Miracle of Chile

The “Miracle of Chile” was a term used by Nobel Prize winning economist Milton Friedman to describe liberal and free market reorientation of the economy of Chile in the 1980s and the purported benefits of his style of economic liberalism. He said the “Chilean economy did very well, but more important, in the end the central government, the 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.”

Other economists (such as Nobel laureate Amartya Sen) have argued that the experience of Chile in this period rather demonstrate the failure of Friedman-style economic liberalism, claiming that there was little net economic growth from 1975 to 1982 (during the “pure Monetarist experiment”). After the catastrophic banking crisis of 1982 the state controlled more of the economy than it had under the democratic regime that preceded the military dictator General Pinochet, and sustained economic growth only came after these later reforms, while social indicators remained poor. Pinochet’s military dictatorship made the unpopular economic reorientation possible by repressing opposition to it. Rather than a triumph of the free market, the OECD economist Javier Santiso described this reorientation as “combining neo-liberal sutures and interventionist cures”. By the time of sustained growth, the Chilean government had “cooled its neo-liberal ideological fever” and “controlled its exposure to world financial markets and maintained its efficient copper company in public hands”.

In the early 1970s, Chile experienced chronic inflation reaching highs of 140 percent per annum, at a time when the country, under high protectionist barriers, had no foreign reserves, and GDP was falling. The economic reforms were originally drafted by Chilean economists known as the “Chicago Boys” because many of them had studied at the University of Chicago. The plan had three main objectives: economic liberalization, privatization of state-owned companies, and stabilization of inflation. The first reforms were implemented in three rounds – 1974–1983, 1985, and 1990. The reforms were continued and strengthened after 1990. However, the democratic centre-left governments of the 1990s also made a strong commitment to poverty reduction. In 1988, 48% of Chileans lived below the poverty line. By 2000 this had been reduced to 20%. This was achieved through a 17% increase in the minimum wage, a 210% increase in social spending targeted at the low income sectors of the population, and across the board tax increases, reversing the Pinochet tax cuts of 1988 and bringing in a further 3% of GDP in tax revenue. Overall, social spending and redistribution accounted for 40% of the poverty reduction, with economic growth doing the rest.

Hernán Büchi, Minister of Finance under President Augusto Pinochet between 1985 and 1989, wrote a book detailing the implementation process of the economic reforms during his tenure. Successive governments have continued these policies. In 2002 Chile signed an association agreement with the European Union (comprising free trade and political and cultural agreements), in 2003, an extensive free trade agreement with the United States, and in 2004 with South Korea, expecting a boom in import and export of local produce and becoming a regional trade-hub. Continuing the coalition’s free-trade strategy, in August 2006 President Bachelet promulgated a free trade agreement with the People's Republic of China (signed under the previous administration of Ricardo Lagos), the first Chinese free-trade agreement with a Latin American nation; similar deals with Japan and India were promulgated in August 2007. In 2010, Chile was the first nation in South America to win membership in the Organization of Economic Cooperation and Development, an organization restricted to the world’s richest countries.