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Soundings

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Cheers for Chile’s Chicago Boys
Milton Friedmanesque reforms helped create South America’s most prosperous nation.
Winter 2008

There are now two South Americas,” says Chilean economist Rolf Lüders, a former prime minister under Augusto Pinochet. The old South America, which remains mired in populism and Marxist rhetoric, includes Argentina, Bolivia, Ecuador, Nicaragua, and Venezuela. The new South America is democratic and free-market-oriented, and includes Brazil, Chile, Colombia, Costa Rica, Paraguay, Peru, and Uruguay. Chile is undoubtedly the most prosperous and stable country in the group, with an annual real growth rate averaging 5.5 percent over the last 15 years and a per-capita annual income of $12,000, the highest in Latin America. The country owes its unqualified success to an oft-vilified group of U.S.-educated free-market economists known as the “Chicago boys,” of whom Lüders, a former student of Milton Friedman at the University of Chicago, is one.

“Pinochet had no clue about economics,” Lüders recalls, “and our country was in a desperate situation.” But when Pinochet asked Friedman, who had helped mold Chicago’s economics department, to provide solutions for hyperinflation, the great economist proposed just the right cure: monetary control. Harshly criticized in the U.S. for his “collaboration” with the dictator, Friedman responded by asking whether he should have let the patient—the Chilean economy—die instead.

Lüders admits that he and his fellow academics relished the chance to devise a new economic model on a blackboard and observe the results. At first, those results weren’t much to brag about. In the early 1980s, external shocks, capital flight, declining prices for copper (the main Chilean export at the time), and excessive trust in the market’s self-correcting mechanisms caused many glitches—and a severe recession.

Beginning in 1985, however, the more pragmatic Hernán Büchi, who served as finance minister under Pinochet, helped correct the errors through tighter control of capital flows into and out of the country. Though he holds a degree from Harvard, Büchi is still deemed a Chicago boy in a land where that city’s name has become a generic term for free-market economists. “The economic solutions we provided for Chile had nothing extraordinary about them,” Lüders says. “We privatized the companies, which had been nationalized by the Socialist Allende regime. We stabilized the currency. We opened the borders to trade. The strong Chilean tradition of entrepreneurship took over from there.”

Vittorio Corvo is another Harvard graduate considered a Chicago boy. Governor of the Central Bank of Chile, an office beyond party politics, he credits Chile’s success to economic continuity. “Since Pinochet left, Chile has been governed by Christian Democrats and Socialists,” Corvo observes. “They never shifted the economic institutions we designed for the country. The left-wing parties opened the economy even more than we did by reducing trade barriers.” Chileans, Corvo adds, “can buy consumer goods at a cheap, world-market price. Our entrepreneurs are now able to sell fruits, wine, and fish all over the world. When I was young, I never saw a salmon. Now we sell them to the U.S. The Chilean people like what we did because we got rid of inflation, which was a tax on the poor. We got rid of corruption, which was entrenched in the huge public sector.” Corvo notes that the numbers of the poor have fallen from 6 million at the beginning of the Pinochet regime to 2 million today.

The Chicago boys didn’t just reform Chile’s economy; they also tackled the country’s bloated state sector. “Our real breakthrough was in the social services,” says Lüders. In most countries, governments directly provide social services such as schools, hospitals, and housing. The Chicago boys have tried to shift Chile away from this model, while ensuring that citizens aren’t left behind. The Chilean state no longer builds housing for the poor, for instance, but it still offers financial aid or mortgage guarantees to truly needy citizens who aspire to become private owners in the real-estate market. Along the same lines, a school voucher system that Friedman initially devised, allowing parents to choose any private or public school for their children, is in place, though it is imperfect. The vouchers cover only one-fifth of a private school tuition, so the poorest students remain stuck in the public schools. And the teachers’ union, opposed to parental choice, refuses to provide information on school achievement, leaving parents in the dark when trying to choose the best schools.

The Chicago boys’ proudest achievement is Chile’s privatized pension system. Its main architect was José Piñera, now a scholar at the Cato Institute. Before the Pinochet regime, Piñera recalls, only workers in government industries, public servants, and the military had pensions. Pinochet—like Otto von Bismarck before him—decided that all citizens should have pensions, and so in 1981 then–labor minister Piñera created a sophisticated system that gave Chileans the choice between a state or a private pension. The state deducts a compulsory 10 percent from each worker’s wages—or as much as 20 percent, if the worker requests it—which he can invest in either the public or the private system. Nearly everyone picks the private pensions, which are managed by six private investment companies, each offering a mix of safer and riskier investments; the Chilean state also regulates these companies and their investments. So far, on average, the private system has provided pensions that pay an equivalent of 70 percent of citizens’ previous annual salaries. Chile was a pioneer in pension privatization, and many countries have followed its lead in one form or another.

Patricio Meller, a Christian Democrat whom Socialist president Michelle Bachelet has asked to chair a national commission on social equity, criticizes the private pensions, saying that they aren’t inclusive enough and should also cover nonworking mothers and the unemployed. Meller has recommended the creation of a national minimum income for every family. The resources would come from a state fund that currently guarantees Chilean copper against price volatility by investing copper-export income in diversified portfolios abroad.

If adopted, could a government-guaranteed minimum income pull Chile back into the old, corrupt South America? Yes, if the guarantee became, as the Left prefers, a direct government subsidy to the poor, working and nonworking alike. There is a risk that such a scheme could encourage both dependency and cash-for-votes-style populism. But if the Chilean Left instead implemented a neutral “negative income tax,” as the Chicago boys, following Friedman, would recommend, then the guaranteed minimum would be less disruptive of the market—automatically geared to one’s income, it would keep bureaucratic interference minimal—and actually encourage work, since, to qualify for a negative tax in the first place, one needs to earn at least something and file a tax return. Chile would then likely maintain its leading position among those new South American countries that have escaped the left-wing mystique.

Guy Sorman is the author of numerous books, including The Empire of Lies, forthcoming from Encounter. He is a contributing editor of City Journal and president of the publishing house Éditions Sorman.

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