1973: Pinochet’s “Chicago Boys” usher in the neoliberal era in Chile

The United States, as we know, was no stranger to the military coup of September 11, 1973, which led to the death of President Salvador Allende and the establishment of the dictatorship of General Pinochet. They are also no strangers to the neoliberal policies introduced during the dictatorship by Chilean economists trained at the Department of Economics at the University of Chicago, nicknamed Chicago Boys.

It all started in 1956 with the signing of a cooperation agreement between the Catholic University of Chile and the School of Economics of the University of Chicago. There is a stronghold of a small minority group of neoliberals, led by a bunch of future prizes from the Swedish Economic Bank, who fight against Keynesian hegemony in favor of “good economic science”.

The first group of students is thus sent to Chicago. They returned to Chile in 1958 and, after becoming professors themselves at the Catholic University, raised a second generation of economists. Around their main figure, Sergio de Castro, in the 1960s they challenged the Latin American version of Keynesianism that had prevailed in Chile since 1938.

Economic policy ensures the control of foreign trade, the control of sectors considered strategic, as well as the protection of national industries that allow local production to replace imports. Since 1948, CEPAL, the Economic Commission for Latin America within the United Nations, has provided theoretical support for this policy, which it calls “structuralist,” and has also emphasized the need for agrarian reform.

The Christian Democratic government of Eduardo Frei (1964-1970) followed this program at the same time that it partially nationalized the copper mines, Chile’s main export product. This policy was accentuated during the presidency of the socialist Salvador Allende (1970-1973), who was accused by the entire right and employers of preparing the way for communism.

Criticism Chicago Boys then increases. In early 1973, senior officials of the navy – which was at the heart of the coup d’├ętat preparation – made contact with the most political. Chicago Boys, Emilio Sanfuentes. They asked him to quickly develop an economic program in the event of Allende’s fall. At the end of May, a 500-page book was published by eleven economists, nine of whom Chicago Boysnicknamed El Ladrillo (The Brick) is ready.

The measures proposed in El Ladrillo everything leads to a significant limitation of the role of the state in economic and social affairs. They remain measured given that they are supported by the Christian Democratic Right and remain acceptable to conservative circles. To give just one example, import taxes would be reduced, but to the level of 30%.

THE Chicago Boys and military dictatorship

However, La Brique is really the first stone of the neoliberal building to come, which will launch a political-economic career Chicago Boys. If they always denied, despite all the evidence, when they heard about the planned military coup and then the savagery of the repression, from the day after the overthrow of Allende, their agenda is in the hands of the junta leaders..

On September 14, Admiral Merino, in charge of the Economic Committee, appointed Sergio de Castro as adviser to General Gonzales, the new Minister of Economy. Robert Kelly, a former naval officer closely associated with Chicago Boys is placed at the head of ODEPLAN (National Planning Office), which paradoxically will manage the return to the market and withdrawal of the role of the state in the economy.

However, for a year and a half, advocates of radical liberal measures ran into a part of the “developmental” army that remained tied to the role of the state and protectionism. So much so that the government decided on gradual liberalization: privatization remain limited, as does the slowdown in government spending.

But inflation, which remains at a very high level, lends weight to the arguments boys in favor of drastic cuts in public spending. All this in an unfavorable international economic context with a drop in the price of copper and a rise in oil prices, which worsen the external deficit.

On March 21, 1975 Augusto Pinochet received Milton Friedman who convinced him with his arguments doubling down boys. On April 10, 1975, he entrusted the leadership of economic coordination to Jorge Cauas, a Christian Democrat close to the Chicago gang. With Sergio de Castro at the Ministry of Economy, Alvaro Bardon and Pablo Barahona at the Central Bank, Juan Carlos Mendez at the Ministry of Finance and the Budget Department, Chicago Boys occupy all the positions that allow them to finally implement the radical policies they advocate.

1975-1980: the neoliberal revolution began

Their program goes well beyond the short-term stabilization plan. It consists in entrusting the economic and social balance to the free market. The priority is to reduce the public deficit through the privatization of most enterprises – except those considered “strategic” – and the reduction of social spending – except for those related to the fight against extreme poverty. The decentralization of education and healthcare paves the way for their privatization.

The unilateral opening to international trade results in a reduction of tariffs to 10%, with the hope that liberalization will also benefit exports – copper, agricultural products, fisheries, where Chile is supposed to have a comparative advantage – views as a new pioneer of development. Liberalization is also financial in that it opens the door wide to international investment and borrowing.

Initially, this shock policy caused severe economic recession and social tragedy. By early 1976, industrial production had fallen by 28%, GDP by 13%, real wages had fallen to 60% of what they had been in 1970, and interest rates had risen from 9.6 to 20%. The regime doesn’t mind because it can afford it, as any opposition is violently suppressed.

There was some recovery in the period 1977-1982 thanks to cheap international credit. Cutting government spending helps reduce inflation to around 30%. The establishment of a fixed exchange rate of an overvalued peso, which is supposed to give investors confidence in the economic stability of the country, certainly weighs on exports, but leads to an explosion of imports of cheap products.

The overall record in terms of GDP growth, the alpha and omega of the liberal measure of prosperity, is unremarkable: an average of 1.7% per year over the period 1973-1990, slightly less than population growth.

This economic boom is clearly quite relative: unemployment remains around 15% of the active population and real wages are not improving. However, it was enough to give confidence to the dictator Pinochet, who on September 11, 1979, the anniversary of the coup, launched a program of seven modernizations.

Health is increasingly covered by private insurance. Education is largely privatized. The pension system is moving from distribution to capitalization with the support of pension funds to provide capital to the economy. Among other things, a more flexible labor market facilitates dismissals that no longer need to be justified. Agriculture, justice and administration are also undergoing this shock treatment.

But the system is taking over. In 1982, the economy, too dependent on the international capital market, was undermined by the sudden recovery of the dollar that the United States desired. Capital is flowing back into that country, leading to a serious banking and exchange rate crisis. That year, GDP fell by 14%, investment by 30%. Foreign exchange reserves fell by 40% compared to the previous year. Unemployment jumped to 19% and even 26% in 1983.

A new government is appointed to put out the fire: the state returns in force to the economy, nationalizing failed banks and indebted companies. The peso is devalued by 30%, contrary to the recommendations of Sergio de Castro, who had to resign as finance minister.

1985-1989: Chicago Boys in line with the IMF

Far from denying that the most critical phase of the financial crisis is over, the military authorities see it only as an accident weakening an economy still in transition. With at the head of its economy Chicago Boys second generation, more pragmatic, adjusting exchange rates, privatization renewed: The state will exchange its debt at a low price for shares in public companies in telecommunications, energy, steel, air transport.

In 1988, freed from a referendum he thought he would win, Pinochet, who asserted his continued leadership of the military for eight years, also forced, with financial support from the International Monetary Fund (IMF), the preservation of the liberal economic revolution, further strengthened by the fall of the Soviet model in 1989.

What is the economic outcome of the Pinochet years after the transfer of power to civilians under military control in 1990? ? A liberal economic policy could only be implemented at the cost of constant human rights violations: 40,000 people were victims of repression, 250,000 went into exile.

The overall record for GDP growth, the alpha and omega of the liberal measure of prosperity, is unremarkable: an average of 1.7% per year over the period 1973-1990, slightly less than population growth. Average inflation is around 30%.

Extreme poverty fell to 14% of the population, but inequalities widened. More telling is the figure for household consumption: in Santiago, the richest 20% accounted for 55% of consumption in 1988, up from 44% in 1969. The share of the poorest 40% rose to 12.6%, compared to 19.4% before the dictatorship.

However, the neoliberal model is now well established in Chile, in an international context very favorable to this ideology after 1990. Civil society-based governments have later mitigated the most negative aspects of social policy. But it was not until 2019 that a large-scale social movement challenged the consequences of neoliberalism. And 2022, for the government of Gabriel Boric to challenge it.

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