Miracle Cure, but the Medicine was Bright Red


Sunday, November 22, 1998

By Gregory Palast for The Observer/Guardian UK
Sunday November 22, 1998

Cinderella's Fairy Godmother and Augusto Pinochet have much in common. Both have magic powers. Pinochet is credited with the Miracle of Chile, the successful experiment in free markets, privatisation, deregulation and union-free economic expansion whose laissez-faire seeds spread from Santiago to Surrey, from Valparaiso to Virginia.

But Cinderella's pumpkin did not really turn into a coach. And the Miracle of Chile is another fairy-tale. The claim that Pinochet begat an economic powerhouse is one of those utterances whose truth rests on its repetition. Chile can claim economic success. But that is entirely the work of Marxist leader Salvador Allende, who saved his nation, miraculously, a decade after his death.

In 1973, the year the general seized power, Chile's unemployment rate was cut by 4.3 per cent. In 1983, after 10 years of free-market modernisation, unemployment reached 22 per cent. Real wages declined by 40 per cent under military rule. In 1970, 20 per cent of Chile's population lived in poverty. By 1990, the year 'President' Pinochet left office, the number of destitute people had doubled to 40 per cent. Quite a miracle. Pinochet did not destroy Chile's economy all by himself. He had the help of academia's most brilliant minds: a gaggle of Milton Friedman's trainees, the Chicago Boys. Under their spell, the General abolished the minimum wage, outlawed union bargaining, privatised the pension system, abolished all taxes on wealth and business profits, slashed public employment, privatised 212 industries and 66 banks and ran a fiscal surplus. Free of the dead hand of bureaucracy, taxes and unions, the country took a giant leap ... into bankruptcy and depression. After nine years of Chicago-style economics, Chile's industry keeled over and died.

In 1982 and 1983, GDP dropped by 19 per cent. Blood and glass littered the laboratory floor, yet the mad scientists of Chicago declared a success. The US State Department concluded: 'Chile is a casebook study in sound economic management.' It was Friedman who himself coined the phrase 'Miracle of Chile'. Friedman's sidekick, economist Art Laffer, preened that Pinochet's Chile was, "a showcase of what supply-side economics can do".

It certainly was. More exactly, Chile was a showcase of deregulation gone beserk. The Chicago Boys persuaded the junta that removing restrictions on the nation's banks would free them to attract foreign capital to fund industrial expansion. Pinochet sold off the state banks - at a 40 per cent discount against book value.

They fell into the hands of two conglomerate empires, controlled by speculators Javier Vial and Manuel Cruzsat. Using these banks, Vial and Cruzat bought up manufacturers, then leveraged these assets with loans from foreign investors panting for their piece of the state giveaway. By 1982, the pyramid finance game was up. The Vial and Cruzat 'Grupos' defaulted. Industry shut down, private pensions became worthless, and the currency swooned. Riots and strikes by a population too desperate to fear bullets forced Pinochet to boot out his beloved Chicago experimentalists. Reluctantly, the General restored the minimum wage and collective bargaining. Having previously decimated the ranks of state employees, he authorised a programme to create 500,000 jobs.

Chile was pulled from depression by dull old Keynesian remedies, all Franklin Roosevelt, zero Margaret Thatcher. (The junta even instituted what is today South America's only law restricting the flow of foreign capital.) New Deal tactics rescued Chile from the panic of 1983, but the nation's long-term recovery and growth is the result of (cover the children's ears) a large dose of socialism. To save the nation's pension system, Pinochet nationalised banks and industry on a scale unimagined by Salvador Allende. The General expropriated at will, offering little or no compensation. While most were eventually reprivatised, the state retained ownership of one industry: copper.

For nearly a century, copper has meant Chile and Chile has meant copper. Dr Janet Finn, metals expert at the University of Montana, remarks: "It's absurd to describe a nation as a miracle of free enterprise when the engine of the economy remains in government hands." (And not just any government: a Pinochet law, still in force, gives the military 10 per cent of state copper revenues.

Copper has provided between 30 and 70 per cent of the nation's export earnings. This is the hard currency that has built today's Chile. The proceeds from the mines seized from Anaconda and Kennecott in 1973 was Allende's posthumous gift to his nation. Agribusiness was the second locomotive of the Allende years. According to Professor Arturo Vasquez of Georgetown University, Washington DC, Allende's land reform, the break-up of feudal estates (which Pinochet could not fully reverse), created a new class of productive tiller-owners who, along with corporate and co-operative operators, now bring in a stream of export earnings to rival copper.

"In order to have an economic miracle," says Dr Vasquez, "maybe you need a socialist government first to commit agrarian reform." So there we have it. Keynes and Marx saved Chile, not Friedman. But the myth of the free-market miracle persists because it serves a quasi-religious function. Within the faith of the Reaganauts and Thatcherites, Chile provides the necessary Genesis fable, the ersatz Eden from which laissez-faire dogma sprang, successful and shining

Half a globe away from Chile, an economic experiment is succeeding quietly and bloodlessly. The southern Indian state of Kerala is the laboratory for the humane development theories of Amartya Sen, winner of this year's Nobel Prize for Economics. Committed to income redistribution and universal social services, Kerala built an economy on intensive public education. As the world's most literate state, it earns its hard currency from exporting technical assistance to Gulf nations. If you've heard little or nothing of Sen and Kerala, maybe it is because they pose an annoying challenge to the neo-liberal consensus.

Last week, the international finance Gang of Four - World Bank, IMF, Inter-American Development Bank and Bank for International Settlements - offered a Dollars 41.5 billion line of credit to Brazil. But before the agencies hand over the lifebelt, they want Brazil to swallow the economic medicine that nearly killed Chile. You know the list: fire-sale privatisations, flexible labour markets and deficit reduction through savage cuts in government services and social security.

Here in Sao Paulo the public is assured that these cruel measures will ultimately benefit the average Brazilian. What looks like financial colonialsim is sold as the cure-all that had miraculous results in Chile. But that miracle was a hoax, a fraud, a fairy tale in which everyone did not live happily ever after.

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Gregory Palast's other investigative reports can be found at www.gregpalast.com where you can also subscribe to Palast’s column.

Gregory Palast's column "Inside Corporate America" appears fortnightly in the
Observer’s Business section. Nominated Business Writer of the Year (UK Press
Association - 2000), Investigative Story of the Year (Industrial. Society - 1999), Financial Times David Thomas Prize (1998).

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