Pinochet-Era Economics, Borne From “Chicago Boys”, Still Impacting Chile

The Chicago Boys are not the name of a 1960s-era boy band, rather they were a group of highly influential, and some say dangerous, Chilean economists. They were …

The Chicago Boys are not the name of a 1960s-era boy band, rather they were a group of highly influential, and some say dangerous, Chilean economists. They were responsible for what has been labeled the “Miracle of Chile” which came about during one of Chile’s darkest hours, the dictatorship of General Augusto Pinochet – the ramifications of which are still being felt some 40 years later, and are an ever-present specter over the current Chilean presidential elections.

In a December 2008 paper, W. Robert Needham, Professor Emeritus, Department of Economics, University of Waterloo, Chicago, wrote, “One may characterize the descent of the Chicago boys on Chile and elsewhere to be like members of the group known as the Four Horsemen of the Apocalypse—War, Famine, Pestilence and Death.”

Who are these horsemen, where did they come from and did they indeed unleash an economic and social apocalypse in the guise of a miracle upon the unsuspecting people of Chile?

Learning to Ride

Originally students at the Pontificia Universidad Católica de Chile in Santiago at a time when the country was ruled by the democratically elected Salvador Allende and his Popular Unity Party, a group of promising students were hand-picked for scholarships – sponsored by the US State Department – to study deeper economic theory at the respected University of Chicago under the tutelage of free-market postulates and proponents of laissez faire economics, professors Milton Friedman and Arnold Harberger.

The basis of what Friedman and Harberger were teaching – some would say indoctrinating – was the implementation of “an economic doctrine that opposes governmental regulation of or interference in commerce beyond the minimum necessary for a free-enterprise system to operate according to its own economic laws.”

Allende’s Democratic Socialism

Under Allende, the Chilean economy shifted from the capitalist policies of the Christian Democratic government of Eduardo Frei which – had seen many benefits to the economy and society at large – to socialist practices. However, some of Allende’s policies were a completion of what Frei had set in motion –such as the nationalization of copper mines largely owned by US interests – and were well received by the Chilean population. Allende’s moves to nationalize the banking and credit sectors and other key industries were not as popular, especially among the middle and upper classes. Although inflation continued to climb, the working class cheered Allende’s reforms as their buying power increased. Meat and milk made daily appearances in their homes, alongside the newly acquired appliances and toys that were previously unattainable.

In a December 2006 piece for the Library of Economics and Liberty on Friedman, Venezuelan author Ibsen Martinez postulated that the overthrow of Allende was the result of an economic policy that emphasized “growth” and income distribution while dismissing the risks of inflation and deficit finance: “Mr. Allende’s ‘experiment’ in attaining a Communist society by electoral consensus quintessentially embodied that Latin American populist paradigm. It reflected in erratic, aggressive non-market economic policies during his tenure. These policies inevitably unleashed internal forces that ultimately brought about a major political change…as hyperinflation and the Chilean middle class reaction to it sanctioned a growing threat of total social chaos.”

These policies tilled the ground for the complete overhaul envisaged by the Chicago Boys, some of whom were appointed to high-ranking positions within the Pinochet regime, including Sergio de Castro, Minister of Finance, 1977–1982; José Piñera, Minister of Economy, 1976–1979; and Alvaro Bardón, Minister of Economy, 1982–1983.

The US-Backed Coup

On August 28, 1976, Orlando Letelier, the former Chilean Ambassador to the US and Minister of Foreign Affairs under Allende, published a stinging piece in The Nation which not only condemned the Chicago Boys for their – according to him – misguided economical applications – but also drew a direct relationship between this group and the military junta that took down Allende with the tacit, if not outright, support of the CIA. In his article Letelier wrote, “Deeply involved in the preparation of the coup, the Chicago Boys…convinced the generals that they were prepared to supplement the brutality, which the military possessed, with the intellectual assets it lacked.”

At that time the US Senate Select Committee on Intelligence disclosed that CIA collaborators helped plan the economic measures that Chile’s junta enacted immediately after seizing power, even though those in command barely understood how to practically apply the theories. Letelier also recounted that “Committee witnesses maintain that some of the Chicago boys received CIA funds for such research efforts as a 500-page economic blueprint called El Ladrillo, or The Brick, that was given to military leaders before the coup. It is therefore understandable that after seizing power they were, as The Wall Street Journal (November 2, 1973) put it, ‘champing to be unleashed on the Chilean economy.’”

Letelier was killed by a car bomb as he drove along Embassy Row in Washington, DC on September 21, 1976, less than a month after his piece was published, one of the thousands of victims who were exiled, disappeared, imprisoned, tortured and murdered during the Pinochet regime. The movie Missing starring Sissy Spacek and Jack Lemmon chronicles the true case of US journalist Charles Horman who was taken from his home in Santiago, held captive in the city’s stadium, brutally murdered and buried in the stadium’s wall as a result of his investigation into US warships off the coast, and US military presence on the ground, in Viña del Mar preceding the overthrow of Allende.

The CIA’s involvement in the September 11, 1973 coup should come as no surprise since it is well-documented that Henry Kissinger and then President Richard Nixon were actively trying to manipulate the Chilean political system in 1970 in order to prevent Allende from being elected. At the time Kissinger justified these actions by saying, “I don’t see why we need to stand by and watch a country go Communist due to the irresponsibility of its people. The issues are much too important for the Chilean voters to be left to decide for themselves.” Perhaps taking a cue from Friedman, who was an economic advisor to Nixon, the president directed CIA director Richard Helms to “make the economy scream.”

Shock Therapy on a Blank Slate

During the first two years of Pinochet’s rule, the dictator’s ministers – military men and not economists – implemented some of the Chicago Boys’ recommendations such as removal of price controls, sale of state companies, elimination of import barriers and cuts to government expenditures, including the elimination of a free school milk program. A year later, annual inflation skyrocketed to 375%.

In March 1975, Friedman and Harberger made a trip to Chile in order to set things on the right track, even though Friedman would later repeatedly and adamantly deny that he was ever a direct advisor to Pinochet. However, he also stated in an interview that “It was the first case where you had a movement toward Communism which was replaced by a movement towards free markets.” As reported within Chile at the time during a much protested lecture tour throughout the country, the two US economists insisted that the only way to fix the Chilean economy was to dismantle it completely and give it shock treatment. As quoted in El Mercurio on March 23, 1975, Friedman asserted that this method was “the only medicine. Absolutely. There is no other. There is no other long-term solution. 

This sat well with their acolytes, some of whom were biding their time until they had the opportunity to experiment not only with economic theorem, but also with reconstructing an entire society. Although Friedman and Harberger argued that free market economics went hand-in-hand with democratic ideals, when implemented within the framework of a totalitarian dictatorship, the opposite proved to be true.

In his 1975 paper, “The Neo-Liberal Model and the Mechanisms of Economic Repression—the Chilean Case” Professor Michael Chossudovsky, economist at the University of Ottawa and an advisor to governments in developing nations, wrote:

“While the actors and instruments of economic repression are hidden in the ‘ethically neutral’ and impersonal mechanisms of the market and of economic policy, the economists and the school of thought which inspired the application of the Military Junta’s ‘neo-liberal’ policy measures bear the moral and intellectual responsibility for the impoverishment and economic repression of more than three quarters of Chile’s population.”

This idea is taken further by Andre Gunder Frank, PhD, a classmate of the Chicago Boys at the University of Chicago where he received his doctorate 1957, (after being advised on his thesis by Friedman), in the 1976 book, Economic Genocide in Chile: Monetarism Versus Humanity: Two Open Letters to Arnold Harberger and Milton Friedman, wherein he declares:

“After the application of shock therapy of manipulated crisis and violence, including torture and its attendants, people are not very likely to question the laisser-faire logic. Moreover children born into the system, and knowing no other are more easily trained to passive uncritical acceptance, that is, to take the system as given. Shock therapy ties Friedman and his Chicago Boys to the CIA and to state sponsored murder. Indeed genocide.”

Granted, Frank’s own economic and political outlook was decidedly leftist, and he applied some Marxist philosophy to his thoughts on political economics, but as history would prove, his assertions were not baseless.

An Unconvincing Denial

However, in an October 2000 interview with PBS, Friedman once again asserted that he was never a guest of Pinochet’s, and was actually invited to Chile by a private organization in order to deliver a talk at the Catholic University entitled “The Fragility of Freedom,” the thesis of which “was that freedom was a very fragile thing and that what destroyed it more than anything else was central control… So it was essentially an anti-totalitarian talk.” A talk which, according to Friedman, “would undermine political centralization and political control,” and essentially undermine the Pinochet regime.

It seems very unlikely that the theoretical godfather of the Chicago Boys and demagogue of an economic system seemingly tailored-made for the overhaul of the Chilean economy would be openly speaking out against the junta in the very university that prepared his disciples, and that had a long-standing exchange program with the University of Chicago – especially not without suffering dire consequences.

In the PBS interview cited earlier, Friedman staunchly defended his dictates and reflected that, “The Chilean economy did very well, but there is something more important: in the end, the central government, a military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society.”

But not before over 3,000 Chileans were killed or disappeared, at least 20,000 were imprisoned and tortured and more than 200,000 went into exile. And thousands of lives were shattered, including those of the family of former president and a current front runner Michelle Bachelet.

From Childhood Friends to Political Rivals

It could be argued that not one Chilean family was left unmarked by the Pinochet regime which ended by plebiscite in 1988. Indeed, Michele Bachelet and Evelyn Matthei, the two favored presidential candidates in Chile’s November 2013 election, are inextricably tied to the Pinochet regime, and to each other. And by default, if not necessarily by practice, to the economics of the Chicago Boys.

The women became close friends in elementary school when their fathers were fighter pilots in the 1960s. Both men rose in the ranks and were promoted to general at about the same time, just a few years before things would change forever for them and their families. General Bachelet was chosen by President Allende to oversee the Food Distribution Office to regulate the sale of the country’s food resources which had become strained due to interference of the supply chain by right-wing opponents of the president’s, with the support of the US, in an effort to destabilize the Allende government. At that time General Matthei was military attaché to the Chilean embassy in London, but he returned to Chile shortly after the coup to take a key position as Health Minister and later Commander-in-Chief of the Air Force and a valued member of the junta. General Bachelet refused to stand with Pinochet and was imprisoned at the Air War Academy, and subjected to daily torture at Santiago’s Public Prison, where he died of a heart attack on March 12, 1974.

Political Separation

The daughters of these men of honor took divergent paths as well, each one following in her father’s footsteps. Bachelet, an early member of the Socialist Youth, became entrenched in the resistance movement until she and her mother were arrested by agents of Chile’s secret police, the DINA, in January 1975. After being taken to the secret detention center Villa Grimaldi, the women were separated and victimized with harsh interrogations and torture. Bachelet was soon moved to the Cuatro Álamos detention center, until her release and exile at the end of January. First moving to Australia where her brother was already settled, Bachelet later left for East Germany where her mother joined her. She continued her studies in medicine at the University of Humboldt, got married and had her first child. In February 1978, Bachelet received notification that she was authorized to return to Chile which she did in 1979.

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As for Matthei, she was studying to be a concert pianist in London where she remained in order to assist the junta’s embassy with translations and other clerical work in the early stages of the regime. Returning to Chile in 1974, she enrolled in the Economics Institute of the Catholic University of Chile, where the Chicago Boys had studied some twenty years earlier. Graduating in 1979 Matthei became an International Economics professor at the Economics Institute, but left to work as a private consultant and then as an analyst for the Superintendencia de AFP, the governmental agency charged with overseeing Chile’s privatized pension system. As president, Bachelet would later reform the beleaguered system in an attempt to bring as many people as possible into it by following recommendations of the World Bank, and the analysis of her chief economic advisor and Finance Minister Andrés Velasco, who recognized that the coverage of the population and the amount of the administrative costs were the main issues. This was a significant departure from the capital-funded system run by investment funds as established by José Piñera under Pinochet, after he read Friedman’s influential book Capitalism and Freedom.

Chile’s First Female President

Both Matthei and Bachelet held various positions throughout the ensuing decades, Bachelet in healthcare and politics, where she was a very active member of the Socialist Party and was appointed Minister of Health in 2000 under President Ricardo Lagos. In 2002 Bachelet became Chile’s first female Defense Minister and in January 2006 she was elected president in a runoff against Sebastián Piñera. After four years fraught with many problems, low popularity ratings and accusations of opportunism, her presidential term ended in March 2010 with a surprising popularity rating of 84%.

In April 2010, Bachelet created a think-tank Fundación Dialoga, based in a suburb of Santiago. Then on September 14, 2010, she was appointed by UN Secretary-General Ban Ki-moon to head the newly created body UN Women. She resigned in March 2013, announcing her presidential run and becoming the candidate for the center-left coalition Concertación with 73% of the vote.

Matthei has held positions in economics, academia and politics, including being appointed Minister of Labor and Social Security by President Sebastián Piñera in 2011. Over the years she has earned a reputation for her combativeness and somewhat liberal stances on issues such as same-sex marriage, tax reform and abortion. Although Matthei planned to exit the political arena upon completion of her term as minister, she was chosen by the party as its new presidential candidate after a strange turn of events in which the UDI’s chosen candidate Pablo Longueira backed out due to extreme depression.

Economic Policy

When she took office, Bachelet inherited a sizeable budget and a legacy of free market policies, including a free-trade agreement with the US, that were implemented by her predecessor, Ricardo Lagos. But she also moved away from Washington’s influence and allied herself closer to other South American governments, including those of then Venezuelan President Hugo Chavez and Bolivia’s Evo Morales.

During her presidency, Bachelet was firmly opposed to a plan submitted by her coalition partners to use the considerable revenues from the copper industry to close the gap between rich and poor. Instead, she devised a strategy to accumulate fiscal surpluses which are above 1% of GDP with the creation of a sovereign wealth fund, the Economic and Stabilization Fund. Her forethought allowed the government to finance social programs and stimulus packages during the 2008 financial crisis.

Embracing free-market ideals, Bachelet expanded international trade by signing free trade agreements (FTA) with 58 countries including the US (plugging into NAFTA with Canada and Mexico), South Korea, China, the European Union, Japan, Central American countries, and a multilateral FTA with Brunei, New Zealand, and Singapore. This policy further illustrates the fact that Bachelet, and her predecessors, embraced the basic tenets of the Pinochet economic model which has helped to form a consensus between the political right, the Concertación and Chilean and foreign business leaders based on a shared vision of economic policy.

Free Education?

However, there was, and remains, domestic unrest – especially among university students who continue to stage countrywide demonstrations to demand free education, something Bachelet has vowed to implement if reelected. During her speech accepting the coalition’s nomination, she vowed, “Today’s triumph is not the victory of one person, but of millions of Chileans. It’s a project where the voices of citizens are vital. It’s the triumph of the demand for education that is free, dignified and of quality for every child. We must guarantee everyone a public education system that integrates them at all levels, ends profit and advances toward universal gratuity…It’s the desire of most Chileans.”

The concept of free education is something that Matthei is totally opposed to. The conservative candidate also opposes tax reform, which Bachelet is promoting to help pay for her free education initiative. “We need to follow a path of looking after growth,” Matthei is quoted as saying, “If Chile has stood out in Latin America for its achievements, what is the sense of making profound changes when it is precisely existing institutions that have allowed us to make great progress?”

Chicago Revival

Matthei doesn’t seem to have her own economic proposals, and is instead expected to continue the policies established by Piñera which are directly tied to the Chicago Boys. As Piñera said in a 2011 interview with The Council on Foreign Relations, “When we came into power, our main goal was to recover and to revitalize what was once called the Chilean miracle.” He then explained, “We are building the new pillars of development, which are basically to invest – to triple our investment in science and technology; to promote innovation, entrepreneurship; to improve the income distribution of the country and to fight poverty with a new attitude and a new conviction; and to improve substantially the quality of education.”

Like previous administrations, the Piñera government benefited from and continued the economic policies of some of their predecessors – which were built upon some of the foundations built by the Chicago Boys. Foreign Direct Investment quadrupled in 2010 to over $15 billion USD, after dropping to $7 billion USD in 2009 as a result of the international financial crisis. Policy established by Bachelet to accumulate surplus incomes principally from copper mining helped the country to weather that storm, a cushion which allowed GDP to grow more than 5% per year from 2009 to 2011. Shortly after Piñera took office, Chile suffered an 8.8 magnitude earthquake in February 2010; one of the strongest earthquakes on record. Despite this, the country’s economy continued to grow. Chile is currently one of the strongest economies in Latin America and became the first South American nation to join the OECD in 2010.

Lasting Legacy

Economic policy must change to meet the challenges presented by domestic and international dynamics, and Chile appears to have met these challenges over the 14 years since the end of Pinochet’s rule. This can be attributed, in part, to the free-market economic theories of Friedman and Harberger that were implemented by the Chicago Boys and sewn deeply into the fabric of Chilean society. Indeed, the intellectual and philosophical descendants of the Chicago School held or continue to hold high-level positions in the Piñera administration, including Joaquín Lavín, Minister of Education, 2010–2011, Minister of Planning 2011–present;  Cristián Larroulet (Minister of General Secretariat to the Presidency [SEGPRES], 2010–present); and Juan Andrés Fontaine, Minister of Economy, 2010–2011. It is a legacy that is no longer an option, and it appears that the pillars built by the Chicago Boys under the aegis of terror are what will keep the Chilean economy strong and propel it to a prosperous and truly free future.

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