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CHILE'S RECIPE WILL NOT WORK
Chileans are bemused by the attention paid the robust economy bequeathed them by General Augusto Pinochet. Reformers as far afield as Europe and America have taken special note of his reform of health care, education and social security. President Carlos Saul Menem pinned a medal on Pinochet, wishing aloud that he had received Argentina from his own democratically elected predecessor in as good political and economic condition. Most ironically, the one-time Soviet Communist Party organ Pravda-which had led a worldwide campaign against the Chilean leader-interviewed Pinochet to ask how Russia might follow the Chilean example.
Indeed, the "Pinochet model" is one of the standard cures touted for nearly any country seeking to make the transition from socialist poverty. This model, as it is widely understood, calls for some combination of political repression and economic liberalism: a strong-armed leader imposes a period of economic austerity and political stasis, after which the country emerges with a lean free-market economy, a vigorous civil society and a political class that is once again ready to assume the reins of government.
The closer one looks, however, the more difficult it is to construe a model from Chile's experience. Chile's reforms are indeed admirable. But the path by which they were achieved is less so. Beyond its repressive, undemocratic nature, the military government did not follow a clear blueprint or schedule for reform, and it made many inconsistent, counterproductive and nearly disastrous decisions along the way. Moreover, the accidents of time, place and fortune make it impossible for other countries to tread the same path. Between 1970 and 1973, Salvador Allende's avowedly Marxist government inflicted the full logic of statism on the Chilean people. By doing so, it created a demand for a radical about-face. The military thus took power with the simple idea of reversing Chile's long history of statist government. It was that vision, rather than the acrimonious 16-year political-military war between the armed forces and the country's traditional parties, that changed the country to the point where few Chileans long for the old days.
CHILE'S GREAT LEAP FORWARD
Between 1970 and 1990 Chile changed dramatically. In 1970, when Eduardo Frei transferred the presidency to Salvador Allende, Chile had enjoyed six years as the beneficiary of worldwide prosperity and record prices for its copper exports. Chile was the world's second largest recipient of foreign aid per capita. Yet only half the homes in the country had inside bathrooms. In 1990, after Pinochet-despite 16 years as an international pariah and the target of trade boycotts, disinvestment and foreign aid cutoffs-about nine out of ten Chilean homes had them. Only a half million homes had televisions or refrigerators after Frei. After Pinochet, two million did, about two thirds of homes. In 1990, although per capita GDP stood at a relatively low $2,000 per year, it had increased in constant pesos by 50 percent. Since the 1982-83 recession it had grown by seven percent a year.
But Chile's advances were more than material. The country also saw vast social changes as well as a stark transformation of the role of government. After Frei, 82.2 babies per thousand died in infancy. After Pinochet, that figure fell to 17. Reduced infant mortality plus better nutrition and sanitation increased life expectancy from 63.6 years in 1970 to 71.8 in 1990. In 1973 the Chilean government had 650,000 employees. By 1989 the Chilean people had only 157,871 central government employees to support and to obey. By 1992 polls showed that people of all classes rated their satisfaction with the bureaucracy as 5.2 out of 7.
Before 1973 the middle and lower-middle classes had regarded the government as a major source of employment and as the fount of entitlements. The military government, however, cut all but the very poor out of most social expenditures. In 1970 one out of ten Chilean voters was also a dues-paying member of a political party-and no wonder, since the government controlled perhaps 75 percent of GDP. By 1990, party membership drives yielded only four percent of voters: the value of partisan connections had fallen because government now controlled only about one fourth of GDP.
The psychological changes that took place among Chileans were dramatic. By 1990 a plurality identified neither with the political left, right nor center. Rather, they saw themselves as independents or as apolitical. Prior to 1973 political parties had been able to count on followers tightly bound by direct material interest and ideology. By 1990, opinion polls showed that large percentages of voters had become both unattached and skeptical and could now shift easily among parties and candidates. In the intervening years Chileans had been convinced to prefer moderate politics or to remove themselves from politics altogether. They had been taught the limits of government and to look to themselves rather than to the state. Today Chile remarkably resembles the kind of state that some of the military regime's leading personages had wanted. But how this transformation came about does not necessarily serve as a recipe for other countries.
THE FORCE OF IDEAS
President Salvador Allende's socialist-communist coalition, elected in 1970 with 36 percent of the vote, represented the culmination of a long history of statist government in Chile. Although Allende's economic policies differed more in degree than in kind from modern interest-group redistributionism, the regime presented itself as avowedly Marxist. It instituted food rationing, introduced a new school curriculum that amounted to indoctrination, ignored more than 7,000 court rulings, and replaced the rule of law with the prerogative of its partisans. As popular resistance mounted, Allende did his best to bring the military into his fold, hoping to borrow its force or at least to deny it to his enemies, which by 1973 included the entire political spectrum outside the extreme left. Both the congress and the supreme court formally declared that Allende had breached the constitution and asked that the military intervene.
It did, and during Pinochet's 16 years in power the regime and the far left goaded each other in word and deed, producing death and rancor. In a typical incident, a riot squad caught a young couple with a Molotov cocktail and used it to set them afire. Torture was common. Many observers of Chile's experience have thus concluded that Pinochet's repressive rule was ultimately responsible for the eclipse of the country's deeply entrenched leftist culture. But they are as mistaken as those who predicted in the 1980s that Pinochet was merely a goon unwittingly paving the way for communism. Both views focus on a struggle between counterinsurgency and opposition forces that was more violent than meaningful. They overlook the more significant political battle that Pinochet waged against the entire establishment that had ruled Chile since the 1930s.
The generals' guns proved far less important than the ideas they adopted. None of the Chilean reforms that have drawn the world's interest were accomplished by force. In fact, the generals' agenda required peculiarly unmilitary kinds of force-the force by which one conceives plans and holds one's team together, the force by which one persuades people to vote yes rather than no, or to abandon an old social security scheme and sign up with a voluntary new plan, and the force to say no to friendly business people looking for a special break.
Each of the groups that had asked for the military's intervention to overthrow the Allende government in September 1973 hoped to be the generals' special beneficiary. The generals, however, judged that Allende's avowedly Marxist regime was only the climax of the long-growing tendency of Chileans to use state power to try to live off one another-a tendency to which all parties had contributed. Rather than arbitrate indefinitely among bad alternatives, the generals took power having already decided to try to break the political system's bad habits and to inculcate new ones.
When Pinochet made the generals' agenda unmistakable in March 1974, Chilean politics divided along a new line. The business community split. Some business people hard-pressed by the Allende regime were even more frightened by generals who promised to do away with all privileged relationships. Others kept their fears to themselves and sided with the generals. In the conservative parties the split was generational, with the young tending to support the military's promise of economic freedom and impartial government at the expense of a long political time-out. On the other side, the Christian Democrats, who had begged the army's help against the socialists and defended the coup abroad, now joined the socialists and communists in demonizing Pinochet.
Pinochet wavered between reformers and old-style conservatives, and the long exercise of power dulled his political focus. Nevertheless, more often than not he stuck to an inherently productive agenda, one that used consumer sovereignty to combat the power of politicians to draw rent from society. The thrust of the regime's reforms combined the military's attachment to the idea of frugal, impartial, authoritative government with the free-market preferences of its favorite civilians. Legal-constitutional and economic reforms worked to a coherent end because the regime understood that liberal government requires liberal economics and vice versa.
The world has known innumerable brutal regimes that have not bettered their country's economy or mentality. But the drafters of Chile's new constitution and "organic laws," as well as those charged with the economic reforms, concentrated on fixing what they saw as previous regimes' fatal flaw: the state, they believed, had manipulated, distorted and increasingly embittered group competition.
The authors scorned nothing so much as modern states that tout their citizens' freedom to elect their own government while forcing them to obtain permission to work out the least details of personal, family and professional life. The new constitution thus puts special emphasis on safeguarding citizens' freedom from government. It is deliberately friendly to individual rather than group rights. Equal treatment before the law is safeguarded by allowing citizens to take the government to court for perceived arbitrariness or illegal behavior. It specifies that the right of free association also implies the freedom not to join a group, that each family may educate its own children without state interference, and that no law may deprive a person of property or professional preference. The right to life is protected even before birth.
Chilean policymakers did not try to improve the economy through economic policy alone. They realized that weakening party bossism by requiring democratic procedures within parties and cutting the ties between politicians and interest groups is at least as important to securing an investment climate as establishing an independent central bank. Chile's reformers tried to think of as many ways as possible, tiny steps along with big ones, to reduce political patronage and to remove government from the majority of people's lives while maintaining a safety net for the poorest.
The constitution thus attempted to outlaw pork-barrel politics by making it as difficult as possible for laws to benefit or disadvantage specific sectors, activities or geographic zones. It requires the congress, whenever it passes a spending bill, to specify from where the money will come. It obliges the president, when faced with a bill that puts the budget out of balance, to choose between not spending the money and proportionately reducing expenditures for other accounts. Like similar legislation adopted by the U.S. Congress in 1986, these obviously are "parchment barriers." But they show the drafters' intentions, as does the establishment of an independent central bank.
One of the most important of the "organic laws" made public the membership of political parties and forced them to choose their officers and candidates openly and democratically. Most important, officers of parties are prohibited from simultaneously holding positions in labor or professional organizations. Although the parties have tried to get around this provision, the depoliticization of society has seemed such a good idea to so many that the parties have not returned to their old practice of colonizing society through economic and political patronage.
To maintain the integrity of the armed forces, Pinochet involved as few officers as possible in government. Instead, he hired civilians with interesting ideas. Thus a cohesive group of University of Chicago-trained economists became instrumental to the success of Chile's economic reforms. A year before the coup, they had compiled a 189-page typescript dubbed "the brick," which described how statism had throttled the Chilean economy and what reforms were needed to set the country on the path to growth. "The Chicago boys," as they were known, appealed to the military because, unlike old-line businessmen, their policy recommendations were obviously aimed at empowering average people rather than at enriching themselves. Their image as desinteresados, disinterested ones, matched the military's image of itself.
The military's acceptance of radical economic liberalization nevertheless happened only gradually, and the reforms were never implemented wholesale. The military quickly took a few basic steps: decontrolling prices, returning the most egregiously expropriated properties and slimming the most bloated bureaucracies. But it was not until 1975, when tumbling copper prices and foreign disinvestment threatened disaster for the regime, that Pinochet authorized a more radical approach. This plan aimed to balance the budget by shrinking the state, and to strengthen the economy by drastically reducing tariffs and exposing domestic producers to international competition. Importantly, it also aimed to privatize not only state-owned industries but also many traditional government functions.
The regime recognized that economic performance depends less on technical factors than it does on the rules and habits by which society lives. Hence the reforms with the most far-reaching impact on the economy were social. While honoring commitments to previous social-security contributors, for example, the military regime attempted to privatize much of the system by offering incentives for individuals to invest in privately owned retirement accounts. Two thirds of Chileans opted for the new system. Although the system has been operating for only a dozen years, its retirees already receive an average 40 percent more than retirees in the state system. The funds have built up a $13 billion pool of investment capital that otherwise would have been spent by politicians.
Similar reforms were undertaken to privatize health care and higher education. Although only about 16 percent of the population has joined the privately run health maintenance organizations, the percentage of the nation's health care bill financed by taxes has nonetheless dropped from 56 percent to 34 percent. Less bureaucracy has resulted in better health care at lower cost. In education, the military regime shifted subsidies away from universities to elementary and secondary schools. Since private schools could receive public subsidies, consumers were given the final judgment on school performance. University students were made to pay tuition either directly or through taxes after graduation. The results have been a diversification of higher education and students who are eager to get value out of a college experience they have to pay for.
While the total tax burden on the economy did not decrease significantly, the economy was nevertheless unburdened by shifting government spending away from bureaucracy, regulations and middle-class entitlements to simple poverty relief. New laws also radically decentralized the delivery of services such as sanitation and transportation. Still others covered commerce, mining and, above all, agriculture. The civil service, too, was decentralized, even as it was being shrunk. The idea was to transfer these matters out of the hands of central bureaucrats and into those of local voters. At the same time, the establishment of small-claims courts as well as hiring more judges and streamlining the legal process cut the costs and risks of economic activity. The message of each reform was the same: to encourage individual enterprise and risk-taking.
Chilean policymakers prided themselves on equal hostility to all privilege-seekers. Regulation, they believed, is inherently partisan. The best evidence of their claim is the impersonal nature of the harshest economic discipline they employed: free trade. Tariffs were slashed to an average of ten percent as the regime shifted to the value-added tax as its principal source of revenue. Entrepreneurs were thus forced to seek out Chile's comparative advantages. Since they could no longer compete, say, against Japanese electronics or American appliances, they were driven to invest in agriculture and fisheries. But the bitter medicine of competition eventually ensured that Chile's new businesses would be world-class.
The Chilean experience also showed how important it is for those who preach a way of life to practice it. The military's long-standing reputation for probity and frugality stood it in good stead. It helped that, as reforms took hold, citizens could see that the regime was not robbing them to enrich its friends. To its credit, the Chilean military did not try to become a new ruling class. No former member of the military government followed the U.S. practice of going into business as a lobbyist, or the Latin American practice of getting a government franchise for a particular business. Moreover, the military government never tried to build a political party or movement that would support it. Hence each of its seven cabinets was forced to build public support for itself according to its peculiar lights. When Pinochet built himself a luxurious presidential palace, adverse public opinion made it impossible for him or his successors to move in.
A HARD PATH TO FOLLOW
The similarities between prosperous societies from Switzerland to Singapore are undeniable: order and as little interference as possible with the rewards of hard work. Other countries, notably in Asia, have leaped into export-led prosperity even faster than Chile. And countries the world over search for the key to rapid development and this kind of economic success. While Chile's experience under Pinochet provides no blueprint, the end result of Pinochet's rule offers valuable lessons.
First, cultural differences matter. The Japanese or Korean economies, for example, can be managed successfully as if they belonged to large clans because these societies seem to accept that the rulers will shift massive amounts of privilege between social sectors. In societies based on Christian individualism, however, light-handed and impartial administration is the key to success. If there is a Chilean model, it consists of the orderly reduction of statist privileges-a goal and a process that do not take a military regime to bring about.
Second, timing and a number of special circumstances contributed greatly to Pinochet's success. For most of its tenure, the military regime was lucky enough to receive no foreign aid, and especially no American aid. This helped convince interest groups that it was no use asking for money from the government. Chilean policymakers also were spared the pressure for negotiated compromises among opposing parties and interest groups that usually accompanies being on America's dole. Had Chile made such compromises, it would be poorer for it today. The Chilean experience clearly teaches that deprivation of foreign aid can have a bracing effect.
Moreover, the accident of time helped. When the Chilean military moved against socialism in 1973, the Soviet Union and communists from Vietnam to Europe had the wind in their sails, the patron saint of Latin American collectivism, Juan Perón, was making a comeback in Argentina and even the United States had price controls. But as the military government drew to a close, the Soviet Union was dying, Chilean socialists had been chastened by actually living in socialist countries, Argentineans were already talking about copying Chile, and the world was talking about the successes du jour of Margaret Thatcher and Ronald Reagan. By 1990, then, both supporters and opponents of Pinochet had a host of reasons beyond Chile's own domestic circumstances for supporting political moderation and economic freedom.
Third, while the strength of Chile's reforms lay in their intellectual coherence, their weakness lay in implementation. For the most part, Chile's reformers knew where they wanted to go but not exactly how to get there. The military rulers' learning process and backsliding wasted time and political capital. Thus the reforms did not occur according to any logical schedule, but rather came primarily in short bursts in 1975, 1978-81 and 1987-88. Time and again, the regime made hard decisions only when pushed. It promulgated its labor law in 1979, for example, only when faced with the prospect of nationwide strikes. In other instances, the regime never carried out reforms it thought necessary and proper, like privatizing the state copper company, because circumstances never forced its hand.
Moreover, the reformers learned the hard way no shortcuts can raise a nation out of poverty. Beginning in 1979 the economic team set the exchange rate at 39 pesos to the dollar, and kept it there for three years despite a glaring disproportion between inflation in Chile and the United States. When the global recession of the 1980s brought on the debt crisis, Chile was devastated by failures of banks, mutual funds and businesses. Some middle-class retirees lost their life savings. One fourth of the labor force was unemployed, and GDP dropped by 14 percent. "What Allende could not manage, the Chicago boys did" was a quip common at the time. The government was forced to assume mountains of debt and temporarily resumed old-style industrial policies. The regime and all its works were well-nigh discredited. Thereafter, Chilean economics was forced to return to basics. Real wages did not again reach their 1982 levels until June 1988.
Finally, the regime's undemocratic nature and the length of time it held power were detrimental to the success of the reforms. Chile's hard-liners had convinced Pinochet of the need to lengthen and retain draconian control of the transitional period. But the conflict between a constitution aimed at diminishing state power and rulers who, as a practical matter, sought to hang on to unelected power that they often exercised brutally, ultimately made it harder for the regime and more difficult for the new constitution to take root.
The popular rejection of reformist politicians in Poland and elsewhere in the former communist world has led some to conclude that only regimes like Chile's, which do not have to answer to the people, can do the job. But these critics are mistaken. The military's strength came from its success in identifying itself as the defender of ordinary individuals. Many post-communist politicians have raised taxes and frozen wages to reduce government deficits, all the while maintaining huge public sectors. Pinochet, on the other hand, never tried to balance the budget on the backs of taxpayers or consumers. Instead he fired bureaucrats, cut subsidies and tariffs and let the market pile the pains of transition on the remnants of the old regime.
So long as it continued a process of liberalization, the Pinochet regime did not need dictatorial powers. A duly elected government in control of both the legislative and executive branches for five years could have instituted all the constitutional, legal and economic reforms that Pinochet did. However, when the 1982-84 recession forced the Chilean people to bear the cruel consequences of the economic team's mistakes, the Pinochet dictatorship was able to put off the day of reckoning with the people only until 1988-the date specified by the constitution. The point is this: dictatorial power is useful only as a highly imperfect shield against incompetent performance.
The difference between Chile's success and the lack of it in former communist lands lies not in any superiority of dictatorship over democracy but rather in the content of policy. Chile's reforms had nothing in common with the statist, austerity, aid and managed-trade packages that Poles, Russians and others have negotiated with the International Monetary Fund, the ec and the Group of Seven leading industrialized nations. The Chilean reforms succeeded politically and economically for one reason: they shrank the state.
WITHERING AWAY THE STATE
Victory comes only when the adversary concedes, something which the military regime's opponents never did explicitly. In the 1988 referendum, which was specified in the transitional articles of the constitution, the regime's adversaries found echoes for their accusations against Pinochet, but far fewer against the system he had established. In their hearts and from the historical depths of their organizations, the regime's opponents still do not like Pinochet's reforms. But they lack a compelling alternative vision, never mind public support to roll the reforms back.
In 1988, the voters ended Pinochet's presidency by a vote of 54 to 43 percent. Had the vote come closer to the recession, the margin would have been wider. Had it come in 1991 or 1992, Pinochet might well have won, just as he won a referendum on constitutional reform during the boom year 1981. The winners of the 1989 presidential and congressional elections were the Christian Democrats, socialists and the center-left parties loosely allied in a concertacion. They are likely to repeat their victory in 1993.
The 1992 municipal elections gave the parties of the left (including communists) 30 percent of the vote, the centrist Christian Democrats 29 percent, and the parties of the right (including one that calls itself centrist) 38 percent. As in 1970, the Christian Democrats have an uneasy alliance with the left. On the surface, then, it can be argued that the Chilean political scene is little different from what it was in the 1960s and before.
But in a new country the old parties cannot be the same. The Christian Democrats can no longer be comfortable describing themselves as a party of the center that is moving to the left, one that espouses big government either for the same pragmatic reasons as its European counterparts or in pursuit of liberation theology: European Christian democracy is dying; liberation theology is yesterday's fad. The socialists, a party whose label has itself become a heavy burden, feel the need to redefine themselves even more.
Thus Chile's left-leaning alliance, which in the 1960s was based on shared ideology and in the 1980s was patched together against Pinochet, is in the 1990s unlikely to endure. The population's chief concerns-crime and public morality, economic growth-as well as its growing appetite for primaries and conventions to choose political candidates do not augur victories by party coalition. Rather, they indicate a style of politics more reminiscent of that in the United States. In personal affairs as well as in politics, true reform usually comes only after hitting bottom, rejecting one's old ways, and recalling the nasty experience whenever tempted to waver. The Chile model is best understood as a reaction against something that most Chileans felt had gone too far in 1970-73. Allende showed Chileans what statism could mean far more believably than any number of brilliant op-ed pieces by the Chicago boys, never mind speeches by Pinochet himself. If the Chile model holds, then, nations only learn the hard way-that is, by their own trials and experiences. Nonetheless, Chile's revolutionary example-the withering away of the state-stands for those inspired to follow.