Note that Peru had a somewhat similar growth path after shock therapy and liberalization: moderate growth under Fujimori and faster growth after he left. As much as I despise Pinochet, I think your article may underestimate the long term impact of structural reforms, even if it's likely true that the democratic environment that followed his government was more favorable for growth. One important fact is that Peru's and Chile's new and much more free-market oriented constitutions remained even after they left, and this helped prevent macroeconomic policy mismanagement. Peru's constitution explicitly forbids the government borrowing from the central bank, for example.
I agree that Chile (and Peru) still rely too much on commodities and are not precisely industralized economies. However, they are macroeconomically much more sound that most latin american economies.
Zambia was a copper based economy too. Still probably is but became an highly indebted poor country needing debt forgiveness. Pinochet was a monster whereas Zambian Presidents were, most of them, just corrupt. But it may be worth comparing them to see whst the commodity curse did to Zambia. However not so many available resources, comment or research exists for Zambia.
I was comparing it to Poland and per Wikipedia (which quotes the IMF), the nominal GDP per capita estimate for 2022 is Poland's $18,506 vs $15,941 for Chile. Yet PPP adjusted the difference is MUCH larger $41,685 compared to $28,526.
I'm assuming* this is a result of the infamous "resource curse" that leads wages to be higher than they would otherwise be due to the profitability of exporting. It seems like this would make it incredibly hard to foster the basic low end industrial work that most other countries have used to begin their industrialization process.
Are there good examples of countries that have been able to skip ahead to mid-level industrialization through education, subsidies, or other methods?
*Assuming is always dangerous and I'm very interested if there are other reasons people would propose...
>"As a developing country, you’re not supposed to fall behind developed countries; you’re supposed to catch up! Poorer countries are supposed to grow faster than rich ones. And Pinochet’s Chile fell behind the U.S. even as it was far poorer in absolute terms"
Except that poor countries grew slower than rich ones for most of the second half of the twentieth century, i.e. when most of the economic growth recorded in human history occurred. In fact, the divergence was so large that, even today, rich countries have had higher income growth (in relative terms) than poor ones.
In fact, Chile's growth remains impressive because every country that significantly outgrew it in Latin America was a total shithole, while Chile started the twentieth century as one of the richer countries in the region.
>"But it’s worth noting that both Argentina and Israel beat their hyperinflations in the 80s and early 90s without suffering big drops in living standards — indeed, hyperinflation itself was so terrible for the economy that ending it was enough to generate a recovery, even with the punishing austerity."
Yeah, and Argentina's nominal anchor exchange rate policy ended up causing the biggest depression in the country's history in 2000. Who are you trying to fool? It's rare and hard to succesfully pull of stabilizations without pain.
>""Shock therapy” didn’t go well in East Europe, so there’s reason to suspect that Pinochet’s similar program in 1974 caused a similar temporary crash in living standards."
Factually incorrect and based on an incorrect understanding of what "Shock therapy" actually means.
Pinochet has an allure in America because of the narrative behind his tenure. There are plenty of instances where we overthrew leftist leaders and then propped up corrupt right wing leaders that presided over pretty bad economies. There were some economic successes, but Iran could be written off as just another oil state and South Korea was nothing compared to neighboring Japan in the '70s. The American right wanted to prove that the "capitalist system" they were exporting was better than Cuban-style socialism, and, well...
Enter Chile, the custom made story you ordered. An internationally heralded socialist wins with 37% of the vote, parades around with the Castros, and Venezuelas the economy within three years. Enter a military man with a photogenic cape, cool shades, and a menacing looking hat who tortures and kills a bunch of people the right hates and starts implementing every Milton Friedman policy proposal he can get his hands on. Yes, the line looks jagged as hell, but compared with the rest of America's portfolio of corrupt and brutal dictators, that line certainly floats above the rest, especially w/r/t those policies that stayed in place through the '90s and '00s. And it directly contrasts with a bona fide democratic socialist directly before him. As Brasil and Argentina stagnate and Venezuela drops from contention, you're left with Chile and Uruguay as the two top countries on the whole continent in a lot of key metrics.
It's not a miracle by any means, but as an excuse for America to say "we staged a coup, killed a bunch of left wing civilians, stole a bunch of money, *and somehow it worked*," it's a more compelling argument than it perhaps should be.
Valourising Deng is problematic for honest libertarians with at least some knowledge of China beyond surface level. It's the dreaded I word - industrial policy. There's a reason why they don't want to say much about the East Asian success stories, which are genuine success stories, not confected stuff like Chile. They know it doesn't say much about libertarian policy prescriptions for developing countries.
Avoiding hyperinflation, multiple devaluations where zeroes are knocked off and default is the miracle (well, outside of Latam it wouldn’t be classified as a miracle, but handicapped against the local competition - yes. And of course most of the competition also relied on natural resources and kept their cronies well fed- up to an including today’s leaders across most of Latam).
Bret Stephens doesn't have the expertise he claims on economic matters? Next you'll tell me that global warming is a serious concern (Bret assures me it's just exaggerated liberal hokum).
(I try not to make snide posts but I literally can't recall the last time I read a Bret Stephens column that didn't combine serious errors of analysis with intellectual dishonesty)
Allende was a disaster, but Pinochet was a monster. Since Pinochet did a lot of horrible things to people, a variety of sadists think highly of him. They'd probably enjoy the section on the Pinochet years at the Naval Museum in Valparaiso just as much as they enjoy the economics of Milton Friedman. Their logic seems to be that if it hurts someone, it has to be good. It's the old alcohol on the wound has to help because it hurts reasoning.
I'm willing to give credit where it is due. Some pretty awful people who did horrible things deserve credit for the good things that they did. They also have to account for the bad stuff as well. There aren't a lot of saints in this world, and definitely not saints who have done good things for economic growth. I'd like to thank Noah for his analysis here. Numbers can only tell a part of the story, but the numbers are pretty clear here. Pinochet didn't do much for Chile's economy, and, no, waving one's hand to give him credit for the years before and years after just doesn't work.
When I was in Chile ten years ago, it was during an export boom. Copper prices were good and there were signs of economic growth and the mineral wealth being spread around to make infrastructure improvements. There were new roads, new water systems, new schools and so on. There was also a push for more education. I have no idea of how that played out.
I just did not find this convincing at all, for a multitude of reasons:
1) It seems like the real reason they fell behind in economic growth was because of the crisis of 1982, which can be pretty much put up to Cowen's reason (was "cronyist finance" really a huge part of it?), but that doesn't mean all of their policies were bad, right? Also seems like some reforms at the time weren't neoliberal, either.
2) Are synthetic control studies taken really serious in the literature? It just looks like a hotbed for OVB and overfitting, but I could be wrong!
3) The graph of GDP and potential GDP looks like a classic Friedman plucking model. This is exactly what we would expect out of any country. Blaming both of those recessions on solely him and acting like now fast recoveries are bad feels weird to me. Aren't 99% of recessions created by fiscal or monetary policy mistakes, anyways?
4) I also think that there's no evidence on either side (at least in the article) that talks about whether Chile really diversified or not. Showing the OEC graph feels like a weak argument to me, isn't it possible it would've been way worse w/o Chicago Boys reforms?
5) I think the fact that Chile is one of the richest countries in South and Central America is ehhh evidence for those reforms potentially having been good, as there's a lot of other factors. However, saying "but inequality has dropped by less" feels like a really weak argument on the other side of that.
You analysis has many errors. From the privatization numbers (240 between 1973 and 1978 “free of charge”) Please see Claudio Milman, Ph.D., is Assistant Professor, Department of Management, Haworth College of Business, Western Michigan University
Per capita numbers are wrong. Please normalize those by PPP, which a more accurate perspective, and you will get a different response.
There are other errors but I only have a few minutes tonight.
When I first started getting into economics it was stories about Chile, New Zealand, Iceland and Ireland which got me really into believing in libertarianism. But that view really switched after I started digging and realizing that very often it was moderate social democrats who actually got the economy going. Extreme economic policies in either direction rarely seem to work well. Rapid changes in particular seem to go wrong all too often. Whether it is shock therapy or Stalin collectivizing farms. Predictable step by step gradual reforms seem to be the way to go. Business need predictability to invest and plan, not jojo economics.
One of the reasons why libertarians hold on to Chile dearly is because the other case studies aren't very convincing. Half of the developing world tried the Washington consensus several decades ago and are still apart of the developing world. The countries who have eclipsed developing world status have usually gotten there by using some sort of industrial policy - not very libertarian! There's also Hong Kong - doesn't look too hot nowadays. I don't believe that East Asian style development is the silver bullet that'll answer "how can countries develop?" but with 30-40 years of evidence from various neoliberal policy experiments in LatAm/Africa, it's clear that free markets alone won't make developing countries look like Western Europe, hell even the Southern Cone.
Noah, you refer to "Shock therapy". if i´m not wrong, who told for the first time about "Shock Therapy" was Balcerowicz, Lech Walesa´s minister. And Poland is the richest country among this group of countries. Why do you tell that "Shock therapy" didn´t go well?
Note that Peru had a somewhat similar growth path after shock therapy and liberalization: moderate growth under Fujimori and faster growth after he left. As much as I despise Pinochet, I think your article may underestimate the long term impact of structural reforms, even if it's likely true that the democratic environment that followed his government was more favorable for growth. One important fact is that Peru's and Chile's new and much more free-market oriented constitutions remained even after they left, and this helped prevent macroeconomic policy mismanagement. Peru's constitution explicitly forbids the government borrowing from the central bank, for example.
I agree that Chile (and Peru) still rely too much on commodities and are not precisely industralized economies. However, they are macroeconomically much more sound that most latin american economies.
Zambia was a copper based economy too. Still probably is but became an highly indebted poor country needing debt forgiveness. Pinochet was a monster whereas Zambian Presidents were, most of them, just corrupt. But it may be worth comparing them to see whst the commodity curse did to Zambia. However not so many available resources, comment or research exists for Zambia.
I was comparing it to Poland and per Wikipedia (which quotes the IMF), the nominal GDP per capita estimate for 2022 is Poland's $18,506 vs $15,941 for Chile. Yet PPP adjusted the difference is MUCH larger $41,685 compared to $28,526.
I'm assuming* this is a result of the infamous "resource curse" that leads wages to be higher than they would otherwise be due to the profitability of exporting. It seems like this would make it incredibly hard to foster the basic low end industrial work that most other countries have used to begin their industrialization process.
Are there good examples of countries that have been able to skip ahead to mid-level industrialization through education, subsidies, or other methods?
*Assuming is always dangerous and I'm very interested if there are other reasons people would propose...
Sooo... what the fuck did Paraguay do RIGHT?!?
>"As a developing country, you’re not supposed to fall behind developed countries; you’re supposed to catch up! Poorer countries are supposed to grow faster than rich ones. And Pinochet’s Chile fell behind the U.S. even as it was far poorer in absolute terms"
Except that poor countries grew slower than rich ones for most of the second half of the twentieth century, i.e. when most of the economic growth recorded in human history occurred. In fact, the divergence was so large that, even today, rich countries have had higher income growth (in relative terms) than poor ones.
In fact, Chile's growth remains impressive because every country that significantly outgrew it in Latin America was a total shithole, while Chile started the twentieth century as one of the richer countries in the region.
>"But it’s worth noting that both Argentina and Israel beat their hyperinflations in the 80s and early 90s without suffering big drops in living standards — indeed, hyperinflation itself was so terrible for the economy that ending it was enough to generate a recovery, even with the punishing austerity."
Yeah, and Argentina's nominal anchor exchange rate policy ended up causing the biggest depression in the country's history in 2000. Who are you trying to fool? It's rare and hard to succesfully pull of stabilizations without pain.
>""Shock therapy” didn’t go well in East Europe, so there’s reason to suspect that Pinochet’s similar program in 1974 caused a similar temporary crash in living standards."
Factually incorrect and based on an incorrect understanding of what "Shock therapy" actually means.
Maybe Branko Milanovic can help you get it: https://braveneweurope.com/branko-milanovic-distinguishing-post-communist-privatizations-from-the-big-bang
Pinochet has an allure in America because of the narrative behind his tenure. There are plenty of instances where we overthrew leftist leaders and then propped up corrupt right wing leaders that presided over pretty bad economies. There were some economic successes, but Iran could be written off as just another oil state and South Korea was nothing compared to neighboring Japan in the '70s. The American right wanted to prove that the "capitalist system" they were exporting was better than Cuban-style socialism, and, well...
Enter Chile, the custom made story you ordered. An internationally heralded socialist wins with 37% of the vote, parades around with the Castros, and Venezuelas the economy within three years. Enter a military man with a photogenic cape, cool shades, and a menacing looking hat who tortures and kills a bunch of people the right hates and starts implementing every Milton Friedman policy proposal he can get his hands on. Yes, the line looks jagged as hell, but compared with the rest of America's portfolio of corrupt and brutal dictators, that line certainly floats above the rest, especially w/r/t those policies that stayed in place through the '90s and '00s. And it directly contrasts with a bona fide democratic socialist directly before him. As Brasil and Argentina stagnate and Venezuela drops from contention, you're left with Chile and Uruguay as the two top countries on the whole continent in a lot of key metrics.
It's not a miracle by any means, but as an excuse for America to say "we staged a coup, killed a bunch of left wing civilians, stole a bunch of money, *and somehow it worked*," it's a more compelling argument than it perhaps should be.
Valourising Deng is problematic for honest libertarians with at least some knowledge of China beyond surface level. It's the dreaded I word - industrial policy. There's a reason why they don't want to say much about the East Asian success stories, which are genuine success stories, not confected stuff like Chile. They know it doesn't say much about libertarian policy prescriptions for developing countries.
Avoiding hyperinflation, multiple devaluations where zeroes are knocked off and default is the miracle (well, outside of Latam it wouldn’t be classified as a miracle, but handicapped against the local competition - yes. And of course most of the competition also relied on natural resources and kept their cronies well fed- up to an including today’s leaders across most of Latam).
Bret Stephens doesn't have the expertise he claims on economic matters? Next you'll tell me that global warming is a serious concern (Bret assures me it's just exaggerated liberal hokum).
(I try not to make snide posts but I literally can't recall the last time I read a Bret Stephens column that didn't combine serious errors of analysis with intellectual dishonesty)
Allende was a disaster, but Pinochet was a monster. Since Pinochet did a lot of horrible things to people, a variety of sadists think highly of him. They'd probably enjoy the section on the Pinochet years at the Naval Museum in Valparaiso just as much as they enjoy the economics of Milton Friedman. Their logic seems to be that if it hurts someone, it has to be good. It's the old alcohol on the wound has to help because it hurts reasoning.
I'm willing to give credit where it is due. Some pretty awful people who did horrible things deserve credit for the good things that they did. They also have to account for the bad stuff as well. There aren't a lot of saints in this world, and definitely not saints who have done good things for economic growth. I'd like to thank Noah for his analysis here. Numbers can only tell a part of the story, but the numbers are pretty clear here. Pinochet didn't do much for Chile's economy, and, no, waving one's hand to give him credit for the years before and years after just doesn't work.
When I was in Chile ten years ago, it was during an export boom. Copper prices were good and there were signs of economic growth and the mineral wealth being spread around to make infrastructure improvements. There were new roads, new water systems, new schools and so on. There was also a push for more education. I have no idea of how that played out.
I just did not find this convincing at all, for a multitude of reasons:
1) It seems like the real reason they fell behind in economic growth was because of the crisis of 1982, which can be pretty much put up to Cowen's reason (was "cronyist finance" really a huge part of it?), but that doesn't mean all of their policies were bad, right? Also seems like some reforms at the time weren't neoliberal, either.
2) Are synthetic control studies taken really serious in the literature? It just looks like a hotbed for OVB and overfitting, but I could be wrong!
3) The graph of GDP and potential GDP looks like a classic Friedman plucking model. This is exactly what we would expect out of any country. Blaming both of those recessions on solely him and acting like now fast recoveries are bad feels weird to me. Aren't 99% of recessions created by fiscal or monetary policy mistakes, anyways?
4) I also think that there's no evidence on either side (at least in the article) that talks about whether Chile really diversified or not. Showing the OEC graph feels like a weak argument to me, isn't it possible it would've been way worse w/o Chicago Boys reforms?
5) I think the fact that Chile is one of the richest countries in South and Central America is ehhh evidence for those reforms potentially having been good, as there's a lot of other factors. However, saying "but inequality has dropped by less" feels like a really weak argument on the other side of that.
You analysis has many errors. From the privatization numbers (240 between 1973 and 1978 “free of charge”) Please see Claudio Milman, Ph.D., is Assistant Professor, Department of Management, Haworth College of Business, Western Michigan University
Per capita numbers are wrong. Please normalize those by PPP, which a more accurate perspective, and you will get a different response.
There are other errors but I only have a few minutes tonight.
When I first started getting into economics it was stories about Chile, New Zealand, Iceland and Ireland which got me really into believing in libertarianism. But that view really switched after I started digging and realizing that very often it was moderate social democrats who actually got the economy going. Extreme economic policies in either direction rarely seem to work well. Rapid changes in particular seem to go wrong all too often. Whether it is shock therapy or Stalin collectivizing farms. Predictable step by step gradual reforms seem to be the way to go. Business need predictability to invest and plan, not jojo economics.
One of the reasons why libertarians hold on to Chile dearly is because the other case studies aren't very convincing. Half of the developing world tried the Washington consensus several decades ago and are still apart of the developing world. The countries who have eclipsed developing world status have usually gotten there by using some sort of industrial policy - not very libertarian! There's also Hong Kong - doesn't look too hot nowadays. I don't believe that East Asian style development is the silver bullet that'll answer "how can countries develop?" but with 30-40 years of evidence from various neoliberal policy experiments in LatAm/Africa, it's clear that free markets alone won't make developing countries look like Western Europe, hell even the Southern Cone.
Noah, you refer to "Shock therapy". if i´m not wrong, who told for the first time about "Shock Therapy" was Balcerowicz, Lech Walesa´s minister. And Poland is the richest country among this group of countries. Why do you tell that "Shock therapy" didn´t go well?
Great piece thanks Noah 👏