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Greetings and welcome to Free Lunch. This week marks the 50th anniversary of the military coup in Chile, when general Augusto Pinochet led a bombardment of the presidential palace that led to president Salvador Allende’s death, the end of Chilean democracy, and a 17-year regime of terror and oppression — and an experiment in free-market economics.
That last aspect is the reason for this economics column to address the anniversary of “the first September 11th” as Michael Goldfarb calls it in a podcast interview with the American journalist Marc Cooper, who worked as Allende’s translator. It is not uncommon to encounter the claim that while Pinochet may have been a dictator, “at least” he fixed the economy. Even inside the country, 26 per cent of Chileans “say the military was right to act . . . up from 16 per cent in 2013”, according to the FT’s latest dispatch from Santiago. In the rest of the world, Chile has long been seen as a model of economic development policy, often celebrated for what a committed application of free market policies can achieve. That is seen in contrast to the economic disruptions that Allende’s statist policies undeniably brought.
So did the dictatorship “at least” fix the economy? The first answer is that the question really ought not to be asked. It certainly ought not to compete for attention with the condemnation the horror unleashed by Pinochet and his allies deserve. We should not measure GDP growth rates against the thousands of people murdered in the most gruesome ways, the tens of thousands tortured and the callous attack on Chile’s democratic system of which the bombing of the presidential palace is a symbol. The economics of Pinochet’s dictatorship are no more relevant than whether Russian president Vladimir Putin implements more or less business-friendly policies in ravaged Mariupol.
What we can do is to examine the economic facts. And in terms of policy and in terms of results, what these facts do is undermine the simplistic story that the free-market purism of Pinochet’s “Chicago boys” (young Chilean economists trained at Milton Friedman’s University of Chicago economics department) led to outstanding economic achievements.
In terms of economic prosperity, the most generous description of the dictatorship’s achievement is “erratic”. The chart below shows Chile’s real gross domestic product per capita (from the World Bank). Output per person declined in the last two years of Allende’s government, after strong growth in the first, amounting to stagnation on average when the military put an end to democratic rule. But the coup did not arrest the decline, far from it: 1974 saw stagnation, and the economy nosedived in 1975. It was not until 1979 that a boom pulled average incomes up to levels previously seen under Allende.
We should not forget, moreover, that the growth failures in 1972 and 1973 are not all attributable to Allende’s policies, but in part due to the forces arraigned against them. They include disruptive truckers’ strikes which were at least indirectly facilitated by the CIA, and, of course, the September 1973 coup itself. Massacres and terror have a way of putting a chill on economic activity as well.
An even deeper nosedive happened in 1982 and 1983 after a homegrown banking crisis, once more bringing GDP per capita below the levels of the Allende years. All in all, the dictatorship presided over an average GDP per capita growth rate of just 1.7 per cent. And since inequality went up significantly after the decline under the last two democratic presidents (see chart below), it’s fair to say that what growth there was largely passed the great masses by.
In contrast, Chile’s restored democracy shifted the per capita income growth rate up to a stunning 4 per cent per year in the two decades from 1990. During the same time, Chile’s level of inequality — one of the highest in the world — finally started falling again.
In terms of outcomes, then, Chile’s achievement must be credited to its restored democracy. What about policies? It is true that at micro level, the dictatorship’s economic manager returned the country to a much more market-driven system open to international trade, with a cut in tariffs, the removal of price controls and the privatisation of state-owned companies. But in two of the most consequential policy areas for the Chilean economy, this was hardly a free-market paradise.
Above all, the dictatorship stuck with the previous democratic governments’ decision to nationalise copper under the state-owned copper company Codelco. No free market principles there: the only change Pinochet made was to direct a large part of Codelco’s export earnings to the armed forces.
Second, the deregulation of the economy in the late 1970s, which coincided with growing international capital flows, led to a form of crony financial capitalism that may well have inspired the Russian oligarchs’ rise in the 1990s, as one Chilean economist suggested to me, explaining that “with both banks and large companies privatised, corporations would borrow a little money in New York, buy the banks, and issue loans to themselves”. Ultimately, the loans went bad, the banks faced big losses, but Pinochet’s friends in business were bailed out.
Keeping copper in state hands was largely a good policy; the management of the banking sector definitely bad. But neither followed a principled approach of competitive free markets Chile is generally renowned for. The banking disaster, in particular, was responsible for an economic lost decade; the median Chilean was worse off in simple economic terms in 1983 than a decade earlier, in addition to being terrorised and unfree.
We should not forget the private corruption of Pinochet and his family, who directed ill-gotten funds into the infamous Riggs Bank in the US. And that highlights the crucial lesson as far as the economics of dictatorship go: the prerequisites for prosperity of growth involve a kind of predictability, freedom and rules-based order that authoritarian systems ipso facto do not respect (as I discussed recently in regard to China).
To paraphrase Benjamin Franklin, those willing to give up on democracy for the sake of economic growth will end up losing both. That is Chile’s real lesson for those dissatisfied with democratic government’s performance — 50 years ago and today.
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