Posted on 03/02/2008 10:35:31 AM PST by neverdem
Milton Friedmanesque reforms helped create South Americas most prosperous nation.
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 Chicagos 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 patientthe Chilean economydie 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 werent 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 markets self-correcting mechanisms caused many glitchesand 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 citys 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 Chiles 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 didnt just reform Chiles economy; they also tackled the countrys 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 arent 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 Chiles 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. Pinochetlike Otto von Bismarck before himdecided that all citizens should have pensions, and so in 1981 thenlabor 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 workers wagesor as much as 20 percent, if the worker requests itwhich 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 arent 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 marketautomatically geared to ones income, it would keep bureaucratic interference minimaland 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.
10...9...8...[counting down the appearance of all the latino-bigots]...7...6...
Chile has the kind of privatized 401K style of state retirement program we can only dream about. Even the baby step Bush proposed in that direction has been shouted down here.
Great article. Thanks.
Pinochet was in a unique position. As a dictator, he could MAKE these changes and fortunately chose wisely. Friedman was the best. In countries like Argentina, you have an intransigent bureaucracy that refuses to let go. Pinochet could get rid of this issue.
Same in the US. The world is changing to flat taxes and private pensions, while the US snoozes. Meanwhile, everyone in the US Congress has their own private pension, which is different from our Social Security System. I wonder why Congress doesn’t agree that whatever is good for the general public should be the same as their system. Hmmm
What’s wrong with Latino countries bringing up their standard of living with economic policies that are based on economics instead of ideology?
What leadership! Wouldn’t it be great if our ‘repub’ politicians used real data to justify conservative positions?
Indeed he was.
We've lost him and Reagan and now Buckley. Do we have anyone in the wings?
I'm surprised at "Ahnald" - he got his business smarts direct from Friedman - and built his mega personal fortune.
In 'managing' California, it seems he's forgotten everything he knew...
Too much pillow-talk influence?
Indeed. It’s shameful that our SS system, etc remains in place the way it is. My generation is going to be paying for it for a long time with little to nothing in return. I’d be happy if just 2 (+2% emp match) % went to a privatized system.
Thanks for the post. A good tutorial on what REALLY brings down the poverty rate.
Chile has wonderful seafood, AND penguins. I’m ready to go!
Its shameful that our SS system, etc remains in place the way it is. My generation is going to be paying for it for a long time with little to nothing in return.
I think it's pathetic how people of my generation and older have listened to the Siren song of "safe investment" of payroll taxes in government bonds.It sounds wonderful from a selfish POV. But since Government Bonds are a liability to the Treasury, those "investments" are mere records of past government profligacy. They can be of no actual help to the younger generations upon whom we count to keep our Social Security checks from fueling inflation.
The fact that Congress has successfully sold that scam for votes for the past three generations is a disgrace to the very idea of a democratic republic. A year or two ago GWB complained of Congress' refusal to consider "privatizing Social Security" - which alone can possibly ameliorate the burden on future taxpayers - and all Democratic Congressmen and senators stood up and cheered. I at least hope that when the reality of the uselessness of the Government Bonds in the SSTF sets in that the Republican Party uses that scene in an effective commercial. Cold comfort tho it will by then be . . .
Some pinheads see ghosts behind every corner.
Maybe he just hates Latinos that do well. Legally. ;)
Bachelet hates Pinochet and everything he stands for, and will do anything to kill his legacy, even if it means destroying Chile along with it.
Excellent find.
btt
Economic historians should check out the economic freedom reports put out by the Fraser Institute (address below).
http://www.freetheworld.com/2007/1EFW2007ch1.pdf
Chile was recently backsliding from the heady days of Friedman/Pinochet’s freeing the Chileans (from elected, but usurper, Communist Allende).
Chile is now ranked 58th in economic freedom. The U.S. is ranked 16th, U.K. is ranked 24th. Hong Kong usually wins every year. Singapore is also up there. See the report for (almost) annual rankings. A new 2007 report is expected soon.
In 1970 Chile’s economic freedom index was 4.08 then increased to 7.48 in 2000, then fell to 7.27 in 2001, stayed low (they got liberal) and now has climbed back to 7.71 (the U.S. is 7.97).
Thanks for the link.
Uncle Sam: gimme some money to save for your retirement.
Citizen: what happened to the money I gave you last week?
Uncle Sam: I spent it.
Citizen: maybe I should put some of it in the stock market.
Uncle Sam: nah, too risky.
Ping for economic and personal freedom locations.
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