Did neoliberalism fail in Chile?

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Hi! So my original question, that I posed to several different online communities was this: I am currently reading Naomi Klein’s book “the shock doctrine, the rise of disaster capitalism”. In it, she has a chapter critiquing Milton Friedman, specifically on his involvement with the Chilean government and the spread of neoliberal ideals common to the Chicago School of Economics. In this chapter, she basically argues that the Chilean neoliberal experiment was a failure, and speaks about Pinochet’s policies and their results.

Here are some quotes from her book: “He took no pity on local companies and removed even more trade barriers; the result was the loss of 177,000 industrial jobs between 1973 and 1983”

“Pinochet had deliberately sent his country into a deep recession, based on the untested theory that the sudden contraction would jolt the economy into health”

“In the first year of Friedman-prescribed shock therapy, Chile’s economy contracted 15 percent, and unemployment- only 3 percent under Allende— reached 20 percent, a rate unheard of in Chile at the time”

“He calculated what it meant for a Chilean family to try to survive on what Pinochet claimed was a ‘living wage’. Roughly 74 percent of its income went simply to buying bread... by comparison, under Allende, bread, milk, and bus fare took up 17 percent of a public employees salary”

“In 1974, inflation reached 375 percent- the highest rate in the world and almost twice the top level under Allende”

So I’d like to ask;

1) are there any statistics/ data that contradict these claims, or maybe give more context to them
2) was Pinochet’s “neoliberal experiment” really an example of neoliberalism? And if it was, was it a failure?

Also,

1) was the economy under Pinochet really that terrible
2) if it was, was it due to the pushing of neoliberal ideals by the Chicago boys (those educated at the Chicago school of economics)
3) is Chile proof of the failures of neoliberalism

Answer: 

My name is Marcelo Oviedo and used to work as Assistant Professor at Iowa State University. My ex-colleagues in the Department of Economics have invited me to answer your questions posted in the Ask An Economist section in that department. I believe they have given me the opportunity of doing that for two reasons. First, because I am a Latin American economist; and second, because I specialize in Macroeconomics and your questions match subjects belonging to two main areas of specialization in Economics: Macroeconomics and Economic Development. Of course, what follows is my opinion and not that of the Department of Economics nor that of ISU.

Economic Science has not useful tools to evaluate political theories like the one apparently stated by Naomi Klein´s book. I was not aware of the book until receiving your questions so I will not be too useful either to evaluate the book or its theories. And, please let me state that I am not interested in analyzing political and civil freedom in Chile and other countries here.

I celebrate that you want to seek for statistics to corroborate statements you found in your reading of the book. Data effectively allow us to achieve what Alfred Marshall –one of the most influential economists-- wanted to achieve as an educator; when he took his position as Professor of Political Economy at Cambridge, in 1885, he claimed that his most cherished ambition was sending out economists with cool heads to inform warm hearts. Data seems not to backup claims stating that Chile's economic reform started during the 1970's have lead the country into a failure. Answering your second question, effectively, it can be said that Augusto Pinochet's Presidential Administration (1973-1990) can be identified with Neoliberalism, in the sense of favoring free markets, laissez faire, and minimum intervention of the State into the economy. 

Was it a failure? Most economists agree that economic growth is the most powerful engine for generating long-term increases in material living standards. What happens to the living standards overtime can be measured by the real, per capita, Gross Domestic Product. Figure 1 shows the per capita GDP of Argentina, Brazil, Chile, Colombia, and Peru to compare Chile to other Latin American economies. I have obtained the data from the World Bank (and it is available at https://datos.bancomundial.org/?locations=CL-AR-BR-PE-CO). As you can see, in 1974, Chilean per capita GDP was about 60% of the Argentina's and 72% of the Brazilian. Today, Chilean per capita GDP has surpassed that of Argentina by 50% and that of Brazil by 37%, becoming the most prosperous economy in South America. I have chosen Argentina and Brazil for the comparison because they have the two largest (by GDP) economies in Latin America. Besides, while Chile has been consistent at following the path led by free markets, Argentina and Brasil have been pendulating for more than four decades between interventionist and market friendly policies.

We can look at another central variable to assess economic failure: the poverty rate. The World Bank measures poverty headcount ratio at $5.50 a day at 2011 international prices; this is the percentage of the total population that has a daily income ($5.50 in this case) estimated to be necessary to buy the essential resources that an average human adult consumes. The first year for which data for Argentina, Brazil and Chile is available is 1987. Then, poverty rates were 8.3% in Argentina; 52.9% in Brazil and 52.8% in Chile. By 1996, they were 22.3%; 45.7% and 31.2%, respectively. And in 2017, 7.7%, 21.0% and 6.4%, also respectively. Just to have a reference, according to the US Census Bureau, the official US poverty rate in 2018 was 11.8 percent, although this number is not strictly comparable to the figures reported for the Latin American countries. As you can see, at least from these data it is hard to believe that Chilean economy can be characterized
as failure after the reforms started in the 1970's. There you can find several statistics about development and growth in Chile and in other countries.

 

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Last updated on February 5, 2020