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

This article is from the September/October 2004 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org

This article is from the September/October 2004 issue of Dollars & Sense magazine.

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 Concertación 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, Economía 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 free-market 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.

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 29.5% higher than in 1970. Chile now has the third most unequal income distribution in Latin America (behind Brazil and Guate-mala). According to official government data, the top 20% received 57.5% of the national income in 2000; the top 10% received 42.5%. 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 in-come, 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%. Another is to keep wages low in the export sec-tors 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 fails to address the inequality and the near-poverty status of workers that re-sult 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, and 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.

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 strategy.

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 ISI era.

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, Raúl 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 Fundación 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 and medicine.)

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 of Mining 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 15 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 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 elites.

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 crops.

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 good-will. 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.

James Cypher teaches economics at California State University, Fresno. In 2003 he was visiting research professor at the Facultad Latinoamericana de Ciencias Socialies (FLACSO-Chile). He is a Dollars & Sense associate and co-author of The Process of Economic Development, 2nd edition (Routledge, 2004).

SOURCES: Rafael Agacino, "Reestructuración Productiva, flexiblidad y empleo" (mimeo 2003); Carlos Alvarez, "La CORFO y la transformación de la industria manufacturera" in La transformación de la producción en Chile, CEPAL (Santiago: Estudios y informes de la CEPAL no. 84, 1993); Orlando Caputo and Juan Radrigán, "Economía Chilena: agotamiento relativo del modelo (octubre 2003) www.cetes.cl; Graciela Moguillansky, La inversión en Chile: ¿el fin de un ciclo en expansion? (Mexico: Fondo de Cultura, 1999); Peter Winn (ed.), Victims of the Chilean Miracle: Workers and Neoliberalism in the Pinochet Era, 1973-2002 (Durham, N.C.: Duke University Press, 2004).