Allende, Pinochet, and the stock market

We document the impact of Allende’s election and subsequent coup on share prices.

A rare natural experiment to identify impacts of institutions on economic outcomes.

The unexpected socialist victory in 1970 reduced share prices by one half.

The 1973 coup launching a business-friendly dictatorship raised share prices by 80%.

These effects reflect Allende’s systemic challenge to private property rights.

That is from Daniele Girardi and Samuel Bowles, here is an ungated version.


Share prices are certainly one economic outcome, but this doesn't speak to the effect of institutions on economic outcomes beyond short term share prices. Rather, it tells us about investor perceptions of left wing victories during a period when such things often pressed nationalization (and is thus fairly banal in its insights). The external validity of this natural experiment is effectively non-existent.

*presaged, goddamn autocorrect

What is banal about expropriation of property without fair compensation? It's pretty significant.

As for the Chicago Boys and Pinochet, their influence on Chile, IMO, was vastly overrated. I recall a graph that showed the GDP of Chile depends more or less on the price of copper, which increased in value about the time that Pinochet seized power. When copper fell in the late 1980s, Pinochet also lost power. Coincidence?

The insights into the phenomenon at hand. This is an empirical question, not a normative one, so get your panties out of a bunch, Ray.

None of your comments have anything to do with the nature of the research at hand. Sorry you have problems properly grasping the motivations and practice of social science.

Poor Brad, literally. Nothing in your OP indicates you have an open mind, nor that you question the empirical data. Rather, you come across as a ranting left that you are. Remember Brad, I'm in the 1%, retired in his 40s, have a gf half my age, and living the dream. You, by contrast, are still hustling to make a name for yourself. So "do the hustle" Brad. Doo doo doo doo doo doo doo too too.

I never tire of laughing at the pathos of Ray thinking he's a big winner making us all jealous because he took a modest sum of money to a third world dump and hired a mistress, where he could grow old and childless.

More interesting is what we saw during the recent election in Chile. In November, when the center-right candidate got far fewer votes than anticipated, the stock market went down significantly because of the risk that in the run-up election the then-government coalition could remain in power with a new president.

However, when Piñera won the run-off with a significantly wider margin than anyone anticipated (thus, giving him a strong mandate), the stock market recovered and went up a great amount.

The Libertarian-Authoritarian Axis has a long history.

You could have come up with a more-appropriate-than "libertarian" liberal-swear-word for Pinochet. Of course, I could be wrong. I think military dictators, US/Western cold warriors, and neo-cons are the antitheses of anything "libertarian." Also, none of this is meant to praise anything "libertarian."

Allende didn't quickly deploy sufficient numbers of Cubans and Russians.

Today, millions of Venezuelans wish their nation had not been overthrown by Hugo Chavez and his gangster-authoritarian axis.

Panama, the Dominican Republic, Chile, and Peru have had Latin America's most dynamic economies since 1980 and all have made considerable improvement in their per capita output vis a vis the United States (1.65x to 2.15x) Per capita income levels in Panama and Chile are about equal and the highest in Latin America, but Chile scores better on certain quality-of-life metrics (as it has Latin America's lowest crime rate and a homicide rate lower than ourse). Chile also has fairly stable prices (CPI increases ~1.8% per year), a satisfactory labor market (employment to population ratio is 0.60), manageable public sector debt (about 25% of gdp), and a trade surplus. Life expectancy his higher than that in the U.S. to boot.

Gen. Pinochet and his Minister of Finance Mr. Buchi played their part in making it happen.

One note of reserve: the country remains quite dependent on extractive industries. Mining accounts for > 40% of export revenue and about 1/4 of nominal GDP.

Years ago I read an article on how Chile's monetary and fiscal affairs (I think they privatized some aspects) the were set aright (no pun intended) by a group of U of Chicago-educated/Milton Friedman-acolyte economists.

Also, recently read Ron Chernow's bio on Grant. Therein I learned that the US and Dominican Republic seriously considered the DR becoming a territory and ultimately a state. The Americans noted that the DR potentially was a rich country.

My son was in a STEM grad school with a number of outstanding young men and women from Argentina, Colombia, Costa Rica. We housed them a number of times on visits to NYC. The Argentinians were mostly of Italian extraction and speak I slightly different (usage of vos/vosotros) Spanish. They are absolutely outstanding young people.

No real Argentine will say he speaks spanish- they speak Castilian.

Too true. They will also inform you that your food is pleasant, but that you must try the food in Rosario because it is unparalleled, and that dessert is nice but it is nothing compared to the alfajores of Industría Argentina.

I am certain that they looked around NYC with politeness, but in their heart of hearts could not wait to return to Buenos Aires, which is like Paris, but with grander buildings and better looking people.

Don't even try to serve them wine.

the US and Dominican Republic seriously considered the DR becoming a territory and ultimately a state.

So that's how it works. The Hawaiian Republic enthusiastically embraced the idea of becoming a US military base/territory. The Alaskan natives were heavily involved in the negotiations between Seward and the Czar over the sale of 663,300 square miles that neither of them had ever seen. The Creeks and Cherokees blissfully staggered from Georgia to Oklahoma to open up the Peach State to white settlement. Many of the Wisconsin Ho-Chunks agreed with the US government that life would be better in eastern Nebraska.

"The Libertarian-Authoritarian Axis has a long history."

Well, we know which end of the axis you lie on.

Business-friendly dictatorship?

Of course, the stubbornness of the "benevolent" dictator on the fixed CLP-USD rate isolated the country from the 1982 debt crisis.......wait, not at all haha

Maybe investors thought the socialist government would eventually run out of other people's money and this would happen.

Odd the way those Latin American freedom fighters - Castro, Ortega, Maduro - end up looking like monarchs. After a while, you can't tell the pigs from the farmers.

Chileans are fascists. They support Perón and they supported Hilter. Brazil sent troops to Europe to fight the nazist beast.

LOL amigo! I think--from memory--Brazil and most other South American countries declared war on Nazi Germany after 1943, when it was clear the Germans would lose.

Bonus trivia: the Boys from Brazil!

Brazil pretended to support Nazi Germany to extract some economical concessions feom Hitler. But Brazil was a staunch ally of the Allies. Brazilian President Vargas and American President Roosevelt met to coordinate their anti-Nazi efforts:

The Argentinians and Chileans wanted to ally themselves to Nazi Germaniy.

Chile never wanted to ally itself with the axis. It would have never happened, as the coalition in power at the time was leftist and included socialists that supported Russia; they wanted to join the war on Russia's side when it was attacked by the Nazis, but they only got Chile to break relations in 1943 with the Axis and declare war in 1945, after the atom bombs were dropped.

In addition, Chile sold copper very cheaply to the Allies, which was very criticized afterwards, especially since Brazil and Argentina got a windfall for their sales of commodities to the Allies and many thought we should have done the same.

"For the Axis, the Southern Cone nations of Argentina and Chile were where they found most of their support, and they utilized it to the fullest by interfering with internal affairs, conducting espionage, and distributing propaganda.

Brazil and Mexico were the only countries to send troops to the European Theate" -

For years, Argentinians and Chileans plotted together led by pro-fascist leaders. Brazil pretended to go along to be able to report to the USA what was happening. Chilexp's anti-Brazilian policies are widely known.

Chile has a lot of immigrants from Germany who arrived during the XIX Century. There were also many Italian immigrants during the early XX Century. So I am not surprised that there were supporters of the axis in Chile. However, they were a small minority when compared to the rest of the country and had no ability to influence the government in their favor (beyond pushing for a neutrality agenda that suits the Chilean mentality).

Brazil had lots of Japanese, Italian and German immigrants. Yet, Brazil fought against the Nazist beast. I think it is a matter of character

Chileans don't support Peron-next country over fella...

Shorter version: Henry Kissinger, corporate greenmailer, increased shareholder value.

Bonus trivia: reading the fascinating antebellum book "Battle Cry of Freedom" by James M. McPherson where the South made some of the same arguments made here, in that slavery is a valuable form of property that should not be abolished, that the South saved the North via slave-driven King Cotton in the Panic of 1857, and that indeed slavery should not only not be abolished, but it's necessary for civilized society (the "Mudsill" theory). Who is right? We need a Robert William Fogel and Stanley L. Engerman to weigh in here.

The bit about "necessary for a civilized society" is wrong; although what about Chicago? Children hereabouts would say, "Racist."

However, I think economic arguments may be useful in regard to "King Cotton," which was highly profitable and hugely independent on very cheap labor, i.e., slavery.

Not only the panic of 1857. Decades of revenues from (protective) tariffs and foreign exchange earned from international cotton sales Tobacco to a lesser extent?) likely allowed for North industrialization. Did King Cotton (again dependent on slave labor) largely fund economic and industrial/RR developments in the North, which combined with waves of Northern immigration, produced the demographics, industries, and transport systems which defeated the Confederacy? I don't know. Were foreign exchange account balances important in the 19th century? Overall, all that could be racist.

@auruns - Thanks; it's not racist, it's historical. When you say ancient Athens was founded on the backs of slaves, in particular the silver mines of Laurium, that's not racist but historical. However, to a large degree money is neutral, so the idea that either silver in ancient Athens or King Cotton revenue in the antebellum North somehow saved these cultures seems a bit far fetched to me. No doubt they helped--or else why would the North be so obsessed with fighting a war with the South to keep them in the Union, if it was not profitable to the North?--but as a Southerner Hinton Rowan Helper pointed out at the time, slavery was as much a retarder of progress as a helper to the South.

Bonus trivia: the US South is *still* undeveloped relative to the North, so many years after the 1860s civil war. The heavy hand of history.

I fully agree with the paper's conclusion: "The most parsimonious interpretation of these share price changes is that they reflected,
respectively, the perceived threat to private ownership of the means of production under a socialist government, and its subsequent reversal."

But I'm sorry that Sam Bowles has wasted his time doing research on something so well-known (I don't know his co-author). Any economist that lived in Chile in 1970-73 could have told him what happened: first in 1970, a credible threat to property rights led to a sharp decline in the prices of all assets and at the same time an increase in the price of all foreign currencies, in particular the dollar; and after the coup, the promise of restoring property rights led to an increase in the prices of those assets and a decline in the prices of all foreign exchanges. No economist living in Chile became rich by predicting those in changes in prices, although most Chileans with some money knew what was going to happen both in 1970 and in 1973. I knew only one Chilean economist that became rich: since late 1972 he had been betting that there would be a coup sooner rather later, and he bought several properties by borrowing abroad (in January 1973, when I moved to Chile for a year, he rented me for $125 per month a wonderful house that he had bought for $5,000 just to rent it to me —I was sorry I couldn’t borrow to buy the house). He was right. Sam should had talked to this guy (I understand a few other Chileans also did that but most continued selling property at least until the failed coup of June 1973).

Of course, what happened in Chile at that time has nothing to do with institutional economics. We know that any credible threat to the status quo will trigger a sale of assets (ask Paul Krugman who knows a lot about other people's character). The paper fails to tell the story of what happened the week after the election in September 4, 1970: Allende didn't win the popular election, he became President because his coalition Unidad Popular negotiated with Partido Demócrata Cristiano and signed a Statue of Constitutional Guarantees that most "demócratas cristianos" knew well that they will repudiate once in power. Also, the paper fails to provide a reliable account of what with the Chilean economy under Pinochet until the end of 1974, when a fiscal adjustment became urgent (they rely on a journalist to explain the change! Sam should not trust journalists).

In sum, good quantitative analysis of the initial decline and the final increase in the prices of shares. But we knew about them.

Thanks for some important review -- it would be good to know even more about the few years before Allende.

I'd also like to see more Chile - Venezuela comparisons since WW II.

At the time I moved to Chile (January 1973), I didn't know anything about Chile. I was hired to spend a year as professor of Monetary Theory and Policy but there was a threat of hyperinflation because government spending had increased sharply since September 1970. At the beginning Allende could finance the increase by depleting the country's international reserves accumulated during the presidency of E. Frei (1964-70) but by early 1972 Allende had to rely on the inflationary tax to finance the new high spending. By July 1973, inflation was very high and I had become an "expert" on hyperinflation. Note: in a private meeting that I attended to discuss these issues, former president Frei said that he was very upset that he didn't use the reserves himself to support his party's candidate in the election of September 4, 1970.

Paging Barro (and anyone doing Resource Curse stuff)...

Can we get that return expressed in terms of persons-disappeared per-basis point?

You've confounded Argentina and Chile.

And the place was in ruins by September 1973, though perhaps not as thoroughly as Venezuela is today.

Are you suggesting Pinochet did not?

Surely a White Trashionalist such as yourself is familiar with the "helicopter" meme.

So what? Americans love the Japanese. Yet,

Clearly helicopters are good for the markets

Confounding my memes, didn't Friedman as a Chicago Boy himself suggest a helicopter drop? Da da dumb.

They were only socialists. No need to cry about spilled dirtbags four decades on.

"No need to cry about spilled dirtbags"

Oh indeed. I was wondering if there had been any innovations in fascist terror efficiency since then.

Probably, but there's no reason to rest on one's laurels.

Pinochet dropped leftists out of helicopters. We need to do the same here. #maga

Funny thing about those right wing death squads, turns out that killing other people is a lot like eating potato chips. You start out with some Marxist subversive that no one will miss much, and eventually you end up whacking nuns and children.

Fine movie "Missing" about a young US journalist murdered in the coup plus the US complacency.

Also I remember a great quick sequence about socialism and its attractions:
Socialist: Under socialism, when one has two houses, and another has no house, one is taken for the other.
Farmer: uh-huh (yes, nodding)
S: one has two cars, another has none, one is taken...
F: uh-huh
S: one has two chickens, another has none, one is taken...
F: no, no, that is no good.
Socialist: what? why not?
Farmer: I have two chickens!

Even socialists know there's no free lunch -- but it's almost free as long as it's paid for with Other People's Money.

Venezuela's socialist crisis is far more important but less covered than Trump-Russia silliness.

Actually, Missing's thesis was inane. Charles Horman was a red-haze political tourist writing for an opinion magazine (something the film conceals). Writers fancy they're consequential and other writers are consequential, so ascribe malevolence to officialdom in cases where people are simply lost in the shuffle.

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