Miracle of Chile - Background

Background

In 1972, Chile’s inflation was at 150%. According to Hernán Büchi, several factors such as expropriations, price controls, and protectionism caused these economic problems. The Central Bank increased the money supply to pay for the increasing deficit. Büchi states that this increase was the primary cause for inflation.

Immediately following the Chilean coup of 1973, Augusto Pinochet was made aware of a confidential economic plan known as El ladrillo (literally, “the brick”), so called because the report was “as thick as a brick”. The plan had been quietly prepared in May 1973 by economists who opposed Salvador Allende’s government, with the help from a group of economists the press were calling the Chicago Boys, because they were predominantly alumni of the University of Chicago. This document contained the backbone of what would later on become the Chilean economic policy, recommending a set of economic reforms that included deregulation and privatization. Among others reforms, they made the central bank independent, cut tariffs, privatized the state-controlled pension system, state industries, and banks, and reduced taxes. Pinochet’s stated aim was to “make Chile not a nation of proletarians, but a nation of entrepreneurs”.