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Cheers for Chile’s Chicago Boys (Milton Friedman's legacy - South America’s most prosperous nation)
City Journal ^ | Winter 2008 | Guy Sorman

Posted on 03/02/2008 10:35:31 AM PST by neverdem

Milton Friedmanesque reforms helped create South America’s 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 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.


TOPICS: Business/Economy; Culture/Society; Editorial; Politics/Elections
KEYWORDS: chicagoboys; chile; economics; miltonfriedman; pinero; pinochet; southamerica
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1 posted on 03/02/2008 10:35:35 AM PST by neverdem
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To: neverdem

10...9...8...[counting down the appearance of all the latino-bigots]...7...6...


2 posted on 03/02/2008 10:36:38 AM PST by the invisib1e hand (the model prescribes the required behavior. disincentives ensure compliance.)
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To: neverdem

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.


3 posted on 03/02/2008 10:52:48 AM PST by marron
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To: neverdem

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


4 posted on 03/02/2008 11:13:57 AM PST by cowtowney
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To: the invisib1e hand

What’s wrong with Latino countries bringing up their standard of living with economic policies that are based on economics instead of ideology?


5 posted on 03/02/2008 11:20:26 AM PST by AlaskaErik (I served and protected my country for 31 years. Democrats spent that time trying to destroy it.)
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To: neverdem

What leadership! Wouldn’t it be great if our ‘repub’ politicians used real data to justify conservative positions?


6 posted on 03/02/2008 11:35:14 AM PST by sgtyork (The secret of happiness is freedom, and the secret of freedom, courage. Thucydides)
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To: cowtowney
Friedman was the best

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?

7 posted on 03/02/2008 12:03:40 PM PST by maine-iac7 (",,,but you can't fool all of the people all the time" LINCOLN)
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To: sgtyork

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.


8 posted on 03/02/2008 12:09:06 PM PST by rb22982
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To: neverdem

Thanks for the post. A good tutorial on what REALLY brings down the poverty rate.


9 posted on 03/02/2008 12:25:02 PM PST by tanuki (u)
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To: neverdem

Chile has wonderful seafood, AND penguins. I’m ready to go!


10 posted on 03/02/2008 12:32:27 PM PST by Tax-chick (If there's a bustle in your hedgerow, don't shoot! It might be Wednesday!)
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To: rb22982
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 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 . . .


11 posted on 03/02/2008 2:07:07 PM PST by conservatism_IS_compassion (The Democratic Party is only a front for the political establishment in America - Big Journalism.)
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To: AlaskaErik
What’s wrong with Latino countries bringing up their standard of living with economic policies that are based on economics instead of ideology?

Some pinheads see ghosts behind every corner.

Maybe he just hates Latinos that do well. Legally. ;)

12 posted on 03/02/2008 2:22:00 PM PST by VeniVidiVici (Benedict Arnold was against the Terrorist Surveillance Program)
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To: neverdem
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.

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.

13 posted on 03/02/2008 3:11:54 PM PST by ikka
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To: neverdem; Toddsterpatriot; Mase; expat_panama; LowCountryJoe

Excellent find.


14 posted on 03/02/2008 4:59:12 PM PST by 1rudeboy
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To: neverdem

btt


15 posted on 03/02/2008 6:52:01 PM PST by Cacique (quos Deus vult perdere, prius dementat ( Islamia Delenda Est ))
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To: neverdem

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).


16 posted on 03/02/2008 11:11:46 PM PST by Hop A Long Cassidy
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To: Hop A Long Cassidy

Thanks for the link.


17 posted on 03/03/2008 8:07:12 AM PST by neverdem (I have to hope for a brokered GOP Convention. It can't get any worse.)
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To: neverdem; Abathar; Abcdefg; Abram; Abundy; akatel; albertp; AlexandriaDuke; Alexander Rubin; ...
Libertarian ping! To be added or removed from my ping list freepmail me or post a message here.
18 posted on 03/04/2008 7:27:35 PM PST by traviskicks (http://www.neoperspectives.com/Ron_Paul_2008.htm)
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To: conservatism_IS_compassion
A year or two ago GWB complained of Congress' refusal to consider "privatizing Social Security" -

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.

19 posted on 03/04/2008 7:38:10 PM PST by groanup (Why is it some SQL's won't answer the simplest questions?)
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To: inneroutlaw

Ping for economic and personal freedom locations.


20 posted on 03/04/2008 7:43:15 PM PST by elkfersupper
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