Neoliberal Case Study: Chile

This article was originally in my recent book, GINI: Capitalism, Cryptocurrencies, and the Battle for Human Rights. However, some people said it was too data-heavy for the book’s general audience. So, this article now lives here.  (Note: “Neoliberalism” is an economic philosophy that has nothing to do with political Liberalism. So, this is not a political article. If you’re not sure about the difference between political Liberalism and economic Neoliberalism, please see Economic Liberalism vs. Political Liberalism and Classical Liberalism vs. Neoliberalism.)

The Chicago Boys & Their Murderous Prophet of Profit. After 43 years of peaceful, democratic governance, Neoliberalism violently swept into Chile in the mid-1970s. That was when Milton Friedman and several other American economists (the “Chicago Boys”) from the University of Chicago were invited to advise Chile’s freshly unelected military dictator and self-proclaimed prophet, Augusto Pinochet. After leading a CIA-backed coup d’état that led to the death of Salvador Allende (Chile’s democratically elected president), Pinochet brutally ruled Chile from 1973 to 1990[1].[2]

The USG Actively Supported the Destruction of Chilean Society. Globally, Pinochet is most famous for brutally imposing Neoliberal policies on Chile; locally within Chile, he is most famous for murdering several thousand political opponents, kidnapping and disappearing up to 80,000 political dissidents and their families, torturing tens of thousands of Chileans in concentration camps, embezzling USD tens of millions from the Chilean Treasury, tax fraud, arms dealing, and generally destroying the social and economic fabric of Chilean society.[3]  This was no accident; it was exactly what U.S. President Nixon and Secretary of State Kissinger had in mind when, regarding Chile’s economy, Nixon said, “Make the economy scream.”[4]

Global Systemic Collapse. From a systemic perspective, several important factors led to the 1970s collapse of the global financial system that had been in place since 1945:

  • The 1971 collapse of the Gold-Exchange Standard and the Bretton Woods System.
  • The OPEC oil embargo in 1973.
  • High inflation and high unemployment worldwide throughout the 1970s.
  • Rapidly increasing global interest rates from the mid-1970s to the late-1980s.
  • Depreciating Latin American currencies, debt contracts and bonds denominated in appreciating
  • A global recession in commodities markets (except for oil) spawned a perfect storm that sent the commodity-export-dependent countries of Latin America into an economic death spiral.

As a result, Latin American governments were forced to borrow huge sums of money from international banks just to fund their core government operations. As interest rates continued climbing throughout the 1980s, their debt service obligations became unbearable. Then, like dominoes, economies throughout Latin America collapsed.

Latin America Blamed for the USG’s Sabotage. Neoliberalism was pitched as a response to prodigal Latin American governments, but the reality was the exact opposite: It was the Nixon Administration’s reckless fiscal and monetary policies, his dismantling of U.S. and global capital controls, and the flooding of the planet with USD during the Vietnam War that killed the Gold-Exchange Standard.[5] It was the USG’s intervention in the Middle East and abusive contracts by U.S. and British oil companies that instigated the OPEC oil embargo and the nationalization of virtually all major oil production facilities worldwide.[6] It was the U.S. Federal Reserve’s decision to dramatically increase interest rates to stop the worldwide inflation that the USG caused, which dramatically increased the borrowing costs in all countries worldwide because virtually all institutional lending activities were (and most still are) linked to U.S. bond market prices.[7]

Saudi Pipeline of Capital Props Up the Unsustainable U.S. Economy. After Nixon negotiated with the Saudi Royal family to price all Saudi crude oil in USD in exchange for Nixon’s promise to not militarily invade Saudi Arabia, the Saudis were accumulating USD hundreds of billions in foreign currency reserves.[8] With nothing better to do with that mountain of USD, the Saudis agreed to invest the reserves back into U.S. Treasury Bonds and allow U.S. banks to manage their surplus funds.[9] This, combined with the USD’s special reserve currency status, has enabled reckless and short-sighted U.S. politicians to exploit countries around the world, fund endless wars, and ignore the avalanche of debt that is now choking generations of Americans.

Saudi Pipeline of Capital Fueled Latin American Debt. In addition to perpetuating the USD’s status as the dominant global reserve currency and the USG’s endless budget deficits, with all this new cash flooding the U.S. banking system, the banks needed to find borrowers to generate interest income for themselves and the Saudis. This created an incentive for them to push Latin American governments to take loans for every conceivable infrastructure project, regardless of whether the projects were economically justifiable or sustainable.[10] This triggered a gold rush for U.S. banks, engineering, construction, and consulting firms to exploit every possible inch of South America, regardless of the economic, social, or environmental consequences.

Subvert Democracy & Sabotage the Economy. On top of a devastating economic crisis, now Latin America was being sold an endless river of unsustainable bank loans with sophisticated sales pitches that were presented as economic development programs. The Chicago Boys were the most famous, but they were just the tip of the spear: A phalanx of American corporations, political operatives, and Neoliberal economists plunged deep into every corner of every country in Latin America.[11] In this environment, Democracy took a backseat to financial profit, which led to many ethical compromises in U.S. Democratic and Republican administrations. For example, from a secret 1973 CIA memo: “It is firm and continuing policy that Allende be overthrown by a coup. . . . It is imperative that these actions be implemented clandestinely and securely so that the USG [the U.S. government] and American hand be well hidden.” That was the year when Nixon ordered the CIA to “make the economy scream”[12] in Chile and to “prevent Allende from coming to power or to unseat him.”[13]

Partners in Crime. Instead of denouncing the bloodthirsty Pinochet as an anti-democratic tyrant, Nixon and Secretary of State Henry Kissinger explicitly ordered the CIA to destroy Chile’s economy by imposing devastating capital and trade embargoes and violently overthrowing democratically elected President Allende. Why did they do this? Because Nixon, Kissinger, and USG policymakers and economists perceived Pinochet as a useful partner in spreading the ideology of Neoliberalism to protect Latin America against Communism. “The nation is trying to make Chile a country of proprietors, not of proletarians,” said Pinochet in an April 1987 speech.[14] Apparently, it never occurred to Pinochet or American officials that Allende was democratically elected because neoliberals were destroying capitalism, engaging in humanitarian atrocities in the name of democracy, transferring Chile’s land and natural resources to foreign corporations, and the Chilean people were desperate for meaningful economic reforms to achieve a more just and equitable quality of life.

Hubris & Tyranny Disguised as Liberty. Some people say Allende was incompetent, a communist, etc., because he justifiably resisted Neoliberalism, which they claim was justification for U.S. intervention. Allende was a socialist, not a communist; most politicians are not economic experts, which is why they have economic advisors; and it’s always easy to identify incompetent and/or left-wing politicians in every government on Earth, but that does not give us the right to murder and destroy them. Regardless of their ideology or technical competence, the USG never has any legitimate right to destroy the economies and political systems of other countries. When this happens, it represents a catastrophic breakdown of human civilization, which can only lead to racial hatred and ethnic conflicts; poverty of mind, body and spirit; and genocidal wars. Indeed, these are the rotten fruits of Neoliberalism and the USG’s economic and foreign policies.

Verifying the Success Stories. Given the unholy USG-backed dictatorships and economic disasters throughout the entire South American continent during the early days of Neoliberalism, very few people would dispute the fact that the 1980s were a lost decade for Chile and virtually all of Latin America. But how have Latin America’s economies performed lately? Maybe we can forgive and forget the violence of past atrocities if we can attribute recent success stories to Neoliberalism? This is the amoral logic that guides many neoliberals today. Chile, Brazil, and Mexico are the most prominent Neoliberal success stories in Latin America, but there is only space-time for the most successful case; so, let’s take a brief look at Chile’s performance.

evolution-of-chile-economy--eanfar.org
Neoliberalism was Pinochet’s Path to Personal Wealth & Power. Neoliberalism perfectly matched Pinochet’s governing style: Control the people and economy while claiming to have a laissez-faire philosophy. Pinochet personally became very wealthy by embezzling USD millions from the Chilean Treasury. With his ill-gotten war chest and USD billions of illicit financial assistance from the USG, Pinochet had the financial power to systematically terrorize, oppress, and destroy all political opposition for nearly two decades.

Economic Daggers of Despair. As Pinochet’s personal wealth and power were increasing thanks to the largess of Nixon and Kissinger, and as Pinochet made hundreds of his cronies wealthy by selling them state assets at deep discounts, the chart above illustrates how the general population of Chile suffered from vicious economic volatility until Pinochet began to lose power in the late-1980s.[15] Economic volatility invariably begets social volatility. Given Pinochet’s brutally oppressive regime, we can reasonably imagine the two sharp downward spikes in the GDP trend line as two deadly daggers metaphorically plunging downward into the heart of the Chilean people, while they were literally suffering and dying under Pinochet’s homicidal neoliberal reign of terror.

Chile’s Economy Rises After Pinochet Falls. According to Chilean economist Alejandro Foxley, 44% of Chilean families were living below the poverty line at the end of Pinochet’s regime.[16] Based on World Bank data, Chile’s Gini Index was over 57% in 1990. Today, Chile still suffers from a Gini Index of about 47%, which represents a very high concentration of wealth in the hands of a relatively small number of citizens, but it’s still lower than the Gini Index of the United States, which is over 48%.[17] In fact, Chile’s economy has been performing significantly better than the U.S. economy almost every year since the end of Pinochet’s neoliberal reign of terror.

us-vs-chile-gdp--eanfar.org
The Chilean Miracle. Some people refer to Chile as “an economic miracle.” It’s tempting to assume this is because it would be a miracle for any economy to succeed after being tortured with the Neoliberal Policy Package. In reality, the miracle of Chile’s economy did not emerge until after many economic and social stability policies were implemented on top of Pinochet’s privatization and market liberalization reforms.[18] And contrary to popular neoliberal myths, significant portions of the Chilean economy are still owned or controlled by the government, including dozens of state-owned enterprises (SOEs).[19] These SOEs include the national copper company (CODELCO), the national petroleum company (ENAP), the National Postal System (Correos de Chile), and the state-owned bank (Banco Estado), among many others.[20]

Strong Non-Neoliberal Reforms. In addition to preserving domestic control of strategic natural resources, Chile has very strong banking regulations, which enforce safe lending practices and bank debt management.[21] Workers in all Chilean industries enjoy far more rights and protections than workers in the United States. For example, all Chilean companies with over 25 employees must hire Chilean citizens for at least 85% of their labor force. Outsourcing and off-shoring are also strictly regulated and prohibited in almost all cases. Chilean companies have strict limitations on their use of part-time employees to prevent them from eliminating full-time jobs for the sole purpose of shareholder profit maximization.[22] These and many other healthy economic and social stability reforms are certainly not components of the Neoliberal Policy Package.

Chile Case Study Conclusion. The Neoliberalism of the Pinochet Era was replaced with a rational balance of relatively liberal trade, a balance of private and public enterprises, strong domestic labor market protections, relatively strict capital controls, rational banking regulations, protection of Chile’s precious natural resources, and dozens of state-owned enterprises (SOEs) that protect vital national industries from the self-interest of foreign investors who have no loyalty and little concern for the Chilean people. This rational balance between market-oriented and human welfare-oriented policies has laid the foundation for Chile’s economic “economic miracle” since 1990, not the Neoliberal Policy Package.

The Current Economic System is Unsustainable & Collapsing. No matter what we call it (crony capitalism, neoliberalism, neomercantilism, plutocracy, kleptocracy, corporatism, corporate socialism . . .), the current economic system that dominates the world today is collapsing. It’s not collapsing because of a lack of free markets; it’s collapsing in the U.S. and many other countries because of systemic corruption, cronyism, unsustainable concentrations of economic and political power, A.I. and robots replacing human labor, widespread ignorance about how real wealth is created (and destroyed), political campaign financing systems that artificially limit our electoral choices to a tiny handful of rich oligarchs, and an unaccountable political class that is often corrupt and manifestly incapable of serving the best interest of the general public.

The nonpartisan, politically viable, and economically sustainable solutions presented in GINI: Capitalism, Cryptocurrencies, and the Battle for Human Rights would fix all those problems.


Notes:
[1] Kornbluh, P. (2013). The Pinochet File: A Declassified Dossier on Atrocity and Accountability (Updated edition). The New Press.

[2] News, A. B. C. (2006, January 6). CIA Admits Involvement in Chile.  http://abcnews.go.com/International/story?id=82588&page=1

[3] La Comisión Nacional sobre Prisión Política y Tortura – GOBIERNO DE CHILE. (2016, September 24).  http://www.comisiontortura.cl/2016/09/24/la-comision-nacional-sobre-prision-politica-y-tortura/

[4] “Make the Economy Scream”: Secret Documents Show Nixon, Kissinger Role Backing 1973 Chile Coup. (2013). http://www.democracynow.org/2013/9/10/40_years_after_chiles_9_11

[5] Nixon’s Colossal Monetary Error: The Verdict 40 Years Later. (2011, August 15). https://www.forbes.com/sites/charleskadlec/2011/08/15/nixons-colossal-monetary-error-the-verdict-40-years-later/#15351b0469f7

[6] “King Faisal Stood Firm on Oil Embargo.” (2008, May 4). Retrieved November 26, 2017, from http://www.arabnews.com/node/311576

[7] Volcker’s Announcement of Anti-Inflation Measures | Federal Reserve History. (n.d.).  https://www.federalreservehistory.org/essays/anti_inflation_measures

[8] The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret – Bloomberg. (n.d.). Retrieved November 26, 2017, from https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret

[9] “King Faisal Stood Firm on Oil Embargo.” (2008, May 4). Retrieved November 26, 2017, from http://www.arabnews.com/node/311576

[10] Perkins, J. (2016). The New Confessions of an Economic Hit Man (2 edition). Oakland, CA: Berrett-Koehler Publishers.

[11] Perkins, J. (2016). The New Confessions of an Economic Hit Man (2 edition). Oakland, CA: Berrett-Koehler Publishers.

[12] “Make the Economy Scream”: Secret Documents Show Nixon, Kissinger Role Backing 1973 Chile Coup. (n.d.). Retrieved November 26, 2017, from http://www.democracynow.org/2013/9/10/40_years_after_chiles_9_11

[13] Kornbluh, P. (2013). The Pinochet File: A Declassified Dossier on Atrocity and Accountability (Updated edition). The New Press.

[14] Pinochet’s rule: Repression and economic success. (n.d.). Retrieved November 26, 2017, from http://news.bbc.co.uk/2/hi/americas/63821.stm

[15] W, R. S. (2002). Privatization in latin america: How did it work and what difference did it make? Latin American Politics and Society, 44(4), 153-166.

[16] Foxley, Alejandro. 2001. PBS interview. Part of “The Commanding Heights: The Battle for the World Economy” series.

[17] Based on the latest World Bank data, which was published in 2016.

[18] W, R. S. (2002). Privatization in latin america: How did it work and what difference did it make? Latin American Politics and Society, 44(4), 153-166.

[19] Making this observation does not mean I believe SOEs are preferable to private enterprises in all cases at all times. That would be an ideological position without any evidence. In contrast, an unbiased analysis of economies worldwide reveals 100s of large and efficient SOEs that serve their country’s economic development goals very effectively. These SOEs minimize interference and sabotage from foreign entities and produce large sovereign wealth funds, which provide crucial economic and social stability during their nascent developmental phases, which would be difficult, if not impossible, to achieve with purely private enterprises.

[20] Source: U.S. Bureau of Economic and Business Affairs

[21] Chile Retains a Strong Regulatory Framework, Says Latest Doing Business Report. (2016, October 25). Retrieved from http://www.worldbank.org/en/news/press-release/2016/10/25/chile-retains-a-strong-regulatory-framework-says-latest-doing-business-report

[22] U.S. International Trade Administration. Chile – 9.2-Labor Policies & Practices | export.gov. (n.d.). Retrieved from https://www.export.gov/article?id=Chile-Labor



About Ferris Eanfar

Ferris Eanfar has over 20 years of experience in technical, financial, media, and government intelligence environments. He has written dozens of articles and several books in the fields of International Political Economy and blockchain/cryptocurrencies. Ferris is the author of the Global Governance Scorecard, the Blockchain Cryptonian, and Broken Capitalism: This Is How We Fix It, which provides unique insight into what is wrong with the global economy and how to fix it. Ferris is also the CEO of the AngelPay Foundation, a nonprofit financial services company with a mission to “return wealth and power to the creators of value.” To learn more about Ferris, please visit the About Ferris page.

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