How did CHILE become the RICHEST country in Latin America?
According to the quality of life index published in 2022 by the economist magazine, chile was the Latin American country with the best quality of life. It also has the best safety indicators and the highest life expectancy at birth in the region, but chile did not always have the best indicators. In fact, in 1982, 45 percent of the population still lived in poverty and its GDP per capita growth from 1900 to 1985 averaged only 0.9 percent. Latin America
It was from 1986 to 1997 that it grew at a much higher rate of 5.5 percent. This is the period that is some of the time alluded to as chile’s brilliant age or the Chilean monetary wonder. So the questions are: how did chile achieve this economic miracle? Why was chile an inspirational model for the united kingdom at that time and why do most Chileans want to modify the current economic model despite receiving international recognition in 1970 Salvador Allende was elected president?
His government program was characterized by several reforms, such as the nationalization of the banking sector and most industries, and a sharp increase in public spending. The number of state-controlled enterprises increased from 46 companies and zero banks in 1970 to 488 companies and 19 banks in 1973. In addition, more than 6 million hectares were expropriated, equivalent to about 40 percent of the country’s total agricultural land. Latin America
It also fixed the price of more than 3 000 products, which used to generate shortages of goods and mass protests. On the other hand, the government deficit went from 0.5 percent of GDP to 23 in only three years. Likewise, the inflation rate began to rise despite price controls. Latin America
In addition, the government defaulted on its debt as the fall of the economy and foreign investment left, and the government was insolvent as a consequence of the debt default. There was no more external financing for chile. Therefore, in the context of lack of financing, there were two options: reduce spending or print money. Indeed, the government resorted to the latter option. Latin America
As a result, the inflation rate exceeded 500 percent in 1974. This period of economic and political instability was followed by a coup in 1973. The military junta ruled until 1990 when it handed over power. During this period, chile pursued a policy of stabilizing the public deficit reducing state employment, and re-privatizing public enterprises that were in a precarious financial situation and required permanent support from public funds, the government liberalized prices and promoted integration into the world economy. Latin America
Paradoxically, the military dictatorship generated strong deconcentration of economic power and paved the way for what would become chile’s golden age. This 180-degree change in economic policy was ideologically driven by a group of Chilean economists, who graduated from the University of Chicago popularly known as the Chicago boys in the mid-1950s. A collaborative program was created between the catholic university of chile and the University of Chicago in the united states. Latin America
One of the professors was Milton Friedman who influenced libertarian thinking in Chilean students after graduating. They initially occupied academic positions in chile, but during the military government, they occupied important positions from which they would reorient the Chilean economy, based on the idea that the state should intervene as little as possible. Latin America
It was in this way that chile became a focus of attraction around the world and not for nothing. In 1990, inflation had already fallen to 26 and as of 1995, it would not exceed 10 again the percentage of the population living in poverty had fallen to 20 percent in 1990 and to 2 percent in 2013. Latin America
Gdp per capita went from 6 384 in 1975 to 22 446 dollars in 2016. That is 16 000 more. If we compare with the average of all Latin American countries, the GDP per capita of these countries increased by about seven thousand dollars in the same period and if we look at this indicator compared to most countries in the region as measured by the madison project, chile was still the richest in the region in 2016. Latin America
chile and its economic liberalization was a special case in the 1970s as the norm was social democracy growing well for states in Europe and the union of soviet socialist republics influenced almost half the world. For this reason, chile served as a model of inspiration for Margaret thatcher in the united kingdom, who also received advice from Chicago school professors. Latin America
Milton Friedman won the Nobel prize in economics in 1976 and Friedrich Hayek another libertarian won it two years earlier. These events and the recent Chilean economic liberal experiment prompted Margaret Thatcher and Ronald Reagan to some extent to implement these ideas in their countries. Latin America
The question is why the majority of Chileans are unhappy with this economic model that was and is recognized worldwide, for its results are so positive. It all started in 2019 when the president of chile Sebastian Pinera, decreed an increase in public transport fares in Santiago. Faced with this, there was a moderate rejection by hundreds of people, but weeks later the discontent grew so much that the city was paralyzed by massive protests. Latin America
But the discontent was not only about the increase in transport fares but also about economic inequality and distrust in public institutions and political parties. Latin America
Due to the pressure, the president announced a plebiscite to create a new constitution to satisfy these demands. As expected, in 2020, the majority approved the drafting of a new constitution. These desires for a less unequal society are respectable, but it is paradoxical to want to change the very model that lifted millions of Chileans out of poverty based on the market and little government intervention.
Let us remember that chile has the best index of economic freedom in the region. It is also contradictory to yearning for greater transparency in public institutions and fewer privileges for the political elite while demanding a larger public sector. Latin America
If we take it to the extreme suppose, the public sector did not exist, in which case, there would be no one to distrust because there would simply be no resources to waste. On the contrary, if the public sector grows by spending more resources on subsidies, infrastructure programs, or monetary transfers, there will be more possibility of mismanagement.
In short, if there is social unrest due to inequality, the objective should be how to generate more wealth and more opportunities for the less privileged, rather than finding ways to distribute the current wealth with redistributive policies. In most cases, the poor are condemned to depend on aid which starts temporarily but often becomes permanent. Latin America
There is a belief that a country’s wealth is constant and therefore must be redistributed, but in chile, as we have seen, the country’s wealth measured by GDP has increased considerably. Latin America
At the same time, poverty has decreased. So if only the rich had benefited from the model, poverty levels would still be above 40 percent. Even so, if one were to consider that it is more important to reduce inequality than to reduce poverty income inequality has decreased in chile. According to data from the madison project, the genie coefficient is an indicator that measures income. Latin America
Inequality in chile in 1987 was 0.55 and by 2015 it was 0.43 that is, inequality has decreased, although it is still high compared to the rest of Latin America. Chile is located in an intermediate position. On the other hand, in a free country, income inequalities are inevitable because there are talents, skills, personalities, or genetic characteristics which cannot be redistributed or socialized, such as the talent that an architect has for his occupation.
the entrepreneurial spirit of a young person or the savings and consumption preferences of a person, however, in chile and Latin America in general, this anti-market sentiment that seeks state intervention to redistribute wealth has been growing in chile. Latin America
This sentiment began to take shape with the presidency of Michelle Bachelet in 2006. In that year, the government debt went from 13.2 percent of GDP to 37.2 in 2019, and public spending went from 16 of GDP in 2006 to 22.
in 2016. That is the size of the government has been growing in recent years, so it can be deduced that already for several years, chile is moving away from the model that originated the economic miracle, and more and more people will want to benefit from the state revenues.