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Chilean Economy

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Submitted By EdgarWhite1
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Chilean Economic Structure An analysis of the Chilean economic structure reveals that this country has overcome the 1970’s Marxist economic rule, austerity and mass privatization to obtain the strongest sovereign bond rating in South America. Under the rule of socialist President Salvador Allende from 1970 to 1973, Chile experienced civil unrest and the county spun out of control as President Allende’s economic policies polarized an already fragile nation. During President Allende’s brief tenure, the astronomical rise in the prices of goods and services coincided with a plummeting consumer purchase power rate cased massive inflation that plunged the country into a huge recession. The following details the Chilean economic structure and the role the government played during its pedestrian growth in the 1950’s, its fall in the 1970’s and its current day resurrection. During the 1950’s to 1970, Chile had the poorest economic performance among Latin America’s large and medium-sized countries. This pedestrian growth was attributed to the government and its overvaluation of the domestic currency. The government continually resorted to controlling agricultural prices in order to subsidize the urban and middle classes. This subsidy caused a lag in the growth of the agricultural sector, was one of the most glaring symptoms of Chile’s economic woes during the 1950’s. At the beginning of the 1950’s, inflation, which had already and economic problem and been since the 1880’s, became much more serious, widespread and prevalent and it continued to plague the country well into the 1960’s. During President Eduardo Frei’s reign (1964-1970), inflation rose to thirty five percent. In an attempt to stem this tide and reform the economy, he decided to impose agrarian reform. The 1962 Agrarian Reform Law was a government initiated redistribution of agricultural land but this policy was a miserable failure because the government continued controlled agricultural pricing in order to subsidize the urban working and middle classes. President Frei’s propaganda force fed the agenda to peasant farmers that this option provided them with greater equity and social justice. Sadly, this proposed fix progressed at a snaillike pace because of the government’s tight reign on agricultural pricing and ultimately proved to be ineffective and outrageously costly. The 1970’s ushered in a new and rejuvenated sense of hope for the citizens of Chile and its floundering economy. Salvador Allende (1970- 1973) became the twenty-ninth President of Chile. He assumed office on November 3rd, 1970 by winning a hotly contested three-way race the preceding September. In this race, he narrowly attained a majority of the vote edging out former President Jorge Alessandri 36.2% to 34.9 %, with 27.8% of the vote going to Radomiro Tomic. At the time, if no Presidential candidate had gained a majority of the popular vote, the tradition was that Congress would elect the candidate with the highest number of popular votes regardless of margin. Once in office, Allende quickly adopted the policies of nationalization of industries, collectivization in the agricultural sectors and even more restrictive price controls. Unlike his predecessor, he wanted to move swiftly to implement his Marxist beliefs on the Chilean economy and its people in an effort to stop the rising inflation that had plagued the country. These extreme policies not only created a divide between he and the people he was elected to serve but a growing rift emerged between the President and the legislative and judicial branches of the Chilean government. Allende’s arrogant and incessant belief that his economic policy structure was the only way to achieve economic stability continually widened chasm between he and his opposition. This simmering pot of hostilities, of those that opposed President Allende’s Marxist economic policy, boiled on September 11th, 1973. On this day, the Chilean Parliament declared a “constitutional breakdown” and gave the military the authority to oust President Allende in a coup d’état. As troops surrounded the La Moneda Palace, (the Chilean governments equivalent of the United States’ White House) President Allende gave his last speech. In his final act of defiance, he vowed not to resign and committed suicide not giving his captors the satisfaction of seeing him defeated. The coup left a Presidential vacancy that was only to be filled on a temporary basis by the Army General Augusto Pinochet. Once hostilities had subsided, General Pinochet was to return the authority to the civilian government. However, this plan quickly unraveled as General Pinochet refused to relinquish power thus forcing Chile to be ruled by a Military Junta. The Junta, a government led by a committee of military leaders of which General Pinochet was the Commander-in-Chief, did not just make all of the military decisions for the country, it was in charge of making all the economic decisions as well. This power structure lasted from 1970 to 1990 ending nearly forty-eight years of Chilean democratic rule. President Pinochet (1974- 1990) acted much like many of his predecessors because he too had no real substantive plan on how to stabilize the Chilean economy. President Pinochet was solely focused on controlling and army not saving his country. Inflation was still at an alarming rate and there were no plans on making Chile a self-sustaining country. One of the Junta’s Economic Planners, Roberto Kelly who saw the impending handwriting on the wall, approached President Pinochet and advised him that if he wanted to be known as the Chilean savior that he would need to devise an economic plan an implement it quickly. Pinochet allowed group of economic thinkers called “The Chicago Boys” to be commissioned to make recommendations on how to repair the Chilean economy. This young group of Chilean economists, participated in an exchange program between the Catholic University of Chile and the University of Chicago and were trained by the Arnold Harberger and Milton Friedman. Harberger and Friedman, who were considered the leading economic thinkers of their time and were the fathers of the Chicago School of Economics “Free Market” theory. The “Free Market” theory was characterized by the Chicago School of Economics as having a strong belief in minimal government restrictions and emphasis on free markets as a way to control the economy. The Chilean Chicago Boys began to implement the teachings of Harberger and Friedman in their home country. They mistrusted all versions of state planning and government control. This practice was a stark contradiction to the belief and rule of President Pinochet’s dependency practices. President Pinochet and the Junta were more concerned with having an economy that took and obeyed orders rather than having an economy that flourished for the betterment of the people. The rivalry of The Chilean Chicago Boys, who wanted to push towards a free market economy, versus the President and the Junta’s tight fisted controlled economy was at a stalemate with no resolution on the horizon. Junta sympathizer, Javier Vial, who believed The Chilean Chicago Boys’ “Free Market” theory was to be the savior of the Chilean economy, desperately needed something or someone to move the economic gridlock forward. Who better to explain and articulate The Chilean Chicago Boys’ economic theory than their leader, Milton Freidman? Friedman was summoned to come to Chile to speak to the Chilean people to drum up support for his “Free Market” theory. Once there, Friedman hit the lecture circuit with a vengeance. There he discussed how free markets and their implementation could immediately and positively impact the Chilean economy. For five days, Friedman delivered a laser focused message on inflation’s devastating impact on the Chilean economy, what could be done to repair its broken economic structure and how free market societies dictated freedom for its citizens i.e. repressive governments and free market systems cannot coexist. After hearing of this blasphemous rhetoric, President Pinochet summoned Friedman to his palatial office. Friedman advised that if President Pinochet wanted to stop the inflation that was killing his country he needed to implement major reforms immediately. A begrudging Pinochet agreed and the Junta capitulated and allowed the Chilean Chicago Boys to execute their “Free Market” ideals and strategies to rescue their country’s dying economy. Days after being allowed to carryout their strategies, five hundred state owned businesses, including a number of banking institutions, were privatized, governments were forced to operate on shoestring budgets, import tariffs were eliminated, exports were increased, artificial price controls were abolished and rural lands were returned to their rightful owners. Almost immediately, this “Free Market” strategy pumped not only new life into the Chilean economy but also infused the state with millions of dollars in operating capital. However, The Chilean Chicago Boys’ “Free Market” strategy came with a cost. The rapid repeal of Communism coupled with the forced infusion of a free market drove the cost of living threw the roof. The gap between the rich and the poor widened. The poorest of the Chilean citizens became even poorer and the unemployment rate spiked to 30%. The Chilean Chicago Boys knew that this would be an unintended consequence of radically implementing “Free Market” strategies but they believed that this collateral damage was necessary in order to affect a rapid economic turn-around. Once stabilized, Chile became the fastest growing economy in Latin American by deregulating its markets and opening up its economy. Chile’s free market success also allowed for the reintroduction of democracy in 1990 by displacing the military Junta. Once the Chilean economy and its people had tasted the sweet fruits of their economic harvest, they were destined never to go backwards. As Friedman said in one of his initial speeches in Chile, “Repressive governments cannot coexist in free markets.” For his Chilean Miracle, Milton Friedman was awarded the Nobel Peace Prize in 1976. However for performing this perceived miracle, Friedman and the “Free Market” strategies he espoused paid a huge cost. Many of the Chilean people believed that Friedman assisted with the coup that overthrew their beloved President Allende not only causing his death but the subsequent deaths and disappearances of thousands of Allende sympathizers. There were protests and demonstrations at many of Friedman’s speeches. Chants calling him a traitor and murderer regularly rained down in unison from the sea of protestors. The Chilean economic reform also had far reaching consequences for many of the remaining Latin American countries. Liberal economics was set back as much of Latin America was resistant to economic reforms because of the heavy price paid by the Chilean people. Most of Latin America believed that it was better to deal with the devil you know that the devil you don’t theory. The political and socio-economic repercussions were seen as too steep of a price to pay to have a free market society. This belief retarded the overall growth of Latin America for decades. Chile’s economic resurgence made it a leader in the Latin American community and became the standard bearer for all other Latin American countries to imitate. Proof that a “Free Market” society can replace a Communist society and prosper existed in the Chilean Experiment. The foundation had been laid, the blueprints had been drawn up and the dye was cast. From the “Free Market” system, Chile emerged as a shinny new lighthouse for all other wayward Latin American economic ships were to follow. After years of trepidation and angst, many Latin American countries have begun to follow Chile’s lead by becoming more self-sufficient and economically sound. Today Chile has the seventh freest economy as ranked by Heritage.org and has the highest degree of economic freedom among South and Central America/Caribbean region. Chile’s flexibility and openness have made this small but impressive economy capable to withstand changes in the market because of its effective judicial system and prudent financial management structure. Chile also is an active and aggressive participant in Trans-Pacific Partnership negotiations. Partnerships with India, The United States, South Korea, Japan and China are making Chile a major player in the import and export markets. Chile is a country rich with natural resources. Those resources are: copper, timber, iron ore, precious metals, molybdenum and hydropower. Copper is the most plentiful, profitable and exported natural resource. Many countries pay top dollar to gain access to the copper mined in Chile. Lithium is the second most abundantly exported natural resource. As of 2009, Chile exported more than a third of the world’s lithium total of more than sixteen million pounds. Sixty one percent of that total was provided to the United States. As of 2009, Chile’s total external trade in goods (exports plus imports) made up 58.4% of its GDP. In 2012 Chile’s GDP was valued at 268.3 billion ranking it in the top forth of all countries polled. This ranking was achieved while having only seventeen million people in its population. Chile’s GNI (Per Capita Gross National Income) is thirteen thousand two hundred and fifty dollars as reported by The World Bank. In conclusion, Chile’s economic growth is stable and predictable. Gone are the days of no economic direction and price fixing. Chile is a resilient country that has overcome: communist and oppressive rule, military coups, staggering inflation and political and societal division. The “Free Market” society has also given the Chilean people back its democratic state. With the help of the Chilean Chicago Boys, Milton Friedman and a reluctant President Pinochet and his Military Junta, Chile has experienced an economic resurgence. The economic revival has also allowed Chile to reinstitute democratic rule because oppressive regimes cannot exist in free market societies. The Chicago School of Economics theory that less government intervention allows for greater market growth proved to be true in the Chilean Study.
Works Cited
. N.p.. Web. 21 Jul 2013. <http://www.heritage.org/index/country/Chile>.

. N.p.. Web. 21 Jul 2013. <http://data.worldbank.org/country/chile>.

n.d. n. page. <http://www.forbes.com/places/chile/>.

. N.p.. Web. 21 Jul 2013. <http://en.wikipedia.org/wiki/Augusto_Pinochet>.

. N.p.. Web. 21 Jul 2013. <http://www.indexmundi.com/chile/economy_profile.html>.

. N.p.. Web. 21 Jul 2013. <http://www.thomaswhite.com/world-markets/chile-like-fine-wine-and-burnished-copper/>.

. N.p.. Web. 21 Jul 2013. <http://en.wikipedia.org/wiki/Miracle_of_Chile>.

. N.p.. Web. 21 Jul 2013. <http://en.wikipedia.org/wiki/1973_Chilean_coup_d'état>.

. N.p.. Web. 21 Jul 2013. <http://www.indexmundi.com/chile/>.

. N.p.. Web. 21 Jul 2013. <http://www.mongabay.com/reference/country_studies/chile/ECONOMY.html>.…...

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