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]an (blue) and average ]n (orange) ] (1950-2007).]] ]an (blue) and average ]n (orange) ] (1950-2007).]]


The "'''Miracle of Chile'''" is a term coined by ] to describe the dictator ]'s ] and ] reorientation of the economy of ] upon taking power in the spring of 1975. It targeted, stopped, and reversed the ] model implemented by ]. The plan behind this "miracle" was drafted by the "]."
The "'''Miracle of Chile'''" is a term coined by ]{{fact}}} to describe ] and ] reorientation of the economy of ] upon in the 1980s, 1990s, and 2000s. The economic reforms were originally drafted by Chilean economist sometimes known as the "]" because many of them had studied at the University of Chicago. The plan had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. It was continued and strengthened after 1990.<ref name="Thomas M. Leonard p. 322">Thomas M. Leonard. ''Encyclopedia Of The Developing World.'' Routledge. ISBN 1579583881 p. 322</ref> Successive governments have continued these policies. In 2002 Chile signed an association agreement with the ] (comprising FTA, political and cultural agreements), in 2003, an extensive free trade agreement with the ], and in 2004 with ], expecting a boom in import and export of local produce and becoming a regional trade-hub. Continuing the coalition's free-trade strategy, in August 2006 President Bachelet promulgated a ] with the ] (signed under the previous administration of ]), the first Chinese free-trade agreement with a Latin American nation; similar deals with Japan and India were promulgated in August 2007.


The plan had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. It was continued and strengthened after Pinochet stepped down.<ref name="Thomas M. Leonard p. 322">Thomas M. Leonard. ''Encyclopedia Of The Developing World.'' Routledge. ISBN 1579583881 p. 322</ref> Successive governments have continued these policies.
Today, Chile leads Latin America in terms of ], ] (at ]s<ref>{{Cite web

| url=http://imf.org/external/pubs/ft/weo/2008/02/weodata/weorept.aspx?pr.x=37&pr.y=17&sy=2007&ey=2007&scsm=1&ssd=1&sort=country&ds=.&br=1&c=213%2C263%2C268%2C273%2C218%2C278%2C223%2C283%2C228%2C288%2C233%2C293%2C238%2C243%2C248%2C253%2C298%2C258%2C299&s=NGDPDPC&grp=0&a=
Supporters point out that since Pinochet stepped down, Chile has become one of South America's most stable and prosperous nations.<ref name="BBC-Chile">{{Cite web
| title=World Economic Outlook Database, October 2008
| url=http://news.bbc.co.uk/2/hi/americas/country_profiles/1222764.stm
| accessdate=2008-10-11}}</ref> and ]<ref>{{Cite web
| title=Country profile: Chile
| url=https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html
}}</ref> Within the greater Latin American context it leads in terms of ], ], political stability, ], ], low ] and comparatively low ] rates.<ref>{{Cite web
| title=], GDP - per capita (PPP)
| publisher=]
|accessdate=2008-12-19}}</ref>), ], ], political stability, ], ], low ] and low ] rates.<ref>{{Cite web
| url=http://hdrstats.undp.org/indicators/25.html | url=http://hdrstats.undp.org/indicators/25.html
| title=Human and income poverty: developing countries | title=Human and income poverty: developing countries
| work=] | work=]
| accessdate=2008-05-19 | accessdate=2008-05-19
}}</ref> It also ranks high regionally in ] and democratic development.<ref>See the ] section below for more details and references.</ref> }}</ref> It also ranks high regionally in ], ] and democratic development. <!--(See the ] section below for more details and references.) -->Its status as the region's richest country in terms of ] (at ]s<ref>{{Cite web
| url=http://www.imf.org/external/pubs/ft/weo/2008/01/weodata/weorept.aspx?sy=2007&ey=2007&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=30&pr1.y=16&c=213%2C263%2C268%2C273%2C218%2C278%2C223%2C283%2C228%2C288%2C233%2C293%2C238%2C243%2C248%2C253%2C298%2C258%2C299&s=NGDPDPC&grp=0&a=
| title=World Economic Outlook Database, April 2008
| accessdate=2008-05-02}}</ref> and ]<ref>{{Cite web
| url=http://www.imf.org/external/pubs/ft/weo/2008/01/weodata/weorept.aspx?pr.x=26&pr.y=9&sy=2007&ey=2007&scsm=1&ssd=1&sort=country&ds=.&br=1&c=213%2C263%2C268%2C273%2C218%2C278%2C223%2C283%2C228%2C288%2C233%2C293%2C238%2C243%2C248%2C253%2C298%2C258%2C299&s=PPPPC&grp=0&a=
| title=World Economic Outlook Database, April 2008
| publisher=]
|accessdate=2008-05-02}}</ref>) Critics counter that the system started by what they sometimes term Pinochet's "] ]" from Allende continues to be defined primarily by its high level of ] as measured by the ].<ref>{{Cite web
| url=http://www.mideplan.cl/final/bajar.php?path=casen2006regional&id=Imp_Distrib.pdf
|format=PDF| title=Encuesta Casen
| work=Mideplan
| year=2007
}}</ref>


==Background== ==Background==


The government, under the advice of a group of Chilean ] who had mostly studied at the University of Chicago Department of Economics (the ]), implemented a set of economic reforms that included ] and ]. Among others, they privatized the ] system <ref name=PENSION> </ref>, state ], and ]s, and reduced ]es. Pinochet's stated aim was to "''make Chile not a nation of ], but a nation of ]s''.<ref name="news.bbc.co.uk"></ref> Pinochet, under the advice of a group of Chilean ] who had mostly studied at the University of Chicago Department of Economics (the ]), implemented a set of economic reforms that included ] and ]. Among others, they privatized the ] system <ref name=PENSION> </ref>, state ], and ]s, and reduced ]es. Pinochet's stated aim was to "''make Chile not a nation of ], but a nation of ]s''.<ref name="news.bbc.co.uk"></ref>


=== Inflation under Allende ===
In 1972 inflation in Chile was running at 150%.<ref name="news.bbc.co.uk"/> A range of factors led to increased inflation in Chile, such as fixed prices on essential goods, and a multiple exchange rate. Jacobo Schatan claims that US opposition to the government (their stated goal was to "make the economy scream") affected.<ref>p.60 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>. Jacobo Schatan claims "It was clear that the scarcity had been manipulated for political reasons, to create a climate favourable to both the coup and, subsequently, the total change of the economic system."<ref>p.60 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>
In 1972, during the second full year of Allende's government (and prior to the coup that brought ] to power), inflation in Chile was running at 150%.<ref name="news.bbc.co.uk"/> A range of factors led to increased inflation in Chile, such as fixed prices on essential goods, a multiple exchange rate and US opposition to the elected government (their stated goal was to "make the economy scream")<ref>p.60 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>.


In 1973, due in part to a sustained US campaign against the elected government <ref>United States Senate Report (1975) "Covert Action in Chile, 1963-1973" ''U.S. Government Printing Office'' Washington. D.C.</ref>, the Chilean population were critically short on many food and consumer items. Chilean economist Jacobo Schatan writes, "''It was clear that the scarcity had been manipulated for political reasons, to create a climate favourable to both the coup and, subsequently, the total change of the economic system.''"<ref>p.60 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>
Immediately following the ], ] was made aware of a confidential economic plan known as ''El Ladrillo'' <ref name=LADRILLO>{{es}}</ref> (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 <ref name=HERENCIA>>{{es}} </ref> by economists who opposed ]'s government, with the help from a group of economists the press were calling the ], because they were predominantly alumni of the ]. This document, ''El Ladrillo'', was made available to the offices of the Chilean Armed Forces Generals on the very day after the coup, September 12, 1973 <ref name=LADRILLO/>, and contained the backbone of what would later on become the Chilean economic policy.<ref name=HERENCIA>>{{es}} </ref>


==Reforms== ==='El Ladrillo'===
Immediately following the ], ] was made aware of a confidential economic plan known as ''El Ladrillo'' <ref name=LADRILLO>{{es}}</ref> (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 <ref name=HERENCIA>>{{es}} </ref> by economists who opposed ]'s government, with the help from a group of economists the press were calling the ], because they were predominantly alumni of the ]. This document, ''El Ladrillo'', was made available to the offices of the Chilean Armed Forces Generals on the very day after the coup, September 12, 1973 <ref name=LADRILLO/>, and contained the backbone of what would later on become the Chilean ] economic policy.<ref name=HERENCIA>>{{es}} </ref>
The government ]d almost every nationalized industry, from mines to factories to the ].{{fact}} He welcomed ] and eliminated protectionist ]s, forcing Chilean businesses to compete with ]s on an equal footing, or else go out of business. The main copper company, ], remained in government hands due the ] completed by ], however, private companies were allowed to explore and develop new mines. Copper resources were, however, declared "inalienable" by the ].


===Nature of the reforms===
Minister of Finance ], departing from Friedman's well-known support for flexible exchange rates, decided on a ] of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant ] to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos ] outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe ] that lasted more than two years.
Pinochet's government ]d almost every nationalized industry, from mines to factories to the ]. He welcomed ] and eliminated protectionist ]s, forcing Chilean businesses to compete with ]s on an equal footing, or else go out of business. The main copper company, ], remained in government hands due the ] completed by ], however, private companies were allowed to explore and develop new mines. Copper resources were, however, declared "inalienable" by the ].


The privatizations brought in a new right wing industrial oligarchy{{Fact|date=November 2007}}, wiping out previous industrialists who had depended on strict trade protections and subsidies in order to maintain their economic power. Only one of the free market recommendations of ''El Ladrillo'' was not implemented: a ]. Minister of Finance ], departing from Friedman's well-known support for flexible exchange rates, decided on a ] of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant ] to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos ] outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe ] that lasted more than two years.
Supporters of Friedman's liberal economic views argue that subsequent events in Chile have vindicated his free market philosophy. They claim that Chile's economy is "noticeably stronger and more advanced than those of other Latin American nations"{{Fact|date=January 2008}}. Jacobo Schatan says Chile is a failure of Friedmanite policies.<ref>Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. 'Development and Society', 30(2) pp.57-77</ref><ref></ref><ref>Klein, N. (2007) Shock Doctrine: The Rise of Disaster Capitalism</ref>


===Chile as a model economy===
Supporters of Friedman's liberal economic views argue that subsequent events in Chile have vindicated his free market philosophy. They claim that Chile's economy is "noticeably stronger and more advanced than those of other Latin American nations"{{Fact|date=January 2008}}. Opponents use Chile as an example of the failure of Friedmanite policies.<ref>Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. 'Development and Society', 30(2) pp.57-77</ref><ref></ref><ref>Klein, N. (2007) Shock Doctrine: The Rise of Disaster Capitalism</ref>

==Immediate effects of the reforms==
==="First Miracle" vs. "Second Miracle"===
Some analysts{{Who|date=November 2007}} divide the ] economic experiments of Chile in two distinct phases: the "First Miracle" (1973- 82), that ended when the fixed exchange rate policy failed and led to the depression of 1982 (see below), and the "Second Miracle" (1985-89), which occurred after the devaluation initiated{{Fact|date=November 2007}} an export-led boom which brought an end to the depression.

===Early 1980s recession===
Chile had a strong economic recession in 1982-1983, its second in eight years (in 1975, when GDP fell by 13 per cent, industrial production plunged by 27 per cent, and unemployment shot up to 20 per cent). Real economic output declined by 19% just in 1982 and 1983 and most of the recovery and subsequent growth took place after Pinochet left office <ref name=DEPRESSION></ref>, when market-oriented economic policies were additionally strengthened.<ref name="Thomas M. Leonard p. 322"/> Chile had a strong economic recession in 1982-1983, its second in eight years (in 1975, when GDP fell by 13 per cent, industrial production plunged by 27 per cent, and unemployment shot up to 20 per cent). Real economic output declined by 19% just in 1982 and 1983 and most of the recovery and subsequent growth took place after Pinochet left office <ref name=DEPRESSION></ref>, when market-oriented economic policies were additionally strengthened.<ref name="Thomas M. Leonard p. 322"/>


Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. However, this devaluation was done so incompetently<sup>citation needed</sup> and belatedly<sup>citation needed</sup>--and at the exact moment that the United States, Chile's major creditor and trading partner, was going into a major recession--that it led to a fall in Chile's GDP of 20% during 1982 and 1983, resulting in widespread ] and the collapse of the financial sector. Unemployment spiked to 30 percent. Around 50 percent of the population fell below the poverty line. Extreme poverty affected 30 percent of the population. In his Memoirs ("Two Lucky People", 1998), Milton Friedman directed blame towards De Castro and the fixed exchange rate, claiming that it was contrary to the free market model.
In his Memoirs ("Two Lucky People", 1998), Milton Friedman directed blame towards De Castro and the fixed exchange rate, claiming that it was contrary to the free market model.

===Post-recession period===
Following the 1983 implosion, some claim the Pinochet dictatorship did not abandon the free-market reforms of ''El Ladrillo''. Though the recession had huge social and political costs to the junta, during 1983 and 1984, the government maintained a free-market, hands-off approach to the economy, refusing to reinstate tariffs or other trade barriers, and allowing major Chilean industries to fail, rather than offering subsidies.{{Fact|date=February 2008}}


Starting in 1985, the focus of economic policies shifted toward financial solvency and economic growth. Exports grew rapidly and unemployment went down. People living below the poverty line represented 45 percent of the population in 1987.<ref name=DEPRESSION2></ref><noinclude></noinclude> Starting in 1985, the focus of economic policies shifted toward financial solvency and economic growth. Exports grew rapidly and unemployment went down. People living below the poverty line represented 45 percent of the population in 1987.<ref name=DEPRESSION2></ref><noinclude></noinclude>


Others, such as economist and investigative journalist Greg Palast, dispute this position, pointing to economic changes in response to the recession, such as Pinochet's restoration of the minimum wage and union bargaining, large scale public sector job creation schemes, laws restricting the free flow of foreign capital, and bank and industrial nationalisations as indicating an abandonment of the Friedmannite experiment in the face of economic disaster. Others, such as economist and investigative journalist Greg Palast, dispute this position, pointing to economic changes in response to the recession, such as Pinochet's restoration of the minimum wage and union bargaining, large scale public sector job creation schemes, laws restricting the free flow of foreign capital, and bank and industrial nationalisations as indicating an abandonment of the Friedmannite experiment in the face of economic disaster.

===Free trade agreements===
Successive Chilean governments have actively pursued trade-liberalizing agreements. During the 1990s, Chile signed ]s (FTA) with Canada, Mexico, and Central America. Chile also concluded preferential trade agreements with Venezuela, Colombia, and Ecuador. An association agreement with Mercosur—Argentina, Brazil, Paraguay, and Uruguay—went into effect in October 1996. Continuing its export-oriented development strategy, Chile completed landmark free trade agreements in 2002 with the European Union and South Korea. Chile, as a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. To that end, it has signed trade agreements in recent years with New Zealand, Singapore, Brunei, India, China, and most recently Japan. In 2007, Chile held trade negotiations with Australia, Thailand, Malaysia, and China. In 2008, Chile hopes to conclude an FTA with Australia, and finalize an expanded agreement (covering trade in services and investment) with China. The P4 (Chile, Singapore, New Zealand, and Brunei) also plan to expand ties through adding a finance and investment chapter to the existing P4 agreement. Chile's trade talks with Malaysia and Thailand are also scheduled to continue in 2008.<ref name="USDoS">{{Cite web
| url=http://www.state.gov/r/pa/ei/bgn/1981.htm
| title=Background Note: Chile
| work=], Bureau of Western Hemisphere Affairs, January 2008
}}</ref>


== Performance on economic and social indicators == == Performance on economic and social indicators ==
=== Annual growth ===
Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. Since then the economy has averaged 7-percent annual growth, raising ] income for Chile's 16-million citizens to more than $10,000 and creating a thriving middle class{{Fact|date=January 2008}}. This growth stagnated in 1997, with GDP rising by only a small margin between 1997 and 2002.<ref>Cypher, James. (2004) Is Chile a neoliberal success? ''Dollars & Sense'', September-October 2004</ref>
From the beginning of the reforms of the ] in 1975 through 1986, there was almost no growth in per-capita GDP, a decline in per capita consumption (unclear, but around 15%) and an (overall) increase in unemployment from 4.8% to 14%{{Fact|date=December 2008}}. Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. Since then the economy has averaged 7-percent annual growth, raising ] income for Chile's 16-million citizens to more than $10,000 and creating a thriving middle class{{Fact|date=January 2008}}. This growth stagnated in 1997, with GDP rising by only a small margin between 1997 and 2002.<ref>Cypher, James. (2004) Is Chile a neoliberal success? ''Dollars & Sense'', September-October 2004</ref>


], in his book ] (1989) examines the performance of Chile in various economic and social indicators. He says "The so-called "monetarist experiment" which lasted until 1982 in its pure form, has been the object of much controversy, but few have claimed it to be a success...The most conspicuous feature of the post 1973 period is that of considerable instability...no firm and consistent upward trend (to say the least)."{{citation needed}} ], in his book ] (1989) examines the performance of Chile in various economic and social indicators. He finds, from a survey of the literature on the field:
{{Bquote | The so-called "monetarist experiment" which lasted until 1982 in its pure form, has been the object of much controversy, but few have claimed it to be a success...The most conspicuous feature of the post 1973 period is that of considerable instability...no firm and consistent upward trend (to say the least).}}


] in Chile fell from 82.2 per 1000 to 19.5 per 1000 from 1970-85. ] at birth increased from 64.8 years to 68.3 years in the same period and life expectancy at age 1 remained about constant at 68.6 years in the same period. === Infant mortality and life expectancy ===
] in Chile fell from 82.2 per 1000 to 19.5 per 1000 from 1970-85. ] at birth increased from 64.8 years to 68.3 years in the same period. However, life expectancy at age 1 remained virtually constant at 68.6 years in the same period. He{{Who|date=March 2009}} finds that
{{Bquote | favourable infant mortality trends in Chile have not been reflective of corresponding general improvement in living conditions }}


He also notes that Chile had a very long tradition of public action for the improvement of living standards, which were largely maintained:
Chilean economist Jacobo Schatan claims that "in 1996 the average per capita income of the top 5% was about 100 times larger than the average for the poorest 5%."<ref>p.60 of Schatan, J. (2001) "Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism." ''Development and Society'', 30(2) pp.57-77</ref><ref>p.144-148 of Schatan, J. (1998) "El Saqueo de America Latina." ''LOM Ediciones,'' Santiago de Chile.</ref>

{{Bquote | ... there is little disagreement as to what caused the observed improvement in the area of child health and nutrition...It would be hard to attribute the impressively steady decline in infant mortality ... (despite several major economic recessions) ... to anything else than the maintenance of extensive public support measures}}

=== Social inequality and poverty rates ===
Chilean economist Jacobo Schatan found that "''in 1996 the average per capita income of the top 5% was about 100 times larger than the average for the poorest 5%.''"<ref>p.60 of Schatan, J. (2001) "Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism." ''Development and Society'', 30(2) pp.57-77</ref><ref>p.144-148 of Schatan, J. (1998) "El Saqueo de America Latina." ''LOM Ediciones,'' Santiago de Chile.</ref>


Today, while some sources state that only 14% percent of the population lives below the ] (compared with 31 percent in ] and 62 percent in ])<ref name=POVERTY></ref>, others contend that these estimates are inaccurate, and as many as 39% of the Chilean population live in actual poverty<ref></ref>. Jacobo Schatan has criticised the methodology used to asses poverty in Chile, writing that "''the real figures for poverty would be between double and more than double the official figures''."<ref>p.76 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref> Today, while some sources state that only 14% percent of the population lives below the ] (compared with 31 percent in ] and 62 percent in ])<ref name=POVERTY></ref>, others contend that these estimates are inaccurate, and as many as 39% of the Chilean population live in actual poverty<ref></ref>. Jacobo Schatan has criticised the methodology used to asses poverty in Chile, writing that "''the real figures for poverty would be between double and more than double the official figures''."<ref>p.76 of Schatan, J. (2001) ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism''. ''Development and Society'', 30(2) pp.57-77</ref>


===Wages and employment===
By 1983, real salaries dropped 14% what they had been in 1970.<ref>Elton Rayack, Not so Free to Choose, p. 69</ref> Median salaries have fared even worse, declining by 30% over the same period, signalling a transfer of wealth from the poor and middle class to the rich, a pattern that is reflected in consumption trends.<ref>Hudson, Rex (ed.) (1994) Chile: A Country Study, ''Chapter 2: The Society and Its Environment'', Federal Research Division (U.S.), Library of Congress</ref> The Pinochet regime also saw unemployment rise to record levels that were only alleviated after a democratic government took over in 1991.<ref>Hudson, Rex (ed.) (1994) Chile: A Country Study, ''Chapter 2: The Society and Its Environment'', Federal Research Division (U.S.), Library of Congress</ref> By 1983, real salaries dropped 14% what they had been in 1970.<ref>Elton Rayack, Not so Free to Choose, p. 69</ref> Median salaries have fared even worse, declining by 30% over the same period, signalling a transfer of wealth from the poor and middle class to the rich, a pattern that is reflected in consumption trends.<ref>Hudson, Rex (ed.) (1994) Chile: A Country Study, ''Chapter 2: The Society and Its Environment'', Federal Research Division (U.S.), Library of Congress</ref> The Pinochet regime also saw unemployment rise to record levels that were only alleviated after a democratic government took over in 1991.<ref>Hudson, Rex (ed.) (1994) Chile: A Country Study, ''Chapter 2: The Society and Its Environment'', Federal Research Division (U.S.), Library of Congress</ref>


==Nobel laureate Milton Friedman== ==Milton Friedman and Chilean economic policy==


Milton Friedman advocated releasing price controls and replacing undeveloped countries' command-based economies with free market capitalism. Friedman's name has been strongly linked to the coup by Orlando Letelier, a ] agent and Allende's Defense and Foreign Affairs Minister.<ref></ref><ref>Letelier, Orlando (1976) "The Chicago Boys In Chile", ''The Nation'', 28th August</ref> Milton Friedman advocated releasing price controls and replacing undeveloped countries' command-based economies with laissez-faire free market capitalism, even if it meant using quick reforms that ] would refer to as "]." In the case of Chile, these reforms were instituted in the wake of a violent coup, and Friedman's name has been strongly linked to the coup in Chile by critics such as exiled Chilean Foreign Affairs Minister Orlando Letelier<ref>Letelier, Orlando (1976) "The Chicago Boys In Chile", ''The Nation'', 28th August</ref>.


Friedman did not personally support Pinochet, though he had given some lectures advocating free market economic policies in La Universidad Católica de Chile and met with Pinochet for 45 minutes, where the general "indicated very little indeed about his own or the government's feeling" and the president asked Friedman to write him a letter laying out what he thought Chile’s economic policies should be; Friedman did that <ref name=REASON> Friedman's 21 April 1975 letter may be found in Milton and Rose Friedman's ''Two Lucky People'' and in an .</ref>. The New York Times columnist Anthony Lewis declared in 1975 that "the Chilean junta’s economic policy is based on the ideas of Milton Friedman…and his Chicago School". <ref name=REASON></ref> However, Milton Friedman did not even meet with Pinochet until 1975, two years after the coup, and free-market policies were not begun until 1975, again, two years after the coup.<ref name=REASON/> Friedman did not personally support Pinochet, though he had given some lectures advocating free market economic policies in La Universidad Católica de Chile and met with Pinochet for 45 minutes, where the general "indicated very little indeed about his own or the government's feeling" and the president asked Friedman to write him a letter laying out what he thought Chile’s economic policies should be; Friedman did that <ref name=REASON> Friedman's 21 April 1975 letter may be found in Milton and Rose Friedman's ''Two Lucky People'' and in an .</ref>. The New York Times columnist Anthony Lewis declared in 1975 that "the Chilean junta’s economic policy is based on the ideas of Milton Friedman…and his Chicago School". <ref name=REASON></ref> However, Milton Friedman did not even meet with Pinochet until 1975, two years after the coup, and free-market policies were not begun until 1975, again, two years after the coup.<ref name=REASON/>
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Commenting on his statement about the "Miracle", Friedman says that "the emphasis of that talk was that free markets would undermine political centralization and political control." Friedman claimed that "The real miracle in Chile was not that those economic reforms worked so well, but because that's what ] said they would do. Chile is by all odds the best economic success story in Latin America today. The real miracle is that a ] was willing to let them do it." He says the "Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." The term ''Miracle of Chile'' is also commonly used to refer to the claimed favorable economic results of economic liberalization in that economy. Detractors claim that the ] went into serious decline between 1973 and 1983. Supporters point out that this economic downturn was not confined to Chile but was a Latin American phenomenon; Chile being the first nation in the region to recover. Commenting on his statement about the "Miracle", Friedman says that "the emphasis of that talk was that free markets would undermine political centralization and political control." Friedman claimed that "The real miracle in Chile was not that those economic reforms worked so well, but because that's what ] said they would do. Chile is by all odds the best economic success story in Latin America today. The real miracle is that a ] was willing to let them do it." He says the "Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." The term ''Miracle of Chile'' is also commonly used to refer to the claimed favorable economic results of economic liberalization in that economy. Detractors claim that the ] went into serious decline between 1973 and 1983. Supporters point out that this economic downturn was not confined to Chile but was a Latin American phenomenon; Chile being the first nation in the region to recover.


Some people{{who}} have criticized Friedman for assisting the Pinochet government with economic reforms. Friedman has defended himself against such criticisms, stating that he had given nearly similar speeches and promoted the same policies in ] and ], and pointing out that his visit was unrelated to the political side of the regime and that during his visit to Chile he even stated that following his economic liberalization advice would help bring political freedom and the downfall of the regime. Some people have criticized Friedman for assisting the Pinochet government with economic reforms, pointing to the brutal tactics used by that regime. Friedman has defended himself against such criticisms, stating that he had given nearly similar speeches and promoted the same policies in ] and ], and pointing out that his visit was unrelated to the political side of the regime and that during his visit to Chile he even stated that following his economic liberalization advice would help bring political freedom and the downfall of the regime.


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According to the 2008 ], Chile is the world's 8th "most free" economy today and 11th "most free" in the 2009 Index of Economic Freedom.<ref></ref>. Chile is ranked 3rd out of 29 countries in the Americas and has been a "regional leader" for over a decade. Chile had GDP growth of 6.1% in 2004, and has averaged a 4.0% annual increase in GDP over the last five years for which data is available. According to the 2008 ], Chile is the world's 8th "most free" economy today and 11th "most free" in the 2009 Index of Economic Freedom.<ref></ref>. Chile is ranked 3rd out of 29 countries in the Americas and has been a "regional leader" for over a decade. Chile had GDP growth of 6.1% in 2004, and has averaged a 4.0% annual increase in GDP over the last five years for which data is available.

==Bibliography==
* {{es}}
*
* COLLIER, Simon and Sater, William F. ''A History of Chile, 1808-2002'', New York and London, Cambridge University Press, 2004.
* CONSTABLE, Pamela and Valenzuela, Arturo. ''A Nation of Enemies: Chile Under Pinochet.'' New York, W. W. Norton & Company, 1993.
*
* PALEY, Julia. ''Marketing Democracy: Power and Social Movements in Post-Dictatorship Chile''. University of California Press, 2001
*
* SCHATAN, Jacobo. ''Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism.'' Development and Society, 30(2) pp.57-77
*
*


==Additional information== ==Additional information==
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===External links===
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* from PBS.org
* by economist Jim Cypher in ] magazine
* made by a Chilean economist and former principal of ] about Chilean economic history

===Articles===
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===Criticism===
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===References=== ===References===

Revision as of 17:58, 4 May 2009

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Chilean (blue) and average Latin American (orange) GDP per capita (1950-2007).

The "Miracle of Chile" is a term coined by Milton Friedman to describe the dictator Augusto Pinochet's liberal and free market reorientation of the economy of Chile upon taking power in the spring of 1975. It targeted, stopped, and reversed the socialist model implemented by Salvador Allende. The plan behind this "miracle" was drafted by the "Chicago Boys."

The plan had three main objectives: economic liberalization, privatization of state owned companies, and stabilization of inflation. It was continued and strengthened after Pinochet stepped down. Successive governments have continued these policies.

Supporters point out that since Pinochet stepped down, Chile has become one of South America's most stable and prosperous nations. Within the greater Latin American context it leads in terms of competitiveness, quality of life, political stability, globalization, economic freedom, low perception of corruption and comparatively low poverty rates. It also ranks high regionally in freedom of the press, human development and democratic development. Its status as the region's richest country in terms of gross domestic product per capita (at market prices and purchasing power parity) Critics counter that the system started by what they sometimes term Pinochet's "fascist coup" from Allende continues to be defined primarily by its high level of income inequality as measured by the Gini index.

Background

Pinochet, under the advice of a group of Chilean economists who had mostly studied at the University of Chicago Department of Economics (the Chicago Boys), implemented a set of economic reforms that included deregulation and privatization. Among others, they privatized the pension system , state industries, and banks, and reduced taxes. Pinochet's stated aim was to "make Chile not a nation of proletarians, but a nation of entrepreneurs.

Inflation under Allende

In 1972, during the second full year of Allende's government (and prior to the coup that brought Pinochet to power), inflation in Chile was running at 150%. A range of factors led to increased inflation in Chile, such as fixed prices on essential goods, a multiple exchange rate and US opposition to the elected government (their stated goal was to "make the economy scream").

In 1973, due in part to a sustained US campaign against the elected government , the Chilean population were critically short on many food and consumer items. Chilean economist Jacobo Schatan writes, "It was clear that the scarcity had been manipulated for political reasons, to create a climate favourable to both the coup and, subsequently, the total change of the economic system."

'El Ladrillo'

Immediately following the Chilean coup of 1973, Augusto Pinochet was made aware of a confidential economic plan known as El Ladrillo (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 by economists who opposed Salvador Allende's government, with the help from a group of economists the press were calling the Chicago Boys, because they were predominantly alumni of the University of Chicago. This document, El Ladrillo, was made available to the offices of the Chilean Armed Forces Generals on the very day after the coup, September 12, 1973 , and contained the backbone of what would later on become the Chilean neoliberal economic policy.

Nature of the reforms

Pinochet's government privatized almost every nationalized industry, from mines to factories to the pension system. He welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business. The main copper company, Codelco, remained in government hands due the nationalization of copper completed by Salvador Allende, however, private companies were allowed to explore and develop new mines. Copper resources were, however, declared "inalienable" by the 1980 Constitution.

The privatizations brought in a new right wing industrial oligarchy, wiping out previous industrialists who had depended on strict trade protections and subsidies in order to maintain their economic power. Only one of the free market recommendations of El Ladrillo was not implemented: a floating exchange rate. Minister of Finance Sergio de Castro, departing from Friedman's well-known support for flexible exchange rates, decided on a fixed exchange rate of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos inflation outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe recession that lasted more than two years.

Chile as a model economy

Supporters of Friedman's liberal economic views argue that subsequent events in Chile have vindicated his free market philosophy. They claim that Chile's economy is "noticeably stronger and more advanced than those of other Latin American nations". Opponents use Chile as an example of the failure of Friedmanite policies.

Immediate effects of the reforms

"First Miracle" vs. "Second Miracle"

Some analysts divide the neoliberal economic experiments of Chile in two distinct phases: the "First Miracle" (1973- 82), that ended when the fixed exchange rate policy failed and led to the depression of 1982 (see below), and the "Second Miracle" (1985-89), which occurred after the devaluation initiated an export-led boom which brought an end to the depression.

Early 1980s recession

Chile had a strong economic recession in 1982-1983, its second in eight years (in 1975, when GDP fell by 13 per cent, industrial production plunged by 27 per cent, and unemployment shot up to 20 per cent). Real economic output declined by 19% just in 1982 and 1983 and most of the recovery and subsequent growth took place after Pinochet left office , when market-oriented economic policies were additionally strengthened.

Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. However, this devaluation was done so incompetently and belatedly--and at the exact moment that the United States, Chile's major creditor and trading partner, was going into a major recession--that it led to a fall in Chile's GDP of 20% during 1982 and 1983, resulting in widespread unemployment and the collapse of the financial sector. Unemployment spiked to 30 percent. Around 50 percent of the population fell below the poverty line. Extreme poverty affected 30 percent of the population. In his Memoirs ("Two Lucky People", 1998), Milton Friedman directed blame towards De Castro and the fixed exchange rate, claiming that it was contrary to the free market model.

Post-recession period

Following the 1983 implosion, some claim the Pinochet dictatorship did not abandon the free-market reforms of El Ladrillo. Though the recession had huge social and political costs to the junta, during 1983 and 1984, the government maintained a free-market, hands-off approach to the economy, refusing to reinstate tariffs or other trade barriers, and allowing major Chilean industries to fail, rather than offering subsidies.

Starting in 1985, the focus of economic policies shifted toward financial solvency and economic growth. Exports grew rapidly and unemployment went down. People living below the poverty line represented 45 percent of the population in 1987.

Others, such as economist and investigative journalist Greg Palast, dispute this position, pointing to economic changes in response to the recession, such as Pinochet's restoration of the minimum wage and union bargaining, large scale public sector job creation schemes, laws restricting the free flow of foreign capital, and bank and industrial nationalisations as indicating an abandonment of the Friedmannite experiment in the face of economic disaster.

Performance on economic and social indicators

Annual growth

From the beginning of the reforms of the Chicago Boys in 1975 through 1986, there was almost no growth in per-capita GDP, a decline in per capita consumption (unclear, but around 15%) and an (overall) increase in unemployment from 4.8% to 14%. Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. Since then the economy has averaged 7-percent annual growth, raising per capita income for Chile's 16-million citizens to more than $10,000 and creating a thriving middle class. This growth stagnated in 1997, with GDP rising by only a small margin between 1997 and 2002.

Amartya Sen, in his book Hunger and Public Action (1989) examines the performance of Chile in various economic and social indicators. He finds, from a survey of the literature on the field:

The so-called "monetarist experiment" which lasted until 1982 in its pure form, has been the object of much controversy, but few have claimed it to be a success...The most conspicuous feature of the post 1973 period is that of considerable instability...no firm and consistent upward trend (to say the least).

Infant mortality and life expectancy

Infant mortality rate in Chile fell from 82.2 per 1000 to 19.5 per 1000 from 1970-85. Life expectancy at birth increased from 64.8 years to 68.3 years in the same period. However, life expectancy at age 1 remained virtually constant at 68.6 years in the same period. He finds that

favourable infant mortality trends in Chile have not been reflective of corresponding general improvement in living conditions

He also notes that Chile had a very long tradition of public action for the improvement of living standards, which were largely maintained:

... there is little disagreement as to what caused the observed improvement in the area of child health and nutrition...It would be hard to attribute the impressively steady decline in infant mortality ... (despite several major economic recessions) ... to anything else than the maintenance of extensive public support measures

Social inequality and poverty rates

Chilean economist Jacobo Schatan found that "in 1996 the average per capita income of the top 5% was about 100 times larger than the average for the poorest 5%."

Today, while some sources state that only 14% percent of the population lives below the poverty line (compared with 31 percent in Brazil and 62 percent in Bolivia), others contend that these estimates are inaccurate, and as many as 39% of the Chilean population live in actual poverty. Jacobo Schatan has criticised the methodology used to asses poverty in Chile, writing that "the real figures for poverty would be between double and more than double the official figures."

Wages and employment

By 1983, real salaries dropped 14% what they had been in 1970. Median salaries have fared even worse, declining by 30% over the same period, signalling a transfer of wealth from the poor and middle class to the rich, a pattern that is reflected in consumption trends. The Pinochet regime also saw unemployment rise to record levels that were only alleviated after a democratic government took over in 1991.

Milton Friedman and Chilean economic policy

Milton Friedman advocated releasing price controls and replacing undeveloped countries' command-based economies with laissez-faire free market capitalism, even if it meant using quick reforms that Jeffrey Sachs would refer to as "shock therapy." In the case of Chile, these reforms were instituted in the wake of a violent coup, and Friedman's name has been strongly linked to the coup in Chile by critics such as exiled Chilean Foreign Affairs Minister Orlando Letelier.

Friedman did not personally support Pinochet, though he had given some lectures advocating free market economic policies in La Universidad Católica de Chile and met with Pinochet for 45 minutes, where the general "indicated very little indeed about his own or the government's feeling" and the president asked Friedman to write him a letter laying out what he thought Chile’s economic policies should be; Friedman did that . The New York Times columnist Anthony Lewis declared in 1975 that "the Chilean junta’s economic policy is based on the ideas of Milton Friedman…and his Chicago School". However, Milton Friedman did not even meet with Pinochet until 1975, two years after the coup, and free-market policies were not begun until 1975, again, two years after the coup.

Commenting on his statement about the "Miracle", Friedman says that "the emphasis of that talk was that free markets would undermine political centralization and political control." Friedman claimed that "The real miracle in Chile was not that those economic reforms worked so well, but because that's what Adam Smith said they would do. Chile is by all odds the best economic success story in Latin America today. The real miracle is that a military junta was willing to let them do it." He says the "Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." The term Miracle of Chile is also commonly used to refer to the claimed favorable economic results of economic liberalization in that economy. Detractors claim that the Chilean economy went into serious decline between 1973 and 1983. Supporters point out that this economic downturn was not confined to Chile but was a Latin American phenomenon; Chile being the first nation in the region to recover.

Some people have criticized Friedman for assisting the Pinochet government with economic reforms, pointing to the brutal tactics used by that regime. Friedman has defended himself against such criticisms, stating that he had given nearly similar speeches and promoted the same policies in China and Yugoslavia, and pointing out that his visit was unrelated to the political side of the regime and that during his visit to Chile he even stated that following his economic liberalization advice would help bring political freedom and the downfall of the regime.

Long term results

The experience of Chile in the 1970s and 1980s, and especially the export of the Chilean pension model by former Labor Minister Jose Piñera, has influenced the policies of the Communist Party of China and has been invoked as a model by economic reformers in other countries, such as Boris Yeltsin in Russia and almost all Eastern European post-Communist societies .

Current Chilean economy

See also: Economy of Chile

According to the 2008 Index of Economic Freedom, Chile is the world's 8th "most free" economy today and 11th "most free" in the 2009 Index of Economic Freedom.. Chile is ranked 3rd out of 29 countries in the Americas and has been a "regional leader" for over a decade. Chile had GDP growth of 6.1% in 2004, and has averaged a 4.0% annual increase in GDP over the last five years for which data is available.

Bibliography

Additional information

See also

External links

Articles

Criticism

References

  1. ^ Thomas M. Leonard. Encyclopedia Of The Developing World. Routledge. ISBN 1579583881 p. 322
  2. "Country profile: Chile".
  3. "Human and income poverty: developing countries". UNDP. Retrieved 2008-05-19.
  4. "World Economic Outlook Database, April 2008". Retrieved 2008-05-02.
  5. "World Economic Outlook Database, April 2008". International Monetary Fund. Retrieved 2008-05-02.
  6. "Encuesta Casen" (PDF). Mideplan. 2007.
  7. RIX, Sara E., Ph.D.Chile's Experience With The Privatization Of Social Security. , AARP Public Policy Institute, August 1995
  8. ^ BBC NEWS | Americas | Pinochet's rule: Repression and economic success
  9. p.60 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp.57-77
  10. United States Senate Report (1975) "Covert Action in Chile, 1963-1973" U.S. Government Printing Office Washington. D.C.
  11. p.60 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp.57-77
  12. ^ Template:EsEl Ladrillo: Bases de la Política Económica del Gobierno Militar Chileno. Santiago de Chile: june 2002, ISBN 956-7015-07-4
  13. ^ >Template:Es VILLAROEL, Gilberto. La herencia de los "Chicago boys". Santiago do Chile: BBC Mundo.com - América Latina, 10/12/2006.
  14. Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. 'Development and Society', 30(2) pp.57-77
  15. Bidstrup, Scott (2002) Free Market Fundamentalism: Friedman, Pinochet and the "Chilean Miracle"
  16. Klein, N. (2007) Shock Doctrine: The Rise of Disaster Capitalism
  17. BELLO, Walden Bello and KELLY, John. The IMF and Chile A Parting of Ways? International Finance, The Multinational Monitor, April 1983, Volume 4, Number 4
  18. Chile: Successes and Failures in Poverty Eradication. World Bank
  19. Cypher, James. (2004) Is Chile a neoliberal success? Dollars & Sense, September-October 2004
  20. p.60 of Schatan, J. (2001) "Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism." Development and Society, 30(2) pp.57-77
  21. p.144-148 of Schatan, J. (1998) "El Saqueo de America Latina." LOM Ediciones, Santiago de Chile.
  22. Country Comparison > Population below poverty line
  23. UDI acusa al Gobierno de falsear cifras de pobreza en Chile
  24. p.76 of Schatan, J. (2001) Poverty and Inequality in Chile: Offspring of 25 Years of Neo-Liberalism. Development and Society, 30(2) pp.57-77
  25. Elton Rayack, Not so Free to Choose, p. 69
  26. Hudson, Rex (ed.) (1994) Chile: A Country Study, Chapter 2: The Society and Its Environment, Federal Research Division (U.S.), Library of Congress
  27. Hudson, Rex (ed.) (1994) Chile: A Country Study, Chapter 2: The Society and Its Environment, Federal Research Division (U.S.), Library of Congress
  28. Letelier, Orlando (1976) "The Chicago Boys In Chile", The Nation, 28th August
  29. ^ DOHERTY, Brian. The Life and Times of Milton Friedman: Remembering the 20th century's most influential libertarian. Reason Magazine, March 2007 Print Edition Friedman's 21 April 1975 letter may be found in Milton and Rose Friedman's Two Lucky People and in an online Chilean newspaper. Cite error: The named reference "REASON" was defined multiple times with different content (see the help page).
  30. SCHAEFER, Standard. Chile's Failed Economic Laboratory: an Interview with Michael Hudson. CounterPunch, October 20, 2003
  31. The 2009 Index of Economic Freedom
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