman]] stated that the Chilean experiment was "comparable to the economic miracle of post-war Germany." <ref name=DEPRESSION>[http://multinationalmonitor.org/hyper/issues/1983/04/bello.html BELLO, Walden Bello and KELLY, John. ''The IMF and Chile A Parting of Ways?'' International Finance, The Multinational Monitor, April 1983, Volume 4, Number 4]</ref> Some commentators have disputed this interpretation, arguing that the implementation of [[free market]] reforms was followed by massive rises in poverty and unemployment.<ref>Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. 'Development and Society', 30(2) pp.57-77</ref><ref>[http://www.bidstrup.com/economics.htm Bidstrup, Scott (2002) ''Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"'']</ref><ref>Klein, N. (2007) Shock Doctrine: The Rise of Disaster Capitalism</ref>
==Background==
Pinochet, under the advice of a group of Chilean [[economists]] who had mostly studied at the University of Chicago Department of Economics (the [[Chicago Boys]]), implemented a set of economic reforms that included [[deregulation]] and [[privatization]]. Among others, they privatized the [[pension]] system <ref name=PENSION> [http://assets.aarp.org/rgcenter/econ/ib23_chile.pdf RIX, Sara E., Ph.D.''Chile's Experience With The Privatization Of Social Security.'' , AARP Public Policy Institute, August 1995]</ref>, state [[industry|industries]], and [[bank]]s, and reduced [[tax]]es. Pinochet's stated aim was to "''make Chile not a nation of [[proletariat|proletarians]], but a nation of [[entrepreneur]]s''.<ref>[http://news.bbc.co.uk/2/hi/americas/63821.stm BBC NEWS | Americas | Pinochet's rule: Repression and economic success<!-- Bot generated title -->]</ref>
=== Inflation under Allende ===
In 1972, during the second full year of Allende's government (and prior to the coup that brought [[Augusto Pinochet|Pinochet]] to power), inflation in Chile was running at 150%.<ref>[http://news.bbc.co.uk/2/hi/americas/63821.stm BBC NEWS | Americas | Pinochet's rule: Repression and economic success<!-- Bot generated title -->]</ref> A range of factors led to increased inflation in Chile, such as fixed prices on essential goods, a multiple exchange rate and US opposition to the elected government (their stated goal was to "make the [Chilean] economy scream")<ref>p.60 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>.
In 1973, due in part to a sustained US campaign against the elected government <ref>United States Senate Report (1975) "Covert Action in Chile, 1963-1973" ''U.S. Government Printing Office'' Washington. D.C.</ref>, the Chilean population were critically short on many food and consumer items. Chilean economist Jacobo Schatan writes, "''It was clear that the scarcity had been manipulated for political reasons, to create a climate favourable to both the coup and, subsequently, the total change of the economic system.''"<ref>p.60 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>
==='El Ladrillo'===
Immediately following the [[Chilean coup of 1973]], [[Augusto Pinochet|Augusto Pinochet]] was made aware of a confidential economic plan known as ''El Ladrillo'' <ref name=LADRILLO>{{es}}[http://www.cepchile.cl/dms/lang_1/cat_794_inicio.html ''El Ladrillo: Bases de la Política Económica del Gobierno Militar Chileno.'' Santiago de Chile: june 2002, ISBN 956-7015-07-4]</ref> (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 <ref name=HERENCIA>>{{es}} [http://news.bbc.co.uk/hi/spanish/latin_america/newsid_3192000/3192145.stm VILLAROEL, Gilberto. ''La herencia de los "Chicago boys"''. Santiago do Chile: BBC Mundo.com - América Latina, 10/12/2006.]</ref> by economists who opposed [[Salvador Allende]]'s government, with the help from a group of economists which were called by the press, at that time, the [[Chicago Boys]], because they were predominantly alumni of the [[University of Chicago]]. This document, ''El Ladrillo'', was made available to the offices of the Chilean Armed Forces Generals on the very day after the coup, September 12th, 1973 <ref name=LADRILLO>{{es}}[http://www.cepchile.cl/dms/lang_1/cat_794_inicio.html ''El Ladrillo: Bases de la Política Económica del Gobierno Militar Chileno.'' Santiago de Chile: june 2002, ISBN 956-7015-07-4]</ref>, and contained the backbone of what would later on become the Chilean [[neoliberal]] economic policy.<ref name=HERENCIA>>{{es}} [http://news.bbc.co.uk/hi/spanish/latin_america/newsid_3192000/3192145.stm VILLAROEL, Gilberto. ''La herencia de los "Chicago boys"''. Santiago do Chile: BBC Mundo.com - América Latina, 10/12/2006.]</ref>
===Nature of the reforms===
Pinochet's government [[privatize|privatized]] almost every nationalized industry, from mines to factories to the [[Chile pension system|pension system]]. He welcomed [[foreign investment]] and eliminated protectionist [[trade barrier|trade barriers]], forcing Chilean businesses to compete with [[import|imports]] on an equal footing, or else go out of business <ref>Fact|date=November 2007</ref>. The main copper company, [[Codelco]], remained in government hands due the [[Chilean nationalization of copper|nationalization of copper]] completed by [[Salvador Allende]], however, private companies were allowed to explore and develop new mines. Copper resources were, however, declared "inalienable" by the [[Constitution of Chile|1980 Constitution]].
The reforms effectively wiped out the entrenched right wing industrial oligarchy{{Fact|date=November 2007}}, which depended on strict trade protections and subsidies in order to maintain their economic (and therefore political) power. Only one of the free market recommendations of ''El Ladrillo'' was not implemented: a [[floating exchange rate]]. Minister of Finance [[Sergio de Castro]], departing from Friedman's well-known support for flexible exchange rates, decided on a [[fixed exchange rate]] of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant [[inflation]] to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos [[inflation]] outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe [[recession]] that lasted more than two years.
===Chile as a model economy===
Supporters of Friedman's liberal economic views argue that subsequent events in Chile have vindicated his free market philosophy. They claim that Chile's economy is "noticeably stronger and more advanced than those of other Latin American nations"{{Fact|date=January 2008}}. Opponents use Chile as an example of the failure of Friedmanite policies.<ref>Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. 'Development and Society', 30(2) pp.57-77</ref><ref>[http://www.bidstrup.com/economics.htm Bidstrup, Scott (2002) ''Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"'']</ref><ref>Klein, N. (2007) Shock Doctrine: The Rise of Disaster Capitalism</ref>
==Immediate effects of the reforms==
===Early 1980s recession===
Chile had a strong economic recession in 1982-1983, its second in eight years (in 1975, when GDP fell by 13 per cent, industrial production plunged by 27 per cent, and unemployment shot up to 20 per cent). Real economic output declined by 19% just in 1982 and 1983 and most of the recovery and subsequent growth took place after Pinochet left office <ref name=DEPRESSION>[http://multinationalmonitor.org/hyper/issues/1983/04/bello.html BELLO, Walden Bello and KELLY, John. ''The IMF and Chile A Parting of Ways?'' International Finance, The Multinational Monitor, April 1983, Volume 4, Number 4]</ref>, when market-oriented economic policies were additionally strengthened.<ref>Thomas M. Leonard. ''Encyclopedia Of The Developing World.'' Routledge. ISBN 1579583881 p. 322</ref>
Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. However, this devaluation was done so incompetently and belatedly—and at the exact moment that the United States, Chile's major creditor and trading partner, was going into a major recession—that it led to a fall in Chile's GDP of 20% during 1982 and 1983, resulting in widespread [[unemployment]] and the collapse of the financial sector. Unemployment spiked to 30 percent. Around 50 percent of the population fell below the poverty line. Extreme poverty affected 30 percent of the population. In his Memoirs ("Two Lucky People", 1998), Milton Friedman directed blame towards De Castro and the fixed exchange rate, claiming that it was contrary to the free market model.
===Post-recession period===
Following the 1983 implosion, the Pinochet dictatorship did not abandon the free-market reforms of ''El Ladrillo''. Though the recession had huge social and political costs to the junta, during 1983 and 1984, the government maintained a free-market, hands-off approach to the economy, refusing to reinstate tariffs or other trade barriers, and allowing major Chilean industries to fail, rather than propping them up artificially by means of subsidies or other preferential treatment.{{Fact|date=February 2008}}
Starting in 1985, the focus of economic policies shifted toward financial solvency and economic growth. Exports grew rapidly and unemployment went down. On the poverty front, however, results were less successful. People living below the poverty line still represented 45 percent of the population in 1987.<ref name=DEPRESSION2>[http://info.worldbank.org/etools/docs/reducingpoverty/case/24/summary/Chile%20Summary.pdf ''Chile: Successes and Failures in Poverty Eradication.'' World Bank]</ref><noinclude></noinclude>
== Performance on economic and social indicators ==
=== Annual growth ===
From the beginning of the reforms of the [[Chicago Boys]] in 1975 through 1986, there was almost no growth in per-capita GDP, a decline in per capita consumption (unclear, but around 15%) and an (overall) increase in unemployment from 4.8% to 14%. Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. [http://www-hoover.stanford.edu/publications/digest/974/bckr3.html] Since then the economy has averaged 7-percent annual growth, but stagnated in 1997, with GDP rising by only a small margin between 1997 and 2002.<ref>Cypher, James. (2004) Is Chile a neoliberal success? ''Dollars & Sense'', September-October 2004</ref>
[[Amartya Sen]], in his book [[Hunger and Public Action]] (1989) examines the performance of Chile in various economic and social indicators. He finds, from a survey of the literature on the field:
{{Bquote | The so-called "monetarist experiment" which lasted until 1982 in its pure form, has been the object of much controversy, but few have claimed it to be a success...The most conspicuous feature of the post 1973 period is that of considerable instability...no firm and consistent upward trend (to say the least).}}
=== Infant mortality and life expectancy ===
[[Infant mortality rate]] in Chile fell from 82.2 per 1000 to 19.5 per 1000 from 1970-85. [[Life expectancy]] at birth increased from 64.8 years to 68.3 years in the same period. However, life expectancy at age 1 remained virtually constant at 68.6 years in the same period. He finds that
{{Bquote | favourable infant mortality trends in Chile have not been reflective of corresponding general improvement in living conditions }}
He also notes that Chile had a very long tradition of public action for the improvement of living standards, which were largely maintained:
{{Bquote | ... there is little disagreement as to what caused the observed improvement in the area of child health and nutrition...It would be hard to attribute the impressively steady decline in infant mortality ... (despite several major economic recessions) ... to anything else than the maintenance of extensive public support measures}}
=== Social inequality and poverty rates ===
Chilean economist Jacobo Schatan found that "''in 1996 the average per capita income of the top 5% was about 100 times larger than the average for the poorest 5%.''"<ref>p.60 of Schatan, J. (2001) "Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism." ''Development and Society'', 30(2) pp.57-77</ref><ref>p.144-148 of Schatan, J. (1998) "El Saqueo de America Latina." ''LOM Ediciones,'' Santiago de Chile.</ref>
Today, while some sources state that only 14% percent of the population lives below the [[poverty line]] (compared with 31 percent in [[Brazil]] and 62 percent in [[Bolivia]])<ref name=POVERTY>[http://indexmundi.com/g/r.aspx?c=ci&v=69 ''Country Comparison > Population below poverty line'']</ref>, others contend that these estimates are inaccurate, and as many as 39% of the Chilean population live in actual poverty<ref>[http://espanol.upi.com/Titulares/2007/10/21/udi_acusa_al_gobierno_de_falsear_cifras_de_pobreza_en_chile/5047/ UDI acusa al Gobierno de falsear cifras de pobreza en Chile]</ref>. Jacobo Schatan has criticised the methodology used to asses poverty in Chile, writing that "''the real figures for poverty would be between double and more than double the official figures''."<ref>p.76 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>
=== Wages and employment ===
By 1983, real salaries dropped 14% what they had been in 1970. <ref>Elton Rayack, Not so Free to Choose, p. 69</ref>. Median salaries have fared even worse, declining by 30% over the same period, signalling a transfer of wealth from the poor and middle class to the rich, a pattern that is reflected in consumption trends.<ref>Hudson, Rex (ed.) (1994) Chile: A Country Study, ''Chapter 2: The Society and Its Environment'', Federal Research Division (U.S.), Library of Congress</ref> The Pinochet regime also saw unemployment rise to record levels that were only alleviated after a democratic government took over in 1991.<ref>Hudson, Rex (ed.) (1994) Chile: A Country Study, ''Chapter 2: The Society and Its Environment'', Federal Research Division (U.S.), Library of Congress</ref>
==Milton Friedman and Chilean economic policy==
Milton Friedman advocated releasing price controls and replacing undeveloped countries' command-based economies with laissez-faire free market capitalism, even if it meant using quick reforms that [[Jeffrey Sachs]] would refer to as "[[shock therapy (economics)|shock therapy]]." In the case of Chile, these reforms where instituted in the wake of a violent coup, and Friedman's name has been strongly linked to the coup in Chile by critics such as exiled Chilean Foreign Affairs Minister Orlando Letelier<ref>Letelier, Orlando (1976) "The Chicago Boys In Chile", ''The Nation'', 28th August</ref>.
Friedman did not personally support Pinochet, though he had given some lectures advocating free market economic policies in La Universidad Católica de Chile and met with Pinochet for 45 minutes, where the general "indicated very little indeed about his own or the government's feeling" and the president asked Friedman to write him a letter laying out what he thought Chile’s economic policies should be; Friedman did that <ref name=REASON>[http://www.reason.com/news/show/118494.html DOHERTY, Brian. ''The Life and Times of Milton Friedman: Remembering the 20th century's most influential libertarian.'' Reason Magazine, March 2007 Print Edition] Friedman's 21 April 1975 letter may be found in Milton and Rose Friedman's ''Two Lucky People'' and in an [http://www.cb.cl/newcbcl/Estudios/DetalleE.asp?Id=1297 online Chilean newspaper].</ref>. The New York Times columnist Anthony Lewis declared in 1975 that "the Chilean junta’s economic policy is based on the ideas of Milton Friedman…and his Chicago School". <ref name=REASON>[http://www.reason.com/news/show/118494.html DOHERTY, Brian. ''The Life and Times of Milton Friedman: Remembering the 20th century's most influential libertarian.'' Reason Magazine, March 2007 Print Edition]</ref>
Commenting on his statement about the "Miracle", Friedman says that "the emphasis of that talk was that free markets would undermine political centralization and political control." [http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ufd_reformliberty_full.html] Friedman claimed that "The real miracle in Chile was not that those economic reforms worked so well, 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." [http://www.druglibrary.org/special/friedman/socialist.htm] He says 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." [http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ufd_reformliberty_full.html] The term ''Miracle of Chile'' is also commonly used to refer to the claimed favorable economic results of economic liberalization in that economy. Detractors claim that the [[Economy of Chile|Chilean economy]] went into serious decline between 1973 and 1983. Supporters point out that this economic downturn was not confined to Chile but was a Latin American phenomenon; Chile being the first nation in the region to recover.
Some people have criticized Friedman for assisting the Pinochet government with economic reforms, pointing to the brutal tactics used by that regime. Friedman has defended himself against such criticisms, stating that he had given nearly similar speeches and promoted the same policies in [[People's Republic of China|China]] and [[Yugoslavia]], and pointing out that his visit was unrelated to the political side of the regime and that during his visit to Chile he even stated that following his economic liberalization advice would help bring political freedom and the downfall of the regime.
[http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/int_miltonfriedman.html#10]
==Long term results==
The experience of Chile in the 1970s and 1980s, and especially the export of the Chilean pension model by former Labor Minister Jose Pinera, has influenced the policies of the [[Communist Party of China]] and has been invoked as a model by economic reformers in other countries, such as [[Boris Yeltsin]] in Russia and almost all [[Eastern Europe]]an post-Communist societies <ref name=HUDSON>[http://www.counterpunch.org/schaefer10202003.html SCHAEFER, Standard. ''Chile's Failed Economic Laboratory: an Interview with Michael Hudson.'' CounterPunch, October 20, 2003]</ref>.
===Current Chilean economy===
{{seealso|Economy of Chile}}
According to the [[2007]] [[Index of Economic Freedom]], Chile is the world's 11th "most free" economy today. Chile is ranked 3rd out of 29 countries in the Americas and has been a "regional leader" for over a decade. Chile had GDP growth of 6.1% in 2004, and has averaged a 4.0% annual increase in GDP over the last five years for which data is available. [http://www.heritage.org/research/features/index/country.cfm?id=Chile]
==Bibliography==
* {{es}} [http://www.cepchile.cl/dms/lang_1/cat_794_inicio.html ''El Ladrillo: Bases de la Política Económica del Gobierno Militar Chileno.'' Santiago de Chile: june 2002, ISBN 956-7015-07-4]
* [http://www.bidstrup.com/economics.htm BIDSTRUP, Scott. ''Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"'', Revised 10/15/02]
* COLLIER, Simon and Sater, William F. ''A History of Chile, 1808-2002'', New York and London, Cambridge University Press, 2004.
* CONSTABLE, Pamela and Valenzuela, Arturo. ''A Nation of Enemies: Chile Under Pinochet.'' New York, W. W. Norton & Company, 1993.
* [http://www.rrojasdatabank.org/econom~1.htm KANGAS, Steve ''The Chicago boys and the Chilean 'economic miracle.'']
* PALEY, Julia. ''Marketing Democracy: Power and Social Movements in Post-Dictatorship Chile''. University of California Press, 2001
* [http://www.counterpunch.org/schaefer10202003.html SCHAEFER, Standard. ''Chile's Failed Economic Laboratory: an Interview with Michael Hudson.'' CounterPunch, October 20, 2003]
* SCHATAN, Jacobo. ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism.'' Development and Society, 30(2) pp.57-77
* [http://www1.tau.ac.il/eial/index.php?option=com_content&task=view&id=77&Itemid=114 WINN, Peter (editor).''Victims of the Chilean Miracle: Workers and Neoliberalism in the Pinochet Era, 1973-2002''. Durham, NC: Duke University Press, 2004.]
* [http://www.fas.org/irp/ops/policy/church-chile.htm UNITED STATES SENATE, ''Covert Action in Chile, 1963-1973'', U.S. Government Printing Office Washington. D.C. 1975.]
==Additional information==
===See also===
* [[Chicago Boys]]
* [[Chile pension system]]
* [[Economic history of Chile]]
* [[Education in Chile]]
* [[Chilean nationalization of copper]]
* [[Salvador Allende]]
* [[Chilean coup of 1973]]
* [[Joaquín Lavín]]
* [[Orlando Letelier]]
===External links===
* [http://www.urban.org/UploadedPDF/410841_Chile.pdf Unemployment Protection in Chile, Wayne Vroman, August 2003]
* [http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ufd_reformliberty_full.html Jeffery Sachs interviews various economists about the "Miracle of Chile"] from PBS.org
* [http://dollarsandsense.org/archives/2004/0904cypher.html Is Chile a Neoliberal Success?] by economist Jim Cypher in [[Dollars & Sense]] magazine
* [http://www.uchile.cl/uchile.portal?_nfpb=true&_pageLabel=conUrl&url=5989 Discurso de Incorporación a la Sociedad Chilena de Historia y Geografía del prof. Luis A. Riveros (Incorporation Discourse to Chilean Society of History by Professor Luis Riveros)]made by a Chilean economist and former principal of [[Universidad de Chile (university)|Universidad de Chile]] about Chilean economic history
===Articles===
*[http://www.jimrogers.com/content/stories/articles/venezuela.html The Millennium Adventure - From Top to Bottom - 6 Oct 2001]
*[http://assets.aarp.org/rgcenter/econ/ib23_chile.pdf RIX, Sara E., Ph.D.''Chile's Experience With The Privatization Of Social Security.'' , AARP Public Policy Institute, August 1995]
===Criticism===
* [http://www.bidstrup.com/economics.htm BIDSTRUP, Scott. ''Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"'', Revised 10/15/02]
* [http://www.huppi.com/kangaroo/L-chichile.htm Chile: the Laboratory Test]
* [http://www.xs4all.nl/~tni/letelier-docs/thenation.htm The Nation, August 1976: The Chicago Boys In Chile: Economic Freedom's Awful Toll, by Orlando Letelier]
===References===
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[[Category:Economic history of Chile]]
[[Category:Economic booms]]
[[Category:Augusto Pinochet]]
[[Category:Neoliberalism]]
[[Category:1970s in Chile]]
[[Category:1980s in Chile]]
[[de:Wunder von Chile]]
[[es:Milagro de Chile]]
[[fi:Chilen ihme]]
[[fr:Miracle chilien]]
[[pl:Chilijski cud]]