thumb|Chilean (blue) and average Latin American (orange) [[GDP per capita (1980–2017)]]
thumb|[[Chilean (orange) and average South American (blue): Rates of Growth of GDP (1971–2007)]]
The "Miracle of Chile" was a term used by economist Milton Friedman to describe the reorientation of the Chilean economy in the 1980s and the effects of the economic policies applied by a large group of Chilean economists who collectively came to be known as the Chicago Boys, having studied at the University of Chicago where Friedman taught. He said the "Chilean economy did very well, but more importantly, 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."
The junta Friedman referred to was the military government that came to power in a 1973 coup d'état, which came to an end in 1990 after a democratic 1988 referendum removed Augusto Pinochet from the presidency.
Overview
The economic reforms implemented by the Chicago Boys had three main objectives: economic liberalization, privatization of state-owned companies, and stabilization of inflation. The first reforms were implemented in three rounds: 1974–1983, 1985, and 1990. The reforms were continued and strengthened after 1990 by the post-Pinochet center government of Patricio Aylwin's Christian Democrats. However, the center-left government of Eduardo Frei Ruiz-Tagle also made a commitment to poverty reduction. In 1988, 48% of Chileans lived below the poverty line. By 2000 this had been reduced to 20%. A 2004 World Bank report attributed 60% of Chile's 1990's poverty reduction to economic growth, and claimed that government programs aimed at poverty alleviation accounted for the rest.
Hernán Büchi, Minister of Finance under Pinochet between 1985 and 1989, wrote a book detailing the implementation process of the economic reforms during his tenure. Successive governments have continued these policies. In 2002 Chile signed an association agreement with the European Union (comprising free trade and political and cultural agreements), in 2003, an extensive free trade agreement with the United States, and in 2004 with South Korea, expecting a boom in import and export of local produce and becoming a regional trade-hub. Continuing the coalition's free-trade strategy, in August 2006, President Bachelet promulgated a free trade agreement with the People's Republic of China (signed under the previous administration of Ricardo Lagos), the first Chinese free-trade agreement with a Latin American nation; similar deals with Japan and India were promulgated in August 2007. In 2010, Chile was the first nation in South America to win membership in the Organization of Economic Cooperation and Development, an organization restricted to the world's richest countries.
Some economists (such as Nobel laureate Amartya Sen) have argued that the experience of Chile in this period indicates a failure of the economic liberalism posited by thinkers such as Friedman, claiming that there was little net economic growth from 1975 to 1982 (during the so-called "pure Monetarist experiment"). After the catastrophic banking crisis of 1982, the state controlled more of the economy than it had under the previous socialist government, and sustained economic growth only came after the later reforms that privatized the economy, while social indicators remained poor. The OECD economist Javier Santiso described this reorientation as "combining neo-liberal sutures and interventionist cures".
Background
In 1972, Chile's inflation was at 150%. At the same time, the United States conducted a campaign to deepen the inflation crisis. The Central Bank increased the money supply to pay for the increasing deficit. Büchi states that this increase was the primary cause for inflation. (literally, "the brick"), so called because the report was "as thick as a brick". The plan had been quietly prepared in May 1973 by economists who opposed Salvador Allende's government, with the help from a group of economists the press were calling the Chicago Boys, because they were predominantly alumni of the University of Chicago. The document contained the backbone of what would later on become the Chilean economic policy.
The plan recommended a set of economic reforms that included deregulation and privatization. Among other reforms, they made the central bank independent, cut tariffs, privatized the state-controlled pension system, state industries, and banks, and reduced taxes. Pinochet's stated aim was to "make Chile not a nation of proletarians, but a nation of entrepreneurs".
Reforms
The first reforms were implemented in three rounds: 1974–1983, 1985, and 1990. The government welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business. The main copper company, Codelco, remained in government hands due to the nationalization of copper completed by Salvador Allende, however, private companies were allowed to explore and develop new mines.
Minister of Finance Sergio de Castro, departing from Friedman's support for free floating exchange rates, decided on a pegged exchange rate of 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose, leading Milton Friedman to criticize De Castro and the fixed exchange rate in his Memoirs ("Chapter 24: Chile", 1998). Since Chilean peso inflation continued to outpace U.S. dollar inflation, every year Chilean buying power of foreign goods increased. When the bubble finally burst in late 1982, Chile slid into a severe recession that lasted more than two years. This deep economic recession of 1982–1983 was Chile's second in eight years. (In 1975, when GDP fell by 13 percent, industrial production plunged by 27 percent and unemployment increased to 20 percent). Additionally, inflation reached 375 percent in 1974—the highest rate in the world and almost twice the top level under Allende. During the 1982–1983 recession, real economic output declined by 19%, with most of the recovery and subsequent growth taking place after Pinochet left office, when market-oriented economic policies were additionally strengthened.
Free trade agreements
Successive Chilean governments have actively pursued trade-liberalizing agreements. The process began in the 1970s, when Pinochet cut tariffs on imports to 10%. Prior to that, Chile had been one of the most protectionist economies in the world, ranking 71 out of 72 in a 1975 Cato Institute and Fraser Institute annual report. During the 1990s, Chile signed free trade agreements (FTA) with Canada, Mexico, and Central America. Chile also concluded preferential trade agreements with Venezuela, Colombia, and Ecuador. An association agreement with Mercosur—Argentina, Brazil, Paraguay, and Uruguay—went into effect in October 1996. Continuing its export-oriented development strategy, Chile completed landmark free trade agreements in 2002 with the European Union and South Korea. Chile, as a member of the Asia-Pacific Economic Cooperation (APEC) organization, is seeking to boost commercial ties to Asian markets. To that end, it has signed trade agreements in recent years with New Zealand, Singapore, Brunei, India, China, and most recently Japan. In 2007, Chile held trade negotiations with Australia, Thailand, Malaysia, and China. In 2008, Chile hopes to conclude an FTA with Australia, and finalize an expanded agreement (covering trade in services and investment) with China. The P4 (Chile, Singapore, New Zealand, and Brunei) also plan to expand ties through adding a finance and investment chapter to the existing P4 agreement. Chile's trade talks with Malaysia and Thailand are also scheduled to continue in 2008.
Performance on economic and social indicators
thumb|right |GDP per capita in Chile and Latin America (1950–2010)
Amartya Sen, in his book Hunger and Public Action, examines the performance of Chile in various economic and social indicators. He finds, from a survey of the literature on the field:
thumb|left|Unemployment in Chile and South America (1980–1990)
Nobel laureate and economist Gary Becker states that "Chile's annual growth in per capita real income from 1985 to 1996 averaged a remarkable 5 percent, far above the rest of Latin America." Since then the economy has averaged 3% annual growth in GDP. Becker also said, in 1997, that Chile had become "an economic role model for the whole underdeveloped world". Margaret Thatcher declared that Pinochet's regime had turned Chile "from chaotic collectivism into the model economy of Latin America" whereas George H. W. Bush asserted that "Chile's record of economic accomplishment is a lesson for Latin America on the power of the free market. Nowhere among the nations of this continent has the pace of free‐market reform gone farther, faster than right here in Chile". Infant mortality rate in Chile fell from 76.1 per 1000 to 22.6 per 1000 from 1970 to 1985. from "118" legislation permitting abortion under limited circumstances (if the pregnancy endangers the life of the woman, if the fetus is not viable, or if the pregnancy resulted from rape) was passed.
However, Sen claims that this improvement was not because of "free-market" policies but because of active public and state intervention. Chile had a very long tradition of public action for the improvement of childcare, which were largely maintained after the Pinochet coup:
Nevertheless, according to libertarian writer Axel Kaiser: in 1987 to "43.04"
{| class="wikitable"
! style="width:10.5em;" style="text-align:left;" | Presidency
! style="width:4.5em;" | Alessandri (1959–64)
! style="width:4.5em;" | Frei-Montalva (1965–70)
! style="width:4.5em;" | Allende (1971–73)
! style="width:4.5em;" | Pinochet (1974–89)
! style="width:4.5em;" | Aylwin (1990–93)
! style="width:4.5em;" | Frei Ruiz-Tagle (1994–99)
! style="width:4.5em;" | Lagos (2000)
|-
| style="text-align: center;" style="text-align:left;" | Economic growth (% of GDP)
| style="text-align: center;" | 3.7
| style="text-align: center;" | 4.0
| style="text-align: center;" | 1.2
| style="color:#006600" style="text-align: center;" | 2.9
| style="text-align: center;" | 7.7
| style="text-align: center;" | 5.6
| style="text-align: center;" | 5.4
|-
| style="text-align: center;" style="text-align:left;" | Growth rate of exports
| style="text-align: center;" | 6.2
| style="text-align: center;" | 2.3
| style="text-align: center;" | -4.2
| style="text-align: center;" | 10.6
| style="text-align: center;" | 9.6
| style="text-align: center;" | 9.4
| style="text-align: center;" | 7.5
|-
| style="text-align: center;" style="text-align:left;" | Rate of unemployment (Workers in job creation programs counted as unemployed)
| style="text-align: center;" | 5.2
| style="text-align: center;" | 5.9
| style="text-align: center;" | 4.7
| style="text-align: center;" | 18.1
| style="text-align: center;" | 7.3
| style="text-align: center;" | 7.4
| style="text-align: center;" | 10.0
|-
| style="text-align: center;" style="text-align:left;" | Real wages (1970 = 100)
| style="text-align: center;" | 62.2
| style="text-align: center;" | 84.2
| style="text-align: center;" | 89.7
| style="text-align: center;" | 81.9
| style="text-align: center;" | 99.8
| style="text-align: center;" | 123.4
| style="text-align: center;" | 134.4
|-
| style="text-align: center;" style="text-align:left;" | Rate of inflation
| style="text-align: center;" | 26.6
| style="text-align: center;" | 26.3
| style="text-align: center;" | 293.8
| style="text-align: center;" | 79.9
| style="text-align: center;" | 17.7
| style="text-align: center;" | 6.1
| style="text-align: center;" | 4.5
|}
Milton Friedman
Milton Friedman gave some lectures advocating free market economic policies at the Universidad Católica de Chile. In 1975, two years after the coup, he met with Pinochet for 45 minutes, where the general "indicated very little indeed about his own or the government's feeling" and the president asked Friedman to write him a letter laying out what he thought Chile's economic policies should be, which he also did. To stop inflation, Friedman proposed reduction of government deficits that had increased in the past years and a flat commitment by government that after six months it will no longer finance government spending by creating money. He proposed relief of cases of real hardship among poorest classes. In October 1975 the New York Times columnist Anthony Lewis declared that "the Chilean junta's economic policy is based on the ideas of Milton Friedman…and his Chicago School". Friedman stated that "The real miracle in Chile was not that those economic reforms worked so well, but because that's what Adam Smith said they would do. Chile is by all odds the best economic success story in Latin America today. The real miracle is that a military junta was willing to let them do it." Friedman said 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." Chile is ranked 1st out of 29 countries in the Americas and has been a regional leader for over a decade. Chile's annual GDP growth was 3.2% in 2008 and had averaged 4.8% from 2004 to 2008.