Tuesday, November 27, 2007
Thursday, November 22, 2007
Milton Friedman and Chile
One of the things for which Milton Friedman is both reviled and hailed is his connection with the "Miracle of Chile".
There are at least two questions:
a) What happenned in Chile and was it a "miracle"?
b) Why did Friedman consider it a "miracle"?
Let's try to lay out what happenned in Chile. The relevant time period is 1973-late 80s, the reign of Augusto Pinochet.
In 1970, a democratic socialist politician, Salvador Allende came to power in the Presidential election. He tried to carry out moderate reforms, including minor land reform. Unfortunately, as is the norm in Latin America, this means the President wasn't going to last very long. The CIA immediately started efforts to destabilize the political and economic structure. Nixon famously declared "make the economy scream". On September 11, 1973, what is known as the "first 9/11" in Latin America, Augusto Pinochet overthrew Allende in a coup.
The Pinochet regime is well known for its brutal suppression of labour unions, dissidents and all kinds of torture, massacres and other familiar stuff in Latin America. But it was also notable for its economic policies.
Milton Friedman was in Chile in the initial period and from what I can see, his only direct involvement was giving a speech laying out the case for neoliberal reforms.
However his ideas of economic policy were followed quite widely by a group of economists known as the "Chicago Boys", alumni of the University of Chicago, where Friedman taught. The strategies included large scale "privatization" of industries, cutting taxes, privatizing Social Security and many other familiar features of the neoliberal package.
Amartya Sen, in his book, Hunger and Public Action, examines the economic performance of Chile. From a survey of the literature in the field, he finds:
"This so-called "monetarist experiment"... has been the the object of much controversy, but few have claimed it to be a sucess. The failure of the monetarist experiment to lead to a sustained and broad-based increase in economic prosperity is apparent...The most conspicuous feature of the post-1973 period is that of considerable instability...and no firm and consistent upward trend (to say the least) in the conventional indicators of economic prosperity."
From his data, the per capita GDP fell 20% from 1973-85, real wages declined by approximately the same amount and unemployment rate increased from 4% to 14%.
On the social side, the picture is a little more complex. There has been an undeniable reduction in infant mortality rate (IMR) from 1973-85 from 82 per thousand to 19 per thousand. The life expectancy at birth also increased from 64.8 to 68.3. But life expectancy at age 1 (by definition, less sensitive to IMR) stagnated at 68.6 years. He finds that:
"Favourable IMR trends have not been reflective of a corresponding general improvement in living conditions".
Also, he notes that "there's little disagreement as to what caused the observed improvements in the area of child health and nutrition". Chile had a very long tradition of public action in nutritional and health programs for children, which played the major role in observed trends in IMR.
Friedman did consider the Chilean economy to have performed well.
"Oh, very well. Extremely well. The Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society."
A few comments about that. People can judge for themselves whether it did perform well. As to the second aspect, Friedman displays an extraordinary lack of historical knowledge. Even it Latin America, it was pretty evident, the role of military and business interests in sustaining dictatorial governments. These famous lines come from one of the most decorated American generals in history, Smedley Butler, in his book War is a Racket. He talks about his activities in Latin America in the first half of the 20th century:
"I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents."
Friedman has held that in fact, this picture is misleading because the state in intertwined with the Big Business (which is true) and thus he held that privatizing and minimizing the state would help things along. Did that happen in Chile? From what I can make out (I need to do more research on this), most of the newly privatized business went to Pinochet's cronies and was just taking things out from the public realm, where it had, however small, a measure of control by the public, into the hands of cronies of the barbaric dictator.
There are at least two questions:
a) What happenned in Chile and was it a "miracle"?
b) Why did Friedman consider it a "miracle"?
Reality
Let's try to lay out what happenned in Chile. The relevant time period is 1973-late 80s, the reign of Augusto Pinochet.
Politics
In 1970, a democratic socialist politician, Salvador Allende came to power in the Presidential election. He tried to carry out moderate reforms, including minor land reform. Unfortunately, as is the norm in Latin America, this means the President wasn't going to last very long. The CIA immediately started efforts to destabilize the political and economic structure. Nixon famously declared "make the economy scream". On September 11, 1973, what is known as the "first 9/11" in Latin America, Augusto Pinochet overthrew Allende in a coup.
The Pinochet regime is well known for its brutal suppression of labour unions, dissidents and all kinds of torture, massacres and other familiar stuff in Latin America. But it was also notable for its economic policies.
Economics
Milton Friedman was in Chile in the initial period and from what I can see, his only direct involvement was giving a speech laying out the case for neoliberal reforms.
However his ideas of economic policy were followed quite widely by a group of economists known as the "Chicago Boys", alumni of the University of Chicago, where Friedman taught. The strategies included large scale "privatization" of industries, cutting taxes, privatizing Social Security and many other familiar features of the neoliberal package.
Performance
Amartya Sen, in his book, Hunger and Public Action, examines the economic performance of Chile. From a survey of the literature in the field, he finds:
"This so-called "monetarist experiment"... has been the the object of much controversy, but few have claimed it to be a sucess. The failure of the monetarist experiment to lead to a sustained and broad-based increase in economic prosperity is apparent...The most conspicuous feature of the post-1973 period is that of considerable instability...and no firm and consistent upward trend (to say the least) in the conventional indicators of economic prosperity."
From his data, the per capita GDP fell 20% from 1973-85, real wages declined by approximately the same amount and unemployment rate increased from 4% to 14%.
On the social side, the picture is a little more complex. There has been an undeniable reduction in infant mortality rate (IMR) from 1973-85 from 82 per thousand to 19 per thousand. The life expectancy at birth also increased from 64.8 to 68.3. But life expectancy at age 1 (by definition, less sensitive to IMR) stagnated at 68.6 years. He finds that:
"Favourable IMR trends have not been reflective of a corresponding general improvement in living conditions".
Also, he notes that "there's little disagreement as to what caused the observed improvements in the area of child health and nutrition". Chile had a very long tradition of public action in nutritional and health programs for children, which played the major role in observed trends in IMR.
Friedman's view
Friedman did consider the Chilean economy to have performed well.
"Oh, very well. Extremely well. The Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society."
A few comments about that. People can judge for themselves whether it did perform well. As to the second aspect, Friedman displays an extraordinary lack of historical knowledge. Even it Latin America, it was pretty evident, the role of military and business interests in sustaining dictatorial governments. These famous lines come from one of the most decorated American generals in history, Smedley Butler, in his book War is a Racket. He talks about his activities in Latin America in the first half of the 20th century:
"I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents."
Friedman has held that in fact, this picture is misleading because the state in intertwined with the Big Business (which is true) and thus he held that privatizing and minimizing the state would help things along. Did that happen in Chile? From what I can make out (I need to do more research on this), most of the newly privatized business went to Pinochet's cronies and was just taking things out from the public realm, where it had, however small, a measure of control by the public, into the hands of cronies of the barbaric dictator.
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