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How Milton Friedman saved Chile

March 2, 2010

Interesting article on how Friedman’s policies worked in a real life situation.

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.

(…)

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.

(…)

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.

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One Comment leave one →
  1. March 7, 2010 8:21 pm

    Stephens’ WSJ article juxtaposes images of the destroyed Haitian and intact Chilean presidential palaces to illustrate his point about championing Pinochet and his brand of free enterprise. An examination of La Moneda Presidential Palace and some history of Chilean building codes is instructive.

    La Moneda was originally built as a mint, hence it’s name. Since it was completed in 1805, I could not say under what building codes applied, but I think it’s fair to say it was under government auspices.

    From a little reading on the topic I’ve done today, it seems that earthquake building codes and enforcement were instituted in Chile in 1930, after 1960, and notably in 1972. Perhaps La Moneda was retrofitted against earthquake damage after these years, and again, I would assume under government direction.

    Oddly, Milton Friedman was in fact critical of building codes, see the 1992 interview with David Levy, because they were government mandated and “impose costs that you might not privately want to engage in.” But La Moneda seemed to survive destruction largely due to the government.

    However, in 1973 La Moneda did sustain damage, but not from any natural causes. In the midst of the General Pinochet led coup of September 11th, the Presidential Palace was bombed by the Chilean air force while the democratically elected President Allende was inside.

    Lessons from the photograph of La Moneda–a building survives for years due to government programs, but it was also damaged due to a government program. I doubt Stephens would like to acknowledge either of these realities.

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