Chile: The First Latin American Tiger?

September 25, 2007

The groundwork for Chile's impressive
macroeconomic success was laid by the brutal social
surgery carried out under Pinochet. The return to
democracy has seen a move to "neoliberalism with a
human face," but the social and environmental
costs of the model remain severe.
It hits you from hundreds of
yards away, the rich sweet smell
of fermenting wood floating
through the crisp air of a Chilean
night. The scent emanates from
several huge mounds of wood chip,
silhouetted against the dockside
floodlights. Dwarfing the wooden
houses and shops of the southern
port of Puerto Montt, the mounds
steam gently as they await loading
onto the Japanese ship which rides
at anchor in the bay. Each pile con-
tains the remnants of a different
species of Chilean tree, hauled
from the country's dwindling
native forest.
Along the southern coast, the
wire-mesh tanks of innumerable
salmon farms dot the picturesque
fjords and inlets. On the beaches,
the black strings of pelillo seaweed
lie drying, before being sent to
Duncan Green is a researcher at the Latin
America Bureau, London. He is currently
working on Silent Revolution, a book on
the neoliberal transformation of Latin
America, to be published in early 1995
by LAB/Monthly Review Press.
Japan for processing into food
preservative. In the ports, the fish-
meal factories grind mackerel into
animal fodder. All these products
will be shipped overseas as part of
the Chilean export boom, a vast
enterprise which has turned the
country into the fastest-growing
economy in Latin America and a
showcase for neoliberalism's
"silent revolution" in the region.
The figures are eloquent: eco-
nomic growth of nearly 6% in
1993, and over 10% in 1992, mak-
ing Chile the third fastest growing
economy in the world that year;
low inflation; a government which
runs a fiscal surplus of nearly a bil-
lion dollars a year; the highest rate
of investment in Latin America,
most of it financed by local sav-
ings; the next in line for a free-
trade agreement with the United
States. Its supporters trumpet Chile
as the first Latin American eco-
nomic tiger, ready to take its place
alongside the tigres asidticos of
Taiwan, Singapore and South
Moreover, the Chilean economy
is doing better now under a democ-
racy than during the Pinochet dic-
tatorship. Taken over the whole 17
years of the dictatorship, the econ-
omy was far from being a success
story, even in macroeconomic
terms. Two enormous recessions in
1975 and 1982, followed by peri-
ods of high-speed growth, aver-
aged out at a miserly annual per-
capita growth rate of less than 1%
from 1973 to 1989. The first boom,
which ran from 1977 until 1981,
foundered as the "Chicago Boys"-
free-market zealots placed in
charge of the Chilean economy-
deregulated private banks. The
banks promptly went on a borrow-
ing spree and then collapsed in
1981 in a private-sector version of
the debt crisis. Pinochet had to for-
get his neoliberal aversion to the
state and bail out the banking sec-
tor the following year by temporar-
ily renationalizing it.
Emerging from recession in the
mid-1980s, however, the govern-
ment adopted a more pragmatic
approach, concentrating on bal-
ancing the books and promoting
exports and investment. By 1990
it was able to present incoming
President Patricio Aylwin with a
fairly stable platform for an eco-
nomic take-off. Above all, the
dictatorship had turned Chile into
an export-oriented economy.
Aylwin picked up the ball and
ran with it. Over the course of his
presidency, per-capita GDP grew
by almost a fifth, exports by 14%,
and investment rose from under
19% of GDP to an impressive
27%, unmatched anywhere
except by the Asian tigers.
The Economist is impressed,
but what about the Chileans? It
depends on whom you ask. The
Chilean yuppies marvelling
at the giant new Alto las
Condes shopping mall seem
well pleased. Opened in
September, 1993, the
biggest mall in Latin Amer-
ica is a monument to the
new Chile, a temple of con-
sumerism set in the plushest
of Santiago's suburbs. The
mall has three floors of
gleaming boutiques in
cream and gold, a vaulted
glass roof, palm trees, silent
escalators and musak. In the
window of the World Book Harves
Center, Pinochet's memoirs and lu share pride of place with
Martha Stewart's Gardening Month
by Month, the perfect Christmas
presents in the new Chile. The
Chilean elite vastly increased its
wealth under Pinochet, and then did
even better during the Aylwin
Outside the middle-class
enclaves, however, the flaws in the
model start to appear. Chile's
neoliberal success has been built on
past repression and current hard-
ship. In the fruit farms near Santia-
go, life is hard. "They work you
like a slave here, squeeze you dry, and then throw you out," says Rox-
ana, a smartly dressed 30-year-old
ting two non-traditional export crops: seaweed rber (below).
woman. She can only find work
during the harvest and packing sea-
sons, seven months of the year. The
few permanent jobs all go to men,
she explains.
Roxana's house is a wooden hut
with a tin roof, a few sticks of fur-
niture, no heating, and no glass in
the windows. The family bakes in
summer and freezes in winter. Rox-
ana picks and packs kiwi fruit,
peaches and apples for export, all
grown on land that used to belong
to peasant farmers growing food
for Chileans. Under Pinochet the
farmers were bought out by banks
and fruit-growers. Now they are
casual laborers on their old
' C asualization" is cen-
tral to Chile's eco-
"nomic "miracle,"
and has accelerated since the end
of the dictatorship. A labor force
once accustomed to secure,
unionized jobs has been turned
into a collection of anxious indi-
vidualists. Pinochet's bloody
repression of the trade-union
movement played an essential
part in the process. "If he hadn't
killed all those people, the econ-
omy wouldn't be where it is
today," says Luz Santibafiez,
who spent seven years in exile in
Scotland and now runs her own
clothes workshop in Santi-
ago. The military espoused
a particularly brutal form
of economic Darwinism.
When asked about the high
bankruptcy rate, Pinochet's
colleague in the junta, Admiral Jos6 Toribio Meri-
no, replied: "Let fall those
who must fall. Such is the
jungle of...economic life. A
jungle of savage beasts,
where he who can kill the
one next to him kills him.
That is reality."
(above) The Aylwin government corrected some of the worst
abuses of the Pinochet
labor code. It did nothing, however,
to challenge the underlying free-
market model which relies on the
"flexible" labor practices estab-
lished under the dictatorship, such
as subcontracting, short-term con-
tracts, piece-work and manage-
ment's right to hire and fire almost
at will. Aylwin's team of economic
technocrats was convinced that
Pinochet's legacy of a compliant
labor force and a self-exploiting
sweatshop economy was essential
to the Chilean boom and could not
be touched.
Although the number of union-
ized workers increased by about a
third to 700,000 in the first years of
the Aylwin presidency, the Christ-
ian Democrats used their control
over the trade-union leadership to
keep a tight rein on labor. In late
1993, during the height of the elec-
tion campaign, the government was
both able and willing to face down
a rare strike by health-care workers.
Aylwin refused to negotiate while
the 55,000 low-paid members of
the National Federation of Health
Workers were on strike. Wages are
only just getting back to the levels
of 25 years ago, while around 40%
Santa Maria Manquehue, an affluent subur Santiago. The Chilean elite has prospered the last decade.
of the workforce is now estimated
to be operating in the dirty, danger-
ous and unregulated world of the
informal economy.
In purely material terms, even the
poorest Chileans have become less
poor since the restoration of demo-
cratic rule, but the loss of job secu-
rity and the dismantling of the wel-
fare state have exacted a heavy
human price. According to a recent
World Health Organization survey,
over half of all visits to the public-
health system involve psychologi-
cal ailments, mainly depression.
"The repression isn't physical any-
more, it's economic-feeding your
family, educating your child," says
Maria Pefia, who works in a fish-
meal factory. "I feel real anxiety
about the future," she adds. "They
can chuck us out at any time; you
can't think five years ahead. If
you've got money, you can get an
education and health care. Money
is everything here now."
The increased stress and individ-
ualism have also affected Chile's
traditionally strong and caring com-
munity life. According to press
reports, suicides have increased
threefold between 1970 and 1991,
and the number of alcoholics
has quadrupled in the last 30
years. Community leaders in
Santiago's working-class
poblaciones say family break-
downs are increasing, while
opinion polls show the current
crime wave to be the most
widely condemned aspect of
life under Aylwin. "Relation-
ships are changing," says Betty
Bizamar, a 26-year-old trade-
union leader. "People use each
other, spend less time with
their family. All they talk
about is money, things. True
friendship is difficult now. You
have to be a Quixote to be a
union leader these days!"
Pinochet's combination of
b in neoliberal economic surgery
over and the repression of dissent
turned Chile from one of the
most equitable societies in Latin
America into one of its most
unjust-by some reckonings sec-
ond only to Brazil. Average wages
in 1989 were still 8% lower than in
1970. The minimum wage was
drastically reduced and casualiza-
tion, in any case, rendered it mean-
ingless in large sectors of the econ-
omy. The numbers living in
poverty-defined as those in house-
holds with an income of less than
twice the cost of a minimum food
basket-had risen from 20% to
40% of the population, and the
richest 20% of the population had
increased their share of total con-
sumption from 45% in 1969 to 60%
in 1989. These wealthiest were the
only people who experienced a real
increase in their income between
1969 and 1988. Despite growing
poverty and inequality, the dictator-
ship cut per-capita social spending
by a fifth over the course of the
Pinochet years.
Aylwin inherited an economy
primed for growth, but with much-
increased inequality. He chose to
avoid redistribution, and bank on
growth to reduce poverty-every-
one kept the same proportional
slice of the pie, but the pie got
steadily bigger. In the short term
the trickle-down strategy produced
results unparalleled anywhere else
in the region. Growth lifted per-
haps as many as a million Chileans
out of poverty during the Aylwin
years. His newly elected succes-
sor, Eduardo Frei, has sworn to
eradicate extreme poverty-cur-
rently affecting almost one in
ten Chileans-by the end of the
Aylwin had good reasons for
putting continuity before change,
and an excellent alibi in the old
patriarch himself. Pinochet remains
head of the armed forces and a jeal-
ous defender of his legacy. He also
bequeathed a Congress with a built
in majority for the Right designed
to block radical reform or any
attempt to call the military to
account for any of the 3,000 politi-
cal killings under the dictatorship.
Aylwin's other reason for caution
was economic. Any serious attempt
to redistribute wealth would have
led to political and economic war-
fare with the Chilean elite, a slump
in investment, and a swift end to
neoliberal growth. Don't-rock-the-
boatism became the hallmark of the
Aylwin presidency.
One of the least publicized and
perhaps most positive aspects of the
Pinochet legacy is Chile's success
in solving Latin America's historic
inability to generate domestic sav-
ings. The main vehicle has been the
radical pension-fund reform intro-
duced in 1980. The reform replaced
the ramshackle state pension
schemes with private pension funds
(AFPs), and made membership
compulsory for all workers entering
the labor force from 1983, obliging
them to contribute a minimum of
10% of their salaries. AFPs current-
ly manage capital of $13 billion,
equivalent to one third of Chile's
Any new pension scheme has a
honeymoon period while it accu-
mulates capital before having to
start paying out pensions as its
members start to retire. During this
period, the AFPs have not only
generated far higher returns for
their members than the old
schemes, but have been instrumen-
tal in increasing Chile's domestic
savings rate to 21% of GDP, the
highest in Latin America. As a
result, Chile has been able to
finance investment with its own
resources, allowing it to impose
restrictions on speculative foreign
capital, something that other Latin
American countries would not dare
to do, given their desperation for
foreign investment. The experiment
is now being repeated elsewhere;
Peru introduced a similar system in
1991, and Argentina is now follow-
ing suit.
s the Chilean model sustainable?
It certainly seems more stable
than other supposed neoliberal
success stories such as Mexico and
Argentina, which are both relying
on massive inflows of fickle foreign
investment to cover large trade
deficits. In Mexico and Argentina, the influx of foreign investment has
included both direct investment
lured in by privatization programs,
and a growing component of portfo-
lio investment attracted by high
interest rates and rich pickings on
the local stock markets. Now, how-
ever, alarm bells are ringing since
there is not much left to privatize--
especially in Argentina-and spec-
ulative investment can leave as easi-
ly as it enters. Both countries are
exacerbating their trade problems
by running highly overvalued cur-
rencies to hold down inflation. In
comparison, Chile has so far been a
model of prudence, running govern-
ment and trade surpluses until a
large trade deficit appeared in 1993.
But in the long term, the Chilean
model's Achilles' heel is that,
underneath all the hype, Chile's
recent success has been based on
the old developing-country recipe
of exporting raw materials. Last
year, only 20% of its exports
were manufactured goods. Grant-
ed, products have diversified
from the days when copper made
up 80% of Chilean exports-it
now accounts for around 40%-
with dynamic new "non-tradi-
tional" sectors in fruit, forestry
and fisheries. Globally, however,
agricultural products are the most
sluggish backwater of the world
economy. Successful developing
countries get into computers, not
kiwi fruit, yet the Chilean gov-
ernment shows a massive indif-
ference to the country's techno-
logical base. While the business
courses are packed, in 1992 only
three students graduated in math
and four in physics from the Uni-
versity of Chile.
This latest twist to the old com-
modity-export story is already
showing signs of coming to an
unhappy ending. As more and more
developing countries leap aboard
the bandwagon, the increased com-
petition floods the market. As one
author asked: "How many
macadamia nuts or mangoes can
North Americans be expected to
eat, even at lower prices?" In the
Aconcagua Valley near Santiago,
growers are hacking down hectares
of kiwi-fruit trees because of a
world glut. Chile's apple growers
have suffered a different kind of
setback. By competing with Euro-
pean producers, they have triggered
a bout of First-World protection-
ism. In 1993 the European Com-
munity responded to a bumper
apple crop at home by virtually
closing the doors to Chilean apples.
In the same year, in a sign of the
limits to its export drive, Chile ran
up a $1 billion trade deficit after
years of surplus, reflecting sharp
price declines in a number of key
Up to now the response has been
that of a hamster on a treadmill, as
the Chilean economy churns out
ever greater quantities of raw
materials to try and compensate for
In the deforested hills
around Puerto Montt,
the fished-out shore-
lines of the South, and
the chemical-ridden
fields of the fruit belt,
even Chile's abundant
ecosystem is starting to
the falling prices. In the end, the
ceiling on such a rapacious model
is the land itself. In the deforested
hills around Puerto Montt, the
fished-out shorelines of the South, and the chemical-ridden fields of
the fruit belt, even Chile's abun-
dant ecosystem is starting to
protest, and some of the results are
horrific. In the Regional Hospital
of Rancagua in the lakes region of
Southern Chile, investigations
show that of the 90 babies born
with a range of neural tube defects
in the first nine months of 1993,
every one was the child of a tem-
porary worker on the fruit farms.
The Rancagua figure is three times
the national average, leading inves-
tigators to blame the tragedies on
the indiscriminate use of pesticides
on the farms.
Government economists ac-
knowledge the limitations of a
purely natural resource-based
model, and argue for a new kind of
industrialization, based on natural
resources and destined for export
rather than import-substitution.
Chile, say the economists, should
export wine, not grapes, and furni-
ture instead of wood chips. In the
longer term, they argue, the country
should try and mimic Finland, which successfully found a niche in
Copper miners, protesting wage cuts, m through Santiago in June, 1991.
the world market when it devel-
oped timber processing and paper
machinery on the foundations of its
forestry sector.
To date, however, the Chilean
government has failed to shake off
its neoliberal inferiority complex,
believing that the state can only
harm the economy by stepping in to
protect and nurture this process. So
far, President Frei has said nothing
to suggest a change of direction.
There has been sharp growth in a
few areas-wine exports have
grown over 50% a year for the last
five years. But critics argue that
without a coherent industrial policy,
the leap to broader resource-based
industrialization will never happen.
Furthermore, if Chile succeeds in its
efforts to join NAFTA, the govern-
ment may find that any attempt to
encourage fledgling Chilean indus-
tries becomes illegal under clauses
requiring equal treatment of local
and foreign investment.
Aylwin's success has been based
on an unprecedented level of politi-
cal consensus, in part a reaction to
the horrors of military rule, and in
part the result of fast growth which
has been able to keep almost every-
one happy without raising divisive
issues of inequality and redis-
tribution. The danger for his
successor is that, as memories
of the dictatorship fade, differ-
ent sectors will become more
willing to rock the boat. The
first could be the Socialist
Party, which may grow tired of
playing second fiddle to the
Christian Democrats in the
governing coalition, first under
Aylwin and now under Frei.
Disputes over the skewed
distribution of wealth will
probably emerge if the Chilean
boom runs into trouble, and
there are already signs of a
slow-down. Growth in 1993
was 5.7%, down from an
unsustainable 10.4% in 1992,
arch and is forecast to reach only
4% this year. Most Latin
American governments would be
delighted with such a rate, but once
the pie stops growing, Chile's poor
might become more dissatisfied
with the tiny slice they have been
allocated by Pinochet and Aylwin.
In 1992 the poorest fifth of the pop-
ulation received just 4.5% of
national income, exactly the same
percentage as in 1987.
Despite the rhetoric, Chile is a
long way from being a pure neolib-
eral showcase. Foreign investors
complain about the new govern-
ment's insistence on retaining
tighter controls on foreign capital
than almost any other Latin Ameri-
can country. General Pinochet
showed his own double standards
towards the free market by insisting
that the Chilean Copper Corpora-
tion (Codelco) remain in state
hands; indeed copper revenues sub-
sidized the State during the restruc-
turing of the 1980s. The military as
an institution also showed some
aversion to its own free-market
medicine. By law 10% of Codelco
revenues-currently around $190
million a year-goes to the armed
forces. The armed forces also
declared itself the only group in
Chile exempt from joining the new
private pension funds.
Some aspects of the Chilean
experience could usefully be copied
elsewhere, notably the creation of a
local capital market, the tradition of
honest government (which long pre-
ceded Pinochet), and a concern with
avoiding large fiscal or trade deficits
and excessive openness to foreign
speculators. Others, such as Chile's
unique endowment of natural
resources (copper, forests, excellent
farmland and a 2,000-mile coast-
line, all in a country of only 14 mil-
lion people), are just Chile's good
fortune and the envy of others.
But Chile's macroeconomic suc-
cess under Aylwin has only been
possible because of the brutal social
and economic surgery carried out
under Pinochet. In Chile, the rise of
the market has relied on dictator-
ship and repression. The return to
democracy has seen a move to
"neoliberalism with a human face,"
but the social and environmental
costs of the model remain so severe
that they undermine many of its
gains. Moreover, even on its own
terms, the model is flawed in its
dependence on raw materials, and
the government's aversion to taking
a real role in directing the econo-
my. The Chilean experience may
contain some lessons for other
developing countries grappling
with the market, but it is certainly
not the neoliberal nirvana painted
by its supporters.

Tags: Chile, neoliberalism, economics, democratization, inequality

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