Tinker Bell, Pinochet and the
Fairy Tale Miracle of Chile
by Greg Palast, www.gregpalast.com
www/zmag.org, Decmeber 13, 2006
Chile's former military dictator General
Augusto Pinochet died today at the age of 91.
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, 'Its 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
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
Greg Palast is the author of the New York
Times bestseller, 'Armed Madhouse'. Read his reports at www.GregPalast.com