I have written before about Milton Friedman’s influence on the economy of Chile. Now I saw this fine article below from www.heritage.org and below that article I have included an article from the Wall Street Journal that talks about Milton Friedman’s influence on Chile. I wish we would follow their lead more and ALLOW THE PRIVATE ECONOMY TO GROW FASTER THAN GOVERNMENT SPENDING!!!!:
January 23, 2013 at 11:01 am
Chile continues to lead Latin America in 2013 in both economic growth and economic freedom. These positive outcomes reflect well on the solid policy choices being implemented by the Chilean government of President Sebastián Piñera.
Making it onto the 2013 Index of Economic Freedom’s list of top 10 freest countries in the world for the second year in a row, Chile was also ranked No. 1 on Forbes India’s list of 7 Hottest Emerging Markets.
And at the beginning of the year, Bloomberg confirmed that Chile’s economy grew by 5.5 percent in last year—faster than predicted, and significant growth during a period when much of the world has seen only paltry economic expansion.
Chile has seen booming exports, particularly in the mining sector of the economy. But unlike other nations with significant exports of commodities, Chile has successfully diversified its economy away from over-dependence on those exports while using property rights to avoid the destabilizing corruption and over-regulation that have afflicted “oil-cursed” neighbors such as Venezuela. According to Caiman Valores, a prominent Latin American investment consultant,
Chile is an interesting investment location. It is stable, has solid regulations and low levels of corruption coupled with a particularly strong banking and finance sector…Chile is an important addition to any investor’s portfolio, providing geographic diversification along with access to probably the most advanced economy in Latin America.
With such ringing endorsements, the mining industry alone now predicts it will see the addition of $100 billion in foreign investments in the next decade and plans to sell an estimated $55 billion in copper in 2013. The government’s outstanding management of the mining sector, combined with a stable currency, led Standard & Poor’s to upgrade Chile’s bond rating to AA- last month, a rating considered to be on par with nations like Japan and China, according to The Financial Times.
In short, Chile’s economy is on the rise, and policy is the reason. Commenting on the upgrade, S&P said that they “expect the government to continue making gradual progress on microeconomic reforms to bolster the long-term competitiveness of the economy.”
Preliminary data released January 8 showed that due to President Piñera’s continued budgetary restraint, the private economy has been growing faster than government spending. As the Index notes, “Chile continues to be a global leader in economic freedom. With the rule of law strongly maintained by an independent and efficient judicial system, prudent public finance management has kept public debt and recent budget deficits under control.”
Chile’s continued growth is a stark contrast with David Frum’s description of South American neighbor (and fellow commodity exporter) Venezuela’s “life support” economy. As cited in a recent Heritage report:
Despite vast oil wealth, the Venezuelan economy has tumbled into terrible straits. Inflation roars at 25%, unemployment exceeds 8%, the non-oil economy stagnates, electricity flickers on and off irregularly, and basic commodities such as rice and beans have become scarce in the marketplaces and must be obtained as rations from government-controlled stores.
While Chile’s economic freedom rose in the 2013 Index, Venezuela’s score fell by 2.0 points to 36.1, to a rank of 174th. Now, “corruption is prevalent, and the rule of law is weak across the country.” Venezuela’s “regulatory encroachment on private businesses continues to increase, with heavy government control and intervention discouraging entrepreneurship.”
Contrast that bleak outlook with Chile’s entrepreneur-friendly environment, which attracted hundreds of new start-ups since 2010. Business start-ups are a crucial indicator of job creation and freedom in any economy, including the United States. Recent reports about technology start-ups in Latin America’s industry, led by Chile, indicate that the high-tech sector in South America could soon rival that of the U.S.
For the second year in a row, Chile (7th) has outpaced the United States (10th) in economic freedom. U.S. policymakers would be well advised to study the policy differences between the two, and take the better path.
__________
Milton Friedman has been dead for more than three years. But his spirit was surely hovering protectively over Chile in the early morning hours of Saturday. Thanks largely to him, the country has endured a tragedy that elsewhere would have been an apocalypse.
Earthquake magnitudes are measured on a logarithmic scale. The earthquake that hit Northridge in 1994 measured 6.7 on the Richter scale. But its seismic-energy yield was only half that of the 7.0 quake that hit Haiti in January, which was the equivalent of 2,000 Hiroshima-sized bombs exploding all at once.
By contrast, Saturday’s earthquake in Chile measured 8.8. That’s nearly 500 times more powerful than Haiti’s, or about one million Hiroshimas. Yet Chile’s reported death toll—711 as of this writing—was a tiny fraction of the 230,000 believed to have perished in Haiti.
Top: Getty Images Bottom: Associated PressChile’s presidential palace survived the quake intact. Haiti’s did not.
It’s not by chance that Chileans were living in houses of brick—and Haitians in houses of straw—when the wolf arrived to try to blow them down. In 1973, the year the proto-Chavista government of Salvador Allende was overthrown by Gen. Augusto Pinochet, Chile was an economic shambles. Inflation topped out at an annual rate of 1000%, foreign-currency reserves were totally depleted, and per capita GDP was roughly that of Peru and well below Argentina’s.
What Chile did have was intellectual capital, thanks to an exchange program between its Catholic University and the economics department of the University of Chicago, then Friedman’s academic home. Even before the 1973 coup, several of Chile’s “Chicago Boys” had drafted a set of policy proposals which amounted to an off-the-shelf recipe for economic liberalization: sharp reductions to government spending and the money supply; privatization of state-owned companies; the elimination of obstacles to free enterprise and foreign investment, and so on.
In left-wing mythology—notably Naomi Klein’s tedious 2007 screed “The Shock Doctrine”—the Chicago Boys weren’t just strange bedfellows to Pinochet’s dictatorship. They were complicit in its crimes. “If the pure Chicago economic theory can be carried out in Chile only at the price of repression, should its authors feel some responsibility?” wrote New York Times columnist Anthony Lewis in October 1975. In fact, Pinochet had been mostly indifferent to the Chicago Boys’ advice until the continuing economic crisis forced him to look for some policy alternatives. In March 1975, he had a 45-minute meeting with Friedman and asked him to write a letter proposing some remedies. Friedman responded a month later with an eight-point proposal that largely mirrored the themes of the Chicago Boys.
For his trouble, Friedman would spend the rest of his life being defamed as an accomplice to evil: at his Nobel Prize ceremony the following year, he was met by protests and hecklers. Friedman himself couldn’t decide whether to be amused or annoyed by the obloquies; he later wryly noted that he had given communist dictatorships the same advice he gave Pinochet, without raising leftist hackles.
As for Chile, Pinochet appointed a succession of Chicago Boys to senior economic posts. By 1990, the year he ceded power, per capita GDP had risen by 40% (in 2005 dollars) even as Peru and Argentina stagnated. Pinochet’s democratic successors—all of them nominally left-of-center—only deepened the liberalization drive. Result: Chileans have become South America’s richest people. They have the continent’s lowest level of corruption, the lowest infant-mortality rate, and the lowest number of people living below the poverty line.
Chile also has some of the world’s strictest building codes. That makes sense for a country that straddles two massive tectonic plates. But having codes is one thing, enforcing them is another. The quality and consistency of enforcement is typically correlated to the wealth of nations. The poorer the country, the likelier people are to scrimp on rebar, or use poor quality concrete, or lie about compliance. In the Sichuan earthquake of 2008, thousands of children were buried under schools also built according to code.
In “The Shock Doctrine,” Ms. Klein titles one of her sub-chapters “The Myth of the Chilean Miracle.” In her reading, the only thing Friedman and the Chicago Boys accomplished was to “hoover wealth up to the top and shock much of the middle class out of existence.” Actual Chileans of all classes—living in the aftermath of an actual shock—may take a different view of Friedman, who helped give them the wherewithal first to survive the quake, and now to build their lives anew.
Write to bstephens@wsj.com
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