Some analysts divide the neoliberal economic experiments of Chile in two distinct phases: the "First Miracle" (1973- 82), that ended when the fixed exchange rate policy failed and led to the depression of 1982, and the "Second Miracle" (1985-89), which occurred after the devaluation initiated [citation needed] an export-led boom which brought an end to the depression.
Led by young, free-market policy makers, Pinochet's government privatized almost every nationalized industry, from mines to factories to pension system. He welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business. [5]
The reforms were coherent and drastic. They also effectively wiped out the entrenched right wing industrial oligarchy, which depended on strict trade protections and subsidies in order to maintain their economic (and therefore political) power. Since the free trade reforms were implemented in the mid 1970's, the economy has averaged 7-percent annual growth, raising per capita income for Chile's 16-million citizens to more than $10,000—making them the most prosperous people in South America--and creating a thriving middle class. Today; only 14% percent of the population lives below the poverty line, compared, for example, with 31 percent in Brazil and 62 percent in Bolivia[6] . At this pace, Chile, within a generation, will become Latin America's most prosperous nation. [7]
Only one of the free market recommendations of El Ladrillo was not implemented: a floating exchange rate. Minister of Finance Sergio de Castro, departing from Friedman's well-known support for flexible exchange rates, decided on a fixed exchange rate of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean pesos inflation outpaced the U.S. dollars inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe recession that lasted more than two years.
Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. However, this devaluation was done so incompetently and belatedly—and at the exact moment that the United States, Chile's major creditor and trading partner, was going into a major recession—that it led to a fall in Chile's GDP of 20% during 1982 and 1983, resulting in widespread unemployment and the collapse of the financial sector. Unemployment spiked to 30 percent. Around 50 percent of the population fell below the poverty line. Extreme poverty affected 30 percent of the population. In his Memoirs ("Two Lucky People", 1998), Milton Friedman strongly criticized De Castro for this monumental mistake, making clear that it was contrary to the free market model.
Remarkably, following the 1983 implosion, the Pinochet dictatorship did not abandon the free-market reforms of El Ladrillo. Though the recession had huge social and political costs to the junta, during 1983 and 1984, the government maintained a free-market, hands-off approach to the economy, refusing to reinstate tariffs or other trade barriers, and allowing major Chilean industries to fail, rather than propping them up artificially by means of subsidies or other preferential treatment.
Former President Pinochet, under the advice of a group of Chilean economists who had mostly studied at the University of Chicago Department of Economics (the Chicago Boys), implemented a set of economic reforms that included deregulation and privatization. Among others, they privatized the pension system [9] , state industries, and banks, and reduced taxes. Pinochet's aim was to "make Chile not a nation of proletarians, but a nation of entrepreneurs." The main copper company, Codelco, remained in government hands due the nationalization of copper established by Salvador Allende, however, private companies were allowed to explore and develop new mines.
Supporters of Friedman's view argue that subsequent events in Chile have vindicated his free market philosophy: Chile's economy is noticeably stronger and more advanced than those of other Latin American nations. Chile's annual growth in per capita real income from 1985 to 1996 averaged 7%, far above the rest of Latin America. [4]
Chile had a strong economic recession in 1982-1983, its second in eight years (in 1975, when GDP fell by 13 per cent, industrial production plunged by 27 per cent, and unemployment shot up to 20 per cent). Real economic output declined by 19% just in 1982 and 1983 and most of the recovery and subsequent growth took place after Pinochet left office [1] While enacting certain changes, the four successive civilian administrations that followed Pinochet, including that of current Socialist president Michelle Bachelet have not done much to dismantle the changes.
The experience of Chile in the 1970s and 1980s, and especially the export of the Chilean pension model by former Labor Minister Jose Pinera, has influenced the policies of the Communist Party of China and has been invoked as a model by economic reformers in other countries, such as Boris Yeltsin in Russia and almost all Eastern European post-Communist societies. [11]
