Tinker Bell, Pinochet and The Fairy Tale Miracle of Chile
By Greg Palast
Created Dec 12 2006 - 8:54am
Cinderella's Fairy Godmother, Tinker Bell and General Augusto Pinochet had
much in common.
All three performed magical good deeds. In the case of Pinochet, he was
universally credited with the Miracle of Chile, the wildly successful
experiment in free markets, privatization, de-regulation and union-free
economic expansion whose laissez-faire seeds spread from Valparaiso to
Virginia.
But Cinderella's pumpkin did not really turn into a coach. The Miracle of
Chile, too, was just another fairy tale. The claim that General Pinochet
begat an economic powerhouse was one of those utterances whose truth rested
entirely on its repetition.
Chile could boast some economic success. But that was the work of Salvador
Allende - who saved his nation, miraculously, a decade after his death.
In 1973, the year General Pinochet brutally seized the government, Chile's
unemployment rate was 4.3%%. In 1983, after ten years of free-market
modernization, unemployment reached 22%%. Real wages declined by 40%% under
military rule.
In 1970, 20%% of Chile's population lived in poverty. By 1990, the year
"President" Pinochet left office, the number of destitute had doubled to
40%%. Quite a miracle.
Pinochet did not destroy Chile's economy all alone. It took nine years of
hard work by the most brilliant minds in world academia, a gaggle of Milton
Friedman's trainees, the Chicago Boys. Under the spell of their theories,
the General abolished the minimum wage, outlawed trade union bargaining
rights, privatized the pension system, abolished all taxes on wealth and on
business profits, slashed public employment, privatized 212 state industries
and 66 banks and ran a fiscal surplus.
Freed of the dead hand of bureaucracy, taxes and union rules, the country
took a giant leap forward ... into bankruptcy and depression. After nine
years of economics Chicago style, Chile's industry keeled over and died. In
1982 and 1983, GDP dropped 19%%. The free-market experiment was kaput, the
test tubes shattered. Blood and glass littered the laboratory floor. Yet,
with remarkable chutzpah, the mad scientists of Chicago declared success. In
the US, President Ronald Reagan's State Department issued a report
concluding, "Chile is a casebook study in sound economic management." Milton
Friedman himself coined the phrase, "The Miracle of Chile." Friedman's
sidekick, economist Art Laffer, preened that Pinochet's Chile was, "a
showcase of what supply-side economics can do."
It certainly was. More exactly, Chile was a showcase of de-regulation gone
berserk.
The Chicago Boys persuaded the junta that removing restrictions on the
nation's banks would free them to attract foreign capital to fund industrial
expansion.
Pinochet sold off the state banks - at a 40%% discount from book value - and
they quickly fell into the hands of two conglomerate empires controlled by
speculators Javier Vial and Manuel Cruzat. From their captive banks, Vial
and Cruzat siphoned cash to buy up manufacturers - then leveraged these
assets with loans from foreign investors panting to get their piece of the
state giveaways.
The bank's reserves filled with hollow securities from connected
enterprises. Pinochet let the good times roll for the speculators. He was
persuaded that Governments should not hinder the logic of the market.
By 1982, the pyramid finance game was up. The Vial and Cruzat "Grupos"
defaulted. Industry shut down, private pensions were worthless, the currency
swooned. Riots and strikes by a population too hungry and desperate to fear
bullets forced Pinochet to reverse course. He booted his beloved Chicago
experimentalists. Reluctantly, the General restored the minimum wage and
unions' collective bargaining rights. Pinochet, who had previously decimated
government ranks, authorized a program to create 500,000 jobs.
In other words, Chile was pulled from depression by dull old Keynesian
remedies, all Franklin Roosevelt, zero Reagan/Thatcher.
New Deal tactics rescued Chile from the Panic of 1983, but the nation's
long-term recovery and growth since then is the result of - cover the
children's ears - a large dose of socialism.
To save the nation's pension system, Pinochet nationalized banks and
industry on a scale unimagined by Communist Allende. The General
expropriated at will, offering little or no compensation. While most of
these businesses were eventually re-privatized, the state retained ownership
of one industry: copper.
For nearly a century, copper has meant Chile and Chile copper. University of
Montana metals expert Dr. Janet Finn notes, "It's absurd to describe a
nation as a miracle of free enterprise when the engine of the economy
remains in government hands."
Copper has provided 30%% to 70%% of the nation's export earnings. This is the
hard currency which has built today's Chile, the proceeds from the mines
seized from Anaconda and Kennecott in 1973 - Allende's posthumous gift to
his nation.
Agribusiness is the second locomotive of Chile's economic growth. This also
is a legacy of the Allende years. According to Professor Arturo Vasquez of
Georgetown University, Washington DC, Allende's land reform, the break-up of
feudal estates (which Pinochet could not fully reverse), created a new class
of productive tiller-owners, along with corporate and cooperative operators,
who now bring in a stream of export earnings to rival copper. "In order to
have an economic miracle," says Dr. Vasquez, "maybe you need a socialist
government first to commit agrarian reform."
So there we have it. Keynes and Marx, not Friedman, saved Chile.
But the myth of the free-market Miracle persists because it serves a
quasi-religious function. Within the faith of the Reaganauts and
Thatcherites, Chile provides the necessary genesis fable, the ersatz Eden
from which laissez-faire dogma sprang successful and shining.
In 1998, the international finance Gang of Four - the World Bank, the IMF,
the Inter-American Development Bank and the International Bank for
Settlements - offered a $41.5 billion line of credit to Brazil. But before
the agencies handed the drowning nation a life preserver, they demanded
Brazil commit to swallow the economic medicine that nearly killed Chile. You
know the list: fire-sale privatizations, flexible labor markets (i.e. union
demolition) and deficit reduction through savage cuts in government services
and social security.
In Sao Paulo, the public was assured these cruel measures would ultimately
benefit the average Brazilian. What looked like financial colonialism was
sold as the cure-all tested in Chile with miraculous results.
But that miracle was in fact a hoax, a fraud, a fairy tale in which everyone
did not live happily ever after.
_______
About author Greg Palast is the author of the New York Times bestseller,
"ARMED MADHOUSE: Dispatches from the Front Lines of the Class War," just
released from Penguin/Dutton. And go to
www.GregPalast.com [1] for a special
Labor Day treat: an excerpt from Air America Radio's Thom Hartmann's new
book, "Screwed: The Undeclared War Against the Middle Class -- and What We
Can Do About It."
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"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
