There was no “Chilean Miracle”

To explain myself on Twitter. My view of Chile is simply this.

(1) Chile before Allende had already been a middle-income country. It had been a middle-income country since the 19th century. But its economic growth in the 20th century was relatively slow for its income level. Much like Argentina and Uruguay, Chile had been in relative decline since the early 20th century.

(2) Allende was a complete disaster. (I describe it here ) His economic administration was both a ‘short-term’ disaster of fiscal and monetary management; and a long-term structural disaster of increasingly ‘socialising’ the economy. Allende to some extent was unlucky because copper prices were falling during his tenure, but his mismanagement was extreme, Venezuela-like, in the face of the external shock. Yes, most Latin American countries have had balance of payments crises relating to commodities shocks, but seldom this extreme.

(3) Pinochet’s first austerity programme (1973–5) was necessary in the sense that Chile’s 30% of GDP budget deficit and hyperinflation had to be reversed. Sorry to say, but it’s impossible to get rid of that without severe pain. Privatisations were undertaken, in part, because subsidies to state-owned enterprises were a major drain on Chilean public finance. Pinochet was indeed lucky to see rising copper prices during his part of the 1970s.

(4) However, Pinochet also liberalised the capital account, letting in ‘hot money’ capital flows, much of which went into a real estate bubble in the late 1970s. Because of this, Chile faced the debt crisis in the early 1980s just as much as any other Latin American country. Copper prices also collapsed after the “Volcker shock” . The financial austerity in the face of the debt crisis erased the economic recovery of 1973–82. This was purely Pinochet’s mismanagement and incompetence. He was no better than Mexican presidents, in this regard.

(5) Almost all of the economic growth in the Pinochet years was simply recovery from recession, i.e., closing the output gaps that he himself created. There was no change in trend output growth, which is sort of what we expect from ‘miracles’ in economic development.

(6) But Pinochet’s structural reforms largely survived his rule — albeit with more redistribution under democratic governments, more ‘light’ industrial policy, as well as capital account controls, which were actually implemented by Pinochet after 1982. Clearly, Chile is much closer to the neoliberal paradigm, albeit with anomalies, than Chile was in 1969 or 1973. Denying that is tantamount to denying that the rest of Latin America is also closer to the neoliberal paradigm today than it was in 1975 or 1980.

(7) But none of that makes Chile special. There is no “Chilean Miracle”.

Chile has grown in absolute terms, of course, and, had an Allende-like regime persisted, Chile would probably be much poorer today. But the actually existing Chile is no closer to convergence with the rich countries than it was in 1930. The best you can say for Chile is it has reversed its relative decline a little more than Argentina and Uruguay. (See first chart above.)

Chile’s GDP per capita is somewhat higher than Argentina’s or Uruguay’s, but all three are middle-income countries at more than $20,000 in current international dollars.

However, Chileans work longer hours than Argentines:

Argentina has also higher productivity levels than Chile. (See GDP per worker hour and TFP for Argentina, and for Chile.)

Uruguay, despite having a lower GDP per capita , has a higher mean income than Chile at every quintile of the income distribution, except the top. I suspect something similar prevails for Argentina.

So it’s not at all clear the somewhat higher per capita income in Chile versus Argentina and Uruguay reflects a real difference in welfare.

PS: I have been criticised for failing to mention the violence of Pinochet’s regime. Even if he did have an impressive economic record, surely his human rights record cancels all that.

But why can’t we speak dispassionately about Pinochet’s economic record? We (at least non-South-Koreans) do just that with the development record of the comparably bastardy dictators Park Chung Hee and Chun Doo Hwan. Both were responsible for the true economic miracle of South Korea. Yet Park is a highly controversial in South Korea, somewhat analogous with Pinochet in Chile. Chun is simply a reviled figure. But almost no one outside Korea ever vilifies Park and Chun.