Neoliberalism Was Born in Chile. Now It Will Die There

Yves here. Apologies for not giving the regime change in Chile its due. This post gives an overview of the significance of the reforms that got traction in 2019 and served to dismantle most of the neoliberal policies implemented under the dictator Pinochet.

And even though Pinochet did remake Chile into a supposed orthodox “free market” outpost, in fact the original neoliberal reforms were disastrous and were rolled back significantly. As we wrote in ECONNED:

Chile has been widely, and falsely, cited as a successful “free markets” experiment. Even though Chilean dictator Augusto Pinochet’s aggressive implementation of reforms that were devised by followers of the Chicago School of Economics led to speculation and looting followed by a bust, it was touted in the United States as a triumph. Friedman claimed in 1982 that Pinochet “has supported a fully free-market economy as a matter of principle. Chile is an eco-nomic miracle.” The State Department deemed Chile to be “a casebook study in sound economic management.”

Those assertions do not stand up to the most cursory examination. Even the temporary gains scored by Chile relied on heavy-handed government intervention.

It is particularly troubling that “free markets” boosters cite Chile as a showcase, not simply because the facts say otherwise but also because this bogus “miracle” required a brutal dictator. In other words, despite the fact that the “free markets” advocates claim to be tireless supporters of individual liberty, their actions show a disturbing willingness to compromise what they claim as their highest ideal….

The “Chicago boys,” a group of thirty Chileans who had become followers of Friedman as students at the University of Chicago, assumed control of most economic policy roles. In 1975, the finance minister announced the new program: opening of trade, deregulation, privatization, and deep cuts in public spending.

The economy initially appeared to respond well to these changes as foreign money flowed in and inflation fell. But this seeming prosperity was largely a speculative bubble and an export boom. The newly liberalized economy went heavily into debt, with the funds going mainly to real estate, business acquisitions, and consumer spending rather than productive investment. Some state assets were sold at huge discounts to insiders. For instance, industrial combines, or grupos, acquired banks at a 40% discount to book value, and then used them to provide loans to the grupos to buy up manufacturers.

In 1979, when the government set a currency peg too high, it set the stage for what Nobel Prize winners George Akerlof and Stanford’s Paul Romer call “looting” (we discuss this syndrome in chapter 7). Entrepreneurs, rather than taking risk in the normal fashion, by gambling on success, instead engage in bankruptcy fraud. They borrow against their companies and find ways to siphon funds to themselves and affiliates, either by overpaying themselves, extracting too much in dividends, or moving funds to related parties.

The bubble worsened as banks gave low-interest-rate foreign currency loans, knowing full well the borrowers in their own industrial group would default when the peso fell. But it permitted them to use the proceeds to seize more assets at preferential prices, thanks to artificially cheap borrowing and the eventual subsidy of default.

And the export boom, the other engine of growth, was, contrary to stateside propaganda, not the result of “free market” reforms either. The Pinochet regime did not reverse the Allende land reforms and return farms to their former owners. Instead, it practiced what amounted to industrial policy and gave the farms to middle-class entrepreneurs, who built fruit and wine businesses that became
successful exporters. The other major export was copper, which remained in government hands.

And even in this growth period, the gains were concentrated among the wealthy. Unemployment rose to 16% and the distribution of income became more regressive. The Catholic Church’s soup kitchens became a vital stopgap.

The bust came in late 1981. Banks, on the verge of collapse thanks to dodgy loans, cut lending. GDP contracted sharply in 1982 and 1983. Manufacturing output fell by 28% and unemployment rose to 20%. The neoliberal regime suddenly resorted to Keynesian backpedaling to quell violent protests. The state seized a majority of the banks and implemented tougher banking laws. Pinochet restored the minimum wage, the rights of unions to bargain, and launched a program to create 500,000 jobs.

Now to more current events in Chile.

By Carolina Pérez Dattari, the Director of the Institute of Local Governments of the University of Recoleta. After being a student leader during the years of the Chilean student movement, she worked in the creation of the Broad Front, a Chilean political coalition that today faces the second presidential round at the hands of Gabriel Boric. She has worked in the legislative branch, in the NGO sector and today she works as an adviser to the Constitutional Convention. Originally published at openDemocracy

When Chile overwhelmingly elected Gabriel Boric on 19 December, I was elated. Left-wing Boric had been pitted against the far-Right José Antonio Kast, who had systematically denied the climate crisis, attacked the rights of immigrants, women and the LGBTQ community, and spoken admiringly of Augusto Pinochet, the murderous dictator who ruled Chile from 1973 to 1990.

Now, under 35-year-old Boric, who heads the Frente Amplio (‘Border Front’) coalition, the country has a chance for serious and meaningful change – to move away from the economic and social model forged by Pinochet. It is widely acknowledged that the neoliberal model first took hold not in Margaret Thatcher’s Britain or Ronald Reagan’s United States, but in Pinochet’s Chile. Under the dictatorship, the state was shrunk to the minimum, relinquishing to profit-driven businesses the provision of rights through the privatisation of public services.

This turned Chile into a country with housing, health, and education for the rich; a privatised pension system in which social security is at the mercy of investment profitability; a plundered natural environment; communities without access to drinking water as a result of deregulated agribusiness, and a tax system that does nothing to change the fact that the country is one of the most unequal in the world. Pinochet’s biographer, Mario Amorós, characterises the dictator’s legacy as “a model installed by blood and gunfire that benefited the elites who controlled the media and held the economic power”.

Persistent and widespread protests erupted across Chile in 2019, against extreme inequality and for a new constitution to replace the one imposed by Pinochet. The protests forced a 3am showdown on 25 November 2019 in the National Congress, under the watchful gaze of millions of Chileans following the events on television. Capitulating to public pressure, several political parties agreed to a referendum on whether to draft a new constitution.

At that referendum, which was held in October 2020, 78% of people voted ‘yes’, leading to the election of a historic ‘Constitutional Convention’ of 155 people tasked with rewriting the constitution. The convention – to which I am an adviser – includes delegates from across the political spectrum, many of whom are independent of political parties, as well as feminists and environmentalists. It met for the first time on 4 July last year, with a clear directive: drafting the first democratic constitution in Chile’s history, with gender parity and indigenous representation. It has a year to fulfil that mandate, and the public will vote again in October on whether to approve its proposed new constitution.

Convening Democracy

The convention’s first move was to elect Elisa Loncón, an Indigenous Mapuche feminist university professor, as its chairperson. In her first speech in the role, she said: “Thanks to all of you for placing your trust in a Mapuche woman to change the history of this country…This convention is for all Chileans from every sector and every region and… against every system of domination…It is for a Chile that protects Mother Earth.”

Participation rules adopted by the convention are critical to its success. One notable example is the convention’s decision to hold interim public referendums for provisions that fail to obtain two-thirds approval but do receive three-fifths support, which provides a way to skirt potential roadblocks set up by conservatives. Another is known as ‘the popular initiative’, which allows any citizen to propose a constitutional provision on any issue if they can gather more than 15,000 signatures in support.

Graffiti from Chile’s 2019 protests reads ‘Neoliberalism is born and dies in Chile’ | Carolina Pérez Dattari. All rights reserved

Through seven thematic commissions, the Constitutional Convention is discussing key transformations. These include declaring Chile a plurinational state – recognizing the country’s several nations and granting them degrees of autonomy – and recognizing nature as a subject with rights, to provide more tools to protect ecosystems. Another pivotal proposal is to change the role of the state from one oriented to individualism to one oriented to solidarity. Also high on the agenda is eliminating all gender-based asymmetry in public and political participation, enabling a state with equal representation in its judicial, legislative and executive branches.

One of the most groundbreaking discussions is on the institution of a National Care System. Currently, domestic and unpaid care work accounts for the majority (53%) of productive work in Chile, equivalent to 22% of GDP. Some 72% of this work is carried out by women. A National Care System would not only recognize caring occupations as work, but would pay for and professionalise these services. The long-standing demand of Chilean women for our sexual and reproductive rights – and the possible adoption of a law that permits abortion – is also at the centre of this proposal.

Many of these proposals will be strongly contested. Boric’s opponent Kast attacked both women and nature in his election campaign, committing to closing the Ministry of Women and denying global warming. The promise to extend the rights of nature will be strongly opposed by the supporters of Big Business, as it runs against Chile’s history as an exporter of raw or semi-processed materials like copper and more recently lithium, as well as export-oriented agriculture. “The Chilean model is based on extractivism, and a new Constitution could insist that a company has to maintain ecological equilibrium,” explains political scientist Claudio Fuentes. Chile’s Right occupies almost a third of the convention’s seats.

Still, Chile has begun 2022 with a sense of optimism. Gabriel Boric’s new government is charged with organising the October 2022 referendum over the new constitution. “If it’s successful, it will be a model of hope, and not only for Chile,” says constitutional expert Bruce Ackerman. During the 2019 protests, a piece of graffiti declared, ‘Neoliberalism is born and dies in Chile’. A new constitution could make this wish come true.

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  1. ChrisRUEcon

    Thank you for this post. The world’s a bit “kak” at the moment, but this is a most welcome development indeed.

    “Siempre hay esperanza …”

    1. NotTimothyGeithner

      The big problem is the price has soared. Why should a conservative lawyer or car dealer care about the new government? They are going to pay a tax either way (the state is owning for the walled compounds that we see in countries with extreme disparities). It’s just now the People’s Vanguard isn’t a threat, real or imagined.

  2. GramSci

    With only 1/3 of the constitutional delegates, the right’s only hope is to successfully bribe 1/10 of the “left-wing” delegates…

    1. Martín

      Nope, the right’s only hope is that the left will swing the pendulum so hard their own way that it will make for a ridiculous consitution proposal, and have it be rejected at he referendum.

      If the proposal is moderately aggresive, it will pass. If it’s bonkers, it might not. The most recent proposals have begun to show glimpses of the latter.

        1. Martín

          Hahaha, sorry if I was rude. It’s a subject which I’m passionate about since whatever happens it directly will impact the people I love the most. And though I was hopeful at first, the proposals discussed at the constitutional convention have been getting more and more radical, which I fear might alienate the average Chilean.

          We just elected a new congress a couple of months ago. On account of the recent protests here you might have thought it would have gone well for the left. But it turned out that the congress split 50% 50%, with no majority from either side. Now the same people will have to decide if they want to support the new constitution or not.

          Thanks for the welcome!

  3. Federico Folad

    I agree. The murderous Chilean Dictator on one side and the sinker communist in the other side. But the problem has come from the Chicago’s Boys and the Moore Doctrine: yankees go back home is the only solution

  4. Martín

    Yes, they went ahead and changed the rules of the game after it had already started by seting up the interim public referendums. Carolina fails to mention that they also allowed for 16 to 18 year olds to vote on those referendums as well (voting age in Chile starts at 18, but Carolina clearly doesn’t mind breaking the rules as long as the outcome supports her side).

    More recently, the convention has looked on how to favour our indigenous people. So they have decided to “Declare null and void all permits, authorizations or concessions for exploration and exploitation of mining, aggregates, water, forestry, mega power generation projects and any others of the same type that fall on natural assets located in indigenous territories”. What is indigenous territory I hear you ask? That’s to be decided 5 months AFTER the referendum for the adoption of the new consitution. So then those who declare themselves indigenous will be the ones deciding if a mining operation that’s set up in the desert and has been running for 30 years (and still has 20 years left) will be allowed to continue operations or not. Well, let’s get real: it WILL keep on running, only now it will pay an additional ‘indigenous tax’ so that indigenous people give it a thumbs up. Rinse and repeat for every mining operation, aggregates operation, forestry operation, hydroelectric operation, etc.

    So our indigenous people will be the ones making the calls about what get’s done in Chile and what doesn’t (and getting a cut of profits just for being indigenous), effectively making the rest of us Chileans second-class citizens.

    Don’t get me wrong, I do believe there’s a lot to fix in this country, and a new constitution should provide a new path. But Carolina and her peers seem to be pushing the envolpe without giving much thought about the outcome, just as long as it disrupts the powers that be.

    If things keep on this path, the left will be giving the conservatives all the ammo they need to convince people to reject the new constitution. Care to imagine what would happen then?

    1. jefemt

      I got a bit metaphysical and Buddhist… death and re-birth… the wheel

      Or (as appears in a Big Book): As a dog returns to its vomit, so a fool to his folly

      Or (from the golden age of funnies) We have met the enemy, and he is us!

      I’m slogging through shock doctrine by Naomi Klein. Lots on Uncle Miltie, Chile, and many other venues.
      We suck.

    2. Alex Morfesis

      So the poor poor strip mining enterprise which, gosh darn it, has been properly protecting future generations for 30 years, with lovely sunflower gardens next to that pile of tialings, will get quite upset as it will have to work really really hard to figure out who to bribe from the new set of overlords from the pool of indigenous prospects…

      Oh my…what is a commodity trading company to do…so much slosh, so little time… those Wonderful little Chicago neofeudalists….oops…sorry…neo-libertineists…why does it keep doing that…neo-fibberals…well you know…those drunken fools who tore up east 53rd street in Hyde Park in their younger daze…they will have to do some seo management to push reality to page 7 of a googoylemonstyr search…

      1. Martín

        I wouldn’t think they will have to figure out who to pay. Getting paid is a big enough incentive for people to agree on. Oh and congratulations for pointing out that mining is dirty business.

        Maybe you would like to make a point?

      2. Richard

        It’s those mining operations that will provide the stuff needed for our all electric future. Not every country can get along on infinite pixel money.

    3. Sailor Bud

      I haven’t looked at Chile in quite a while. What are they planning on doing for the Poblaciones and campomentos? Are they planning anything similar to the Ley de las Concelos of Venezuela? (Forgive my spelling; not a native speaker.)

    4. Erik Alejandro

      As a Chilean American I hope the Constitutional Convention pushes the envelop very far indeed. It is not “bonkers” to respect indigenous populations and give them a say- for the first time in Chile’s history- in whether extractive industrial projects on their land continue; to free political prisoners; to guarantee decent healthcare and education and old age pensions for all people, not just the rich. What is “bonkers” is how Chile and most of the rest of Latin America have been run for the past 40 years, trashing the Earth in an insatiable drive to make and keep a tiny, radical elite fabulously wealthy.

      The rightwing elites in Chile and Latin America are typically so open in their classist, racist scorn for working people it would take most North Americans’ breath away. There needs to be absolute revolution, from Colombia to Tierra del Fuego, to take away the power of the elite. A constitutional convention is a peaceful, participatory way to do this, and I hope Chile embraces the opportunity.

      1. Martín

        As I said before, I do believe that there needs to be a new path for Chile to forge. There is plenty of truth in your words and hopes for Chileans, and I will not dispute that. Grouping Chile with the rest of Latin America, well -let’s just say that most Chileans will take offense at the idea (a position which is supported by the recent immigration waves). Maybe some other countries in Latin America don’t trash the earth as much as we do? I don’t know about that one, but even if they don’t, it is still true that a lot of latin americans are willing to endure grueling conditions just to come over here.

        Regarding scorn for working people, well, i do believe USA takes the crown. There’s plenty online evidence about it this days (antiwork movement), but if a point must be made, at least in Chile we have 15 days of mandated paid holiday. Not much, I know, but way more than zero.

        I do hope, just as you do, that Chle embraces the opportunity that the constitutional convention brings. BTW, the constitutional convention has just pushed for nationalizing all the mining companies. Maybe it makes you happy or hopeful? It makes me worried. I know what happened the last time. As a Chilean American, you should too.

      2. SusanS

        I totally agree with you Erick! I am for everything they want to include in the new constitution. At least they are trying. I get positivity, energy, and hope that we can someday aim towards that in this country.

    1. Milton

      Yep, the half-measures employed now are non-sterilizing and only allow for an environment where mutant new forms are cultivated and allowed to spread. I guess we can learn to live with it…

  5. Dave in Austin

    Chile still lives off copper, 50% of the nation’s exports. This has been true for at least 60 years. .

    But the copper surplus helped Chile create salmon-farming and fruits exporting industries These development projects seem to have begun in the 1960s, went forward under the leftist, continued during the coup years and are still going on today. The country has a high education level- especially among the settler majority- and a well-developed education system. A very rich place by South American standards blessed with natural resources and an educated population.

    It makes me think that development is more about natural resources (copper and cold water salmon), a stable savings and investment regime regardless of politics (like China, Europe and the US not Argentina and most of Black Africa), and an education-oriented and literate population.

    Politics, ideology and political orientation take second place to these factors.

  6. PlutoniumKun

    Its very good news, especially as from my very distant seat this political change seems more sustainable than other brief flowerings in south and central America, especially those which have been dependent on one or more highly charismatic individuals.

    On the other side of the globe I’d also note the very good news from Portugal, where the centre left comprehensively beat the centre and far right (and far left) in their election, a real vote of confidence in existing policies.

  7. Sound of the Suburbs

    I have read about the trials of neoliberalism in South America.
    How was this ever seen as a success?
    It should have died there.
    What were Maggie and Reagan doing bringing it to the West?

    1. Synoia

      What were Maggie and Reagan doing bringing it to the West?

      Destroying Unions, by exporting their work./

    2. Bazarov

      Neoliberalism was extremely successful, if judged by the rubric of empowering and enriching the elite class by:

      1.) Crushing labor.

      2.) Disbanding, privatizing, or infiltrating government institutions responsible for the public good. This transfers the state’s traditional function to organize the affairs of the bourgeoisie to a shadow government of monopolist oligarchs and shareholders, who became the de facto governing authority (“donors” in the United States).

      3.) Infecting the body politic with the two great social diseases of inequality: rampant poverty and extreme wealth. The former disease ensures that the people are in their abjection desperate and gullible (thus willing to accept crumbs), with either too little leisure time to improve themselves and one another (overwork) or so much leisure that it threatens to destroy them (unemployment). The latter disease gives rise to a wretched husk of a human being, an empty space where money circulates, where life is reduced to the exchange. The rich do not need to have a character, as they can buy whatever character they lack. Thus, their internal life is enervated, and the luxury rapidly barbarizes them.

      Since extreme wealth is barbarizing, and neoliberalism leads to government by the extremely wealthy few, so we have the barbarized state that shrugs its shoulders at 1 million dead from covid.

      Let ‘er rip!

  8. lance ringquist

    and lets not forget americas neo-liberal champion nafta billy clinton. and his fascism still calls the shots today in the nafta democrat party. give nafta joe biden a tiny string, he will run it out till you can no longer see the threads. privatize social security, medicare, hey he is even working on a new free trade agreement, you can’t make this stuff up!

    blow by blow coverage of bill clinton embracing augusto pinochet polices including selling off social security to wall street with bills advisors from the cato inst.

    President Clinton and the Chilean Model

    By José Piñera

    Midnight at the House of Good and Evil

  9. timotheus

    Frente Amplio should be translated as Broad Front.

    While there is a risk of some far-fetched language in the constitution being written, the incoming Boric admin is sounding admirably sober and realistic, and Boric himself is impressively knowledgeable about details of a range of policy issues. Chile has a painful collective memory of what happened to the Allende/Popular Unity experiment. These are not blowhard chavistas.

    Fun detail: the new defense minister is the granddaughter of Salvador Allende.

  10. Susan the other

    What would happen if we called for a constitutional convention? Our government is easily as sick and dysfunctional as Chile’s. Where do we draw the line between “identity politics” and a state with several nations? We are actually trying to stir up a sense of national pride among our various “identities.” To be manipulated politically. What good is democracy when it is all insane? That will happen in Chile as well. The real rubber always hits the road when the wealthy begin to lose money. Then the mines are run like a gulag, 24/7; industry and trade are geared up to a frenzy; profits are extracted in less and less time. Destruction piles up. None of it makes sense. If we convened a constitutional congress we’d have to change the dialog completely. Beginning with the premise that money has no value. From that bedrock it is possible that an actual constitution for people and planet could be construed. But not until. So how likely is that to succeed?

  11. Advait

    A cornerstone of neoliberal propaganda is the false myth that national taxes pay for national govt spending. This is a false myth for nations with a reasonable amount of monetary sovereignty (which I think Chile has). If Boric and his leftist allies believe this false myth, then they have a much greater chance of failure. If they can wake up to the reality of MMT, then they’ll know the true power of monetary sovereignty and can fund needed social programs like a nationally funded job guarantee at a full wage and benefits, free total health care for all, govt guaranteed and administered universal pensions, free public transport, adequate quality public housing, totally free K to PhD education, Green New Deal, nationalized banks, etc, etc…

    Understanding MMT means Boric and co. can easily kill all the “how ya gonna pay for it?” arguments.

    Fact: National debt = private surplus for nations with reasonable monetary sovereignty. National debt is never a problem and a reasonable private surplus is required for a healthy sustainable growing Green economy. Remember, bank money is always temporary (you gotta pay back that loan!). Only national spending is permanent, real money.

    I wonder if Boric or anyone close to him knows the truth and power of MMT? I sure hope so.

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