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. BY DUNCAN GREEN 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 Korea. 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 12NACIA REPORT ON THE AMERICAS NACIA REPORT ON THE AMERICAS 12ANALYSIS / CHILE 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 boom. 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 lands. ' 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 Vol XXVIII, No I JULY/AUGUST 1994 13 0 o 0 0 0 0 Vol XXVIII, No 1 JuLY/AUGusT 1994 13ANALYSIS / CHILE 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 century. 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 NACLA REPORT ON THE AMERICAS 14ANALYSIS / CHILE 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 GDP. 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 exports. 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 protest. 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- Vol XXVIII, No 1 JuLY/AUGusT 1994 15ANALYSIS / CHILE 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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