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Chile coup 40 years on: The shameful legacy

Dick Barbor-Might looks at how Milton Friedman's neoliberalism had a tragic effect on Augusto Pinochet's Chile - and Britain

By and large, growth rates were high in the post-war years and governments had been able to use a variety of fiscal, monetary and other Keynesian measures to successfully manage economies. Yet the long period of post-war economic growth was coming to an end by the mid-1970s. National economies began to fall victim to "stagflation," a combination of low growth and high inflation.

As the value of dividends fell so the conditions for capital accumulation were no longer being met. In these circumstances of economic crisis the attraction of free-market economics, for so long espoused by Milton Friedman and his peers at the University of Chicago, became overwhelming to many among the economic elites since it held out the prospect of reviving faltering national economies by rebalancing them in favour of the rich and powerful.

Chile offered near perfect conditions for a demonstration of Friedman's prescription for running an economy, with a dictatorship in place and the Chicago Boys advising Augusto Pinochet and the other military commanders. Their predominance was signaled in 1975 when Jorge Cauas became Minister of Finance - a post in which he was succeeded in 1977 by another Chicago Boy, Sergio de Castro.

Pinochet's ruthlessness and his strong personal backing for the Chicago Boys were essential to the success of their project since there were doubting voices being raised even within the ruling junta.

Pinochet's ascendancy was made crystal clear on June 27 1974 when he declared himself supreme chief of the nation - six months later he changed his title to president.

He approved of the Chicago Boys with their air of "scientific" certainty, determination to force upon Chile a drastic change in economy and ethos and their callous disregard for the negative impacts upon livelihoods of ordinary Chileans - the justification being that "all would be made right in the end."

As Pinochet and the Chicago Boys dismantled previous protections against foreign imports, many Chilean manufacturers, who had been only too pleased to see the end of Allende and Unidad Popular, found themselves forced out of business by the flood of cheap imports.

Unemployment soared and was made worse as the government savagely cut state expenditures. There was dismay, even among many of the regime's supporters, and all the more so as inflation rates remained catastrophically high and only small financial cliques and foreign-owned capital appeared to be benefiting.

It was in this atmosphere - where doubts were growing even amongst the regime's supporters - that in March 1975 Friedman made a personal visit to Chile. He urged Pinochet and his colleagues not to retreat but to engage in "shock treatment" for the Chilean economy. Any ill effects, Friedman argued, would soon be compensated for by expansion in the private sector and in the export of natural resources.

Pinochet responded as Friedman had hoped that he would, putting even more power over decision making into the hands of Sergio de Castro and the other Chicago Boys. In one year alone public spending was reduced by 27 per cent - by 1980 it was only half as much as it had been under Allende.

Military expenditure, however, was increased while spending on health, welfare and education were savagely cut. Privatisations proceeded apace with many enterprises being sold off at give-away prices. The industrial sector shrunk until it was back to World War II levels.

Subjected to shock treatment, the Chilean economy nosedived in the mid-1970s. It was to do so again in 1982 when the poorly regulated banks and financial houses that had been so encouraged by the Chicago Boys were unable to service a mountain of debt or to provide credit to businesses.

Many small and medium-sized firms went bankrupt, GDP shrank by 14.3 per cent and unemployment soared to 23.7 per cent.

Financial collapse was only averted when the government nationalised a number of the banks and negotiated with foreign creditors - a solution was only made possible because Chile's copper mines, nationalised by Allende and still under state control, produced 85 per cent of the country's foreign exchange earnings.

By the end of the crisis Pinochet's dictatorship ended up having a larger proportion of the Chilean economy under state control than had the Allende government - although much was returned to the private sector after the private owners had been baled out by the public sector.

After this episode economic growth resumed, led by expanding exports of natural resources, and there were years in which the economy boomed.

When Pinochet held a crucial plebiscite in October 1988 his hope was that he would be granted, by popular vote, a further eight years in power. This proposal was decisively rejected by a 56 per cent "No" vote, making it inevitable that Chile would return to a form of democratic government.

However, Pinochet and his supporters still had considerable sources of power at their disposal, including the existence of the 1980 constitution in whose drafting Friedrich von Hayek had had a hand - as well as the dictator's retention of his key post as army commander-in-chief.

The civilian governments that took office from March 1990 onwards sought to improve conditions for Chile's poorest but, broadly speaking, they retained the free-market model, leaving intact the concentrations of power in the hands of the economic elite.

The wider influence of the Chilean example was greatly amplified after Ronald Reagan became US president in 1981 and by the election of Margaret Thatcher in Britain two years earlier.

Alan Walters, a close adviser to Thatcher, was crucial in the process. Walters had become a disciple of Friedman in the 1950s and 1960s. When Thatcher was still leader of the opposition, he had briefed her on Pinochet's Chile. She was always interested in what Walters had to tell her, of his admiration for Pinochet and for the Chicago Boys.

The situations in Chile and in Britain were very different - in Britain there had been no military coup. Yet, as she was to demonstrate when he was arrested on human rights abuse charges in 1998, Thatcher had strong fellow feeling for Pinochet. After all, they shared a similar hatred for the left, followed the precepts of Friedman and the other free-market economists and aspired to change their respective countries beyond recognition.

It is another and longer story of how neoliberal policies have been introduced in many countries, very unevenly, over the last three decades.

But any assessment would have as a main feature the theme of persisting and growing inequalities, the deadly fruits of Friedman's economic doctrines.

Three months ago, in Scotland where I now live, there is this to read in Oxfam Scotland's recent report, Our Economy: "Scotland is one of the most unequal societies in the developed world. The wealthiest households are 273 times richer than the poorest. This looks likely to widen in future years."

It is because we are all affected by the doctrines of neoliberalism that it is worth studying the application of the free-market model in a Chile dominated by Pinochet's dictatorship.

The past informs the present, which is why what happened in Chile is relevant to the struggles of today.

The financial crisis of 2008 exposed as never before the fallacies of neoliberalism but it is the general population that suffers the crippling consequences of the crash. The banking elites have escaped virtually unscathed, saved by massive taxpayer-funded bailouts.

Willingly or unwillingly, national governments submit to the dictates of supranational institutions such as the IMF, the European Central Bank and the European Union whose policies, especially in southern Europe, are enforcing fire sales of state assets.

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