A Chilean Model for Russia

Jose Pinera

From Foreign Affairs, September/October 2000

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Summary:  Russia does not need a Pinochet, but it does need the Chilean economic model. For Russia to grow at self-sustaining annual rates of seven to ten percent for a decade or two -- the only way it can pull itself out of poverty -- it needs much more economic liberalization. Four reforms inspired by Chile's dramatic turnaround can help Russia out of its doldrums: pension privatization, tax reform, radical deregulation of coddled industries, and the replacement of the ruble with the euro. The indispensable element is not a strong four-star general but a team of determined economic policymakers who know that freedom works.

Jose Pinera is President of the International Center for Pension Reform and Cochair of the Cato Institute's Project on Social Security Privatization. As Chilean Minister of Labor and Social Security from 1978 to 1980 he was responsible for the privatization of the Chilean pension system.

FREE MARKETS, FREE PEOPLE

What Russia needed at the beginning of the twentieth century was not a Bolshevik Revolution but an American one. The tragedy of that great nation was that it got a Lenin instead of a Jefferson. Today, nearly ten years after the collapse of the Soviet Union, Russia's new president, Vladimir Putin, has the historic opportunity to start the freedom revolution that his country missed last century.

I had the opportunity to assess Russia's situation at the end of April, when I traveled to Moscow at the invitation of President Putin's newly appointed economic adviser, Andrei Illarionov. As a member of the team of economists that entered the Pinochet government in Chile in the 1970s to produce a free-market economic revolution and a return to democratic rule, I was inevitably asked whether Russia "needed a Pinochet" and whether the country should introduce a "Chilean economic model." My unequivocal answer was no to the first question and yes to the second.

President Putin and his government must not identify the core of the Chilean experience with its historically specific interruption of political liberties. Such a break has happened in many other nations, and in almost all cases, their generals-turned-presidents have not only been a disaster for their countries but have also left a legacy of more state intervention and corruption. I told my Russian audiences that the replicable aspect of the Chilean model is the radical, comprehensive, and sustained move toward free markets.

That model not only doubled Chile's historic rate of economic growth (to an average of 7 percent a year from 1984 to 1998) and reduced the proportion of people living in poverty from 45 percent in 1987 to 22.2 percent in 1998. It also unleashed the forces that brought liberal democracy and the rule of law. Those who argue that a nonelected legislature was necessary to accomplish those beneficial free-market reforms are not only factually wrong but also weaken the case for democracy by implying that correct public policies cannot be understood by the people and their elected representatives. Having helped "export" Chilean pension reform to ten very different countries, I can attest that the indispensable element common to these reforms was not a strong four-star general but a team of determined policymakers who knew that freedom works -- and that the people would understand that concept if it were well explained.

If President Putin is convinced, as he has said he is, that economic freedom is the road to high growth, he can find such a team in Russia to implement the reforms necessary for the transition to a modern free economy and to achieve an economic and political status consistent with the nation's cultural achievements. Indeed, with a GDP smaller than Spain's (a country of 39 million people), Russia is performing far below its potential. Both the president and his 146 million compatriots are painfully aware of this.

Russia is like a giant in chains. Aleksandr Solzhenitsyn expressed it best when he ...

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