Geog 210.

Student: Luis Bellido ID: 27766920

Neoliberalism in Chile 1974-1982

Chile’s economy is one of the most stable for the region of South America nowadays. According to the
World Bank, it is a high-income economy country. His economical growing as a country started since
1980’s decade, after a period of radical neoliberalism changes applied. The topic of this paper is to
describe and analyse these neoliberalism changes during the period of 1974- 1982. This time could be
called as the beginning of the Chilean neoliberal model.

The neoliberal reforms implemented in Chile during the 1970s and 1980s meant in economic and social
terms a radical change for a society that urged for new perspective. The problems in the economy until
1973 were: “low growth rate, exaggerated statism, lack of productive jobs, inflation, delayed agriculture,
poverty in the population” (Castro, 1992, p. 27).

In fact, the failure of Salvador Allende economic program implemented by the Popular Unity between
1970 and 1973. That included a strict regulation by the State, acting as an entrepreneur, promoter of
investment and industrialization, and blocking the participation of private agents in the national economy.
Finished in hyperinflation and other negative effects.

So Chile needed in urgency a big change. The coup d'état on September 11, 1973 by the General Augusto
Pinochet led to the implementation of a new economic policy, never applied in the country. This
represented a solution for the situation reached in that moment. This new policy was the neoliberalism
formulated in the University of Chicago by Milton Friedman and Von Hayek. This new policy was
executed by the “Chicago boys”, they were young graduates of economics at the Catholic University of
Chile, with postgraduate most of them at the University of Chicago.

Unlike the military dictatorships of Latin America, so common in the 1970s, in Chile, the Armed Forces
imposed the task of transforming the country. Davis called this as a combative neoliberalism, “because
this involved an array of tactics aimed at undermining the possibility of socialism, anti-union legislation
and uncompromising, even violent confrontations with society” (Davies, 2016, p.8).

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Such a transformation could only be achieved under strict authoritarian control to eliminate the effects
produced by populism and create appropriate conditions in which market forces could operate freely. The
reduction of the public sector would remove the basis of popular demands for government concessions,
the reorientation of surpluses to the capital market would strengthen support for military policies and
punish those opposing them.

The opening of the economy to the free market would provide the means to grow, without requiring state
support to non-competitive sectors. Allowing the level of wages to be regulated by market forces would
weaken the bargaining power of the trade union movement. All these elements would combine to
eliminate inflation, which caused great social unrest. During the period of 1974-1982, the inflation was
reducing it notably: from 375.9% in 1974 to 20.7% in 19821. It was a big achievement.

The Chicago boys2 entered in the regime in 1975. In order to convince Pinochet of their ideas, they
brought their own teacher, Milton Friedman, who gave him two solutions to the crisis that was happening
in the country. The first was through a slow recovery but Friedman warned that this long wait could die.
The second was to give a shock treatment, to revitalize it, but with very serious side effects.

The treatment of shock was to reduce public spending; reduce public employees; increase IVA (tax on the
commercial transfer of property); and liquidate the system of saving and housing loans.

The initial effects were terrible. The GDP decrease by 12%, the unemployment rate increased to 16% and
the value of exports fall by 40%. But the system began to be strengthened in 1977, starting what has been
called within Chile as the "boom", with positive numbers in all areas, with the exception of
unemployment, always high (close to or above 20% )3. The boom lasted until the 1982 crisis.

1
Central Bank of Chile. Economic and Social Indicators years 1974-1983
2
Jorge Cauas in the Ministry of Finance, Sergio de Castro (leader of the Chicago boys) in the Ministry of Economy
and Pablo Barahona in the Central Bank.
3
http://www.biografiadechile.cl/detalle.php?
IdContenido=1638&IdCategoria=96&IdArea=477&TituloPagina=Historia%20de%20Chile. Accessed 10 April 2017.

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In 1977 a new statute for foreign investment was approved. This legal body was destined to give the
maximum facilities for the entry of foreign capital and the remittance abroad of profits and capital. In
addition, foreign capital was guaranteed for 10 years with a tax invariability.

The population experienced the benefits of a flood of cheap imports, such as televisions, radios, watches,
calculators, and, in general, luxuries. Foreign loans continue to come in large numbers. Inflation began to
decline significantly reaching 63.5% in 1977.

In 1978, the Chilean economy was characterized by a reduction in the rate of inflation, almost half of that
registered in the previous year and a rapid growth in traditional exports was visualized, while a persistent
and a high unemployment rate and a low investment ratio, due to the deficit in the Current Account on the
Balance of Payments and a considerable inflow of capital from abroad.

Privatization was included in the process of institutional reform made by the military regime, which was
convinced that effective economic decentralization was a necessary condition for an efficient democratic
organization, so the government was inclined to privilege individual rights (private property, the principle
of non-discrimination, etc.). The market would be the instrument of the main economic decisions and the
private sector the fundamental agent of the development. Open to foreign trade would be used as a means
to take profit of comparative advantages and as a way of inciting the efficiency of the production process.

The severe global recession of the early 1980s, which began with the oil price rise in 1979, was
characterized by a marked deterioration in trade for developing countries. In addition to the high level of
external indebtedness, the external debt interest rate increased from negative levels to 13% and above.

The year 1981 was characterized by strong expectations, from those who expected growth in previous
years to continue. With a growth rate, at the beginning of this year, of 8.5%, and a high rate of
unemployment, but declining, along with the prompted "Construction Boom." A good year was expected.
But this did not happen and on the contrary, with greater force in the second half of this year, began to
live a recessive phase, evidencing the economic contraction and the unemployment.

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In November 1981, the Superintendence of Banks and Financial Institutions began to take the first steps
to take control of four banks and four financial institutions, which together represented 25% of the loans
granted to private banks.

By the end of this period the Central Bank had taken over the debt of a large number of banking and
financial institutions, from their debts and from their debtors to take control of a large number of
companies that had been transferred to the system, As a result of its bankruptcy, with this the fiscal deficit
reappears, and the inflation rate rises in 1982 to 20%.

In short the model does not work as planned, with difficulties increased by maintaining its economic
policy. Added to all this are the fundamental problems that dominate the Chilean economy, such as the
concentration of capital, unemployment and inequalities, which were exacerbated by this recession.

The exchange crisis of 1982-1983, caused by the devaluation of the exchange rate, by the doubling of the
external debt and by a decline in exports, meant a shift in the economic decisions taken by Pinochet and
his advisory team. This was the result of the neoliberalism policies implemented in the previous years.

The Chilean financial crisis in 1982, was the result of the failure of these economic changes as
deregulation, liberalization, open market economy and subsidies by the State. Increasing poverty and
inequality among this society. This period of time was one of the most convulsive period in the Chilean
history due to all the persecutions and violence applied by Pinochet.

Many people from Latin-American remember that Chile suffered a lot during the years of Pinochet, but
they accept too that those changes implanted were the beginning of a stable economy for the future. Even
that Pinochet is remembered as an assassin and dictator, he is remembered too as the person who changed
forever the destiny of Chile.

Bibliography:

Castro, S. A. (1992). "El Ladrillo": bases de la política económica del gobierno militar chileno. Santiago
de Chile: Centro de Estudios Públicos.

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Davies, W. (2016). New Neoliberalism. New Left Review 101. Retrieved April 12, 2017, from
https://newleftreview.org/II/101/william-davies-the-new-neoliberalism.

Ffrench-Davis, R. (2010). Economic reforms in Chile: from dictatorship to democracy. Houndmills,

Basingstoke, Hampshire: Palgrave Macmillan.

Han, C. (2012). Life in debt: times of care and violence in neoliberal Chile. Berkeley: Univ. of California
Press.

Manzetti, L. (2009). Neoliberalism, accountability, and reform failures in emerging markets: Eastern

Europe, Russia, Argentina, and Chile in comparative perspective. University Park, PA: Pennsylvania
State University Press.