The Chile Challenge: The Story of the Chicago Boys and the Downfall of Neoliberalism, by Sebastian Edwards, Princeton College Press, 376 pages, $32
In 1973, Sebastián Edwards was a supporter of Chile’s socialist president, Salvador Allende. He was, he remembers, an assistant to the “director of prices and costs” on the Chilean Directorate of Trade and Commerce, the place his unit “oversaw each managed value within the nation.” After Augusto Pinochet deposed Allende in a coup that yr, Edwards “opposed the dictatorship and fled the nation in 1977 due to it.”
So Edwards is not any starry-eyed apologist for the Pinochet junta, and he readily acknowledges the regime’s abysmal litany of homicide and torture. He additionally notes that Chile’s later democratic governments willingly embraced (and in some methods prolonged) a lot of the Pinochet period’s financial insurance policies, and he offers these reforms a lot of the credit score for the dramatic post-1983 enchancment in Chile’s financial efficiency. However he believes the wholesale “neoliberal financial revolution” that the dictator imposed would “not have been attainable beneath a democratic regime.” And therein lies the sadly widespread enchantment of imposed capitalism.
Within the early Nineteen Eighties, F.A. Hayek embraced what Purpose‘s Jesse Walker has referred to as the “mad dream of a libertarian dictatorship.” Hayek wasn’t alone: In 1981, when the Mont Pelerin Society met in Chile, Milton Friedman and James Buchanan publicly admonished many contributors for—in Buchanan’s phrases—their “naive perception that dictatorships are the one or the easiest way of creating a free financial system.” Within the early Nineteen Nineties, would-be reformers of the Russian financial system concluded, because the historian Tobias Rupprecht put it, that “authoritarian capitalism of the Chilean kind” can be “probably the most affordable and viable path for a post-Communist Russia.”
Edwards’ evaluation is way extra measured than that. With The Chile Challenge, he has written a marvelously wide-ranging and fair-minded account of the rise and fall of the Chilean neoliberal mannequin. There are just a few minor errors—for instance, Hayek didn’t attend that late 1981 Mont Pelerin assembly—however that is simply the perfect guide to this point on the Chilean experiment.
The guide begins with an in depth evaluation of the occasions that unfolded after the U.S. State Division helped forge a hyperlink between the Pontifical Catholic College of Chile and the College of Chicago. Beginning within the mid-Nineteen Fifties, Chilean college students may undertake graduate research at Chicago; upon returning dwelling, they might “revolutionize the instructing of economics at Católica” and, in the end, revolutionize Chilean financial coverage. This part concludes with an evaluation of Allende’s early-Nineteen Seventies rule, which featured nationalizations, pervasive shortages, a burgeoning deficit, and an inflation fee that soared previous 700 %.
Edwards then turns to the Pinochet years, and to the position the college’s “Chicago boys” performed within the period’s financial insurance policies. He gives an illuminating and detailed account of the pre-coup origins of the notorious “Brick”—the Chicago boys’ “blueprint for Chile’s future”—and of the Chilean authorities’s tendency to finance its fiscal deficits by principally printing extra money, an inflation-fueling drawback that took off beneath Allende and continued within the early years of the navy junta. However Edwards doesn’t give us a lot substantive element in regards to the tenor of Chilean financial coverage till Milton Friedman and his colleague Arnold Harberger arrived in Santiago in March 1975.
When Friedman advocated an enormous fiscal shock in Chile—a right away “across-the-board discount of each separate [budget] merchandise by 25 per cent”—he stated it will produce a major however comparatively short-lived enhance in financial ache. Inflation promptly began to return down, however unemployment wasn’t short-lived: The speed was 22 % in 1976 and stayed at what Edwards calls “extraordinarily excessive ranges till the mid-Nineteen Eighties.” Equally, whereas shock remedy ensured that the fiscal deficit was all however eradicated by 1978, the common actual wage was 23 per cent decrease that yr than in 1971.
The sequence of occasions that unfolded between the 1975 adoption of shock remedy and Chile’s late-Nineteen Eighties transition to democracy included a collection of commerce reforms, culminating in a uniform 10 % import tariff and the creation of an more and more open financial system. Extra ill-fated was the mid-1979 adoption of a hard and fast alternate fee between the Chilean peso and the U.S. greenback. This transfer got here shortly earlier than Federal Reserve Chair Paul Volcker imposed disinflation in the USA, which assured that the peso would turn out to be more and more overvalued. That had very unhealthy penalties for the Chilean financial system, culminating within the April 1982 forex disaster and the abandonment of the beforehand “irrevocable” peso-dollar alternate fee.
Edwards offers equally nice accounts of the 1979 Chilean labor regulation, which rolled again the rights of unions; the 1981 social safety reform, which changed Chile’s pay-as-you-go pension system with particular person retirement accounts; the more and more bitter battle between the Harvard-educated José Piñera and the Chicago-educated Sergio de Castro over the tenor of financial coverage; and the rising affect of a brand new, extra pragmatic era of Chicago graduates within the wake of the 1982 forex debacle.
The ultimate a part of Edwards’ narrative examines the destiny of the Chilean neoliberal mannequin after the 1988–89 transition to democracy. Modifications in financial coverage included the discount of import tariffs to a uniform 6 %, the privatization of water and sewage corporations, the adoption of a freely floating alternate fee, the additional liberalization of the laws governing worldwide capital actions, and quite a lot of social democratic adjustments to the pension system. In the meantime, abortion was legalized beneath some circumstances, same-sex marriage was acknowledged, and divorce legal guidelines have been liberalized. This part of the guide comprises a lot fascinating materials, and Edwards’ detailed dialogue of the failings within the Pinochet junta’s much-vaunted pension reforms is especially enlightening.
The financial system typically fared properly on this interval, however the Achilles’ heel of the Chilean mannequin lay within the more and more widespread notion that it was systematically rigged in favor of the self-anointed Chilean elite. Edwards gives a nuanced and insightful evaluation of a sequence of corruption scandals that in the end culminated within the 2019 protests, the 2021 election of Gabriel Boric to the presidency, the ill-fated (and ongoing) efforts to draft a brand new social democratic structure, and what Edwards views because the inexorable demise of the neoliberal mannequin.
Edwards’ extremely detailed account of Friedman’s 1975 go to to Chile will intensify the controversy over how a lot affect Friedman had on the Pinochet junta’s adoption of shock remedy a month later. Though he referred to as for shock remedy in his Chilean lectures, Friedman insisted in his 1998 memoir Two Fortunate Individuals that the Chicago boys “had already reached the conclusion {that a} shock remedy was required” and that he and Harberger have been there to “test their conclusions,” to offer “the stamp of approval,” and to “promote it to the general public and the navy junta.” Harberger, equally, wrote that “my understanding is that our go to was not the precipitating issue within the [adoption of the] program.”
Edwards argues that varied Chicago boys (and, presumably, Friedman and Harberger themselves) have “systematically diminished Friedman’s affect within the preparation and launching of the April 1975 shock therapy stabilization plan.” Certainly, whereas earlier scholarly assessments of Friedman’s involvement with Chile (together with work by Edwards himself) have claimed this system was within the “design stage earlier than Friedman arrived,” Edwards now believes—”primarily based on newspaper information and interviews with lots of these concerned within the decision-making course of”—that the restoration plan was most likely not “drafted and even outlined” on the time of Friedman’s March assembly with Pinochet.
I’d have favored way more element in regards to the major sources that persuaded Edwards that “Friedman’s go to marked a turning level in Chile’s financial historical past: there’s a earlier than Friedman and an after Friedman.” However his argument right here lends extra scholarly weight to New York Instances columnist Anthony Lewis’ extremely controversial 1975 declare that Friedman was “the guiding gentle of the junta’s coverage.”
Regardless of the deserves of Chilean financial coverage from the mid-Nineteen Seventies by means of the early Nineteen Eighties, it’s notable that, of the famend economists who heap dust-jacket reward on The Chile Challenge, solely Deirdre McCloskey sees match to say that the Chicago boys (plenty of whom realized their economics from McCloskey on the College of Chicago within the Nineteen Seventies) made a “cope with an authoritarian satan.” Sadly, far too many self-styled free market advocates would make an analogous deal, arguing that Venezuela or Iraq or another nation can be fortunate to have “a Pinochet determine who would impose capitalism.” Sadly, the mad dream of a libertarian dictatorship has but to lose its attract.
