The economy grew an astonishing 14 percent in 1936 — the strongest peacetime year in U.S. history. But does that mean that people were enjoying champagne and caviar during the Great Depression? Of course not. The economy was simply making up lost ground. Likewise, the U.S. recessions of 1980-82 were the worst since the Great Depression, and these were followed by an unusually strong seven-year boom: the so-called "Reagan years."

What's going on here? Two economic concepts are useful to understand this phenomenon. The first is that the economy grows in the long run, as both the population expands and each worker produces more per hour, thanks to improving technology and efficiency. This long-term growth experiences mild swings in the form of recessions and recoveries, of course. But if the economy grows in the long run, then deep recessions are going to be followed by even steeper recoveries.

The second concept is the distinction between actual productivity and potential productivity. "Potential" is a somewhat misleading term, since it implies something imaginary, but this productivity does indeed exist. Potential productivity reflects our nation's productive capacity (in the form of our workers, factories, etc.). Actual productivity reflects how much of that capacity is actually being used. For example, a factory may have the potential to turn out 3,000 cars a month. During a recession, however, its actual productivity may fall to only 1,500 cars a month. Actual growth would occur if the factory returned to a full capacity of 3,000 cars. Potential growth would occur only if a second factory were built.

During a recession, actual productivity drops as millions of workers are laid off and factories sit idle. But all the potential productivity is still there. During a recovery, actual productivity climbs closer to its potential, as millions of laid-off workers return to empty factories. This gives the appearance of growth — and we should note that this type of growth is relatively quick and easy to achieve. But what happens when all the workers have returned? Then any further growth will have to involve potential growth — that is, the construction of factories and the birth of new workers. As you might imagine, this type of growth is considerably more difficult to achieve.

So this is all that happened that during Chile's "Economic Miracle" — laid-off workers returned to their old jobs. When you take both the recession and recovery into account, Chile actually had the second worst rate of growth in Latin America between 1975 and 1980. Only Argentina did worse. (6)

And even then, much of Chile's growth was artificial or fictitious. Between 1977 and 1981, 80 percent of Chile's growth was in the unproductive sectors of the economy, like marketing and financial services. Much of this was speculation attracted to Chile's phenomenally high interest rates, which, at 51 percent in 1977, were the highest in the world. (7)

Chile's integration into the world market would leave it vulnerable to world market forces. The international recession that struck in 1982 hit Chile especially hard, harder than any other Latin American country. Not only did foreign capital and markets dry up, but Chile had to pay out stratospheric interest rates on its orgy of loans. Most analysts attribute the disaster both to external shocks and Chile's own deeply flawed economic policies. By 1983, Chile's economy was devastated, with unemployment soaring at one point to 34.6 percent — far worse than the U.S. Great Depression. Manufacturing production plunged 28 percent. (8) The country's biggest financial groups were in free fall, and would have collapsed completely without a massive bail-out by the state. (9) The Chicago boys resisted this measure until the situation became so critical they could not possibly avoid it.

The IMF offered loans to help Chile out of its desperate situation, but on strict conditions. Chile had to guarantee her entire foreign debt — an astounding sum of US$7.7 billion. The total bailout would cost 3 percent of Chile's GNP for each of three years. These costs were passed on to the taxpayers. It is interesting to note that when the economy was booming, profitable firms were privatized; when those firms failed, the costs of bailing them were socialized. In both cases, the rich were served. (10)

After the IMF loans came through, the Chilean economy began recovering in 1984. Again, it saw exceptionally high growth, averaging about 7.7 percent a year between 1986 and 1989. (11) But like the previous cycle, this was mostly due to actual growth, not potential growth. By 1989, the GDP per capita was still 6.1 percent below its 1981 level. (12)

So what was the record for the entire Pinochet regime? Between 1972 and 1987, the GNP per capita fell 6.4 percent. (13) In constant 1993 dollars, Chile's per capita GDP was over $3,600 in 1973. Even as late as 1993, however, this had recovered to only $3,170. (14) Only five Latin American countries did worse in per capita GDP during the Pinochet era (1974-1989). (15) And defenders of the Chicago plan call this an "economic miracle!"

Aggregate statistics are somewhat better. Between 1970 and 1989, Chile's total GDP grew a lackluster 1.8 to 2.0 percent a year. That was slower than most other Latin American countries, and slower than its own record in the 60s. (16)

With the economy booming in 1988, however, the government felt it safe to honor a requirement of its new constitution: a yes-no vote confirming the presidency of General Pinochet for another eight years. But the government's confidence turned out to be self-deluded, and Pinochet lost the vote. This called for another set of more open elections in 1989. The fragmented opposition united to defeat Pinochet, who was replaced by Patricio Aylwin, a moderate candidate from the Christian Democratic party. However, Pinochet remains as head of the military. Today democracy is restored in Chile, but a laissez-faire culture persists, and many social programs (like social security) remain privatized. Chile's economic course seems to have been permanently altered.

The deterioration of labor

Chile's erratic economy and ultimately slow growth are not the worst legacy of the Chicago boys. The standard of living for workers crumbled under the Pinochet regime. In fact, this is a truly horrific part of the story.

By all measures, the average worker was worse off in 1989 than in 1970. During this period, labor's share of the national income fell from 52.3 to 30.7 percent. (17) Even during the second boom (1984-89), wages continued to fall. The following index shows the decline in both average and minimum wages:

By 1989, Chile's poverty rate was 41.2 percent, one-third of them indigent or desperately poor. (19) Shanty towns known as poblaciones grew around Santiago and other major cities, kept alive by las comunes, or soup kitchens. In 1970, the daily diet of the poorest 40 percent of the population contained 2,019 calories. By 1980 this had fallen to 1,751, and by 1990 it was down to 1,629. (20) Furthermore, the percentage of Chileans without adequate housing increased from 27 to 40 percent between 1972 and 1988, despite the government's boast that the new economy would solve homelessness. (21)

Meanwhile, the wealthy were raking it in. The following chart shows how the richest 20 percent of society enlarged their share of the pie at the everyone else's expense. (Note: the "first quintile" represents the poorest 20 percent of society, the "fifth quintile" the richest 20 percent. The percentage numbers here represent the share of national goods consumed by that quintile.)

Chile's income inequality also became the worst on the continent. In 1980, the richest 10 percent took in 36.5 percent of the national income. By 1989, this had risen to 46.8 percent. By contrast, the bottom 50 percent of income earners saw their share fall from 20.4 to 16.8 percent over the same period. (23)

Income was not the only thing that concentrated in the hands of the few; so did production. Once the Chicago boys deregulated the market, oligopolies rapidly formed in virtually every sector. The chart below shows how many large export firms controlled what percentage of their industry:

How did such extreme inequality come about? It was part of an intentional policy to keep unemployment as high as possible. (25) Widespread unemployment has the effect of driving down wages, as unemployed workers compete for a limited number of jobs, accepting even sub-poverty wages to get them. Many promoters of the "free market" forget — or probably exploit — the fact that the labor market is like any other market: dictated by the laws of supply and demand. To see how this works, imagine a land where the supply of workers perfectly matches the employers' demand for them, and everyone gets paid $10 an hour. What happens if we add a few more workers to this economy? Economist Paul Krugman explains:

• "The way that a freely functioning labor market ensures that almost everyone who wants a job gets one is by allowing wages rates to fall, if necessary, to match supply to demand…" (26)

And the more unemployed workers we add to this economy, the more wages fall. An example of this correlation can be seen in the U.S. recession of 1982, when unemployment nearly hit 11 percent in the fourth quarter, and real hourly wages fell nearly 50 cents from three years before. The flip-side to this example is the 1980s "Massachusetts Miracle," when unemployment fell to a phenomenally low 2.7 percent, and McDonald's began offering twice the minimum wage ($7 an hour) trying to attract workers. (27)

In Chile, high unemployment was part of a deliberate policy, encouraged by the IMF and World Bank, to depress wages. During the crisis of 1975, the unemployment rate hit 18.7 percent. But even through the booms and busts that followed over the next ten years, the unemployment rate still averaged 15.7 percent. This was easily the worst in all Latin America. (28) The result of this policy was that wages fell, companies became more profitable, and inequality grew extreme. As might be guessed, such high unemployment also reduces a nation's productivity, which is largely why Chile's growth record compared so poorly to its neighbors.

How did the Chicago boys accomplish this war against workers without the people rising up in revolt? The answer lies in Pinochet's reign of terror.

Pinochet's crimes against humanity

From the very start of his rule, General Pinochet moved to suppress all opposition. He banned all other political parties, suspended labor unions, and cracked down on all dissidents to his regime. During his 16 years in power, his repressive apparatus executed at least 1,500 activists, exiled 15,000 others, and imprisoned, tortured, assassinated, or caused the "disappearance" of countless thousands more. (29) According to one human rights group, the Pinochet regime was responsible for 11,536 human rights violations between 1984 and 1988 alone. (30)

As time went on, however, Pinochet did a most unusual thing for a dictator: he dissolved his own regime. Not only did he give total control of the economy over to the Chicago boys, but he eventually returned a growing share of political freedom to the people as well. Once his totalitarian power was secure in the late 70s, he legalized labor unions and political parties once more, albeit under oppressive limitations and controls. And he agreed to a new constitution that would eventually require a plebiscite on his rule, and even democratic elections.

Does the fact that an oppressive military regime enabled the Chicago boys' to carry out their experiments somehow invalidate their results? Not according to Milton Friedman:

• "I have nothing good to say about the political regime that Pinochet imposed. It was a terrible political regime. The real miracle of Chile is not how well it has done economically; the real miracle of Chile is that a military junta was willing to go against its principles and support a free-market regime designed by principled believers in a free market. The results were spectacular. Inflation came down sharply. After a transitory period of recession and low output that is unavoidable in the course of reversing a strong inflation, output started to expand, and ever since, the Chilean economy has performed better than any other South American economy.
  
  "In Chile, the drive for political freedom, that was generated by economic freedom and the resulting economic success, ultimately resulted in a referendum that introduced political democracy. Now, at long last, Chile has all three things: political freedom, human freedom and economic freedom. Chile will continue to be an interesting experiment to watch to see whether it can keep all three or whether, now that it has political freedom, that political freedom will tend to be used to destroy or reduce economic freedom." (31)

However, Friedman is pessimistic that Chile's economic freedom can last under democracy. He notes elsewhere that "while economic freedom facilitates political freedom, political freedom, once established, has a tendency to destroy economic freedom." By Friedman's lights, democracy should kill Chile's free-market reforms. One gets the impression Friedman would consider the experiment an unqualified success had the regime never existed.

It is interesting to note, however, that the anti-labor reforms enacted by the Chicago boys would have never been tolerated in a democracy (and in fact weren't, when the time came). The suppression of opposition to the Chicago program thus allows us to see how it would work in an uncompromised form.

Deregulation and pollution

Chile is a country of 15 million people, but 5 million of them live in Santiago, its capital city. Chile's free market means there is a distinct lack of anti-pollution laws, either for industry or commuters. And as a result, Santiago has become desperately polluted. In 1992, Santiago had the fifth worst air pollution of any city in the world, with levels three to four times higher than the upper limits recommended by the World Health Organization. (32)

Part of Santiago's problem is that it is ringed by mountains, so air pollution gets trapped in the city. However, that's all the more reason why public officials should have recognized the folly of indiscriminate polluting and passed the needed pro-environmental laws a long time ago.

Some 150 industries in Santiago emit 100 times the pollution recommended by particulate norms. Only 30 percent of the city's 600,000 cars have catalytic converters. Due to a lack of public works programs (and an equal lack of business interest), the city has nearly 600 miles of dusty, unpaved roads. The result is a thick, purplish smog that literally chokes the city. (33)

The cost has been horrendous, translated into unusually high mortality and sickness rates for Latin America. Santiago hospitals are swamped with over 2,700 infants a day brought in needing oxygen masks. Chile's College of Physicians has the called the situation a crisis, and authorities have set up a system of "pre-emergency" and "emergency" alerts. In a typical pre-emergency alert, authorities restrict traffic, physical exercise and industrial activity. The World Bank estimates that Santiago's current pre-emergency level is 18 percent more deadly than states of alert in Los Angeles and Europe. But until very recently, Chile's government has been unwilling to enact any serious pro-environmental legislation. In 1996, Dr. Ricardo Tulane quit the College of Physician's environmental committee in protest, accusing the government of doing too little to meet the crisis. (34)

The Chilean journal Apsi reports:

• "The liquid that emerges from the millions of faucets in the homes and alleys of Santiago have levels of copper, iron, magnesium and lead which exceed by many times the maximum tolerable norms. [The lands that] supply the fruits and vegetables of the Metropolitan Region are irrigated with waters that exceed by 1000 times the maximum quantity of coliforms acceptable. [This is why Santiago] has levels of hepatitis, typhoid, and parasites which are not seen in any other part of the continent." (35)

The problem is not limited to Santiago. Half the country has become a desert under misguided industrial and environmental policies. A study by the Central Bank of Chile estimates that by the year 2025, Chile's native forests will have disappeared at current rates of extraction. (36) The Bank also reports that out of nine fish stocks off the Chilean coast, only one (sardines) has increased between 1985 and 1993. Five are in dramatic decline, having fallen between 30 and 96 percent. (37)

Chicago economist Ronald Coase, you may recall, won a Nobel prize for a theorem explaining how markets can resolve externalities like pollution. Chile — the Chicago boys' own experiment — strongly suggests otherwise.

Chile's privatized pensions

One of the most trumpeted "successes" of Chile's economic miracle is the privatization of its public social security system. It's most vocal supporter is Chilean economist José Piñera, who was once Pinochet's Minister of Labor, and therefore one of the most hated men in Chile. Today he is an international salesman of sorts, selling other nations on the idea of Chile's retirement program. Journalist Fred Solowey writes:

• "In his speeches and articles, Piñera credits the Chilean pension model with producing just about everything short of the second coming of Christ: pensions that are 40-50 percent higher than under Social Security; security for the old; lower costs due to the 'fact' that the private sector is much more efficient than the public; a rate of savings rivaling that in an Asian 'tiger' economy; and even the end of class conflict in Chile." (38)

Piñera is co-chairman of a $2 million war being waged against U.S. Social Security by the Cato Institute. Their goal is to privatize the program along Chilean lines. Converts to their cause include Newt Gingerich, and, apparently, Time magazine. In a cover story entitled "The Case for Killing Social Security," Time included a sidebar on "How Chile Got it Right." (39) The operative word here is right, as in right-wing — Time's article quotes all the usual conservative think tanks, but not a single dissenting voice.

The Chilean retirement system is only a success to those companies who are pulling down outrageous profits from it. For the working people of Chile, it is a disaster in the making. According to SAFP, the government agency which regulates the private pensions, 96 percent of the known work force were enrolled in the private pensions as of February, 1995, but 43.4 percent of the account owners were not adding to their funds. Perhaps as many as 60 percent do not contribute regularly. Given the rising poverty in Chile, it is not difficult to understand why. Unfortunately, regular contributions are necessary to receive full benefits.

By 1988, about one fourth of Chilean workers were contributing enough to make the program's minimum benefits: $1.25 a day! (40) Critics charge that only 20 percent of the contributors will actually receive good pensions.

Worse, much of the plan's supposedly higher benefits are projected from the surging economic growth rates of the late 80s. But this growth followed a deep economic depression in 1983, and was bound to be high for many years following. Now that actual growth has caught up to potential growth, the Chilean economy is slowing down. The pensions are therefore not going to be as profitable as their cheerleaders claim.

When the current system was created in the early 80s, the government gave the people their choice: stay in the public program, or start contributing to private pensions. Over 90 percent of the people switched over to the private plan. This was carried out, however, under a mixture of threats, coercion and short term incentives. Many employers simply switched their employees' plans for them. The cash-starved public also received short-term pay increases by switching to private pensions, whereas the cost of the public programs went up for those who stayed in them.

"With the information I now have," says Cecilia Prado, a 17-year public employee, "I never would have switched. Under a democratic government they never could have imposed it on us. And if they ever passed a law allowing people to go back, there would be a great exodus." (41)

What many defenders of Chile's current program do not reveal is that under the old public plan, workers received not only pensions, but health care, low-interest housing loans from pension funds, and many other benefits. And that program covered 75 percent of all Chileans. When the private pensions went into effect, all these other services were dropped. As a result, Chile's "welfare pensions" for the desperately needy quickly rose 400 percent — up to the legal limit.

It is also extremely telling that when Pinochet introduced the program, his army and police were allowed to keep their own generous public plans. The private plans that were suitable for the masses apparently weren't good enough for those in charge of the country.

There are many more aspects to this unfolding disaster, but to chronicle them all here is impossible. Suffice to say, selling Chile's "success" to America is the ultimate con job.

Conclusion

A common defense of the Chicago experiment is that Chile's "prosperity [was] was born of pain." (42) However, the pain continues even today. Although Chile's economy is growing at a healthy pace today, it still lags behind most of Latin America. Much of the development is environmentally unsustainable. Inequality and poverty remain extreme. Furthermore, much of the country's industry is now foreign-owned — meaning that profits do not stay in Chile, but are shipped to other countries. Chile continues to have one of the highest foreign debts in the world, and therefore continues to serve as the poster child for the IMF and World Bank. In the U.S., Chile is on the fast track to becoming the fourth member of NAFTA — for motives one might easily guess.

Another defense of the Chicago experiment is that the conditions were not right, thus its apparent failure. Most objectionable is Pinochet's oppressive military regime. But it is unclear how his political policies would have adversely affected the Chicago boy's economic policies -- if anything, he allowed them to carry their plans out. If unregulated capitalist markets can only be imposed on workers by terror, then this is an argument that we should look for other, more humane economic alternatives.

A third defense is that the experiment was not a failure at all, but a rousing success. Usually these sort of apologetics are based on manipulative interpretations of the business cycle. The most common is to look to the incredible booms of the late 70s and late 80s — while ignoring the events responsible for them, namely, the deep depressions that happened prior.

At present, democracy seems to have reversed the tide of market tyranny, although big business still has undue influence with the government. The restoration of public life in Chile, therefore, will probably be a long, slow and agonizing struggle.

Endnotes:

1. Newsweek, January, 1982

2. Jose Arellano, Politicas Sociales y Desarrollo: Chile, 1924-1984 (Santiago: CIEPLAN, 1988), p. 19.

3. Business Latin America, March 30, 1977, p. 103.

4. Andres Sanfuentes, "Los Grupos Economicos: Control y Politicas," Coleccion Estudios CIEPLAN no. 15, (Santiago: CIEPLAN, December 1984), p. 119.

5. Fernando Dahse, Mapa de la Extrema Riqueza (Santiago: Editorial Aconcagua, 1979), pp. 175-179.

6. James Petras and Fernando Ignacio Leiva with Henry Veltmeyer, Democracy and Poverty in Chile: The Limits to Electoral Politics (Boulder: Westview Press, 1994), p. 27.

7. Oscar Munoz, Chile y su Industrializacion (Santiago: CIEPLAN, 1986), p. 259.

8. Petras, p. 33.

9. Ibid., p. 29.

10. Ibid.

11. Juan Gabriel Valdes, Pinochet's Economists: The Chicago School in Chile (Cambridge, UK: Cambridge University Press, 1995), p. 265.

12. Ricardo Ffrench-Davis, The Impact of Global Recession and National Policies on Living Standards: Chile, 1973-87 (Santiago: CIEPLAN, 1988), pp. 13-33.

13. Cited in Noam Chomsky, Year 501 (South End Press, 1993), Chapter 7: "World Orders Old and New: Latin America Segment," 15/17. http://www.americas.org/archive/year/year-c07-s15.html

14. World Bank, World Tables 1995.

15. Ffrench-Davis.

16. Ibid.

17. Petras, p. 34.

18. Patricio Meller, "Revision del Proceso de Ajuste Chileno de Decada del 80," Coleccion Estudios CIEPLAN no. 30, (Santiago: CIEPLAN, 1990), p. 44.

19. Petras, p. 34.

20. Alvaro Diaz, El Capitalismo Chileno en Los 90: Creimiento Economico y Disigualdad Social (Santiago: Ediciones PAS, 1991), statistical appendix.

21. Excerpt from FoodFirst by Joseph Collins and John Lear. Chile's Free Market Miracle: A Second Look. http://www.web.net/comfront/miracle.htm.

22. Programa de Economia del Trabajo, Informe Anual (Santiago: PET, 1990), p. 192.

23. Diaz, pp. 58-9.

24. Analisis, no. 238, August 1-7, 198, p. 31.

25. Andres Sanfuentes, "Chile: Effects of the Adjustment Policies on the Agricultural and Forestry Sector," CEPAL Review no. 3 (Santiago: United Nations, December 1987), p. 123.

26. Paul Krugman, Peddling Prosperity (New York: W.W. Norton & Company, 1994) p. 124.

27. For average hourly real wages (Total private industry, 1982 dollars), see U.S. Bureau of Labor Statistics, Series ID: eeu00500049; for Massachusetts example, see Paul Krugman, p. 41.

28. Petras, p. 26.

29. Calculations by Chile's Commission of Human Rights, reported in Petras, p. 20.

30. Calculations by CODEPU (Comite Nacional de Defensa de los Derechos del Pueblo), reported in Fortin, September 23, 1988.

31. Milton Friedman, "Economic Freedom, Human Freedom, Political Freedom," Address at the Smith Center ­- A Conservative Think Tank at Cal State Hayward. November 1, 1991 http://www.sbe.csuhayward.edu/~sbesc/frlect.html.

32. WHO/UNEP (1992), World Bank (1992), other World Bank reports.

33. Andrea Mandel-Campbell, "Anger grows over Chilean capital's smog: Respiratory ailments rise," Miami Herald, Thursday, September 12, 1996.

34. Ibid.

35. Apsi, Chile, July 1990 (LANU, Sept. 1990).

36. Cited in Sara Larrain R., "Winning in the Global Economy: Chile's Dark Victory," PCDForum Column #79, The People-Development Centered Forum, June 1, 1996.

37. A copy of the Central Bank report was leaked to the Santiago newspaper La Nacion and published in the Latin American Weekly Report, September 12, 1996.

38. Fred J. Solowey, "Retiring the Chilean myth: Privatized pensions bring social insecurity," Focus, November 5, 1996

39. Time, March 20, 1995.

40. Joseph Collins and John Lear, Chile's Free-Market Miracle (Food First Books, 1994).

41. Solowey.

42. Quoted in Petras, p. 22.

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