Is Chile a Neoliberal Success?
Chile is often heralded as the
global South's best case for free-trade economic policies, but
the facts tell a different story
by James M. Cypher
Dollars and Sense magazine, September/October
Chile is commonly portrayed as the great
exception to Latin America's long and difficult struggle to overcome
economic backwardness and instability. In 1982, conservative economist
Milton Friedman of the University of Chicago pronounced the market-driven
policies of Gen. Augusto Pinochet's military dictatorship "an
economic miracle." Friedman was hardly an impartial observer.
He and other Chicago economists had trained many of the dictatorship's
ultra-free-market economic advisors, a group of Chilean economists
who became known as the "Chicago Boys." Other prominent
U.S. economists, however, also tout Chile's "economic miracle."
In 2000, Harvard economist Robert Barro asserted in Business Week
that Chile's "outstanding performance derived from the free-market
reforms instituted by ... Pinochet." Even Nobel laureate
Joseph Stiglitz, a strong critic of the Chicago School, described
Chile in his 2002 book Globalization and its Discontents as an
exception to the failure of unregulated free markets and free
trade policies in developing nations.
Neoliberalism, a term first employed in
Latin America, describes the experiment in unregulated capitalism
that the Pinochet dictatorship embraced in the years following
the 1973 coup that toppled the elected government of Socialist
President Salvador Allende. Chile has seen three elected governments
since Pinochet's fall in 1990. None, however, including the present
Socialist-led government, has broken sharply with the neoliberal
economic model instituted by the dictatorship. For years, these
post-Pinochet Concertacion governments (a coalition of the Christian
Democratic and Socialist parties) were content to administer the
economic boom that had begun in the latter years of the dictatorship.
But the boom turned to stagnation in 1997:
average per capita income rose only 0.7% per year between 1998
and 2002, while unemployment stayed above 9% through 2003. Export
growth, widely viewed as the engine of the Chilean "miracle,"
stagnated, with total exports barely rising from $17 billion in
1997 to $17.4 billion in 2002.
While both the Concertación economists
and those of the far right sought to blame Chile's woes on outside
factors: the Asian crisis of 1997, the Argentine implosion of
2000, the U.S. slump of 2001, and so on-a few dissident economists
had predicted all along that the boom would inevitably reach an
impasse. One, economist Graciela Moguillansky of the U.N. Economic
Commission for Latin America and the Caribbean, argued that the
large Chilean finance/resource processing conglomerates which
dominate the economy had exhausted the easy resource-processing
opportunities handed to them by the government through programs
created decades ago. The "Chilean miracle" had reached
its own self-imposed limits. Along similar lines, Orlando Caputo,
director of the Santiago-based Centro de Estudios sobre Transnacionalización,
EconomIa y Sociedad, argued that the underlying cause of the crisis
was Chile's breakneck overproduction of copper. The price of copper
fell so sharply between 1995 and 2002 that dollars received for
copper exports actually declined over this period even while total
output increased by 85%.
Rather than grapple with the need to realign
economic policy and adopt a new model of development, however,
the leaders of the Concertatión have decided to intensify
the free-trade, export-oriented model-for example, by signing
as many free-trade agreements as possible. In 2003 Chile was able
to sign agreements with the two largest trading areas of the world,
the European Union (EU) and the United States. These agreements
would allow Chile's exports to surge, Concertación politicians
and economists argued, pulling the rest of the economy along.
The Chilean ruling elite is once again basking in self-satisfaction.
But can they expect another lengthy period of export-fueled growth?
A review of recent Chilean economic history
suggests that it's not likely. Despite the claims of free marketeers,
Chile's economic performance has been mixed, and its successes
owe more to state intervention than to the invisible hand of the
free market. In fact, it would be hard to find any major sector
of the economy that did not owe much of its existence to state
intervention-intervention which continued in a variety of forms
under the nominally neoliberal Pinochet dictatorship.
THE REAL TARGET: LABOR'S POWER
While the Chicago School is known for
its devotion to freemarket policies and its hostility to government
regulation, the chief target of the Chicago Boys (and other right-wing
economists), along with the military dictatorship and the business
class, was not state intervention in economic life, but rather
the organized power of the Chilean working class.
Through protracted struggles over many
decades, Chilean unions had grown, spreading from the mining sector
into manufacturing and eventually into agriculture. The 1973 coup
destroyed the power of the working class in the political and
economic systems. Its union and party leaders were tortured, assassinated,
imprisoned, or exiled. Political parties were banned and unions
made virtually illegal. The dictatorship introduced a "flexible"
labor system that left workers with the formal right of individual
contract, but stripped them of any right to organize and bargain
collectively. Power shifted to the employers in the mines, factories,
fields, and ports. The dictatorship spared no form of state intervention
to crush workers' power.
The core political and economic strength
of the unions when Pinochet came to power was in the industrial
sector. Given the dictatorship's anti-labor aims, its economic
development policy thus had to be an anti-industry policy. This
meant abandoning the longtime basis of Chilean development policy,
import substitution industrialization (ISI). When the Great Depression
of the 1930s hit Chile harder than any other nation in the world,
advocates of ISI argued that Chile had to stop exporting natural
resources (e.g., nitrates, copper, and other minerals), at falling
prices, and importing machinery and consumer products, at rising
prices. ISI advocates claimed that nations such as Chile would
be better off and more stable if they developed domestic industries
and an internal market. To sustain industrialization, infant industries
needed to develop behind a tariff wall so firms could learn, adapt,
and grow. A developed internal market requires mass-based consumption
(rather than just elite consumption of imported luxuries), trained
workers, and the diffusion of production knowledge. Unions thrived
in this environment: high wages provided the mass consumption
base, while unions helped maintain morale and skill levels which
facilitated higher productivity.
The economists associated with the military
dictatorship realized that an economic development strategy based
on industrialization could not exclude a real voice for labor.
One that drew upon Chile's vast treasure of untapped natural resources,
however-the unceasing ocean, the endless forests of the south,
the exceedingly fertile farm lands-could do just that. (Peter
Winn's Victims of the Chilean Miracle brilliantly documents the
pivotal anti-labor focus, particularly in the agricultural, forestry,
and the fisheries sectors.) Thus, the creation of a "nontraditional"
export sector became the keystone of the dictatorship's economic
The plan worked-for a time. Exports soared
from 14.5% of GDP in 1974 to 31.4% in 1999. Copper fell to 40.5%
of exports by 1995, while nontraditional exports such as salmon
and resource-based "manufactured" products such as wood
pulp, paper, cardboard, disposable diapers, and processed woods
boomed. By 2002 all of the new resource-based exports combined-fresh
produce and processed foods, forestry products, wine, and fishing-totaled
$6.7 billion, less than total mining exports of $7.3 billion,
but ahead of copper at $6.3 billion.
The export boom undeniably fueled the
country's economic growth. After enduring a deep recession from
1982 to 1985 (unemployment reached 20% in 1982), Chile's economy
more than bounced back. Between 1987 and 1998, per capita income
grew by 88%.
MARKET OR STATE?
But it was not the invisible hand of the
market that caused the new boom in resource-based exports. Most
of the credit belongs to the state: most of the strategies-such
as new product development, risk capital, technical training!
advising, marketing, quality control-and many of the personnel
involved in the new Chilean "miracle" were products
of the old, and much derided, state interventionism of the 151
How could the core changes generating
the "miracle" come from the detested state sector? One
part of the answer is that many military officers in the upper
ranks of the dictatorship were "developmentalists"-believing
that the economic growth of Chile was partly a by-product of an
agile and creative state. (When the nationalized copper giant
CODELCO fell into the military's control, it remained a state-owned
corporation. The military reluctantly permitted the privatization
of the electric grid and the telephone system, but not copper,
the state-owned oil corporation, or several other key state entities.)
Another answer is that nations cannot quickly change their economic
structure. The Chilean economy was put on a particular development
path in 1939 with the creation of the CORFO, the state agency
mandated to carry out the ISI strategy and build the national
production base. CORFO's many new public and mixed public/private
firms accounted for the great bulk of Chile's industrial growth
from 1940 to 1974: a 1993 study pointed out that of the 20 top
private exporting companies, at least 13 had been created by CORFO.
For a while under the dictatorship, it
seemed that CORFO's mission was nothing more than to sell off
all the state-owned firms, then disappear. But the agency still
exists, and after the 1982-1985 recession it became more active
in the funding and development of new resource-sector firms.
In one key instance, CORFO was responsible
for the funding and creation of the forestry sector-a strategy
that it had advocated and supported for decades prior to the coup.
The Chicago School economists have portrayed the boom in forestry
products, now the largest export sector after mining, as a result
of good policy and private initiative. The real story is that,
while private capital lacked the initiative and foresight to develop
the forestry sector, CORFO introduced forest management techniques,
provided credits and subsidies, financed projects for technological
development and labor training, and fostered the development of
the allied paper, cardboard, and wood industries. CORFO also created
an affiliate, the Forestry Institute, which launched a marketing
and information campaign designed to promote forestry exports,
while carrying on massive reforestation programs and introducing
new tree varieties.
The same basic story holds for the fishing
industry, as well as for most of the developments in fresh produce
and processed food. Rather than the invisible hand moving through
market forces, the visible (but largely ignored) hand of Fundación
Chile-a public-private agency designed to develop firms in new
areas where private capital would not invest, then sell them to
the private sector-was responsible for most of this diversification.
Fundación Chile began in 1976, with the assistance of a
prominent economist, Ratil Saez, who had headed CORFO for many
years. Like many of the military officers in the highest ranks
of the dictatorship, Saez was contemptuous of the pretensions
and ignorance of the Chicago School neoliberals. With CORFO under
attack from this quarter, Saez moved laterally and gathered a
group of experts who achieved major changes in the productive
apparatus of the Chilean economy. (Incubating institutions similar
to Fundacidn Chile have played a key role in the recent history
of economic development in Korea, Taiwan, and much of East Asia-but
these nations have consciously avoided neoliberal free trade policies.
Instead of accepting the dictates of the market, they have sought
to govern the market.)
Likewise, the dictatorship created ProChile
in 1974 to assist the private sector in locating and selling to
foreign markets. Today, many of the activities of ProChile are
coordinated with support programs fostered by CORFO. Through its
Export Promotion Fund, ProChile has co-financed export projects,
providing up to 50% of the necessary capital-often using funds
obtained from or through CORFO.
In yet another instance of state intervention,
the government facilitated a boom in the private mining sector
from the 1980s by allowing the mines to operate essentially tax-free.
The tax rate was an all but invisible 0.8% of sales in 2002. From
1992 to 2002, eight of the top 10 private mining companies paid
no taxes, in spite of the fact that Chile has the most profitable
copper mining companies in the world. (Meanwhile, the poor pay
a value-added tax of 19% on their consumption, including food
What all this adds up to should not be
too surprising. In spite of a brutal military dictatorship that
sought the total restructuring of the economy and the elimination
of the state's guiding role in it, the state sector was a crucial
ingredient in Chile's efforts to build an export-led economy in
the Pinochet years and beyond. Thus, although neoliberals occasionally
imposed their free-market ideas in the financial sector, the restructuring
of the economy was led by a stealth government development policy.
(Even in the financial sphere, the Chicago Boys were forced by
real circumstances to retreat, imposing protective tariffs in
the 1980s and accepting capital controls on imported short-term
"hot" money.) While Chile is nearly always portrayed
as a neoliberal success story, the reality is that Chile's transformation
was not neoliberal at its core-that is, within the system of production.
END OF AN ERA?
Why has the Chilean "miracle"
stagnated? CORFO, the Fundación Chile, and ProChile-the
core triangle of state institutions responsible for the stealth
development policy are no longer receiving the funding to create
new export sectors. In theory, the large forestry companies and
others involved in resource processing could expand and upgrade
their exports, but Moguillansky's work has demonstrated that these
corporations are unwilling to take risks and plow their profits
into new economic activities. They have no intention of making
the long-term investments in machinery and equipment, personnel
and technology, and marketing that would be necessary to develop,
for example, a strong, dynamic furniture-making sector. The same
criticism was raised by the vice-president of Chile's Institute
Engineers and by the Association of Metallurgy
Industries, who argued that Chile needed an industrial policy
(i.e., state intervention directing investment to strategic new
sectors) to develop copper processing and the manufacture of copper-intensive
products. Currently, only 1% of the copper mined in Chile is processed
or turned into manufactured products in the country.
As Moguillansky stresses, Chile's financial/industrial
groups are not interested in technological modernization. In a
study of IS similar nations, the United Nations ranked Chile next
to last in its index of technological capabilities, and 13th in
terms of expenditures on research and development by private firms.
Yet, in spite of all this, and because
THE FREE TRADE OPTION?
For now, the elite is hoping that the
new free-trade agreements will cure the country's economic stagnation.
Exports to Europe are up, along with copper prices, and Chile
now awaits a further opening to the U.S. market. The new trade
agreements are expected to increase foreign direct investment,
but no one has attempted to quantify it. Chile has been so wide
open to foreign investment, and foreign investors have enjoyed
the assurance of a pro-investor climate for so long, that it is
difficult to imagine much of a surge of new investment from either
Europe or the United States.
Thus, if the new free-trade agreements
are to be the next short-term fix for Chile's unraveling economic
model, the impact will have to come through more export opportunities.
Chile has an edge in trade with the EU and the United States because
its fresh produce is largely grown and harvested during the summer
in the southern hemisphere, which coincides with the winter months
in Europe and the United States. This edge is tenuous, though,
since other southern nations can also grow and transport these
Chile may be a few years ahead of its
competitors, but it has nothing unique to offer. Since 1996, reforestation
has stagnated and Chile's two largest forest-product companies
have shifted investment to Argentina and Brazil. Another successful
niche has been aquaculture, particularly farmed salmon. Salmon
production and prices are up for the moment and Chile has a huge
coastline well adapted to fishing. But other countries can become
competitors in this sector as well. In short, although Chile has
developed some important niche markets like high-end produce,
fish, wine, and wood products, there is no reason to believe that
these nontraditional exports will long be immune to global competition.
The result, as always: overproduction and falling prices, a problem
that has cursed Latin America for centuries.
There is, of course, another side to free-trade
agreements. The United States did not sign the 2003 agreement
with Chile out of goodwill. While Chile's pundits foresee huge
export growth, they are virtually silent about surging U.S. imports.
Which parts of the production system will be knocked out by competition
from U.S. firms? The Chilean government has conducted some relevant
studies, which predict that the agreement's overall results will
be positive for Chile, but small. Between 2004 and 2010, when
the stimulus of the trade agreement is expected to end, Chile's
GDP growth might rise between one-half and one percentage point
per year. Since 1997, Chile's growth has slowed to 2.3% per year.
Thus, in the most optimistic scenario, the U.S. trade agreement
could lift the growth rate for a six year period to 3.3%. The
EU free-trade agreement may have a similar impact, since the EU
market is of similar size. If so, Chile could project, at best,
a 4.3% growth rate. Chilean government economists claim U.S. imports
will essentially complement Chile's expansion, providing machinery
and equipment that will permit more exports. But competition from
U.S. wheat, potato, corn, sugar beet, and dairy producers will
probably destroy much of the farm sector.
Still, all this is just toying with economic
models. Back in the real world, if Chile manages to keep an edge
in its nonmineral exports, it will only be by keeping wages down.
If growth does pick up modestly for a few years, the benefits
of that growth will not flow to the mass of Chileans.
Unfortunately for them, the two new free-trade
agreements will probably prolong the life of the export-led model
a bit longer. Rather than facing the inherent limitations and
injustices of this development model, the Concertación
government has sidestepped the real question: After export-led
policies fail, what next?
In the absence of a critical dialogue,
it is hard to imagine Chile turning away from its free-market,
free-trade orientation. Even a devastating economic crisis might
not spur change if no critical vision can be put forward. Unfortunately,
the legacy of the dictatorship still lingers over Chilean public
opinion and political discourse: The economics departments (with
one or two small exceptions) all speak with a single, free-trade
voice, the independent research centers are silent, and the government
and the press laud the idea of more and greater export possibilities.
In this climate, as a Chilean colleague said: "You can be
critical, but if we say these things we will be committing economic
suicide-our careers will be destroyed." Less than 15 years
removed from the end of the military dictatorship, in Chile dissent
is still largely an unpracticed art.
BOOM FOR WHOM?
The Chilean economy unquestionably enjoyed
a boom In the late 1980s and 1990s. Some Chileans enjoyed the
boom more than others, however. Even as Chile's average per capita
income nearly doubled between 1987 and 1998. workers' average
wages increased by only 53%, and because of wage losses over the
22 years between 1970 and 1992, real wages in 1998 were only 293%
higher than in 1970. Chile now has the third most unequal income
distribution in Latin America (behind Brazil and Guatemala). According
to official government data, the top 20% received 57.5% of the
national income in 2000; the top 10% received 423%. Tax evasion
is widespread, with an estimated 23% of total income going unreported,
virtually all of It flowing to the top 20%. So in reality; income
distribution is even more unequal than official figures acknowledge.
The skewed distribution of income, more unequal than it was in
the 1960s, is a deliberate result of government policy. One element
of the policy is to keep income taxes low-the average income tax
rate on the top 10% is a mere 2.5% Mother is to keep wages low
in the export sectors to keep them internationally competitive.
But this also means that wages must be low throughout the economy.
Redistribution policies instituted by
the Concertación have brought the official poverty rate
from 45% In 1987 to 21% in 2000. Certainly this is a laudable
accomplishment, but it falls to address the inequality and the
near-poverty status of workers that result from the neoliberal
strategy. Those in power may simply have no interest in addressing
these problems on a systemic level. For the top 20% (and this
includes the political class-right, left, and center), Chile is
a great country full of expensive imported SUVs, cheap servants,
spiffy private schools, marvelous skiing, arid exquisite weekend
beach houses. No matter that monthly tuition in one of the private
schools exceeds the entire monthly wage of the average worker,
or that one day of skiing would cost that worker three to four
days' income. Unlike in most of Latin America, the poor are kept
out of sight of the comfortable, thanks to homogeneous neighborhoods
on the U.S. model, of the role of state intervention in the past,
Chile does have a somewhat competitive manufacturing sector: metalworking
exports in the manufacturing sector in 2002 were larger than processed
food exports and nearly equal to fresh produce exports. Other
manufactured exports include plastics, containers, and textiles.
With large investments and a new government policy fostering technological
research and development and massive labor training, Chile could
develop high value-added manufacturing. High wages flowing from
a strongly unionized manufacturing sector could, in turn, enlarge
the internal market for industrial products.
Both forestry and mining have great potential
in terms of expansion into clusters of high value-added industries.
Both would demand the massive participation of a trained, skilled
industrial work force. Support for these sectors is logical from
the standpoint of development economics; however, it would create
more favorable conditions for unionization and, because independent
unions in Chile have always been political as well as economic
organizations, this would help bring the working class back into
the political arena. Such a development would threaten to revive
fundamental struggles not only over the distribution of income,
but also over the institutional organization of the economy-the
worst fear of Chile's economic, political, military, and religious
James Cypher teaches economics at California
State University, Fresno. In 2003 he was visiting research professor
at the Facultad Latinoamericana de Ciencias Socialies (FLACS0-Chile).
He is a Dollars & Sense associate and co-author of The Process
of Economic Development, 2nd edition (Routledge, 2004).