2 November 2015

Chile, jewel in the free market crown, follows Venezuela’s road to ruin


Latin America has raised its news profile as a consequence of two recent presidential election results. In Guatemala, Jimmy Morales, a former comedian, won the presidency with a landslide majority and in Argentina the centre-right opposition candidate Mauricio Macri, mayor of Buenos Aires, held Daniel Scioli, of the Peronist Front for Victory, anointed heir of Cristina Fernández de Kirchner, to an unprecedented run-off vote in November.

Both events show there is a stirring in favour of change in a region that, but for the scourges of corruption, state dependency and Marxist utopianism should be a powerhouse of wealth creation.

But, with one notable exception – the historical experience of Chile in the second half of the 20th century – Latin America has never realised its economic potential. During the period 1970-2004 annual per capita GDP growth in Latin America averaged 0.51 per cent, compared with 2.95 per cent in Asia. In the most recent decade GDP per capita recorded impressive increases in some countries, only to fall back in the later years. Extreme volatility is the hallmark of Latin American economies, aggravated by factors such as the slowdown in China’s growth rate.

The systemic problem afflicting the Latin American economy, however, is political. It was perceptively analysed in 1996 in the book Guide to the Perfect Latin American Idiot, written by three free-market authors.  The factors they identified as promoting backwardness in Latin America were an obsession with revolution, economic nationalism, hatred of the United States, trust in government as an agent of social justice and a passion for caudillismo – rule by a strongman. At the time the book was written these malignant forces appeared to be receding, but they were reborn with the advent of Hugo Chávez in Venezuela and Evo Morales in Bolivia.

But the prophets of the free market have a concrete template in Chile’s bold experiment with capitalism under Augusto Pinochet, from 1973 to 1990 – what Milton Friedman called the “Miracle of Chile”. Free marketeers are often hesitant about invoking that success story because of its association with the military dictatorship that overthrew “democratically elected” president Salvador Allende. He was indeed democratically elected in Congress, with the help of Christian Democrat votes. There the democracy ended.

Three years later Congress declared him guilty of 20 violations of the Constitution and national laws, including support of the North Korean-trained militia quaintly known as the Groups of Personal Friends, illegal arrests, torture, press censorship and confiscation of private property. When Allende’s supporters plotted a violent coup to eliminate the leadership of the armed forces and complete the Marxist reconfiguration of the country, Pinochet launched a pre-emptive strike. His seizure of power was subsequently legitimised at a referendum in 1980 by a 67 per cent majority vote.

But the economic background to these events remains the enduring lesson. By 1973, Allende’s rule had produced an inflation rate of 605 per cent, a GDP growth of –4.3, a fiscal deficit of 30.5 per cent of GDP and, while public sector salaries had risen by 48 per cent, a 38 per cent drop in wages, in real terms. More than 150 industries had been nationalised, with 70 per cent of firms confiscated by the state.

Under Pinochet, Chilean free-market economists known as “The Chicago Boys”, under the tutelage of Milton Friedman and Arnold Harberger, set about reforming the economy. After just two years the fiscal deficit was reduced to 2.9 per cent. From 1975, public spending was cut by 50 per cent. The closed economy was opened up to foreign investors. Between 1985 and 1988 a total of 30 state companies was privatised. There were mistakes – the pegging of the peso to the US dollar was the most egregious – and state mechanisms were employed more than was desirable, but the miracle was real and enduring.

Long after Pinochet voluntarily relinquished power and restored democracy after losing a second referendum in 1988, Chile prospered in its new free-market identity. By 2006 it had doubled its GDP. That year marked the return of the left to government under Michelle Bachelet, but not yet to the extravagances of Allende. A combination of parliamentary arithmetic and awareness that any party that tinkered with a market system that had made Chile the richest nation in Latin America would suffer a severe backlash restrained socialist ideologues.

In 2013, however, Bachelet returned to power with an outright majority and has now succumbed to the temptation to resurrect the failed Marxist prescriptions of the past. Chile is turning into a high tax economy, with the government imposing an increase in corporate taxes aimed at generating an extra $8.3bn in revenue, equivalent to 3 per cent of GDP. The budget for 2015 envisaged a 9.8 per cent increase in spending, including a 27.5 per cent rise in public sector investment, relying on creaming off $2.3bn from the tax hike.

But this programme caused investors to close their wallets, while a slump in copper and gold prices combined with the threat of US interest rate rises are creating a perfect storm to halt Chilean growth. There could be no worse time for the grandstanding Bachelet agenda to be imposed. The president’s priority is education, but her “reforms” are a return to socialism.

In 1981 the Pinochet government introduced education vouchers, which proved an outstanding success. By combining vouchers with parental contributions children from modest backgrounds can attend private schools which practise academic selection. It is the path to self-fulfilment for millions: today 1.9 million Chilean pupils attend private schools via the voucher system. But Bachelet’s new education law prohibits selection, bans use of vouchers to attend for-profit schools and outlaws parental contributions in schools that receive government subsidies.

It beggars belief that, with the example of basket-case Venezuela before them, any Latin American politicians should be so perverse as to take the socialist path to assured beggary. But that is what is happening to Chile. Already GDP growth has slumped from 4.2 per cent in 2013 to 1.9 per cent last year; inflation rose from1.8 per cent to 4.4 per cent; and Chile’s external debt increased from 47.2 per cent of GDP to 56.5 per cent. Subverting the free market is an act of madness. What will it take to make the Latin American leftist idiots confront reality?

Gerald Warner is a political commentator.