“We thought that inequality would, in the end, disappear,” says Rolf Lüders, recalling his time at the helm of the Chilean economy. Now in his 80s, Mr Lüders is one of a group known as the “Chicago Boys”, responsible for the extreme inequality seen in Chile and who tend to be vilified during protests and riots, including those of the past two weeks. I went to Santiago to spend time talking to people at both ends of the income spectrum, and the Chicago Boys themselves. Chile was once a pin-up economy, lauded as the model other emerging economies should copy. What went wrong?

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The Chicago Boys were exchange students who travelled to the US to study economics, the idea being that they would return home to teach, driving up standards and encouraging their peers to abandon socialism-inspired ideas. Their impact would be far greater than anyone imagined. After Pinochet seized power in 1973, the dictator quickly promoted the Chicago-trained economists to ministerial positions. A thick book of market-orientated policies they had put together, known as El Ladrillo (“the brick”) became a blueprint setting out how the Chilean economy must be run.

El Ladrillo diagnosed the bloated state as Chile’s biggest problem – the public sector was duly slashed. Between 1973 and 1980, the number of state-controlled companies fell from 300 to 24, and there were big cuts to budgets for infrastructure, housing, education and social security. The early results were disastrous – Chile’s newly liberalised financial sector was crippled by a crash in 1982 – but with time the country began to bloom, growing 7% a year on average between 1985 and 1997. There was low inflation and Chile’s investment and export rates became the best in South America. Milton Friedman, who had taught Mr Lüders and his compatriots in Chicago, called it “the miracle of Chile”.

Inequality began to rise sharply too – but two pillars of the economists’ plan made this a secondary concern. The first was the belief that poverty, which was more important than inequality, could be eradicated by growth. Here, Chilean data and the accounts I heard in Santiago chime and show the Chicago Boys were, in a way, right. Fully 17% of the population were recorded as indigent in 1987 (meaning they could not afford food), and by 2000 this had fallen to 6%. At the Los Blanco market in San Bernardo – a low-end market in a poor district – I met people in their 50s who recalled being cold and hungry in their youth, and regarded Chile’s economic expansion as a reason for their improved lot.

The second pillar, and the reason Lüders believed inequality would go away, were educational reforms. El Ladrillo contains a section on “equality of opportunity, which explains how liberalisation will help: privatisation would mean more universities, and a new system of loans help those from poorer families gain degrees. With latent talent spread evenly across the country education would be an equalising force, and would make Chile prosper. On paper their plan – poverty-eradicating growth backed up by an educational safety net – seemed complete and coherent. The accounts of those struggling in modern Santiago lay bare the gaps in these ideas.

“We get no assistance,” explains Melissa Niera, showing me the self-built camp she and her husband Emmanuel call home in one of Santiago’s southern suburbs, “we are considered middle class, not poor”. The people I met all had jobs – as gardeners, care assistants, labourers and in cellphone shops – with joint incomes that put their families just above the poverty line. Yet their makeshift homes are built on a reclaimed dump and made of thin chipboard, the communal bathroom – shared between a dozen or so families – is four sheets of corrugated iron and has no roof.

Santiago-style inequality creates hidden poverty that official statistics do not pick up. It is caused in part by high prices: living hand-to-mouth, families like Melissa’s buy goods from small local stores on informal credit, adding up to 20% to the cost of basic goods. Another driver is a refusal to supply: Santiago’s pharmacy chains see no reason to operate in the poorer parts of the city. In Recoleta, one such district, I met Daniel Jadue, a communist local politician forced to set up a state-run “people’s pharmacy” as a result.

Far from soothing inequality, a twisted market for education has come to cement it. Privatisation did boost numbers: in the 1970s there were eight universities in Chile, all government funded. Now there are over 150, two-thirds of which are for-profit outfits run by private firms. The Chilean government commits just 0.5% of GDP to higher education, the lowest in the OECD, yet Santiago seems like a city of learning: there are universities everywhere – on main roads, up side streets, and between car showrooms.

Competition is supposed to drive prices down and quality up. In Chile, things have gone the other way. The average university course cost 41% of the average income, the highest in the OECD. Anything costly, including pastoral care, is cut as university-companies seek profits: the country’s 50% university dropout rate is another dubious statistic in which it is a world leader. Melissa and Emmanuel both regretted their time at university which had done nothing for their job prospects yet shouldered them with debt that will take years repay.

Mutated competition also blights high schools. With the sector effectively privatised, exam scores have become a kind of equity value; the result is aggressive selection to weed out poor performers, rather than help them. It is a city in which performance can be bought and the stratification that has resulted is staggering: as you travel south, away from the leafy Las Condes district where Melissa and her neighbours work and towards the one where they live, educational results and incomes fall in perfect unison. One parent described the scramble that results as an “educational war”.

This does hidden damage to the fabric of a city. Unwritten divisions of income that everyone in Santiago understands delineate places and activities. The Plaza Italia, scene of recent riots, is a dividing line the wealthy avoid stepping south of. There are high-class parks and lower-class parks – the informal conversion of public spaces into gardens where access is based on income. It is perhaps the ultimate privatisation – that of a city’s social infrastructure – and the only one the Chicago Boys did not intend.