Successful neoliberalism?: state policy, poverty, and income inequality in Chile.

Author:Davis-Hamel, Ashley


This study examines Chile's neoliberal transformation, considering both its aggregate results and disaggregated effects, specifically the outcomes of neoliberal policies on the domestic population as measured by levels of poverty and income inequality. As one of the Latin American countries that has experienced the deepest international integration, examining Chile's economic transformation can provide insight on the impact of neoliberal policies on developing countries in the region. Such insight can perhaps facilitate the reduction of poverty and income inequality that many developing states in Latin America face. The intent of this paper is not to challenge the neoliberal model, but rather to examine whether that policy was appropriate in a developing state that instituted an extreme orthodox version of the neoliberal paradigm. It finds that deviation from extreme neoliberalism, through government investment in social programs, that is, the assumption of an active state role in the economy, was necessary to improve socioeconomic conditions in Chile and achieve some level of poverty reduction. The issue of income inequality appears to be more complex and requires further analysis to determine how to improve socioeconomic conditions in Chile and achieve some level of poverty eradication. The issue of income inequality appears to be more complex and requires further analysis to determine how to mitigate its severity.

Even before the free-market philosophy became the dominant global economic ideology, by the early 1980s Chile had embarked on the path toward neoliberal economic reform and successfully integrated into the global market heralded by the growth of exports and foreign investments. As the first Latin American state to do so, Chile is renowned as "the poster child for the neoliberal model." (1) Expressing a commonly-accepted view, William R. Keech, a political economist at Duke University, claims the neoliberal policies implemented during the Pinochet dictatorship, influenced by the 'Chicago Boys,' led the Chilean economy to "a new level of prosperity." (2) Thus, it is postulated that the transformed Chilean economy represents an exceptionally successful model for other Latin American states to replicate. This study examines the validity of that claim by exploring Chile's neoliberal transformation, considering both its aggregate results and disaggregated effects, specifically the outcomes of policies on the domestic population as measured by levels of poverty and income inequality.

What is Neoliberalism?

Over the last two decades, the term neoliberalism has been used in various contexts. (3) It is, therefore, important to define what is meant by neoliberalism in this study. Neoliberalism here refers to a political-economic philosophy that advocates a laissez-faire approach to development by reducing state intervention and relying on unfettered market forces, following capitalist paths of free trade and market expansion. Under neoliberalism, state intervention in the economy is greatly abridged. Functions, such as investment promotion and industrialization, are turned over to private hands in order to generate integrated and well-informed markets. (4) The main policy strategies in neoliberalism include: elimination of price controls; liberalization of import trade; deregulation of financial markets and capital flows; and reduction of the public sector, particularly cuts in social program funding; privatization of public enterprises; and, reform of the labor sectors and tax system. (5) Promoted by U.S. President Ronald Reagan (1981-1989) and British Prime Minister Margaret Thatcher (1979-1990), in what became known as the 'Washington Consensus,' this economic philosophy became the predominant ideology among developed countries in the 1980s. (6)

The neoliberal economic model was extended to developing and less-developed countries through Washington-based developmental institutions, namely, the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO), in the form of structural adjustment programs. Adherence to this ideology, it was assumed, would result in dynamic market competition, thus elevating the economies of developing states by opening them up to foreign trade and investment. Market efficiency would translate into greater economic growth and control inflation. By reconstructing their economies through the implementation of the neoliberal model, the postulation is that development would ensue. Over the long-term, this would reduce poverty and improve the welfare of the domestic population. Supporters of the neoliberal economic model view deregulated markets are the driving force of development. (7) Although alternatives have been proposed, particularly following the 2008 global economic crisis, (8) the neoliberal ideology continues to be the prevailing paradigm in the international economic system.

Chile's Neoliberal Transformation

Neoliberal transformation in Chile began during the brutal dictatorship of General Augusto Pinochet (1973-1990). (9) From 1975-1982, the regime instituted "extremely orthodox neoliberalism" to drive economic development in Chile. (10) During that period, aggregate economic growth was achieved, averaging 8% annual growth from 1977-1981, causing some observers to describe this as an "economic miracle." This economic growth, however, was stimulated primarily through a massive inflow of credit from private international banks stemming from trade and capital liberalization. In 1982, an extreme economic crisis caused the Pinochet government to modify its economic policies, deviating from the orthodox neoliberal model. Thus, from 1983-1989, the Pinochet regime practiced a variation of the neoliberal economic approach, known as "pragmatic neoliberalism." This approach led to Chile's second "economic miracle." Following the Pinochet regime, succeeding governments further diverged from orthodox neoliberalism by increasing the role of the government in the economy with a focus on combating social problems, particularly poverty eradication. Despite deviations from the orthodox model, Chilean governments after Pinochet have continued to follow most neoliberal policies. (11)

Orthodox Neoliberalism under Pinochet (1973-1982)

On September I l, 1973, the Chilean military led by General Pinochet overthrew the democratically elected socialist Unidad Popular government of President Salvador Allende (1970-1973). In the two years preceding the coup, Chile had experienced a highly-polarized, unstable political-economic environment plagued by hyperinflation, a U.S.-led economic boycott, massive strikes, and severe shortages of food, consumer goods and manufactured products. (12) Prior to implementing neoliberal reforms, Chile followed the Latin America postwar paradigm of import-substituting industrialization (ISI). (13) With political power concentrated in the hands of a military dictatorship, President Pinochet set about moving Chile in a vastly different economic direction. Pinochet turned to a group of Chilean economic consultants educated at the University of Chicago, popularly known as the 'Chicago Boys,' to redirect the economy on the free market path. (14) Beginning in 1975, the Pinochet government implemented an "authoritarian version" of neoliberal socioeconomic policies, or "shock therapy," that reduced Chile's public sector significantly. (15)

To achieve economic growth, policies focused on Chile's integration into the global market by attracting foreign investment and expanding the export sector, as well as immobilizing organized labor. (16) Such policies included the elimination of price controls, reduction of tariffs, freeing of government control over interest rates, sharp currency devaluation, and drastic cuts in government domestic spending in healthcare, social security, education, and welfare, as well as privatization of many public enterprises, principally in the financial and industrial sectors. (17) In its dealings with labor, the Pinochet government banned unions, suspended labor laws, and prohibited strikes. (18) In terms of international trade, non-tariff barriers, in the form of restrictions, quotas, and licenses from the ISI years, were replaced by a uniform 10% tariff. (19)

Many of the Pinochet government's programs designed to improve the living conditions of the popular classes (i.e., working class) were reduced or eliminated altogether. (20) Existing welfare programs, including--subsidized consumer goods, housing provisions, health services, and income subsidies--were abolished or curtailed. (21) The initial 1975 reductions were drastic--spending on public housing was cut by 60%, healthcare by 40% and education by 73%. (22) Although social expenditures increased again by 1979, it still reflected a 17% overall reduction in real terms compared to their 1970 levels. (23)

These reductions in government spending on social programs were accompanied by a wave of privatization of state-owned enterprises. (24) The initial wave of privatization sought to reverse the socialist reforms of the Allende government, which had increased the number of state-owned enterprises from 68 in 1970 to 596 by 1973. (25) However, the Pinochet government did not limit privatizations to businesses nationalized under Allende. By 1980, the number of state-owned enterprises was reduced to 48. (26) A number of service industries, including education, electricity, health and the social security system, telecommunications, and water, were among those privatized. Banks that had been nationalized during the Allende government were also privatized, removing interest rate and credit regulations as well as providing foreign banks with easy access to Chilean markets. (27)

The idea behind privatization is that state enterprises are deemed highly inefficient and, therefore, "pose a severe threat to economic development." (28) Consistent with...

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