Is Pinochet the Model?

Angelo M. Codevilla

From Foreign Affairs, November/December 1993

Summary:  The "Pinochet model," a potent mixture of authoritarianism and liberal economic reform, is sold as the elixir to nearly any country ailing under socialist transition. But the years of improvisation by Chile's reformers actually leave scant recipe to follow. The secret of Chile's turnabout, if any can be found, was simply the inspiration to shrink the state. Any country can do it, without a caudillo in charge.

The constitution thus attempted to outlaw pork-barrel politics by making it as difficult as possible for laws to benefit or disadvantage specific sectors, activities or geographic zones. It requires the congress, whenever it passes a spending bill, to specify from where the money will come. It obliges the president, when faced with a bill that puts the budget out of balance, to choose between not spending the money and proportionately reducing expenditures for other accounts. Like similar legislation adopted by the U.S. Congress in 1986, these obviously are "parchment barriers." But they show the drafters' intentions, as does the establishment of an independent central bank.

One of the most important of the "organic laws" made public the membership of political parties and forced them to choose their officers and candidates openly and democratically. Most important, officers of parties are prohibited from simultaneously holding positions in labor or professional organizations. Although the parties have tried to get around this provision, the depoliticization of society has seemed such a good idea to so many that the parties have not returned to their old practice of colonizing society through economic and political patronage.

To maintain the integrity of the armed forces, Pinochet involved as few officers as possible in government. Instead, he hired civilians with interesting ideas. Thus a cohesive group of University of Chicago-trained economists became instrumental to the success of Chile's economic reforms. A year before the coup, they had compiled a 189-page typescript dubbed "the brick," which described how statism had throttled the Chilean economy and what reforms were needed to set the country on the path to growth. "The Chicago boys," as they were known, appealed to the military because, unlike old-line businessmen, their policy recommendations were obviously aimed at empowering average people rather than at enriching themselves. Their image as desinteresados, disinterested ones, matched the military's image of itself.

The military's acceptance of radical economic liberalization nevertheless happened only gradually, and the reforms were never implemented wholesale. The military quickly took a few basic steps: decontrolling prices, returning the most egregiously expropriated properties and slimming the most bloated bureaucracies. But it was not until 1975, when tumbling copper prices and foreign disinvestment threatened disaster for the regime, that Pinochet authorized a more radical approach. This plan aimed to balance the budget by shrinking the state, and to strengthen the economy by drastically reducing tariffs and exposing domestic producers to international competition. Importantly, it also aimed to privatize not only state-owned industries but also many traditional government functions.

The regime recognized that economic performance depends less on technical factors than it does on the rules and habits by which society lives. Hence the reforms with the most far-reaching impact on the economy were social. While honoring commitments to previous social-security contributors, for example, the military regime attempted to privatize much of the system by offering incentives for individuals to invest in privately owned retirement accounts. Two thirds of Chileans opted for the new system. Although the system has been operating for only a dozen years, its retirees already receive an average 40 percent more than retirees in the state system. The funds have built up a $13 billion pool of investment capital that otherwise would have been spent by politicians.

Similar reforms were undertaken to privatize health care and higher education. Although only about 16 percent of the population has joined the privately run health maintenance organizations, the percentage of the nation's health care bill financed by taxes has nonetheless dropped from 56 percent to 34 percent. Less bureaucracy has resulted in better health care at lower cost. In education, the military regime shifted subsidies away from universities to elementary and secondary schools. Since private schools could receive public subsidies, consumers were given the final judgment on school performance. University students were made to pay tuition either directly or through taxes after graduation. The results have been a diversification of higher education and students who are eager to get value out of a college experience they have to pay for.

While the total tax burden on the economy did not decrease significantly, the economy was nevertheless unburdened by shifting government spending away from bureaucracy, regulations and middle-class entitlements to simple poverty relief. New laws also radically decentralized the delivery of services such as sanitation and transportation. Still others covered commerce, mining and, above all, agriculture. The civil service, too, was decentralized, even as it was being shrunk. The idea was to transfer these matters out of the hands of central bureaucrats and into those of local voters. At the same time, the establishment of small-claims courts as well as hiring more judges and streamlining the legal process cut the costs and risks of economic activity. The message of each reform was the same: to encourage individual enterprise and risk-taking.

Chilean policymakers prided themselves on equal hostility to all privilege-seekers. Regulation, they believed, is inherently partisan. The best evidence of their claim is the impersonal nature of the harshest economic discipline they employed: free trade. Tariffs were slashed to an average of ten percent as the regime shifted to the value-added tax as its principal source of revenue. Entrepreneurs were thus forced to seek out Chile's comparative advantages. Since they could no longer compete, say, against Japanese electronics or American appliances, they were driven to invest in agriculture and fisheries. But the bitter medicine of competition eventually ensured that Chile's new businesses would be world-class.

The Chilean experience also showed how important it is for those who preach a way of life to practice it. The military's long-standing reputation for probity and frugality stood it in good stead. It helped that, as reforms took hold, citizens could see that the regime was not robbing them to enrich its friends. To its credit, the Chilean military did not try to become a new ruling class. No former member of the military government followed the U.S. practice of going into business as a lobbyist, or the Latin American practice of getting a government franchise for a particular business. Moreover, the military government never tried to build a political party or movement that would support it. Hence each of its seven cabinets was forced to build public support for itself according to its peculiar lights. When Pinochet built himself a luxurious presidential palace, adverse public opinion made it impossible for him or his successors to move in.

A HARD PATH TO FOLLOW