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Model for the Third World? The Chilean Economy since Allende

By Renfrey Clarke

Renfrey Clarke is a longtime member of the Democratic Socialist Perspective in the Australian Socialist Alliance.


Import substitution and its exhaustion

The Chicago boys

Shock without therapy: the economic record of Pinochetismo

Social Outcomes: Health and Education

The flourishing of neo-liberalism

The limits of neo-liberal growth

Mercosur and the surrender of the elites

The common Latin American destiny



May-August, 2005 -- For supporters of neo-liberal prescriptions for the ills of the Third World, the experience of Chile over the past thirty years is a standard reference. Promoters of these policies may deplore the barbarities of the military dictatorship led by General Augusto Pinochet, and may even acknowledge that the dictatorship's economic record was not unmixed. Nevertheless, the claim is general that Pinochet's government set in place the foundations for a modern, prosperous economy. This legacy is said to have allowed the elected governments of the period since 1990 to achieve superior growth along with improving levels of social justice. Chile's open, minimally regulated economic space, the discourse holds, has encouraged both local and foreign investors to take advantage of the country's comparative advantages, developing production to serve lucrative international markets. The result, it is argued, provides a model for countries in Latin America and beyond.

With due qualifications, the Chilean experience is indeed meaningful as a test of what neo-liberal policies have to offer the Third World. Chile has a uniquely long experience of these strategies, enacted continuously there since the mid-1970s. There can be few other countries in which the implementing of these ideas has been so consistent as in Chile or, for much of the time, so unrestricted by concern for human freedoms and labour rights.

The use of Chile as a "test case" must not, of course, ignore the country's social, historical and geographical peculiarities. The truth is that most economic strategies would work better in Chile than in other countries of Latin America, or of the Third World as a whole. For a population of some 15 million people, Chile's natural resources are exceptionally generous, including more than a third of the world's reserves of copper. Pinochet in 1973 took control of a society whose members were healthy by Latin American standards, and almost all literate. Compared with its neighbours, the country had an efficient civil service, benefiting from a tradition of honesty in public administration. With a rich mercantile experience, Chile's economic elite had developed the operating culture and institutions of capitalism to an unusual degree. After many years practising the compromises of constitutional government, the country's traditional ruling groups were cohesive and disinclined to the violent factional struggles that had maimed development efforts elsewhere.

Moreover, Chile by the early 1970s had moved a significant distance from the traditional model of the semi-colonial economy, which required Third World countries to export primary produce in raw or semiprocessed state and to import all but the simplest manufactured goods. Chile at this time had an expanding industrial sector that included steelmaking and heavy engineering. In consumer manufactures, the country had been close to self-sufficient since the 1940s.

Import substitution and its exhaustion

The development of Chile's industrial plant had closely reflected the so-called import substitution industrialisation model, favoured since the 1930s by nationalist factions within Latin American political elites and eventually promoted by ECLA, the United Nations Economic Commission for Latin America. This model involved the use of tax policies, tariffs and exchange rate controls to help establish national industries and strengthen them to the point where they could compete with foreign producers in local markets. One occasional addition was a limited redistribution of wealth, to expand the domestic markets that provided the main sustenance to national firms. Another was the nationalisation, by governments of the right as well as left, of industries crucial to development programs, or whose owners—especially if they were foreigners—were considered to be running their firms to the detriment of national interests.1 Though often conflicting with the interests of First World exporting firms, the ECLA model was tolerated and even promoted by US administrations as a counter to a perceived "communist threat". Especially in countries whose internal markets were sizable and resources abundant, the model scored substantial successes. The fastest economic growth anywhere in the world between 1930 and 1980 took place in Brazil.2 Overall, per capita incomes in Latin America grew between 1960 and 1980 by some seventy-five per cent.3 Indicators such as health and education figures recorded marked gains.

Along with its successes, the ECLA model generated a host of problems. Raw materials producers who earned dollars for their exports often resented the high tariffs on manufactured imports—as much as ninety per cent in the case of Chile—that provided protection to local producers. With inferior productivity, the protected manufacturers were rarely competitive on world markets. As local products came close to satisfying domestic demand, the lack of export openings meant that further growth was increasingly closed off; pressures then mounted for expansionary fiscal policies designed to increase popular buying power. Even as countries industrialised, they remained dependent for foreign exchange on exports of raw and semiprocessed primary goods. Real prices for such commodities are historically subject to decline—one study suggests at an underlying rate of about 1 per cent per year4—as well as being volatile in the short term. Understandably, countries trying to implement the ECLA model were plagued by balance of payments problems, which caused them to contract burdensome foreign debts.

Above all, the ECLA model was prey to the rising numbers, organisation and combativeness of the industrial proletariat it needed to create, but whose demands for social justice it could satisfy only slowly and incompletely. The national elites of Latin America—weak, like all ruling classes of the capitalist periphery—took financial shortcuts as they manoeuvred among the power blocs that confronted them. The results included persistent high inflation.

Implicit in this situation was the possibility that elections could bring to power forces hostile to the capitalist system itself—the very "communist menace" the ECLA model had been intended to help thwart. In Chile, this came to pass with the election to the presidency in 1970 of Salvador Allende. Elsewhere, crucial sectors of the elites acted to pre-empt such a development. The ECLA model expired in an age of dictators.

The causes that brought an end to import substitution industrialisation were not, however, rooted exclusively—or even predominantly—in Third World countries. The mid-1970s were a period of crisis and straitened profits throughout the capitalist world. Within the metropolis, economic elites questioned whether the old class accommodations, involving welfare provisions and influential trade unions, could be afforded any longer. Giant corporations asked themselves whether they could be content with extracting profits from the Third World on less than ideal terms. These corporations were, after all, regularly losing sales in Third World markets to heavily protected local competitors. If international capital were to penetrate these markets, it was typically forced to do so through local subsidiaries that paid higher than subsistence wages, suffered labour unrest and had to endure the burdens of government regulation and fiscal adventurism.

Where capital sought rationalisations and self-justifications, academia was not slow to provide them. The mid-1970s were a breakthrough period for the "monetarist" school of economists centred in the University of Chicago. Originally technical and esoteric, the ideas of this group evolved quickly to provide a theoretical defence for union-busting and attacks on the welfare state and public property sector. Key elements of these doctrines—later to be summed up as "neo-liberalism"—included rolling back progressive taxation, strict fiscal discipline, interest rate liberalisation and sweeping privatisations. On the international scene, the prescriptions of the Chicago economists included drastic liberalisation of trade and capital flows. Early converts to these ideas were international financial bodies heavily influenced by the US, including the International Monetary Fund and the World Bank.

The Chicago boys

In the year after Pinochet and his junta seized power in September 1973, inflation topped 500 per cent. Influential figures within the new regime were already sympathetic to neo-liberal ideas, and with stabilisation an urgent priority, the government as a whole was soon won to the position that a drastic remodelling of the economy was essential. Instead of trying to industrialise on the basis of its internal market, Chile would seek modernisation and growth in a consistent orientation to international trade.

Key posts in Pinochet's economic ministries were given to young Chilean economists who had performed their graduate studies in US institutions dominated by the ideas of the University of Chicago economics school. Dubbed by the press the "Chicago boys", these economists in 1975 drafted a stabilisation plan with input from the International Monetary Fund and the World Bank. Adherence to this program was made a condition for these agencies' future assistance.

Under the 1975 plan, the key to stabilisation was seen as controlling inflation, and in classic monetarist fashion, this was to be done through drastic cuts to the money supply. Government spending was to be heavily curtailed. At the same time, the economy was to be opened up to the healing blast of international competition. Import tariffs would be reduced, to a standard level of 10 per cent. While these moves would send many national producers out of business, employment levels and domestic demand would soon recover—or so the theory went—as foreign investors responded to the opportunities held out by a stable currency, low taxes, and the absence of meaningful labour organisation. Discrimination against foreign capital was reduced, and to tempt outside investors, a vast sell-off of state-owned enterprises was begun.

In this "shock therapy", the shock was immediate and palpable. During 1975, output in the Chilean economy fell by thirteen per cent, while unemployment reached 18.7 per cent.5 Signs of recovery began appearing in mid-1976, and by the final years of the decade supporters of the neo-liberal model were claiming an "economic miracle", with growth in the years from 1978 to 1981 averaging 6.6 per cent.6 This "miracle" was achieved, however, at the cost of a massive increase in foreign indebtedness. Meanwhile, much of the "growth" amounted to pure speculation, or was a technicality of accounting. Between 1977 and 1981, some eighty per cent of the increased output credited to Chile's economy took place in unproductive sectors such as marketing and financial services.7

Moreover, the unfettered market proved a failure at bringing order and rationality to the country's economic processes. With regulatory strictures removed, sharpwitted financiers took to building speculative empires. When the state banks were sold off—at a forty per cent discount—they were quickly snapped up by commercial operators who proceeded to grant themselves huge loans. Using this money, the speculators bought up media, financial, resources and manufacturing firms, then leveraged these assets with additional loans from foreign investors. Within a few years, the reign of free competition had created two immense, oligopolistic financial-industrial conglomerates—the so-called piranhas—controlled by the entrepreneurs Javier Vial and Manuel Cruzat.

For millions of Chileans, the "miracle" was nonexistent; the immediate problem for these people was paying for food and shelter. In 1969, 28.5 per cent of Chileans had lived in poverty, defined as a household income less than twice the cost of a minimum food basket. As the redistributionist policies of the Allende government took hold in the early 1970s, this figure had dipped sharply, but by 1979 it had risen to thirty-six per cent.8 The general wages and salaries index in 1980 stood at a little under seventy per cent of the figure it had reached in 1972,9 but even this decline is probably understated, since large numbers of workers no longer received regular incomes. Under Pinochet, "flexible" labour practices had become the norm. With managers now enjoying the right to sack workers almost at will, casualisation was rife. Often, workers found themselves transformed from employees into independent subcontractors.

By 1980, the economic transformation demanded by the IMF and the World Bank was substantially complete. Of the manufacturing firms that had grown up behind tariff walls in earlier decades, many no longer existed. The category of "industry" had fallen sharply as a proportion of GDP, from 25.1 per cent in 1974 to 21.8 per cent in 1980.10 To the extent that foreign capital had flowed into the productive economy, it had gone overwhelmingly into the resource sector—into the traditionally dominant mining industry, but also fisheries, forestry and associated processing enterprises.

As before, Chile's economy rested on exports of primary products, above all copper. But the new, "open" economic order was radically more unstable, and Chilean prosperity was even more dependent on factors over which no-one in the country had any control. In the past, if commodity prices fell and Chile's ability to import was reduced, domestic manufacturing capacity had provided a certain cushion against hard currency shortages. Now, dependency on world markets was dramatically greater; any faltering of world prices for Chile's simple exports meant that obtaining essential manufactured goods, including capital equipment needed to run the export industries, could become problematic.

By 1982, the capitalist world was in the midst of its worst economic crisis since the 1930s. With the most "open" economy in Latin America, Chile was also among the countries worst affected as prices for commodities plunged and foreign investment dried up. At the extreme point of the recession, GDP was down on earlier levels by at least fourteen per cent, while overt unemployment was close to thirty-five per cent.11 Exacerbating the problems was the need to channel scarce foreign exchange into paying high interest rates on the now immense foreign debt. Speculative commercial empires built up in the 1970s collapsed; when the Vial and Cruzat groups defaulted on their borrowings, Pinochet was obliged to ignore neo-liberal dogmas and temporarily renationalise the banks.

By 1985, foreign markets had begun to recover, and growth resumed. Economic policy now became less adventurist, concentrating on promoting investment and exports and reducing inflation and the foreign debt. Raw growth rates in the final years of the 1980s were again impressive, but the process underlying them was not so much the creation of new productive capacity—investment as a proportion of GDP remained mediocre—as the switching back on of industrial plant that had been idled during the slump. In 1988 Pinochet judged the situation favourable enough to risk a referendum on his continued rule. The gamble did not pay off; the referendum was lost, and in 1989 the dictatorship was forced to allow elections, followed in 1990 by a transition to a restricted democracy. The new government of the centre-left concertación bloc, overseen by Christian Democrat Patricio Aylwin as president, was severely limited in its options by a Senate top-heavy with Pinochet's appointees, and by Pinochet's own continuing role as head of the armed forces.

By 1989, Chile no longer provided the only example in Latin America of an economy moulded in line with the precepts of neo-liberalism. Since the crash of the early 1980s, the imposition of "structural adjustment" packages on debt-ravaged countries had made some variety of the "open economy" quite the norm. But if neo-liberalism was to work at all in the Latin American setting, it was in Chile, with its long-standing regime of low tariffs and taxes, with its limited capital controls, small state sector and deregulated labour market, that the results by the end of the decade might have been expected to be most striking. In fact, Chile's economic statistics for the Pinochet period are unimpressive.

Shock without therapy: the economic record of Pinochetismo

Annual per capita economic growth in Chile between 1973 and 1989 averaged less than one per cent;12 according to one set of calculations, only five Latin American countries did worse than Chile in this regard during the Pinochet years.13 Expectations that private investment would soar under a free-market regime were confounded. According to neo-liberal doctrine, the removal of domestic price distortions and the freeing of market forces should have seen Chileans rushing to invest their savings in the local economy. In fact, the abandoning of attempts at regulation and the sale of state-owned firms had caused private oligopolies to coalesce in almost every sector; capitalism had spontaneously created massive distortions of its own, which were quite able to convince better-off Chileans to spend their savings on luxury imports or on trips abroad. In the "boom" years of the late 1980s, investment as a proportion of Chilean GDP was in the range of twenty-two to twenty-five per cent—lower, if anything, than the figures typical for Latin America in the 1970s.14

Meanwhile, neo-liberal policies left Chile even more dependent than twenty years earlier on exports of primary produce. Foreign investment during the Pinochet years greatly increased Chile's export trade in fresh and preserved fruit, wine, and fish and forest products. Increased diversity meant that foreign exchange earnings were less likely than before to collapse if prices crashed for a single export commodity. But the export sector remained vulnerable to restricted long-term demand, fierce international competition and resource exhaustion. Meanwhile, it was the export sector that was required to pay for an outlandish proportion of the everyday goods Chileans consumed. Ravaged during the early Pinochet years, non-food consumer manufacturing remained only a small and sickly part of the economy.

Predictably, the slight gains registered by the neo-liberal model under Pinochet flowed overwhelmingly to a privileged minority of the population, at most twenty per cent. Under the dictatorship, poverty in Chile doubled, from a low of barely twenty per cent during the Allende years to forty-one per cent in 1989; hunger was widespread, and an estimated forty per cent of the population lacked adequate housing.15 Between 1970 and 1989, labour's share of national income fell from 52.3 to 30.7 per cent;16 although trade unions were legalised in the late 1970s, anti-labour laws and arbitrary repression kept their membership small and bargaining position weak. Overt unemployment, which under Allende had fallen to less than five per cent, was still above ten per cent in 1989.17 Despite the increase in misery, per capita social spending was cut by a fifth during the Pinochet years.18

Despite having one of Latin America's most equitable distributions of income twenty years earlier, Chile by 1989 was home to some of the worst inequality in the region. The richest ten per cent of the population enjoyed 46.8 per cent of national income, the bottom fifty per cent a mere 16.8 per cent.19

The poor were also the worst sufferers from a drastic decline in state infrastructure spending, as tax cuts prompted reductions to outlays on items such as roads, water supplies and sewerage. Between 1970 and 1989, while Chile's population rose by about forty per cent, public investment fell by thirty-four per cent.20

Social Outcomes: Health and Education

No economy can achieve high productivity if its work force is ignorant and sick. But if Pinochet's economic strategists paid lip service to the need to foster health and education, their neo-liberal beliefs led them to conclude that this was best done through privatisation and the market.

Since the 1950s, Chile had possessed a relatively developed public system of health care, financed out of government revenues. Under Pinochet, strong pressure was placed on Chileans to take out private health insurance and to patronise an expanding network of private health care providers. People with little or no income were still in theory entitled to free treatment at public hospitals, but funding for these institutions was allowed to run down to the point where this right often became meaningless. Over time, a two-tiered, public-private system of health care was set in place. Adding to the inequalities in the treatment received by rich and poor was the fact that responsibility for primary health care was largely decentralised to municipalities. Not surprisingly, wealthier local authorities spent more than poorer ones on the health of their residents.

The new structures imposed on health care services soon had a parallel in education. From 1980 the military government began an ambitious remodelling of the school system, seeking "greater efficiency through administrative decentralization, capitation-based financing, labor deregulation and open competition between public and privately administered schools".21 Responsibility for administering public schools was transferred to local authorities. A system of funding grants based on school enrolments, and resembling the "vouchers" proposed for California, gave parents a choice between sending their children to public and private schools. Teachers lost their right to assured tenure and centrally determined wages.

Government spending on schools was run down, and the burden of supporting the education system was loaded increasingly onto municipalities and parents. Between 1982 and 1990, ministerial outlays were cut by twenty-seven per cent in real terms.22 While schools with prosperous connections generally found ways to make up for the falling value of government grants, public schools in poor districts had no such recourse. Teacher salaries declined by as much as forty per cent. By the end of the Pinochet period, forty per cent of fourth-graders from the poorer half of the population were being assessed as functionally illiterate.23

From 1981, higher education received an analogous remodelling. Post-secondary education was divided into three sectors, with traditional degree-granting universities augmented by "professional institutes" providing technical qualifications and by vocational training centres. University tuition in Chile had traditionally been free, and under Allende, post-secondary enrolments more than doubled. Now fees were charged, with their impact only partly mitigated by a student loans scheme.

The vocational training system, poorly funded by the government and serving mainly working-class students who had trouble affording fees on any terms, proved dysfunctional. In the universities, where a large majority of post-secondary students were enrolled, student numbers in 1989 were still well below 1973 levels as a proportion of the relevant age-group.24

The flourishing of neo-liberalism

Improbably, the ills Pinochet left behind him in 1990 were not terminal; the neo-liberal model in Chile was yet to see its finest days. Under the concertación administrations of Patricio Aylwin and Eduardo Frei, the economy boomed between 1991 and 1997 at annual rates of growth that averaged close to eight per cent. By this time, the economic growth no longer represented primarily a "rebound" after an earlier slump, but reflected high rates of investment from both foreign and domestic sources.

The boom of the 1990s rested partly on the ability of Chile's open, low-wage, export-centred economy to respond quickly to expanding international demand for raw materials and prestige foodstuffs during a period of upturn in most of the developed world. The rapid growth thus represented the obverse of the neo-liberal model's extreme vulnerability to any contraction of international markets. Additionally, the strength of the boom reflected the fact that Chile's primary-goods sector at the beginning of the 1990s still had rich potential that neither the ECLA model, with its stress on broad-based development, nor the Pinochet regime had been able to exploit satisfactorily.

An important inducement for investors to address these opportunities was the fact that key political problems now seemed to have been resolved. Chilean capitalism had managed to negotiate an end—albeit ambiguous—to the military dictatorship without major social explosions and without a strong labour movement reviving. To foreign investors, Chile now appeared a much safer and more predictable haven for their money than earlier. If investment rates under Pinochet defied neo-liberal predictions by staying mediocre, the advent of "democracy" was now supposed to supply the remaining ingredient needed for the model to unleash its full potential.

In the 1990s, neo-liberal commentators in Chile could at last point to a full-scale foreign investment boom. Annual foreign direct investment more than tripled between 1993 and 1998, in the latter year representing 6.8 per cent of GDP and twenty-five per cent of gross fixed capital formation.25 The pattern of this investment confirmed the central role resource exploitation was playing in the economy. "Sectors linked to the extraction and processing of natural resources have received more than 75% of FDI in recent years", a source from the period states, "while almost 50% went to mining, basically copper and gold".26

Of course, there was nothing unique in Latin America about a readiness to open the country's resources sector to foreign investment, or about a quiescent labour movement easily contained within the formal structures of democratic rule. Also contributing to the successes of Chilean capitalism during the 1990s were a series of other factors, not all of which sit easily with the doctrines of neo-liberalism.

Particularly important was a decision by the Aylwin government to allow an expansion of domestic demand, largely through permitting an increase in wages. This never amounted to a redistribution of wealth; the unspoken terms on which the concertación had been admitted to power included an acceptance that the Chilean rich would be allowed to keep their extraordinary gains of the Pinochet era. Nevertheless, growth in the economy during the boom years was allowed to flow through to the population, providing significant multiplier effects. Between 1990 and 1994, the minimum wage increased by twenty-four per cent in real terms, while average incomes grew by almost eighteen per cent.27 Social spending returned to its historic level of fifteen per cent of GDP, though state support for privatised social service providers meant that much of this spending flowed to already welloff groups.28 The government ran various job-creation programs. Poverty declined to as little as seventeen per cent in 1998, even while the extreme relative inequalities of income remained.29 The scandalous state of working-class and rural schools forced major new state investments in education, with big increases in teachers' salaries.

A further important factor underlying the boom of the 1990s was the increased availability to Chilean entrepreneurs of local capital, as a result of dramatically improved domestic savings rates. In previous decades, Chile's public social security system, despite many flaws, had been among the most equitable and effective in Latin America. Beginning in 1980 it was privatised, with most compulsory pension contributions—normally ten per cent of wages—now paid to so-called pension fund administrators (AFPS). The new system drew high praise from partisans of neo-liberalism and stinging criticism from other quarters; according to some of the critics, only twenty per cent of contributors could hope to receive good pensions.30

For the oligopolistic groups that quickly came to control them, the AFPS were extraordinarily profitable, both because of the high administrative fees they charged and because huge numbers of often unemployed casual and seasonal workers were denied the chance to claim a pension corresponding to the contributions they made. Once their retirement savings were exhausted, such people were forced to apply for tiny, hard-to-get public assistance payments. At best, the AFPS extracted forced savings from the population, channelling this money to the use of the economic elite, while at worst, the function of these bodies was one of outright confiscation on behalf of Chile's wealthiest families. The pension funds were nevertheless hailed as having solved the historical Latin American problem of low domestic savings. The law prevented fund managers from investing more than sixteen per cent of fund assets outside Chile; the result was a pool of readily available capital that helped boost gross domestic investment in the mid-1990s to levels well above twenty-five per cent of GDP.31

Indirectly, the pension fund provisions also helped Chilean capitalism to fend off one of the notable dangers the "open economy" holds for Third World countries—the fact that even far-fetched rumours of impending setbacks can denude local share markets of speculative capital within hours. In neo-liberal theory, controls on crossborder capital flows are harmful as a matter of principle and should be removed or minimised. But in a triumph of self-interest over dogma, Chilean governments during the 1980s and 1990s kept in place some of Latin America's tighter controls on the removal of funds by foreign investors. In the mid-1990s, for example, foreign companies paid a thirty-five per cent tax on the repatriation of profits and dividends,32 and so-called "lock-in" provisions compelled foreign investors to keep new funds in the country for a specified period. Elsewhere in Latin America, a dire need for foreign capital meant that governments had little ability to resist foreign demands for a "level playing field". In Chile, by contrast, the domestic savings available through the AFPS gave local firms an alternative to seeking capital from foreign speculators, and allowed governments to resist international pressures.

The deterrent effect of the investment controls on serious foreign investors was probably minimal, and was counteracted in any case by the increased stability—a vital inducement to productive investment—which the rules imparted to Chile's financial system. Repeatedly during the 1990s, when financial shocks caused speculative capital to flee from other countries of Latin America, Chile was insulated from the panic. When the "Asian financial crisis" of the final years of the decade blew away stock markets elsewhere in Latin America and ushered in years of chaos and collapse, the impact on Chile was much less profound.

Though prepared to ignore doctrinal orthodoxy when key capitalist interests were at stake, the concertación governments of the 1990s kept their overall practice firmly within a neo-liberal framework. The "flexible" labour regime imposed under Pinochet remained essentially intact, legitimised now by an elected government. Under the concertación in the mid-1990s as under the dictatorship, an estimated forty per cent of Chile's economically active population were making precarious livings in the informal economy, without guaranteed wages or regulatory protection.33 The number of organised workers began a modest rise, as some of the most flagrantly anti-worker provisions of Pinochet's labour code were modified. But trade unionists, who had made up forty-one per cent of the work force in 1972, still accounted for only thirteen per cent in 1995.34 Predominantly skilled and relatively privileged, union members were kept under tight control by their leaders. Deterrents to struggle included a police force that had never lost the taste for repression and a judiciary that retained its mental habits of the Pinochet years. Real wages took well into the 1990s to regain the levels of a quarter-century earlier.35

Meanwhile, certain key features of the "open economy" were even strengthened. It was the concertación that privatised Chile's water and electricity industries. The "lockin" restricting the repatriation of foreign investment was shortened in the early 1990s from three years to one.

The limits of neo-liberal growth

In the reports on Chile carried by the world's mainstream economic media during the 1990s, the standard note was of triumphalism. The country was said to be a dazzling success story. If the narrow and skewed nature of Chile's productive base was mentioned, this was often to cite it as proof that earlier fears had been misplaced. Chile had a resource-based economy heavily dependent on exports, and what of it? The country was booming.

For its too enthusiastic acolytes, however, global capitalism was preparing a stiff lesson in the realities of the marketplace. In July 1997 the Thai currency was devalued, and speculative capital began fleeing southeast Asia. Within a year, the so-called Asian crisis led to the crash of "emerging markets" throughout the Third World. In Latin America, the effects of the downturn were later to be summed up as "the lost half-decade".

Heralding the impact which the crisis was to have on Chile was the collapse of the world price for copper, which in 1997 provided 42.3 per cent of Chilean export revenues. Between June and December 1997, this price fell by 43.6 per cent.36 Over the next few years, the newer extractive industries that had boomed during the 1990s were hit by similar falls. Salmon prices halved, and cellulose prices declined by a third.37 Foreign direct investment diminished to as little as a fifth of earlier levels.38 Poverty rebounded to 20.6 per cent in 2000.39 Unemployment, which in the 1990s had stabilised at between six and seven per cent, reached a new plateau between nine and ten per cent; in Santiago, where some forty-five per cent of the national work force was concentrated, the level in March 2003 was 13.2 per cent.40

The crisis in Chile did not, of course, attain anything like the scale it reached in Argentina and many other countries of Latin America. Only in one year, 1999, was economic growth actually negative. But disturbingly, the boom conditions of the 1990s failed to return once the worst of the slump was past. During the six years from 1998 to 2003, real annual GDP growth in Chile averaged only about 2.5 per cent.41 The slowing of the economy, it was becoming obvious, was not simply the result of a conjunctural downturn, but was long term and structural. The neo-liberal model was exhausting its potential and approaching its limits.

There was nothing in this exhaustion that informed observers could not have foreseen. In essence, neo-liberalism in Chile had simply resurrected the pre-ECLA model of a resource-intensive economy based on primary exports. Granted, Chile's export offerings no longer consisted almost exclusively of copper and a few other mineral products. Even consumers as cashed-up as those of North America, however, have only a certain hunger for crab meat and table grapes. At the beginning of the new century as in earlier decades, Chile's exports were overwhelmingly directed at market sectors that were long established, slow growing and chronically prone to saturation, since numerous other producer countries were aiming to service the same demand. Meanwhile, several of the key natural resources that had underlain the Chilean boom of the 1990s were either strictly finite, like minerals, or were being exploited at rates that could not be sustained. By the 1990s Chile's natural fish stocks were being described as "virtually exhausted",42 and a study by the central bank had concluded that the country's native forests would disappear by 2025.43

Critical observers had long pointed out that, with prices for raw commodities subject to long-term decline, Chile needed to prepare for a shift to more knowledge-intensive production. Specifically, the need was to develop manufacturing industries and the ability to provide hightechnology services. The Chicago boys had promised that once Chile had an open economic regime, a stable currency and predictable, transparent operating rules for business, foreign capital would flood in and create a vibrant new manufacturing sector. By the 1990s, these conditions appeared at last to have been met. Substantial foreign investment took place, and the manufacturing sector is recorded as having grown during the decade at annual rates of about five per cent.44

It is essential, however, to look behind the figures at the nature of the "manufactured goods" involved. Chilean statistics routinely conflate raw materials processing, from the smelting of copper to the shelling of almonds, with manufacturing in its stricter sense—that is, the elaborate transformation of materials already derived from the industrial sector. Resource processing is simply an adjunct to the primary sector, and the profitability of such industries is tied up inextricably with the trend of commodity prices. In the modern trading system it is only elaborate, knowledge-intensive production, and the services required for pursuing it, that can yield consistently superior returns.

In the data for Chilean manufacturing production in the year 2000, by far the largest categories remain the traditional ones—food products (22.4 per cent of the total), refined metals, chemicals and paper.45 Categories that involve concentrated value-adding are minuscule, "high-technology goods", centred on pharmaceuticals, communications equipment, and computer and office machinery, together accounting for only two per cent.46

There is, to be sure, one set of figures for Chilean industry in which an attempt is made to distinguish between processed raw materials and elaborately transformed manufactures. These figures, which describe Chilean exports at the end of the 1990s, record that 57 per cent of exports consisted of extracted natural resources, and 32.2 per cent of processed natural resources. Goods with their sources in the industrial sector accounted for only 10.8 per cent.47

Neoliberalism in Chile greatly expanded exports, but it has done little to diversify them out of the categories of raw and processed commodities. Nor has the influx of foreign investment brought about far-reaching modernisation. Descriptions of the Chilean industrial scene around the beginning of the new century record that the great majority of enterprises remain small, use relatively primitive technology and aim their products almost exclusively at the domestic market.48 Large, modern, export-oriented plants of course entered production. With few exceptions, however, these were the cellulose mills, fish canneries and similar installations which at times of peak world demand yielded rich returns to their owners, but which at other times might operate at far below capacity.

As growth rates slackened after 1997, the calls for industry to shift its focus to concentrated, knowledge-intensive value-adding grew more insistent. Pundits argued increasingly that the task before Chilean business was to develop new, high-profit product lines on the basis of the country's existing productive strengths. Industry, it was said, needed to move both "upstream" and "downstream"; Chile should export not merely copper ingots but also mining technology and a sophisticated range of fabricated metal goods, and not merely cellulose and newsprint but also paper-making machinery and specialised, high-value paper products. For that matter, Chile also needed to break new ground in innovative, high-profit production that had no particular relation to primary resources; it needed, in short, analogues of the Finnish success in pioneering the mobile phone industry. But making such shifts is exceedingly difficult, not to say inconceivable, in a country with an under-developed knowledge base.

The need to improve the substrate of Chile's skills complex—the education system—had been gospel to the concertación governments of the 1990s, and by the opening years of the twenty-first century, Chileans were again well educated by Latin American standards. But the broad advances in indices such as secondary enrolments concealed serious shortcomings. Fragmented and market driven, the now largely privatised education system continued to skew services toward the better off, and technical and vocational education remained areas of chronic weakness. Meanwhile, Chile's scientific base was small, received little funding and was focused narrowly on a few extractive industries. While the business schools of Chilean universities were crammed with students hoping for careers in financial services, only a relative handful graduated in mathematics and physics.

In a market-driven education system, the poor state of scientific, technical and vocational training followed logically from the weak demand for qualifications in these areas. Chile's traditional manufacturing sector had few jobs for highly trained technologists. The modern processing plants, which made heavy use of machinery designed and built abroad, did not employ large numbers of Chilean specialists either. In knowledge terms, the new plants were narrow in their requirements, and resembled islands within the Chilean economy. Linkages with traditional enterprises were few, and opportunities for technology transfer were almost nonexistent.

In these circumstances, even modest exercises in technology-intensive value-adding faced powerful deterrents. When the mining and forestry industries of Canada and Sweden expanded into high-profit, knowledge-intensive areas of production in the mid-twentieth century, they did so on the basis of developed research facilities and the diverse technical skills that could be drawn from their countries' advanced manufacturing sectors. After a quarter-century of neo-liberalism, Chileans found that for their industries, a broad advance along such a road was blocked. "Chile cannot be said to be prepared for a knowledge-based society", a survey from 2001 stated. "The country's production structure is not connected to either the current technological scientific revolution or the new information technology. It is a traditional structure …"49 The World Economic Forum's 2002-2003 Global Competitiveness Report assigned Chile a relatively high position on overall growth competitiveness. But on the technology index, and especially on the innovation subindex, the country's rank was much more lowly.50

Instances in which firms from Chile's modern industrial sector diversified beyond raw materials processing into new "upstream" and "downstream" production remained very much the exception. Even if the companies involved wanted to expand into more knowledge-intensive areas, there was no essential reason to expect them to locate this activity within Chile. Very often, the companies were not Chilean, and even if they were, neo-liberalism put pressure on them to invest where profits were likely to be greatest. This was much more likely to be in countries where the necessary research and design facilities were located, and where skilled labour was readily available, than in Chile.

Mercosur and the surrender of the elites

How could the closed circle of technological backwardness, low skills, external competition and a small, largely impoverished local market be broken? A radical redistribution of income would have boosted the consuming power of the Chilean masses. But such a move would have been intolerable to the Chilean rich, and in any case, the expanded demand would quickly have been filled by imports. Might the old tariff barriers have been re-erected, so that domestic demand could again stimulate local manufacturing, and begin the process of upskilling the Chilean work force? On its own, the Chilean internal market is too small to permit reasonable efficiencies in most important industries, not to speak of the prospect of international reprisals against Chile's export offerings.

Would the small size of Chile's internal market have remained an obstacle, however, if the internal markets of a number of countries in the region had been combined? Would the weakness of the skills base in each individual country have been prohibitive if neighbouring states had negotiated with one another and agreed to target complementary industries for intensive development? The idea of coordinated development within regional tariff barriers is one which has intrigued economic theorists in Latin America at least since the 1950s. In 1991 the governments of Brazil, Argentina, Uruguay and Paraguay agreed to form Mercosur, the Common Market of the South, as a regional customs union. Invoking memories of the European Economic Community in its early years, Mercosur's promoters looked to the organisation as a tool for building technically sophisticated, increasingly competitive industrial economies in the member states.

The historically weak South American capitalist elites, however, had already made such drastic concessions to their patrons in the North that a serious project of independent development was beyond them. Chilean governments in particular showed only tepid interest in Mercosur, waiting until 1997 before taking out associate membership. The organisation made little progress. Tariff levels between member states were reduced, but a common set of external tariffs was never agreed. By the early years of the new century, Mercosur's original vision had been abandoned, and the organisation had been tacitly transformed into a negotiating bloc aimed not at asserting its members' independence, but merely at diversifying their dependency. Trying to pressure the US to relax its controls on imports of South American foodstuffs, the Mercosur nations were now negotiating with the European Union for a free trade pact. The chief Mercosur offering consisted of cuts to the remaining protection which South American manufacturers enjoyed against European competitors who, in many cases, held vast productivity leads.

By this time, Chile was well on the way to concluding its own free trade pact with the European Union. Coming into force at the beginning of 2003, this agreement immediately eliminated more than 90 per cent of tariffs on manufactured goods imported from EU countries, with the remaining tariffs to be phased out over ten years. Chile was now, arguably, in a better position to take on the fabricating, for low wages and with minimal technical inputs, of components for European manufacturing industries. But the reality is that European manufacturers will almost certainly find it more profitable to locate such activity close by in Poland or Morocco.

With the European Union free trade agreement in place, the Chilean elites now had an important lever for use in achieving their next objective: breaking down protectionist opposition in the US Congress and signing a pact that would allow them to sell their offerings more advantageously in the US market. Approved by the US Senate in July 2003, the Chile-US Free Trade Agreement came into force at the beginning of 2004. Under the agreement, some eighty-five per cent of bilateral trade in consumer and industrial products became duty free immediately. Chile's luxury tax on cars is now to be phased out by 2008, and by 2016 all bilateral trade will be duty free. Import price bands that have protected Chilean agriculture will progressively be relaxed.

The ending of tariff protection against European and North American manufactured goods is not, in fact, likely to have a major impact on Chile's economy. With import tariffs already low, Chilean industries that required tariff protection for their survival almost all succumbed long ago. Much more crucial for Chile's future will be the fact that the free trade agreement with the US bans the use of capital controls. Unlike the situation in 1997-98, when government restrictions helped prevent a stampede of foreign money out of Chile after the economic crisis broke, in future crises Chilean capital markets will be totally exposed to the fears and whims of outside speculators.

The readiness of Chile's rulers to abandon capital controls suggests that the mechanisms that have reserved domestic savings for local investment will not last long. The wealthy Chilean interests that control the country's pension funds, the AFPS, have chafed for years under the requirement that the great bulk of the capital in the funds be invested in Chile. In 2002 the AFPS were reported as calling for the proportion to be reduced to half.51 Also questionable is whether the service sector of Chile's economy will remain an important area of domestic capital accumulation. Already strongly placed in Chilean financial service industries such as insurance, US corporations can now be expected to move vigorously to expand their positions in other service areas. As with the resources sector, profits are likely to stream off disproportionately to the north.

In signing the free trade agreement with the US, the Chilean government was promised a "level playing field"—for a contest between mice and elephants. But the field is not even level; ditches and ramparts appear in a variety of places where sectional interests in the US were able to influence Washington's negotiators. Chilean wheat farmers will lose their priceband protection, while US farmers will continue to be subsidised. the US retains (and has a history of aggressively using) numerous protectionist mechanisms apart from the tariffs it has agreed to stop imposing on Chilean goods. Prominent among these mechanisms are bans on alleged dumping. According to one source, thirty-four per cent of the products on the export list of the Mercosur countries are affected by US non-tariff trade barriers.52

The modest advantages that Chilean exporters now enjoy in US markets are expected to be used by the US as a lever for forcing other Latin American countries into similar deals. The eventual goal, set by the US for later this decade, is the creation of a "Free Trade Area of the Americas", making US capital able to operate throughout most of Latin America with as few restrictions as now limit it in Chile. In this strategy, the chief US targets are the sizable internal markets of Brazil and Argentina, still largely served by local manufacturers and service providers.

The suggestion that the free trade agreements with the European Union and the US will restore Chilean growth rates to something like the levels of the 1990s is outlandish. Will these agreements even prevent chronic near stagnation? The chances do not seem high. The advances made by the Chilean economy in the 1990s depended crucially on factors that either predated neo-liberal policies—such as the country's natural resources and the effectiveness of administration—or else were antithetical to neo-liberalism, such as the capital controls. These positive factors now belong to the past, or face steady decline. The educational levels of Chilean workers are no longer a marked competitive strength; even Peru now boasts comparable data. The honesty and efficiency of Chilean public administration will be difficult to sustain. As the living standards of the lower middle class fall further behind those of the elite, it seems unlikely that Chilean officials will continue to refuse bribes, or that talented young people will freely pass up careers in business in order to work in the civil service. The natural resources will remain, but will yield diminishing returns as the richer pickings are exhausted. For commodities, raw or processed, the terms of world trade can be expected to continue deteriorating.

Meanwhile, it is inconceivable that extreme inequality, when combined with slow economic growth, will not lead in time to social explosions. Chile, in short, faces a future very much like that of other Latin American countries. The notion that history has made some sort of exception for Chile, and that close adherence to neo-liberal policies can bring the country to the point of economic "takeoff" and rapid, socially harmonious development, is simply untenable.

The people who run Chile's largest corporations are not, by and large, economic illiterates unable to distinguish between promising strategies and obvious dead ends. The question thus arises of why the Chilean elite has chosen the path it has. There is no mystery as to why transnational capitalists based in the US or Europe should want to assign Chile the dismal status of a raw materials and foodstuffs appendage of the rich North. But dismayingly for anyone who might still fantasise about a "progressive national bourgeoisie", the thinking of Chile's economic elite is not really any different. After thirty years leading the neo-liberal charge in Latin America, Chile's super-rich no longer conceive of their interests in national or even regional terms. Globalised in their living habits as well as in their share portfolios, these people are now at least as much at home in Miami or Madrid as they are in Santiago. The members of this stratum do not see neo-liberal policies as bad because they condemn Chile to semi-development and large sections of its population to lifelong poverty. The Chilean elite see these policies as good because they multiply the profits of the transnational elite, of which Chile's wealthiest families now feel themselves an integral part.

The common Latin American destiny

If neo-liberal policies are condemning Chile to share in the general fate of Latin America, it is worth reflecting on what this regional fate has been and is likely to be. As noted earlier, per capita GDP in Latin America increased by seventy-four per cent between 1960 and 1980, under the ECLA model; between 1980 and 2000, under predominantly neo-liberal policies, the growth was about seven per cent.53 Even if the "lost decade" of the 1980s is edited out as a painful but necessary transitional phase, the picture is still unflattering. Between 1990 and 2000, annual GDP growth in the developing countries as a whole has been calculated at 4.8 per cent, with Asia leading the way at six per cent. Growth in Latin America was 3.3 per cent, just ahead of Africa at 2.9 per cent.54

Even during the relatively prosperous 1990s, hundreds of millions of Latin Americans lived in wretched circumstances, locked out of the region's small income growth. The absolute number of poor increased, ECLAC's estimate of 197 million people in 1990 swelling to 221 million, some 44 per cent of the total population, in 2002.55 The comparison between the economic performance of Latin America during recent decades and that of the developing countries of Asia is especially illuminating. As one source observes: "In the 1960s and early 1970s, East Asia and Latin America grew at approximately the same rate, and the five largest countries in Latin America had per capita incomes that were above those of the first tier NICs [newly industrialising countries] (South Korea, Taiwan, Singapore and Hong Kong)."56 Since the 1970s, investment rates in Latin America have fallen substantially, from around twenty-five per cent of GDP to approximately twenty per cent. During the same period Asia has seen steady rises, to levels close to thirty per cent.57 It is notable that most of the countries of Asia, unlike Latin America, have been highly selective in applying the measures prescribed by neo-liberalism.

Various specific points of comparison between East Asia and Latin America in the past quarter-century make for poignant reading. Brazil in 1980, for example, is recorded as having been "active in all the important economic sectors, including information technology".58) Of this diverse range of leading-edge technologies, only fragments remain.

No social class that inflicts such developmental atrocities on the nation of which it is nominally part can claim to embody or defend popular interests. If the economic betterment of the masses of Latin Americans is to be served, this will require taking political power away from the elites and those who act on their behalf. So fundamental a shift can be carried out only by the masses of working people and their allies, united in the struggle for governments that truly represent the dispossessed.

It will not be enough for such governments simply to disavow the policies most closely associated with neo-liberalism. The countries of east Asia, which have rejected many of the neo-liberal prescriptions, have nevertheless suffered from a broad range of economic woes, and have come under intense pressure to conform to the neo-liberal orthodoxy. For Third World countries, escaping from underdevelopment requires a comprehensive break with capitalism and the construction of a socialist society on foundations of popular solidarity.


1. See Elizabeth Dore, "In the National Interest", NACLA Report on the Americas, Vol. XXXVI, No. 4, Jan-Feb. 2003, p. 21.

2. Emir Sadir, "Brazil: Neoliberal Decades Bring Down `Emerging Power'", NACLA Report on the Americas, Vol. XXXV, No. 4, Jan.Feb. 2002, pp. 2829.

3. Mark Weisbrot, "Why Globalisation Fails to Deliver", Observer Worldview, July 28, 2002,,11581,764036,00.html.

4. Paul Cashin and C. John McDermott, "The Long-Run Behaviour of Commodity Prices: Small Trends and Big Variability", IMF Staff Papers, 2002,


6. ibid.

7. ibid.

8. Cathy Schneider, "Chile: The Underside of the Miracle", in Fred Rosen and Deidre McFadyen (eds), Free Trade and Economic Restructuring in Latin America: A NACLA Reader, New York, Monthly Review Press, 1995, pp. 151155.

9. Guillermo Campero, "Trade Union Responses to Globalization: Chile", International Institute for Labour Studies, Labour and Society Programme, 2001,

10. ibid.;

11. Campero, op. cit.


13. ibid.

14. Usaid, 1998, "Latin America and the Caribbean. Selected Economic and Social Data: Chile".; Available January 2004.


16. ibid.

17.; Campero, op. cit.

18. Duncan Green, "Flexibility and Repression: The Chilean Model Explained", in Rosen and McFadyen, op. cit., pp. 54-61, p. 57.


20. UK Trade and Investment, "Infrastructure Industry in Chile",

21. FranJoise Delannoy, "Education Reforms in Chile, 19801998: A Lesson in Pragmatism", June 2000.

22. ibid.

23. ibid.

24. /educationindex.php.

25. Plant Research Corporation, "Foreign Investment in Chile", _Foreign_Investment_in_Chile.

26. The Róbinson Rojas Archive, "Foreign Direct Investment Diversifies in Chile",

27. Pilar Vergara, "In Pursuit of `Growth with Equity': The Limits of Chile's FreeMarket Social Reforms", NACLA Report on the Americas, May-June 1996.

28. ibid.

29. /000094946_01100504033520/Rendered/INDEX/multi0page.txt; Chilean National Industrial Overview: Development of Manufacturing Industry and Sustainable Development, Sept. 2001, The inequalities, which compare with those in Brazil as the worst in South America, actually increased marginally during the 1990s. In 1990 the poorest 10 per cent of households received 1.4 per cent of total income, and the richest 10 per cent 42.2 per cent. In 2000 the corresponding figures were 1.1 per cent and 42.3 per cent.




33. Green, op. cit., p. 56.

34. Schneider, op. cit., p. 152.

35. Green, op. cit., p. 56.

36. Plant Research Corporation, Foreign Investment in Chile _Foreign_Investment_in_Chile.



39. Chilean National Industrial Overview, op. cit.


41. /fs/chle.pdf+Chile+2003+GDP&hl=en&ie=UTF8;

42. Americas Update, cited in


44. Chilean National Industrial Overview, op. cit.

45. ibid.

46. Derek Hill, "Latin America: HighTech Manufacturing on the Rise, but Outpaced by East Asia", InfoBrief, August 2002,

47. Chilean National Industrial Overview, op. cit.

48. ibid.

49. ibid.

50. /Chile+KN+sessions. Available May 2004.

51. John Lear and Joseph Collins, "Retiring on the Free Market: Chile's Privatized Social Security", NACLA Report on the Americas, Vol. XXXV, No. 4, Jan-Feb. 2002, pp. 3641.

52. Claudio Katz , "Free Trade Area of the Americas: NAFTA Marches South", NACLA Report on the Americas, Vol. XXXV, No. 4, Jan.Feb. 2002, p. 30.

53. Weisbrot, op. cit.


55. NACLA Report on the Americas, Vol. XXXVI, No. 3, Nov.Dec. 2002, pp. 24; Vol. XXXVII, No. 1, July-August 2003, p.7.


57. ibid.

58. Sadir, op. cit., p. 28.

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