How good was Pinochet for the Chilean economy?

by on December 20, 2006 at 7:14 am in Economics | Permalink

Brian Leiter links to a lengthy critique, excerpt:

...that [Chilean economic] miracle was in fact a hoax, a fraud, a fairy tale in which everyone did not live happily ever after.

I'll put my assessment under the fold, noting that I won't consider his obviously evil record as a torturer and criminal, just the economic policy, and to what extent he led a free market revolution...

Currency policy: The early to mid 1980s were a disaster, largely because Chilean banks were unsound and Chile pegged to a rising U.S. dollar.  This was the biggest economic mistake of the Pinochet regime.  It was a huge error which ruined the Chilean economy for years.  It should be noted, however, that the move from 1000 percent inflation to 10 percent inflation is never an easy one.

Copper: Rising copper prices were a key part of Chilean economic success, and yes Allende had nationalized the copper mines.  Pinochet did not re-privatize them.  You can count this in his favor, but not in a free market way.  Note that copper often counted for 50 percent or more of Chilean export earnings.  You can talk about voucher privatization, but in fact the Chilean state needed a fiscal base to avoid the distortionary (but revenue-raising) policies that are otherwise so common in Latin America.

Agriculture and diversification: Chile moved from very high tariffs to virtual free trade.  The Chilean economy diversified and became far less dependent on copper; this included some moves to hi-tech and light industry.  The regime gets high marks on this score, as few modern nations have benefited more from free trade.  Under Allende tariffs were commonly 100 percent or higher.  Conception was the most rapidly growing Chilean city during much of the reform era, and this shows that the story is not just about copper.

Welfare: As in the New Zealand economic miracle, social welfare spending rose over the broader course of the Pinochet reforms.  I take this to be for public choice and social control reasons, not benevolence.  The distributional consequences of the Chilean reforms were generally inegalitarian, although there was the creation of a large and growing middle class.

Social security: The vaunted "privatization" was in fact done on top of an already-existing government-run system.  Its free market nature is much overrated.  It probably was a good idea at the time, given the stellar performance of the Chilean stock market (which it helped drive), but it has created long-run problems and it is no longer a system to be envied.

School vouchers: Not clear they had much of an effect.  But I recall seeing a more positive recent study, which I can no longer find.  Here is more debate.

Privatization: Pinochet sold off steel, fertilizer, and an airline, among other companies.  The procedures were corrupt, but nonetheless an improvement overall.  There was no good reason why those companies should have been owned by the state.

Banks: Interest rates were freed up and financial repression was replaced by financial liberalization.  Do note that the Chilean government took over the banking system in 1983 or so, to avoid collapse, but later returned it to private hands.

The Allende regime: It was ruining the Chilean economy.  The recipe included deficits, foreign debt, high inflation, price controls, and devaluation, the usual stuff.  The guy was brave, but as a leader we should not idolize him.  He was an economic disaster.

Credibility: The Pinochet regime did restore the economic credibility of Chile.  Investors came to expect pro-commercial policies.  Although Pinochet himself was deeply corrupt (this was not known at the time), on net Chile extended its reputation as the least corrupt country in Latin America.

The 1990s: Much of the superior economic performance of Chile came after Pinochet left the stage (do look at the graph behind that link).  But the roots of this growth spring from the Pinochet years.  The moderate and left-wing successors left virtually all of his economic policies in place and of course they were democratic and eliminated the torture.

The bottom line: Many economic mistakes were made.  The biggest gains came from agricultural diversification, general credibility, the rising demand for copper, and the move away from terrible economic policies.  Chile had the best economic policies in South America from the late 1980s onward and it was and still is the envy of the continent.  But Chilean history from this period is as much a "state-building" miracle as a "free market" miracle. 

The Wikipedia entry on Chilean economic policy is reasonably good.  Here are some other linksOut of the Ashes is the most comprehensive defense of Pinochet; it has useful material but overall it is not to be trusted.  Google yields up many more critiques than defenses.

Pinochet the man behaved so badly, both during his term and after, as to be morally indefensible.  From second hand accounts I have heard, it is also not clear how much the man himself was personally responsible for the good economic policies.  Still many good policies happened.  We need a closer look at the Chilean economic legacy, which is a complicated story and by no means wholly negative.

Addendum: It is worth asking which reforms could have succeeded in a democratic environment, but that would require a post all its own.  Someday you will get it.

tom s. December 20, 2006 at 8:23 am

“I won’t consider his obviously evil record as a torturer and criminal”

– glad to see you acknowledge this record, but are they really separable? I don’t see that “economic policy” has any meaning at all independent of the political system in which it is enacted.

For example, can you talk about restoring “credibility” for investors without acknowledging that it was the “evil record” that restored that credibility? It was the record that delivered the message to investors that “if you invest here you won’t face any labour problems. We’ve taken care of that for you”. Similarly, if my memory serves, the trends in copper prices (low during Allende, higher after) were far from independent of the political system – or the US reaction to that system.

David Sucher December 20, 2006 at 10:12 am

John Pertz.
Your questions may indeed be a good one as a rhetorical question for a grad school seminar.
But I am not sure what it has to do with Tom S statement, which I believe is a fair one, that it was Pinochet’s actions which ‘…delivered the message to investors that “…if you invest here you won’t face any labour problems. We’ve taken care of that for you”.’
If you (as a corporation) want to weaken unions then you must create the conditions in which you out-do the unions in gaining wages, working conditions etc for the workers. Of course I am not sure why you’d want to do that as you would be setting yourself up to compete with unions and unless you have some long-term nefarious goal of destroying them, why bother? — they do the work of organizing the labor force for you.

neil December 20, 2006 at 12:13 pm

But the roots of this growth spring from the Pinochet years.

How would this be differentiated from Pinochet’s regime holding back growth?

School vouchers: Not clear they had much of an effect…

The law creating school vouchers was handed down on Pinochet’s very last day before the handoff to the civilian government, for what that’s worth. And the Chilean schools have been paralyzed by strikes against the law (which contained a lot more than vouchers) this year.

Pinochet sold off … an airline, among other companies.

And the guy who bought it, besides being the brother of the guy who designed the pension plan, is today the richest man in Chile and finished second in the last Presidential election. Was this privatization or just a handoff to an informal part of the public sector?

neil December 20, 2006 at 12:22 pm

Since Tyler refrained from commenting on Pinochet’s record, perhaps commenters could refrain from derailing the discussion with spurious Castro comparisons? Please?

In education policy it should also be noted that Pinochet shut down the liberal arts campuses of the universities, as well as instituting reforms which demanded that all departments be profitable.

Also, Santiago (with over a third of Chile’s population) has an odd, privately-owned public transportation system, where drivers own their own buses and keep their fares. This has been nothing short of disaster — inefficient, as every bus route goes through the crowded center, more profitable than operating more efficient feeder routes, leading to hundreds more buses clogging the streets than are needed; dangerous, since bus drivers race each other in competition for passengers (I have personally been on a bus that hit a pedestrian and didn’t stop, as well as in a car that was hit by a bus which didn’t stop); polluting, since drivers have plenty of incentive to keep old, broken buses on the road rather than buying new ones; and not even really privatized since all of the dozens of bus companies raise fares simultaneously (and also band together for strikes against attempted governmental interference). If there was ever a place for central planning, it’s here.

George December 20, 2006 at 12:38 pm

It was the record that delivered the message to investors that “if you invest here you won’t face any labour problems. We’ve taken care of that for you”.

Labor unions weren’t what destroyed Chilean credibility with international investors. It was the fear of nationalization that prevented international investment. Restoring secure property rights in Chile may have been contingent on Pinochet’s “evil” behavior but property rights in themselves are not necesarily dependent on oppressive regimes.

But the roots of this growth spring from the Pinochet years.

How would this be differentiated from Pinochet’s regime holding back growth?”

The “roots of growth” refers to the neccesary preconditions for growth. The later growth would not have occured in the absence of the roots of growth being planted.

Was this privatization or just a handoff to an informal part of the public sector?

The public sector consists of those enterprises which cannot fail, i.e. if they lose money they are propped up by the state. It may be that the Chilean government would not let the airline fail but the fact that the owner is rich and lost an election doesn’t really say anything about the matter.

Josh December 20, 2006 at 12:53 pm

If there was ever a place for central planning, it’s here.

Maybe it would be better to charge congestion fees to enter the city center and tax emissions? Then you’d have the market efficiency and quick response to changing conditions without the ‘tragedy of the commons.’

Scott Wood December 20, 2006 at 1:30 pm

neil:

Assuming that a system with more feeder routes than currently exist is more efficient, what is preventing a bus company from winning riders by servicing those routes?

Michael Sullivan December 20, 2006 at 2:34 pm

The argument I’ve made in some other comment forms is that US willingness to trade and advise had as much to do with the expanding freedom in Chile as anything positive that Pinochet did. I admit it is empirically difficult to verify, but it appears to be at least as compelling a hypothesis as others I’ve seen which suggest that right-wing dictatorships are inherently more likely to become more free over time. I think that’s a function of the US being more willing to deal with right-wing thugs than left-wing thugs.

The one bit I think does matter on that score is secure property rights. It’s impossible to attract significant foreign investment if people expect any successful business to be nationalized without reasonable compensation, a la the copper industry under Allende. And without foreign investment, the trade bonds and information exchange that tend to promote freedom (both economic and political) are much weaker. I think that was a significant positive for Pinochet’s regime.

To Tom V.: isn’t it possible that many of these “market failures” are merely the result of the market recognizing that some bus lines cannot be made profitable? Like health insurance for poor people, that’s not so much a market failure as a public resource problem. We want everyone to have access to certain things that some people can’t pay the appropriate cost of. Well, some of us do, anyway. So we have to either let that desire go unfulfilled, or come up with the money to pay for it, and provide it in the most efficient way possible. Bus service is just one of those problems. We like to think that everybody in any reasonably populated area should be able to take the bus to work and shopping, etc. But in fact, it’s only in very dense areas, or moderately dense areas where almost everyone wants to use it that it’s actually profitable to operate comprehensive public transport. Europe looks like a PT paradise partly because it is far denser than most of the US, and partly because the government is more willing to subsidise it.

neil December 20, 2006 at 2:44 pm

Good point, Christina. Note that here is a good network of collective taxis that does charge by trip length.

By the way, bus fares in Santiago have increased twice since that article was written two weeks ago. The miracle of the invisible hand!

Van December 20, 2006 at 3:10 pm

Interesting stuff about the bus market, had no idea that was going on.

And great point about “that’s not so much a market failure as a public resource problem. We want everyone to have access to certain things that some people can’t pay the appropriate cost of.” This compassion reasoning is true is we confine our view to the transportation market, but if we expand to the entire city’s economy I feel like it might even make economic sense. One of the reason’s given for US’s lower unemployment compared to EU is the US’s great labor mobility–ie a person from job-poor Michigan is more likely to move to job-rich California than, say, a Frenchman moving to Ireland. Could we shrink this idea down to the municipal level? It would seem that a low-skilled person from the slums would be able to find a job much easier if he were able to easily travel to more job-rich middle class/upper class/tourist areas of town.

Then, even if the city is losing money on some of the bus routes, the economy as a whole (and maybe even city revenues when an increased tax base is factored in) is doing better.

Scott Wood December 20, 2006 at 3:54 pm

TomV:

That doesn’t address my question, which is not rhetorical. If feeder lines are more efficient, implying that costs of providing them exceed the benefits, why don’t private companies provide them?

I can envision some possible answers. E.g.: 1) price controls on bus trips, 2) excessive transactions costs in dealing with the optimal prices for different types of journeys, 3) some sort of externality issue. To be sure, only number 1 jumps out at me as plausible, but I’m open to suggestions.

Remember, it will not do to observe that there are unserved potential bus routes. The argument at hand is either 1) that serving these routes would be “more efficient,” yet is nonetheless not more profitable, or 2) serving these routes is more profitable but is nonetheless not being done.

Again, I’m not saying that there isn’t a reason. I’d just like to hear what those reasons are. –sw

ps–Note that dangerous driving related to competition to get to the bus stop faster, while relevant for some things, is not related to this question.

happyjuggler0 December 20, 2006 at 6:03 pm

Like Scott Wood, I too think price controls or other regulations are a highly plausible explanation for alleged market failure here.

One other explanation is lack of international travel or lack of imagination, or perhaps lack of scale. I’ve lived in a small number of US cities/suburbs and college towns with public transportation of one sort or another. My idea:

Start a bus transportation company. Serve routes to and from the “suburbs” (assuming this is an applicable term for outlying areas of the Santiago or elsewhere). Print schedules of those routes, and make them highly reliable, taking into account traffic delays at different times of day etc. Rush hour coverage is important. Make sure “everyone” in these suburbs gets a copy of the schedule.

Have a wide coverage area, so that all the suburbs are are covered. Have different (higher) fares for departing from suburbs than when in the city, but returning fares are the same as intracity fares. Have a reliable schedule for the city too, which is where your buses will be between rush hours and some evening routes too.

Now here is the killer part. Have daily, weekly, and monthly passes available at a reasonable but not too huge discount, with the discount based on say ten one way trips per week. Have one set for the suburbs, and one for intracity travel only.

Why is this a killer? Because you will “own” those passengers for as long as their pass pasts. You don’t have to careen like a madman to each popular bus stop because you know that passengers will wait for your buses and your buses only. You can then also afford to stop at the smaller stops. The more stops you make, the more likely people will get on your bus to start with (you don’t want to only to get off at the exact same spot as the masses, there are other more convenient locations for you as a passenger. You might or might not want some express buses with only one end destination too, no stops in between, depending on volume.

Depending on how connected your competition and how safe your city is, you may have some personal safety issues to deal with though since you’ll be clobbering the competition.

Almost makes me want to move to Santiago lol. Although, even if I were of a mind to pick up and move to the end of the Earth, I suspect some rent seekers will use government reg’s to put me (a.k.a. a gringo) out of business if private coercion was not a viable option.

Scott Wood December 20, 2006 at 6:35 pm

“They are likely not to be more efficient in the sense that anyone could make more money by operating a feeder route in the existing system.”

Why not?

I could be talked into going along with congestion as a relevant externality, but I’d like to know whether buses in the center of Santiago during peak time are regularly half full. My money would be on the “full most of the time” option, but maybe not.

Also, by “existing system” do you mean the highly centralized nature of the place? (I’ve never been there, so I’m merely parroting other commenters.) If so, do you think a centrally planned system would be better because it would be used to encourage (force?) activity to shift a bit from the center area to the not quite so central areas?

Rich Berger December 20, 2006 at 7:41 pm

How did this discussion turn and keep its focus on the very narrow question of bus service in Santiago?

Castro is very relevant to the posted question, because a wretched communist future would have been likely, had Allende remained in power. That future would have brought political prisoners, executions, persecution, sharp curtailment of personal freedoms and an impoverished economy.

Did Pinochet kill opponents in order to prevent that future, or were his actions mere bloodthirsty revenge? Is it right to fight and kill the forces that seek to enslave you?

Xavier December 20, 2006 at 9:34 pm

Social security: The vaunted “privatization” was in fact done on top of an already-existing government-run system. Its free market nature is much overrated. It probably was a good idea at the time, given the stellar performance of the Chilean stock market (which it helped drive), but it has created long-run problems and it is no longer a system to be envied.

Tyler, would you care to elaborate on that? I was feeling rather comfortable with the 15% annual return on my private account until five minutes ago…

neil December 21, 2006 at 10:23 am

[You couldn't make money starting a feeder route in Santiago] Why not?

My guess is that a significant majority of people are served by just one bus route and would prefer not to pay two fares, which is what they’d have to do to take a feeder route. Meanwhile, anyone who is not served by just one bus route can already get to their destination with two fares, by transferring in the center (which contributes to overcrowding). Feeder routes need transfers to be successful — which is why, as Xavier mentioned, they are being implemented simultaneously.

Also, by “existing system” do you mean the highly centralized nature of the place? (I’ve never been there, so I’m merely parroting other commenters.) If so, do you think a centrally planned system would be better because it would be used to encourage (force?) activity to shift a bit from the center area to the not quite so central areas?

I think there’s a case to be made that the bus system, being reactive to market forces, simply reinforces and amplifies existing growth patterns and discourages new ones from forming. As I mentioned, the hub/spoke system makes it so you can get from anywhere to the center on one bus fare; but this is not true for any other neighborhood, and in fact the system tends to create artificial separation. For instance, the near-central neighborhood of Ñuñoa is not accessible by a single bus fare by many parts of the city, which surely discourages people from opening stores or restaurants here.

Dan K December 23, 2006 at 6:57 pm

Speaking as an American who has lived in Chile and a few other Latin American countries, it seems pretty clear to me that most of Chile’s growth comes as a result of two things:
1. Better respect for rule of law
2. High and rising prices for Chile’s minerals

“Aha!” say the Pinochet fans. Just like in South Korea, a dictatorship forced change that the people were unwilling to do on their own!

My take, however, would be very different. Chile has always had better rule of law than the rest of Latin America. Before Pinochet, they had the 2nd longest actively running democracy in the Americas (behind the USA). In fact, if the military coup had not toppled Allende it is quite possible that there would have been a groundswell for political change from the Chilean electorate (once the truck drivers started striking, Allende lost a lot of popular support).

Being intimidated into following the rule of law is not as welfare enhancing as following the law because it is sensible. Absent Pinochet there are a million possible counterfactuals, but my educated guess is that over time Chile’s economy would have ended up in about the same place.

hoojk December 2, 2007 at 9:05 pm

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Anonymous October 13, 2008 at 11:05 pm
outsourcing March 6, 2010 at 3:02 am

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