Büchi - Economic Transformation of Chile - R. Leiva
Büchi - Economic Transformation of Chile - R. Leiva
Büchi - Economic Transformation of Chile - R. Leiva
Transformation of Chile:
A Personal Account
The Economic
Transformation of Chile:
A Personal Account
__________
Hernn Bchi
Contents
vii
Prologue
During the preparation of the English-language edition of this book, the
world experienced the global financial crisis in September 2008, of
which the bankruptcy of the investment bank Lehman Brothers is the
best known symbol.
It is interesting to note the ways in which the events of the current
crisiseconomic collapse, weak bank balances, loss of confidence in the
financial system, drying up of credit, and further deterioration of the
economyare similar to those of the system-wide crisis experienced by
Chile in the early 1980s at the halfway point of that countrys economic
reform process. While the scale of the crises may be different, their
dynamics are similar, because both deal with phenomena that affect the
behavior of economic actors.
Even more remarkable is the fact that the political issues at stake
todaywhether or when the central bank should intervene, whether or
when the government should use public resources, how much moral
hazard there is in bailing out lenders, the best tools to use, how to get the
financial system going again, and what a future regulatory framework
should look likeare also similar to those debated in Chile back then.
Moreover, while the world has not seen a crisis of this magnitude
since the Great Depression of the 1930s, financial crises have been
common around the world in recent decades. These have common
features, and have affected developed countries, like Sweden, as well as
developing countries, like Chile. The crisis suffered by the latter during
the early 1980s has features that make it worth studying.
The economic collapse and the costs assumed by the Chilean
government in order to restructure the financial system in the 1980s
place that countrys crisis among the most significant relative to the size
of the countrys GDP. Nevertheless, the subsequent recovery was rapid,
and the long-term growth and economic reforms that followed were
extraordinary and without precedent in the countrys history.
viii
It is impossible at this time to redirect the bulk of this volume to deal
with the current global financial crisis. That is a task better left for other
analyses. However, it is worth highlighting certain common features and
lessons learned, in the following pages, given that this edition is nearing
publication as the most serious financial crisis since the Great Depression
unfolded.
The first feature is the facility with which an economic problem can
lead to a financial crisis and recession of unprecedented magnitude. A
small rolling rock can create a devastating avalanche when a vicious
cycle is allowed to develop. It begins with the loss of confidence in the
financial system, followed by a drying up of credit, which then leads to
more serious economic problems.
The lesson is clear. Action must be decisive and timely, carried out
with the instruments at hand to prevent a chain reaction. But this is easier
said than done, especially if at the beginning of an apparent crisis it is not
clear whether the problem is systemic or restricted to a few institutions or
individuals. Moreover, economic crises are difficult to understand, for
both policymakers and the general public.
The main problem lies in the role and structure of the financial
system. Economies function on the basis of trust. This is especially true
in the case of banks, which are the nerve center of economic activity.
Unfortunately, the way in which these wealth-creating institutions have
evolved places them in a precarious position relative to a generalized loss
of public confidence. Their obligations are mostly of a short-term nature,
and are in liquid capital of fixed nominal value. Their assets, on the other
hand, are not, even when they appear to be.
Short-term credit granted to a company ceases during a general
liquidity crisis, because it becomes difficult for the company, regardless
of its solvency, to pay it back. A bond with wide marketability before the
wholesale loss of confidence loses its liquidity and quickly loses much of
its value when the crisis lets loose. In the past, depositors would make a
run for cash. Today, developing countries make a run for hard currencies,
ix
and in the current crisis, depositors around the world have sought refuge
in U.S. Treasury bills.
Because governments have given their central banks a monopoly on
the issuing of currency, they are the only entities that can act in crises
like the current one, providing the instruments that the public and
business sectors then begin to demand in greater measure. And because
such events are infrequent, laws and regulations lag behind events. This
aggravates the crisis by making the policy decision process more
difficult. For example, it is not unusual for the market to have given rise
to institutions that are essentially banks, but which the law does not
recognize as such. This creates a situation that makes the central banks
role as lenders a last resort more difficult.
Without a doubt, indecision by policy makers was exacerbated in
Chile, and similar indecision has exacerbated the current global crisis. In
some ways, the job of central banks is more difficult in developing
countries, where, when a loss of confidence occurs, economic actors flee
toward hard currencies, usually the U.S. dollar, which local central banks
are unable to provide. In the current crisis, the run was toward U.S.
Treasury bills, the value of which is determined by the American
government.
In the case of Chile, two major factors in unleashing the crisis were
the collapse of the terms of exchange and a violent shift in external
financing.
In Chile, once the crisis was overcome, laws governing banks and
other financial institutions were restructured in order to create more
efficient mechanisms to address future insolvency crises. Loans coming
due at the time were given priority of payment. An expedited process
was created whereby other creditors could approve or reject
capitalization agreements with their debtors, thus making the different
institutions liabilities less rigid. At the same time, banks were required
to maintain cash reserves equal to their deposits with priority of payment.
This was all done with the intention of making the central banks job
easier, by not subjecting it to the dilemma of providing liquidity while at
x
the same time using public funds to bail out lenders. The latter occurred
in Chile with external credit and other deposits, either through the
granting of government guarantees over such contracts or through the
direct infusion of capital by the government into the most seriously
affected institutions.
During the current crisis, the policy proposals that have been put
forth in various countries have been varied, but they all share increased
capital requirements as a major feature. Another common proposal has
been that of preventing institutions from becoming too big. In reality,
this latter proposal is debatable, because problems are equally difficult to
overcome whether they affect a few large institutions or a lot of large
ones at the same time.
Reforming the regulatory framework, as is being considered today,
was also a priority during the Chilean crisis in the early 1980s, when the
aforementioned framework was modified and improved. However,
Chiles situation was different. The crisis then occurred in an emerging
market, without a strong regulatory and business culture, while today we
face a globalized world rich in traditions and a wide network of state
regulatory institutions. It is doubtful, as was in the Chilean case, that the
current crisis can be attributed mainly to a lack of regulation, so we need
to be careful and precise in enacting future reforms.
Finally, in Chile, a very important part of the recovery process
consisted of identifying mechanisms by which to restore the solvency of
banks and other financial institutions. This was not easy in a country
suffering from a significant loss of wealth and lacking a developed
capital market. Moreover, it was important to accomplish this without
running the risk of nationalizing aforesaid institutions for an extended
period of time.
Various mechanisms were tried, such as the purchase of bad assets
by the Central Bank that were under an agreement of concrete
provisions. When the government provided capital, it allowed taxpayers
to acquire shares long term, allowing them to pay for them from future
xi
tax payments. Tax levies were also modified in order to allow banks to
retain a greater part of its cash flow.
Additionally, the government aided bank debtors whom it considered
economically viable, partially freeing them from the risk of the
depreciating peso in the case of debt in foreign currencieswhich, as
noted, had been taken on when the country had a fixed exchange rate that
had to be abandoned during the crisis. The government also restructured
loans, mainly home and small business loans, to include more convenient
payment periods and interest rates in both local and foreign currencies.
These policies provided rapid relief to debtors and prevented a huge
number of bankruptcies and the consequent costly liquidation of
foreclosed and repossessed assets. It allowed individuals and businesses
to renew their normal activities and attend to their financial obligations.
This led to a better rate of recovery by creditor banks.
The external debt did not experience a cutback of capital, but it did
have an extension of payment periods. This gave some creditors the
opportunity to sell off debt at market prices, a process that was enabled
by securing debt by both foreign and Chilean investors, under titles
XVIII and XIX of the Chilean Central Banks new exchange rules. Major
companies saw their capital increased and their owners change through
this process. This launched a new awakening of the countrys
entrepreneurial spirit.
Recently, we have seen several developed countries adopt multiple
policies with the purposes described above. Some are similar to those
implemented in Chile in the 1980s, and many are not. Hopefully, as
happened in Chile, in the near future we will be able to say that
confidence has been restored, the economy has recovered and grown as
never before, and capital markets emerged strengthened.
However, to achieve all of this, the required policies need to be
implemented today. Most of the world still does not understand what
happened to the global financial system, or how a problem in an
important but relatively small sectorreal estate, particularly subprime
mortgageslaunched a collapse of the world economy.
xii
We are bound to see many studies and doctoral dissertations on this
topic, perhaps even a Nobel Prize. However, well before that time,
policymakers must act today to help overcome the crisis and resume the
rapid growth of previous years. In Chile, during the 1980s, looking back
at historical precedent proved very useful. Surely, for policymakers
today, it will prove just as effective.
xiii
Introduction
It has been fourteen years since the first edition of this book was
published, so we thought it was important to issue this revised edition.
It has not been our intention to write a new book, but to complement
the first editions analysis with the insight gained by the intervening
years. In that spirit, we have avoided making substantial modifications
and have simply provided a context for the events described in the
original document from the viewpoint afforded by the passing of time.
By the same token, we have decided to mention a few subsequent events
that were difficult to ignore, given their relevance to the contents of the
book. Consequently, the book should be read with the context of the
nineties in mind (except for the situations that needed updating, as
previously explained).
Specifically, Chapters 1 and 2 have been modified to provide
historical context for readers who were not there or who do not
remember the actual events. This was not necessary during the early
nineties, when we published the first edition, since facts and their
circumstances were then vivid in peoples memories. Moreover,
proximity in time would have made it impossible to try to approach these
events from a historical vantage point.
In the chapters that describe major reforms in detail, the changes are
intended to update or include facts both relevant to the account and
necessary to understand subsequent events (although this update is
neither complete nor exhaustive).
A new final chapter has also been added, to analyze the evolution of
the reforms between 1990 and today, the dates of which correspond to
when the Concertacin, a coalition of political parties, took office and
still holds executive power today. Once again, it is meant to be a broad,
rather than detailed analysis, since this issue in itself would probably
warrant a book of its own. The most outstanding aspect in this enquiry is
the causal relation between the significant and comprehensive reforms
xiv
designed and carried out during the seventies and eighties, and the
progress that Chile has experiencedwhich was remarkably rapid until
1997 and more tempered after that.
The influence of the reforms that crystallized in the second half of
the eighties is decisive in all of the areas in which progress is observed
after the nineties. For example, the definitive moderation of inflation can
be explained by, among other reasons, the financial discipline shown
both by the Treasury and by public enterprisesa process that took time
and effortand by the Central Bank, whose final structure was
established in 1989 and is still operative today. The beginning of rapid
economic growth can be traced to the countless reforms in different
sectors that made possible spectacular growth in areas as diverse as
copper mining and forest exploitation. The rapid economic growth that
was enabled by these reforms, combined with a great number of social
policies that were already beginning to bear fruit in the early nineties,
resulted in improved social indicators.
The slackening in economic and social progress over the last ten
years cannot be ascribed to the fact that the level of well-being reached
in Chile makes it difficult to maintain rapid growth rates. This,
unfortunately, is not the case. Empirical evidence shows that some
countries have experienced spectacular changes in their development
levels over the last forty years. Countries that have managed to leave
poverty behind and increase their level of well-being have done so by
maintaining high growth rates during at least three decades.
The explanation for this waning in Chiles growth rate lies mainly in
the weaker conviction toward providing the necessary conditions for
generating wealth and employment shown by successive governments
after 1990. Despite thisand perhaps despite governments themselves
the optimistic aspect that I can highlight is that citizens who have
profited from the countrys progress by gaining access to a job, to a
decent home, and to better health and education for their families
instinctively recognize the conditions that benefit them. Therefore, this
population is the critical mass that makes it easier to get back on course
xv
if national leaders finally lay aside obsolete ideological visions and
provide them with the conditions necessary for development.
After revising this book fourteen years later, it is striking to find it
still relevant today. However, this relevance has both an upside and a
downside. The upside is that the general principles that inspired the great
reforms accomplished are applicable to countries that are just setting out
on reform or have yet to do so. The downside is that in many areasfor
instance, laborarguments that should have been moot long ago are still
being brought up in opposition to reform. Behind reality lies the
explanation for the gradual decrease in growth rates seen over the last ten
years.
This fresh reading reminds me of an important lesson: in order for
policies to be successful and long lasting, they must be comprehensive
and sufficiently deep, and they must tackle the fundamental economic
questions. Given these conditions, reforms take on a life of their own,
thus becoming harder to modify in the future, when the excess of
ideology interferes with development.
This experience can be verified across different areas. In areas where
reforms were more comprehensive, they have endured (or have been
more difficult to change). On the other hand, in areas where they were
weaker or incomplete, backsliding has been significant. For example, if
we look at areas such as health or pensions, we find that the former has
come to a standstill and has had to overcome countless obstacles in
recent yearsleading to worse results. Reform in the pension system, on
the other hand, has remained strong and it is only in the last year that
proposals for modifications have been made. These proposals maintain
the foundations of the system while adding universal benefits more
appropriate to a welfare-state model and their effects remain to be seen.
The inertia of policies, both good and bad, lasts much longer than a
single presidential term.
Critics of Chiles social and economic transformation, who in the
early nineties still questioned the benefits of the reforms carried out by
the military government, never imagined the results that the reforms
xvi
would bring about in decreasing poverty, lowering child mortality,
increasing access to higher education, and making advancement
available to all Chileans. Yet these results are real today.
Transforming a countrys economy, thus enabling its population to
reach higher standards of living, requires awareness that reform is not
owned by any specific group or by any political partyor even by the
government that accomplished it. Effective public policies belong to the
people and are an integral part of the country that implemented them.
When this concept takes root, people rationally defend the policies rather
than seek to undermine them through the political process. Ideally, good
policy will become an integral part of a countrys culture. Unfortunately,
Chile has not managed to incorporate all of the elements that foster
development into its values and culture. It has embraced some, but not
all. And that explains some of the backsliding.
CHAPTER ONE
Summer of 1975
It all began for me in the summer of 1975, while I waited for a bus on a
hot street in Santiago. I had recently returned from the United States,
after taking a two-year post-graduate course at Columbia University in
New York, and was still feeling a bit of a stranger in my own hometown.
I was planning to work at a consulting firm with a group of friends and
eventually set up a construction company.
Our plans were already underway and were most likely on my mind
when an old classmate turned up at the bus stop. That encounter changed
my plans completely. My friend told me that he was working for the
government National Planning Bureau, known as Odepln (Oficina de
Planificacin Nacional), which at the time was committed to carrying
out an economic restructuring and recovery program, and was in need of
a large number of young, qualified people to work in the Economy and
Treasury ministries.
A year and a half had passed since the onset of the military
government headed by General Augusto Pinochet Ugarte. By then the
foundations for the transformation of the Chilean economywhich by
the mid-nineties had become known as an economic miraclehad
already been laid down. Although the military had managed to impose
order at the top, the imbalances and distortions effected by decades of
state control still endured. The performance of state enterprises had
improved, but these companies were still generating astronomical losses.
The state was disproportionately large, and the allocation of resources
escaped all notion of efficiency. Scope for action in the private sector
was very limited, and capital flight of companies was a widespread
phenomenon. Furthermore, Chile was still locked in a closed economy
model. A scant fifteen months into the military government, the situation
was difficultdifficult due to international hostility, difficult in the
aftermath of the oil crisis that put an end to Chiles best decade in terms
2 Summer of 1975
of trade in a long time (19641974), and difficult because unsolved
structural management problems were weighing down the economy.
My friend explained that the first priority, then, was to straighten out
the management of public enterprises, which accounted for no less than
half of the governments deficit. In his opinion, things were being
handled competently and seriously, with the long term in mind.
Why not consider the possibility of cooperating in this task, even if
it were just for a short time? he asked me point blank.
I did, and my time in the governmentfifteen years in allwas not
short. Between 1975 and 1990, I contributed in various areas, working
toward the transformation of the country: first as an adviser for the
Economy Ministry, later as Undersecretary of the same ministry (1979
1980), Undersecretary of the Health Ministry (19801983), National
Planning Minister (19831984), Banks and Financial Institutions
Superintendent (19841985), and Minister of the Treasury (19851989).
This process involved the effort of many people for whom I later had a
chance to speak as their candidate for the presidential election of
December 1989.
I witnessed how, amid failures and victories large and small, Chile
underwent a truly revolutionary liberalization process. I also saw the
country successfully overcome the abrupt fall in its terms of trade that it
experienced in 1974. Later on, the country was also successful in
defeating the external debt crisis during the eighties, before any other
country in the region did so. I was part of a team that prevailed over the
challenges posed by that crisis, which affected the global financial
system and forced us to restructure banks, among other things. None of
these challenges was free of difficulties.
Despite all of the difficulties and challenges, this proved to be the
most important period in my professional life. It was an exciting time,
during which it was my responsibility to become engaged in numerous
action fronts in the modernization program carried out by the Chilean
military government.
Hernn Bchi 3
Deep down, I think that this group, this government, and the
circumstances that Chile was going through in those years gave me great
opportunities to strengthen my interest in the countrys development and
to draw on my ability to put principles and concepts into practice,
applying them to the cause of creating opportunities for the countrys
poorest. This possibility of translating scientific abstractions into
actionsignificantly affecting the lives of people and of societywas
what truly captivated me and kept me in government longer than I ever
would have imagined.
When I joined in 1975, the outlook might have been ominous, but
the pervading spirit at the economy ministry was optimistic and full of
confidence.
4 Summer of 1975
government fell, the countrys annual inflation rate was 286 percent, and
it reached 508 percent three months later, after a few distortions created
by fixed-price policies had been amended. External accounts were out of
control and the governments deficit exceeded 25 percent of GDP. In just
three years, the socialist government increased the countrys foreign debt
by 23 percent. With the benefit of hindsight, and bearing in mind that
while all this was happening the country was still profiting from the high
price of copper, it becomes even easier to understand how misguided that
governments ideology was.
By the end of Allendes administration, savings and gross domestic
investment, at 6 percent and 7.9 percent respectively, were at their lowest
since the early sixties. Since 1970, the economy had been registering
successive and significant balance-of-payments deficits. The state was
gradually taking control of means of production, through
nationalizations, expropriations, confiscations, and interventions. As a
result, the direct managerial participation of the state in the economic
output of all sectors rose to over 73 percent in 1973, except in
manufacturing, where it rose to 40 percent. There were price controls on
most essential goods, under the excuse that fixing prices was needed for
lower income citizens to have access to those goods. Protectionist levies
were such that a 105 percent average nominal import tariff was in effect
at the end of 1973 (with maximums ranging between 220 percent and
750 percent), as well as a variety of non-tariff restrictions, to all intents
and purposes precluding the import of qualified goods in over 3,000 of a
total of 5,125 existing tariff positions.
During the Allende governments last year, 1973, the country was
practically paralyzed by workers strikes. Violence ruled the streets. The
General Secretary of the Socialist Party suggested setting up a peoples
tribunal made up of the workers trade union federation (Central
Unitaria de Trabajadores, or CUT), industrial associations, and other
groups, in order to judge the political and economical delinquents who
are directly responsible for the state of sedition promoted by
Hernn Bchi 5
reactionaries...1 Chaos reigned. Although it is not essential to this
account, it must be emphasized that this chaos was not only economic
but, fundamentally, also social and political. The imprint of socialist
ideology was also clearly visible in the political area, as was its intention
to monopolize political power completely, even when it meant
disregarding the rule of law. Therefore, the Chamber of Deputies voted
on August 22, 1973, stating that, the present Government of the
Republic has, from the start, attempted to gain complete power, with the
obvious purpose of subjecting all individuals to the strictest state control,
both economic and political, and thus establish a totalitarian system. In
turn, several months into the military government, Patricio Aylwin,
president of the Christian Democratic party (and later my opponent and
the winner in the 1989 presidential elections), fully justified military
intervention. He said that the economic crisis, the attempt by Unidad
Popular to monopolize power by any means, the moral chaos, and the
institutional destruction to which Mr. Allendes government has led the
country, have caused the level of collective despair and anguish in most
Chileans that precipitated the Armed Forces uprising
Essentially, the failure of Salvador Allendes project is connected to
the irrational faith shown by Chilean socialism that life and society could
change, and in fact would change, as a result of top-down institutional
measures that would presumably be able to change black into white. This
same top-down, command-and-control approach justified the use of any
means to achieve those ends.
I have always felt deep mistrust for such hubris. Socialism tried to
clothe itself in scientific robes, using extremely complicated formulas
and relatively high-sounding terminology, but at its core, it was nothing
but a crude utopia, supported by feet of clay. As an ideology, socialism
was nothing more than messianic belief based on principles such as the
following: that people could improve their lot without sacrifice and
personal effort, that the right to private property goes hand in hand with
1
6 Summer of 1975
injustice, and that the only important issue is not how to produce more
wealth but rather how to distribute it. In reality, however, these are
nothing but crude and foolish fantasies.
It seemed to me, at the beginning of the seventies, that this kind of
system could never work, and the proof provided by Allendes
government in Chile was categorical and conclusive. It anticipated the
failure that would become manifest on a worldwide scale only two
decades later. Socialism was doomed to failure. On analyzing the
outcome, I think that we should be surprised not so much at its downfall,
but at the fact that it survived for as long as it did. The only explanation
for this is the brutal degree of control that it imposed on entire societies
through propaganda, the manipulation of intermediate organizations,
political control, police repression, and expropriation of all potential
expressions of free life in society.
In addition to the harsh methods, which socialist governments used
to monopolize power and control in the former Soviet bloc, socialist
doctrine effectively capitalized on the idealism of Western intellectuals
to gain a foothold in the West. My generationand many otherswere
captivated by the rhetoric of state control and the panaceas it offered.
Socialism did not offer a solutionfor it was not a solutionbut rather
the hope that the situation of the underprivileged would improve, and
based its legitimacy on this faith.
Time proved this promise and this belief to be irrational. Latin
American history did not follow Fidel Castros lead, as every progressive
voice raised in the seventies had claimed it would. At the end of the day,
not only did socialism fail to live up to the expectations around the world
that it had fed on for years, but it also revealed a sordid sideespecially
in the Eastern bloc countriesin terms of injustice, privilege,
arbitrariness, oppression, corruption, terrorism, jails, clinics, control
systems, and repressive mechanisms of refined cruelty. Glimpses of this
had already been seen during the socialist government years in Chile.
Two decades later, following the dissolution of the Soviet Union and the
fall of Honecker and the Ceausescus, much more would become known.
Hernn Bchi 7
Once againeven though it means stretching beyond the scope of
this documentwe cannot avoid reflecting on how good intentions and
promises of hope can lead entire countries down the road of disastrous
policies that only sow poverty and conflict. Socialism and communism
are not unique in this respect. This could prove an important area for
historical and sociological analysis: to identify clearly the institutional
and cultural elements that prevent societies from embarking on ventures
of this type, which lead to such colossal costs, especially for societys
poorest.
8 Summer of 1975
Commitment by the Government: The Roadmap
It was General Augusto Pinochet, hardly an eloquent but certainly a very
tenacious military man, who dared to challenge voguish myths and put
the countrys economic transformation into effect. The most important
decision made by the new government in the early seventies was to
follow the path prescribed by reality rather than by ideology, opening the
economy to the world at a time when global trends pointed in the
opposite direction: national economies under firm state control.
Long before Margaret Thatcher (19791990) liberalized the
economy in Great Britain or Ronald Reagan (19811989) led the
conservative revolution in the United States, Chile carried out a number
of privatizations and deep structural economic reforms. By becoming one
of the most open economies in the world, the country became a pioneer
in privatizing inefficient state companies and in promoting private
enterprise. Twenty-five years before the European Union made balance
of fiscal accounts a membership requirement, the military government
included it among its economic objectives.
In October 1973, the government lifted price controls on almost all
goods. The prices of only about 30 articles remained fixed, while over
3,000 were freed up. However, not all of the signals sent out by the
government at the time were encouraging. There were serious and urgent
needs in all areas. Not only did the Central Bank lack reserves, but the
country faced a $400 million deficit. Additionally, there was not full
consensus within the governments economic team as to what path to
take. Murmurs, alarmist voices, and attempts to prove that the economic
team was leading the government and the country to ruin, constantly
reached the governing Junta, is Chilean writer Arturo Fontaine A.s2
recollection of those days. The government undertook unpopular but
necessary measures to straighten out the countrys accounts.
Liberalization of prices was accompanied by a strong devaluation. Prices
Hernn Bchi 9
skyrocketed, and the direction of the countrys economic policy was
increasingly called into question by all sides.
This is what makes politics so complicated. Political options are
hardly ever black and white. There are gray areas, conflicts between one
value and another and, quite often, serious internal contradictions. No
group is free of philosophical misunderstandings and personality
conflicts.
Deeply immersed in this social, economic, and political milieu, the
two main architects of these transformationsMinister of the Treasury
Jorge Cauas, and Minister of Economy Sergio de Castroprepared a
recovery program. In April 1975, Law Decree 966 was enacted, naming
Jorge Cauas Superminister and granting him the greatest economic
policy-making power that anybody ever had in Chile in the twentieth
century. His designation was an attempt to correct the existing lack of
coordination and to establish homogeneity in an area in which
undisciplined strongholds made commitment to a uniform and consistent
policy implementation plan difficult. The plan reaffirmed the goal of
implementing the principles of a market economy. Concretely, it meant
applying shock treatment by reducing government spending by 20
percent, dismissing 30 percent of public employees, and privatizing most
state enterprises.
It is important to note that, in addition to the disaster bequeathed by
Allendes government, at that time the Chilean economy faced a
dramatic change in external conditionsfrom the surging price of oil to
the falling price of copperthat would never again reach the levels it
had during the decade of 19641974. Even without the depredations left
behind by Allendes socialist policies, these factors alone would have
made management of the countrys economy a difficult task.
What persuaded me to work for the government, given such
challenging and adverse circumstances? First, it was my belief that this
time things were being done differently. I felt that economic
policymaking was in the hands of a remarkable group of extremely
responsible and technically qualified people. I believed not only in their
10 Summer of 1975
optimistic new vision for Chile, but alsoand this is always important
that they were working without regard to partisan interests, both
individually and as a group. I saw no hidden agendas, which had
frustrated the good intentions of many governments in the past. Finally, I
was impressed by the steadfast vision that the team shared with General
Pinochet of a free, developed Chile, ready to offer equal opportunity to
all of its citizens.
The roadmap that guided the economic liberalization was a
document that became known as El Ladrillo (The Brick), drawn up by a
group of young professionals between the ages of twenty-six and thirtyfive. Concerned by the direction that the country was taking during the
socialist government, they met on a weekly basis and discussed
liberalization of prices, tariffs, real property, and banks. This group
formed largely under the auspices of a joint program run by the
Universidad Catlica de Chiles School of Economics and the University
of Chicagoworked conscientiously to develop a dispassionate
diagnosis of the Chilean economy. The task took a long-term view and
was implemented outside the scope of political partiesalthough some
of the economists on the team were active in rightist and center groups. It
seemed a quixotic endeavor. Everything was done with great discretion.
As far as documents go, El Ladrillo is neither very long nor very
comprehensive when compared to what was actually done, but it reflects
the development process of a different critical and intellectual
consciousness by people who were tired of being asked to believe in
implausible, farfetched promises. Eschewing the alarmist rhetoric and
socialist triumphalism prevalent at the time, they made a very important
contribution toward changing Chiles reality and destiny.
El Ladrillo, which placed individual freedom at the center of
economic activity, reached military circles and became the guiding
economic policy document for the duration of the military regime.
Barely three weeks into the new government, over 200 copies of El
Ladrillo had been distributed among the new authorities.
Hernn Bchi 11
The team that drew up this plan shared not only a desire to leave
economic stagnation and state control behind, but they also had another
important common denominator: they all had absorbed free market
theory at the University of Chicago. They set to work in 1973, and their
ideas became so important to the course that the country was taking that
they became known as the Chicago Boys.
Although by education I did not strictly fit the Chicago Boy
profile, I never felt like an outsider. On the contrary, I found respect,
acceptance, loyalty to teamwork, a genuine disposition to service, and
openness. I believe that the military rendered a decisive and fundamental
service to the country, which not only changed Chiles history for the
better, but also steered it toward an unexpected future of reconciliation
and prosperity.
The costs exacted on Chile by decades of socialist policies, and
carried to extremes during Allendes government, is beyond measure,
both in terms of poverty and deterioration in standards of living. It took a
leap in progress, sustained over decades, to overcome the past difficulties
and leave them behind. Strangely enough, many Chileans are still not
sufficiently aware of the reasons for the price paid or of who were truly
responsible for it.
12 Summer of 1975
As far as I witnessed, General Pinochet never rejected the reforms
proposed by his ministers, as long as they were appropriately presented
and defended, yet he never agreed to them easily. He listened and
insisted on hearing different opinions. Various groups holding
conflicting positions coexisted within the government. Reform projects
were subjected to the harsh scrutiny of different parties. There were those
who defended the governments political stability and refused to support
measures that might seem to contribute to further deterioration of the
populations economic situation. There were also economists who placed
their bets on long-term benefits.
The President moderated, arbitrated, persuaded, and, in the end,
either made the decisions or presented them toand defended them
beforethe government Junta. Behind each decision lay a web of
debate, research, conflict, pressure, consensus, and struggle. This is true
of any government task, even in an authoritarian regime. Restricted as
they may have been, the levels of participation in General Pinochets
government were much more sensitive to public opinion than is thought
to have been the case. Not even a government as strong as General
Pinochets could function in opposition to a whole countryin the long
run, no government can, especially when it is broadening individual
freedoms.
Economic liberalization in Chile had to overcome tremendous
adversity: generalized international hostility toward the military
government and negative external conditions for the prices of the
countrys exports, coupled with financial difficulties. However, these
same circumstances held one great advantage: rejection and isolation
killed any illusions about any alternative models for development. Such
alternative models have been the death of many other Latin American
governments, which were confidentas seems to have been the case in
Ral Alfonsns administration in Argentina (19831989)that they
could solve their economic problems based on the sympathies of world
public opinion and international solidarity. Such internationalist
utopian dreams turned out to be groundless and foolish. Dependency on
Hernn Bchi 13
international economic aid and handouts from rich nations is not only
humiliating, but also fundamentally unproductive. However generous,
international aid can never compensate or correct structural distortions in
an economy. In the end, aid can become a dangerous anesthetic. Even if
populist politicians reject the idea, aid never exonerates governments
from the compelling need to restructure, adjust, and modernize their
economies.
I believe it is best to be realistic when facing this responsibility. In
general, I reject fundamentalist beliefs, even liberal ones. Modernizing
our countries is not a task for gurus or preachers of messianic liberalism.
On the contrary, I consider it a challenge befitting sensible politicians
and reasonable expertspublic servants with keen insights not
necessarily acquired from books, but from experience, and who can
apply those insights to their work. In this area, unyielding commitment to
consistency, unbounded doctrinal zeal, and dogged ideological
determination often cause more harm than good. After all, achieving
liberal reform is not as difficult these days. Being an authority on the
subject is not a requirement. It is simpler than that. All one need do is
notice which economies have been successful and which have not. All
one need do is compare and draw a few conclusions. But one cannot just
stop at this point, as theorists tend to do. It is important to act on these
conclusions, realistically and imaginatively.
Hernn Bchi 15
CHAPTER TWO
Hernn Bchi 17
itself lay in the opposite direction from that in which the country had
been headed for decades. Credit is also due to the transformations having
been carried out realistically and seen through successfully to
completion.
At the time, defending the free market was no easy task. Not among
supporters of the new regime could one find agreement on the
advantages of economic liberalization. In that context, persuading the
population of the benefits of the free market was a tough sell. The idea of
the paternalist state was too deeply embedded in the national mindset to
be removed overnight. Minister of Economy Sergio de Castro, in a book
on his role in the reforms, describes the mental obstacles that he faced in
how exhausting it was to convince people. He points out:
I dont think we were fully aware at the time of the mental
restrictions we faced, because all military men reacted that way. Its true
that we found the same response from priests, trade unions, businessmen,
civil servants, CEPAL [United Nations Economic Commission for Latin
America and the Caribbean] economists, engineers, professors, etc. The
thing is that our basic postulate, that is, giving individuals absolute
freedom to do whatever they wanted in economic matters, seemed
inconceivable to a vast majority of the people who had been educated in
a different viewpoint and thought that this viewpoint only needed
corrections.1
We also faced constant and brutal criticism from the military
governments opponents. We were attacked in a particularly vicious and
uncharitable way. There was not a single criticism that we did not hear:
that our project was not only technically misguided, but also socially
genocidal and politically reactionary; that the development model was
tailored to suit the interests of a repressive and illegitimate dictatorship;
that it did not address Chiles needs; and that nothing we did would last,
Hernn Bchi 19
distortions for the extremely damaging consequences that had thwarted
the countrys development for decades.
To balance accounts, especially when external conditions for Chile
were worsening, meant above all to stabilize the economy and restore
some conditions of rationality that were essential to productivity.
However, in Chile the military regime intended to go quite a bit farther.
There was an urgent problem that had to be dealt with immediately:
putting out the fires that were consuming every sector of the Chilean
economy. But the fundamental question was how the country would
embark on a modernization process that would address the structural
dysfunctions and distortions throughout the economy.
The government acted simultaneously on both fronts. It did not
tackle modernization once the economy had been stabilized. The
campaigns for stabilization and modernization were concurrent. From the
outset, the emphasis was on addressing the chaos prevalent in the country
in September 1973. As soon as the economy was brought under control,
the government set out to work on its longer-term objectives.
The difficulties during this process appeared to be never-ending. The
price of copperabout which Allende had complained so much because
during his government it was lower than during that of his predecessor,
Eduardo Frei Montalva (19641970)began to drop at an alarming rate.
If Pinochet had enjoyed the higher real prices for copper that Allendes
government had, the challenge of stabilizing the economy would have
been far less overwhelming. As we have already mentioned, the price of
copper from 1964 to 1974, when seen in historical context, were
exceptional. They would not reach comparable values again until 2005.
The transformation of the Chilean economy was launched in the
midst of a chaotic state of affairs. In October 1973, the same month in
which prices were freed and some measure of stability was attained, the
OPEC oil embargo struck, causing a dramatic deterioration in Chiles
terms of trade. By the next year, Chile was paying four times more for oil
and selling copper at half the price.
Hernn Bchi 21
until the debt crisis in 1982. That year the global financial crisis, with
interest rates of over 16 percent, hit all developing countries, including
Chile.
At the time that the crisis hit, the country began a new phase of
reform, which lasted from 1982 to 1985. This period was full of
uncertainty and doubt, but all things considered, the country kept on
track on the essentials.
And so it began, in 1985, the last period of the Chilean economic
revolution, which was my responsibility to lead as Minister of the
Treasury. During these years, the country managed to recover from the
debt crisis, reformulated the principles priorities of a market economy,
and intensified several modernizations. All in all, this reform period
came through the restoration of democracy with the government of
President Patricio Aylwin (19901994) unscathed, and has continued
give or take a few adjustmentsto the present day.
Hernn Bchi 23
occupied two ministries and the presidency of the Central Bank and,
despite the sense of urgency of the moment, managed to put together
teams that generated the changes needed to carry out the reforms.
The third factor was a belief in what we were doing that was strong
enough to transcend our individual interests. One way or another, we
were all part of and agents for a greater whole, which was not the
economic team or even the military regime, but the idea of Chile finally
being rescued from mediocrity in order to be able to take advantage of
the immense potential of its resources andmore importantlyof its
people.
Our background was mainly academic and, on the whole, we were
rather clumsy as far as profitable activities went. Any parallel business
would have been considered not only suspicious but scandalous. It is a
known fact that salaries were extraordinarily modest, and austerity within
the ministries, even in leadership posts, reached puritanical levels.
This idea translated into a mistrust of anybody making any personal
gain out of his or her position in government. The alliance between the
government, the banking system, and industrywhich had apparently
gone unhindered in countries such as Japan and Korea, and which
generated collusion and complicity between ministers and managers,
between companies and government institutionsbecame unthinkable in
Chile. If General Pinochet and the military accepted the economic model,
it was because, among other things, it preempted discretionary measures.
The tight relationship between governments and companies, which
during the eighties was considered peculiar to the Asian Tigers
resulting in major concentration, favored export sectors being arbitrarily
chosen, and industrial policies being forged on the basis of exemptions
and privileges. This situation, in which the state places its bets on
specific economic sectors, would never have worked under the military
government.
This not only guaranteed greater economic efficiency, but also
created a cleaner and more transparent public administration. Chile was
probably able to optimize its investments efforts because, to a great
Hernn Bchi 25
interested in at the timebut especially at the grassroots level, among
ordinary people.
That is a fact: transformations cannot be carried out when the whole
country is against them or when the initiatives are not accepted by the
citizens. It will not work, even, as I have noted, in an authoritarian
government such as General Pinochets.
What we learned is that the approval level for reforms can always be
increased as long as the team promoting the changes has a detailed
knowledge of the problems that it is trying to solve. Knowledge is
essential regarding theory and practice, the broad lines and the detail, the
historical background of problems and of the current situation.
It is a thorough knowledge of thingsof the specific tax system
applied in a given activity, of the cargo dispatch system used in sea
transport, of the way companies that generate electricity and those that
distribute it operate, or of how public transportation in Santiago actually
works, to name a few examplesthat makes it possible to move the
discussion from the ideological sphere to the practical one and find indepth solutions, using creativity and common sense.
None of this was easy, of course. Talking about liberalization is not
the same today as it was fifteen or thirty years ago. The international
climate today is much more receptive toward free market solutions than
it was then. In the wake of socialist bankruptcy, the crisis of CEPAL
models, and the huge economic and political fraud played out in the
eighties by Latin American populism in its various styles, the
convergence of viewpoints is much greater. For example, the mention of
the word privatization is no longer scandalous.
Hernn Bchi 27
new governments sense of urgency, conditions were ripe for a drastic
change of course.
A Few Observations
The catastrophic panorama in Chile in 1973 calls for a few qualitative
observations:
This was a homemade crisis. Unlike other crises that the country
experienced later on, which were induced by external factorsthe
first oil crisis in October 1973 and the debt crisis in 1982the crisis
during Allendes last year was brought on solely by irresponsible
economic policies. One need only remember that, when confronted
by the concern expressed by vast sections of public opinion over the
excessive growth of the money supply (119 percent in 1971, 139
percent in 1972, and 337 percent in 1973), the president of the
Central Bank at the time remarked that this was a bourgeois
variable, and irrelevant to the construction of Chilean-style
socialism.
The lack of control in the Chilean economy between 1970 and 1973
was a radicalized expression of the Keynesian panaceas so widely
practiced and recommended in the sixties. It was a period of
accelerated expansion, but it was also a period of recklessness. In
fact, world growth rates were very high during those years, except
in Chile, because even during the 1960s boom, the country was
bogged down by state controls. Between 1950 and 1970, the yearly
GDP growth rate in Chile was only 1.4 percent, whereas in
developed countries with comparable income levels it averaged 3.1
percent.2
Governments at the time thought they had found the philosophers
stone of prosperity and wealth. At the first sign of economic fatigue
or contraction, they resorted to expansionary monetary policies,
which began turning the wheels of growth again. At first the
2
Hernn Bchi 29
The entrepreneurial spirit had practically died out. The best that a
student could hope for was to find a job in the public sector or in
one of the companies controlled by the state. Complex cultural,
historical, and anthropological hypotheses were posited both at the
university level and in conservative circles regarding Chileans lack
of drive and disinclination for business and hard work. Why were
our people not as disciplined as the Germans? Why were we not as
hardworking as the Japanese? In the search for answers to these
questions within the national soulin the collective unconscious
resulting from an ill-fated cross between the natives (allegedly
rather lazy) and the Spanish (allegedly good warriors but bad
producers)no one stopped to think that this, more than a racial
limitation or defect, was a problem of incentives, of an oversized
state, and of a suffocated private sector. Nobody stopped to wonder
why South Koreans, for exampleAsian spirituality
notwithstandingwere at the time achieving economic growth rates
that even the most developed countries in the world would have
wished for.
The Questions
Was the reorganizing and adjustment process of the Chilean economy
botched? Could things have been done differently? Which costs can be
ascribed to the Cauas plan and which must, on the contrary, be put down
to the socialist experience and the oil crisis? How manageable were the
problems that the economy began showing in 1982? How much progress
had been made since then? Did the 19821984 crisis mean that a fresh
start had to be made? To what extent can it be argued that the model was
unresponsive to social issues?
This book is an attempt to answer these and other questions. The
following chapters move in that direction. But explanations, counterexplanations, details, and clarifications aside, the basic facts need be kept
in mind: the facts of a country whose decisions during the seventies went
CHAPTER THREE
Hernn Bchi 33
force prior to 1970. There is no doubt that if that had happened, Chile
would have simply continued marching through the miasma of ideology
and underdevelopment, much like Venezuela or Argentina, whose GDP
per capita in the fifties exceeded that of many European countries, are
still doing.
Hernn Bchi 35
prices, and fixed prices. The process was as much political as it was
economic, and it took several years to reach full liberalization.
External Opening-Up
The first stage in tariff reduction took place in 1974 and comprised three
general reductions. Tariffs ranging between 220 percent and 750 percent
dropped to a single 160 percent rate; those between 35 and 215 percent
were cut to between 5 and 65 percent, and tariffs below 30 percent were
not modified. But there were other adjustments that year. In June, the
maximum tariff was reduced further, but the lower tariffs were increased
to take them to desired levels. It is estimated that during 1974, the
average tariff dropped from 105 percent to 57 percent. The statistically
most frequent tariff dropped from 90 to 55 percent.
In August 1975, the second stage of the external opening-up program
set a 1035 percent tariff structure as its objective. A reduction schedule
was drawn up to this end; some steps were accomplished ahead of time,
and the goal was reached ahead of schedule, in August 1977.
The announcement of the goal of a uniform 10 percent tariff
launched the third stage, on December 2, 1977; a new reduction schedule
was set up for the following eighteen months and, as a result, the single
tariff did not become fully effective until June 1979.
Thus, it took five years and three months in all to complete the
Chilean tariff reform. It is difficult to characterize this today as a
devastatingly short period. It seems an extremely reasonable time
frameassuming that the objective was to actually open up the
economy, not to leave it as closed as it always had been. In any case, we
must not forget that later on, during the debt crisis in 1983 and 1984,
tariffs increased again to 35 percent, but were very soon back to 15
percent, and to 11 percent a few years later. These fluctuations reflected
moments of doubt between keeping on track and returning to the past.
Hernn Bchi 37
country either must make titanic efforts to increase its internal savings or
resign itself to falling into debtwith all of the risks that this entails and
which Latin America suffered firsthand in the eighties. The huge irony in
all of this is that in the end, an oversized external debt compromises
national sovereignty much more than foreign investment does. In fact,
Latin American treasury ministers spent the entire decade of the eighties
negotiating and renegotiating their foreign debtshardly an edifying
spectacle. This anxiety could have been avoided if the debt resources had
been obtained through foreign investment. In that case, the investors, not
the authorities, would have had to deal with the problem.
The central idea behind the whole opening-up effort was that Chile
would develop only if it managed to become part of the world economy.
The provincial concept of socialist development had to be defeated once
and for all. The fear that underdeveloped countries would never be able
to improve their situation and would remain forever condemned to
exploitation at the hands of industrialized nations turned out to be
completely groundless. In practice, quite the opposite proved true. Poor
countries can afford to grow more rapidly than rich countries. It took
England, the leader of the Industrial Revolution, eighty years to double
its gross domestic product. It took the United States only forty. It took
Japan considerably less, and China reached this duplication in just seven
years. The reason for this global acceleration of growth is the fact that
the path to development had already been opened and did not need to be
discovered all over again. The logic of development has its mysteries.
Relatively underdeveloped countries become prosperous gradually and
achieve their first successes through labor-intensive industries. There
was a time when nothing was held in lower regard than Japanese toys
and other products. South Korea started out in manufacturing with
products that were quite inferior. There are many more examples.
Countries have to start somewhere. The important thing is to open up to
world economy in the process.
The belief that economies must be closed or, at best, form part of
closed regional blocs, is a mistake. This explains why Latin Americas
Exchange Policy
A large dose of realism, combined with the imperative need to introduce
deep, long-term counteractive measures, was the main characteristic of
Chilean exchange policy at the beginning of the military government. In
this field as well, the socialist administration had managed to do away
with the exchange market by means of multiple prohibitions, absurd
discriminations, and obstacles galore. This muddle of interventions
naturally projected numerous distortions over the countrys productive
sectors. Exchange arbitrariness was largely responsible for Chile
manufacturing many products in which it had no comparative advantage
whatsoever and neglecting the exploitation of areas and resources in
which it did. The foreign exchange market had been completely
dismantled and the dollar rate oscillated between the 25 escudos fixed by
the Central Bank for certain imports and its black-market exchange rate
at 1000 escudos.
Thus, the task was arduous. The function of the exchange rate as an
adequate standard by which to allocate resources needed to be restored.
Consequently, the first decision was to abolish the socialist governments
Hernn Bchi 39
multiple-rate system and correct the overvaluation of the peso, which
was changed from the escudo to the peso in 1975, and had accumulated
over the previous years. A 229 percent devaluation was implemented in
1973, and it is estimated that for food and raw material imports the
devaluation meant an increase exceeding 1,000 percent, because this area
benefited from formal access to a preferential dollar exchange rate.
Overall, the exchange system was restored, and a fluctuating
exchange rate was maintained until 1979. This rate varied in terms of
domestic and world inflation, and the level of reserves accumulated the
reduction of nominal tariffs and stabilization objectives. Adjustments
exceeded inflation when the price of copper fell (1975), when tariffs
were reduced (August 1974 and December 1977), and when the fixed
dollar was announced (June 1979) in order to establish a better
correlation between internal and international inflation.
Exchange rates readjustments were smaller when the combination of
fiscal, monetary and exchange policies resulted in a spectacular turn in
the balance of payments in 1975. The expected deficit had been reduced
by 80 percent, and foreign currency reserves were increasing at an
accelerated rate, surpassing all predictions. In the first few months of
1976 alone, reserves increased by $250 million.
In June 1979, the government announced a fixed exchange rate,
which remained in place until mid-1982. This exchange policy was
highly controversial, especially toward the end of the period. (Further
reference to this point will be made in the discussion of the 1982 crisis.)
Since 1985, exchange policy has been similar to the policy maintained
until 1979 in that rates were adjusted in terms of domestic and world
inflation, international reserves, and the general international payments
situation. The objective explicitly introduced in this period was to
maintain an exchange rate that would be consistent with a long-term
balance of payments and at the same time high enough to promote an
increase in exportsthe only way to solve the external debt problem for
goodwhich would lead the way to future growth for Chilean economy.
The idea was that the real exchange rate should be high for structural and
Monetary Redemption
Priorities in monetary management were clear from the start. The
effectiveness and credibility of national currency as a payment method
needed to be restored, after having been seriously compromised by the
socialist government. What else could be expected of an irresponsible
monetary policy in which all that the Central Bank did was to simply
keep track of the substantial amounts of money that it transferred on a
daily basis, following political orders, to financial firms and companies,
which had been intervened into by the state? For several years, monetary
management had been nothing but a system to finance the treasury.
The phase that the country was beginning, however, would require a
responsible monetary and financial policy that was capable of offering
efficient incentives to saving and expeditious channels through which
these savings could be geared toward credit for investment. This
necessarily entailed redefining the role of the Central Bank by orienting
it toward conducting monetary policy. It also implied the need to
generate a capital market that would have some degree of development
and independence. The increased scope for activity that was gradually
allowed to intermediary agents played an important role in the
liberalization process, including the perfecting of the indexation
mechanism created in 1968 by Freis government, the Unidad de
Fomento (UF), to ensure that interest rates were real, since inflation was
Hernn Bchi 41
still high. Without the UF, a unit of account that reflects variations in the
consumer price index in Chile, the currency would inevitably have had to
be pegged to the dollar, or rely on other less efficient mechanisms in
order to continue functioning into the long term.
The high interest rates prevalent in Chile during most of this phase
reflect not only the high cost of capital in a country that was extremely
de-capitalized at the beginning of this period, but also the difficulty in
creating a capital market in the country.
Hernn Bchi 43
understand that state enterprises must be, first and foremost, enterprises,
and as such, they are under an obligation to make a profit. If the
government or the community wants the railway company to reach a
remote little town or the price of kerosene to be less than its market
value, well then, that means the government or the community will have
to provide the required subsidies. But it is not a state companys role to
assume, in very questionable ways, social service missions that have
been poorly evaluated and often achieve nothing. Accordingly, it is
essential to define roles so that no one can claim to have been misled. In
my experience, solving problems begins with an awareness of the need to
not confuse the interests of the company with the potential interests of
society.
As in other areas, here too the economic team had to act innovatively
to make sure that independent public enterprises did not stray from the
economic programs general guidelines. The idea of setting up a holding
company to control them was never carried out. At times, the economic
team lacked the political weight to even appoint members to boards of
directors. Resorting to extremes, a decree was issued preventing public
companies from incurring any extra expenses or any debt above a certain
amount without the Treasurys approval. It was a seemingly drastic
solution, but there was no other way to keep the situation under control
in a moment of crisis.
Today there is much discussion in countries around the world about
what should be done first: restructure state enterprises prior to privatizing
them or privatize them immediately, just as they are, leaving it up to the
private sector to reorganize and modernize them. It is worth noting that
the Chilean experience in this area produced rather hybrid solutions.
They are not solutions that can be distilled into any general rule, much
less be followed as a recipe. Every country must determine a strategy and
draw up a schedule to suit its needs. In Chile, the only enterprises that
were privatized immediately were productive units that were very small
or that had been taken over illegally by the socialist government, via
Legal loopholes (resquicios legales) was the name given to the governments
practice of searching through legislation that was dated or had been issued in
different contexts, in order to apply it and attain an objective which was not
authorized by law; for example, expropriating a company by using a long
forgotten law passed in the thirties.
Hernn Bchi 45
just over 500 percent, but in the months prior to military intervention, the
speed at which destabilization was increasing implied much higher
annualized rates.
All this only seemed to be chaotic and the result of local
improvisation. In fact, the same script that had been followed in all true
socialism regimes, from Czechoslovakia to Cuba, from Poland to
Nicaragua, was being followed here too, to the letter. The strategy, quite
sinister in essence, was the sameto strengthen and magnify the
political power of the state system, come what may, to control companies
immediately either by direct expropriation or intervention, to destroy the
price system via outrageous inflation and subsequent price controlsall
with the sole purpose of weakening property rights. The end goal is to
confiscate, nationalize, and control everythingnot just the economy,
not just things, but people as well.
This totalitarian logic has been always the same, give or take a
couple of variations. And so it will remain. For totalitarianism, the
concentration of power is an ever-present, overarching goal. The threat
from Soviet Communism may have disappeared, but it would not be at
all surprising if other totalitarian systems were to appear in the future.
Several could crop up, for example, from radical environmentalism,
which today provides a pretext to attack private enterprise and the market
economy and to gain power over people, including those of us who are
genuinely concerned about nature. Their weapons will always be the
same. If the market is destroyed, all other freedoms become nominal.
Economic control gives political control teeth. That the process in Chile
was quite advanced is reflected in the fact that a political distribution
channel had begun to operate through the Committees of Supplies and
Prices (JAP, Juntas de Abastecimientos y Precios,), a source of so many
bad memories.
It seems strange that none of this was perceived as having been
premeditated, even by people in Chile who experienced this process
firsthand. The problems, beginning with rampant inflation, were
perceived as the consequence of ineptitude on the part of economic
Hernn Bchi 47
Hernn Bchi 49
importance, especially after 1977. The only year in which exports did not
increase was 1981, but at that time, the country was facing a huge crisis,
although we Chileans were not yet fully aware of it. It was not
businessmen who were to blame, but rather the imbalances about which
they could do nothing.
This process yielded important lessons, which proved valuable when
it came to perfecting the system. Many times tariff reduction is blamed
for problems brought on by the exchange rate. Businessmens
recollection of the dramatic impact of the opening-up process is more
closely related to the undervaluation of the dollar in 1981 than to tariff
reduction per se. The country did indeed swing between extreme options.
It was of course unthinkable that the exchange rate in Chile in 1981
could remain as high as it had been three years beforebut it was also
unreasonable for the country to function with the dollar as cheap as it
was that year. It is undeniable that those variations, which today seem
extreme, were accompanied by incredibly sudden changes in the
availability of foreign investment and in the prices of the products that
the country imported and exported.
Between 1973 and 1980, the Chilean economy showed unmistakable
and vigorous signs of recovery. After the sharp 12.9 percent drop in GDP
in 1975, the economys growth rate increased. The government chalked
up major successes in stabilization, although inflation was still quite
high. The balance of payments was increasingly favorable. The rate of
investment became steadier. Non-traditional exports reacted with
surprising dynamism. All of these factors contributed toward creating a
scenario of favorable perspectives. Granted, there remained some
unsolved problems, such as a low level of internal savings and an
alarmingly high interest rate, but by 1980 the country reflected barely a
shadow of the economic shambles in which it had been seven years
before.
This was the process headed by the first stabilization measures and
the first great structural reforms of the military regime. That is where it
CHAPTER FOUR
Hernn Bchi 53
numerous myths and impulses molded by decades of state
interventionism. That is when the connection between statism and
peoples legitimate aspirations for prosperity and security becomes
evident.
Guaranteed Success?
State interventionism takes advantage of those aspirations. The security
that things will not change for the worse, that nobody will lose his job,
that no inefficient factories will be forced to close, that no foreign
competitors will be allowed in, that nobody will be allowed to sell at
cheaper prices, that pensions will be generous and available for
everyone, are all held out as enticement. State control is a straitjacket that
binds and immobilizes the future, deactivates risks, slows down
technological change, and evades the challenges of innovation. For
example, Chiles vineyard law, issued in 1967, forbade planting new
vineyards, thus ensuring a perfect monopoly to established vintners, on
the grounds that this was part of the battle against alcoholism1. Nothing
could be worse than this, if the objective is to generate wealth. Wealth
does not spring from rigidity but from flexibility. It is not the fruit of
conservation but of change. It is not born of a rejection of the future but
of the ability of each society to meet future challenges and opportunities.
It does not come from a tendency to repeat the same thing day after day,
but from the challenge to innovate. An economy in which everyone
wants guaranteed success will be inert, stagnant, and regressive. It is the
worst possible scenario, because rigidity and stagnation lead to
ossification. This means that the rich will continue to be rich, even if
they make mistakes in their business deals, while the poor will continue
to be poor, however much effort they make to improve their lot in life.
Hernn Bchi 55
and intellectual tendencies enforced in the thirties. It was also because
the most acknowledged experts in many specialized areas with
traditionally weak legal or cultural links to the concept of propertysuch
as ports, telecommunications, or transport, to name a fewhad
internalized an interventionist mindset.
The sweep was almost exhaustive. However, some areas went
practically untouched. For example, absolutely no substantial initiative
was taken in relation to the workmens compensation system, for several
reasons. The system contained, and still contains, some reasonable
features. It works well and receives substantial support from the private
sector. On the other hand, at the time when social legislation was revised,
the system had yet to mature. The law creating it had been recently
passed. The system was not fully operational and the contingent of
workers it was to finance over the next decades had not reached
retirement age. A large part of the systems technical reserves were
invested in hospitals, and its books were satisfactory. But none of these
factors was enough to ensure that maximum benefits were being obtained
at minimum cost, as would have been the case in a competitive system
open to the participation of private administrators ready to provide the
same services. In spite of this, the effort required to embark on a
comprehensive reform was not worthwhile at that point in time, given
other priorities pending on the agenda.
If there is any general conclusion to be drawn from the
modernization that the military regime carried out in various sectors, it is
that the greater the degree of state intervention, the poorer the
performance of the area and, consequently, the easier the recovery. The
effort required was much greater in areas that had still not hit bottom or
in those whose performance, albeit not optimal, was at least somewhat
adequate.
In addition to regulations and institutions, it was also necessary to
reform thinking. Entire agencies would need to adapt to new objectives.
For example, a customs service or a bank regulator does not operate in
the same way under a socialist government as in a market economy. The
Agriculture
According to United Nations Food and Agriculture Organization
statistics, 5.7 percent of Chiles land is arable.2 This land became the
scene of one of the most violent episodes during Allendes socialist
government.
The scandal of land reform centered on the fact that land had been
taken from its ownersvia an expropriation process that did not include
adequate compensationand not handed over to anybody. Allendes
Minister of Agriculture himself warned that any estate exceeding 80
hectares would be expropriated. By the end of 1972, this threat had been
carried out in full.3 By 1973, over 4,400 properties totaling 6.4 million
hectares had been seized. The beneficiariesincluding settlements and
CORA cooperatives (Corporacin de la Reforma AgrariaAgrarian
2
Hernn Bchi 57
Reform Corporation)were nothing but political pasturing herds and
legal nonentities, or in some cases shell entities invented in order to
invalidate the right to property.
The agricultural sector inherited by the military government was in
chaos, not only because of the land reform but also because of a
systematic lack of incentives to national producers that was decades old.
Nevertheless, Chiles agricultural sector retained a substantial moral
reservoir of natural notions of land property, which socialism, despite its
best efforts, had managed to wound but not kill.
The advantage that the military government had in this field was that
legislation regarding farm property rights had existed from time
immemorial. Regulations were very clear and were part of the Civil
Code. No new legislation was required. For this reason, the
governments task consisted in reestablishing the notion of property to
wherever it had disappeared. The problem was serious, since more than
50 percent of the land with productive value had already been
expropriated. Not that the rest had escaped. Far from it; a high proportion
of the remaining arable land belonged to smallholders who in turn
created other types of inertia in the countrys agricultural development.
Nothing else can account for the fact that in 1973, the countrys
agricultural production was comparable to its production in 19364.
The restitution of agricultural property was carried out among high
political tensions. The way in which the agrarian reform was applied and
the situation it created in the rural sector was one of the Allendes
governments most critical fronts.
The attitude with which the urban middle class observed the
disintegration of rural society was strange and often contradictory. On
the one hand, the vast majority thought it unfair that the land should be
taken from its owners by means of the broad discretion that the agrarian
reform plan bestowed on officials. On the other hand, many believed that
the owners of large estates were largely responsible for the country not
4
Hernn Bchi 59
the entire productive cycle in agriculture was a lie, from the economics
point of view. None of the prices reflected what things were really worth.
Regularizing farm property rights took many years. The land reform
gave rise to an enormous amount of lawsuits, many of which were still
unresolved in the mid-eighties. There was even a law that offered people
who sued the government the option of trading their claims for shares in
the companies that were privatized during my time as Minister of the
Treasury. Only then was the cycle of wealth transfers, which the reform
had set in motion, completed. Generating alternative channels for buying
supplies and restructuring the price system and the marketing
mechanisms of agricultural production also took a long time. The
government went on granting grain loans much longer than it would have
preferred to do. The idea was that the state should withdraw from the
sector as soon as possible, but in the case of some products this took
quite some time. Price bands, which to this day trigger so much debate,
reflect this gradual process of introducing market mechanisms into the
sectorand are far more respectful of market principles than of price
fixing.
Nevertheless, these bands were a solution worth considering. They
were applied to wheat, sugar, and oil, with the purpose not of fixing
prices but of protecting producers from the relatively violent fluctuations
in the international market. These fluctuations were generated in most
cases by other countries subsidy programs, which entailed unfair
competition.
The first challenge that the implementation of price bands had to
overcome arose from Cartesian reasoning: if all products are subject to
price fluctuations, then why not have specific bands for each one?
Obviously, this line of reasoning could lead to the worst-case scenario:
trying to provide stability for everyone, which ultimately would mean
providing it for no one, as socialism ended up confirming. Nothing can
be more vulnerable than forced stability. Therefore, if price bands were
established for some products, it was only for political reasons. The
products involved had great impact on national agricultural production;
Hernn Bchi 61
more importance to the benefits that they stood to losecheap supplies
and easy creditthan to the opportunities they would gaingreater
competitiveness, freedom to set their own prices, and access to external
markets. Other problems added to this apprehension, such as the
deterioration in the exchange rate between mid-1980 and mid-1982. The
agrarian reform, in fact, had brought about a huge transfer of wealth from
the sector affected by expropriation to the Treasury. By design, only the
state had stood to gain in the process, since it paid less than market value
for the land that it expropriated and soldat higher prices, one would
assumeto the parceleros (smallholders). For those affected, the reform
had been an act of plunder that robbed the agricultural sector of capital.
This problem weighed heavily on the economy for a long time. It became
necessary to pass laws forgiving part of the parceleros debt. Meanwhile,
the farmers who kept the land to which the law authorized them found to
their dismay that it was very difficult to keep up the standard of living
that they had enjoyed when they owned the entire property.
The compensation conditions established by the agrarian reform
were clearly unjust, and this injustice had been abetted by the law. The
farmer concerned received a small down payment for part of his land
with the rest paid in bonds that were indexed at only a percentage of the
inflation rate. It was clearly a case of state exploitation.
But this was not the only plunder occurring in Chile during those
years. The pension system was subjected to a similar fraud. Retirement
pensions were an average of the wages earned over the last five years, of
which only the first three were increased due to inflation. In a country
with the inflation rates that Chile had at the time explains why very soon
all Social Security Service pensioners had been reduced to minimum
pensions.
In the agricultural sector, the military government decided to respect
the situation that had been created by the application of the agrarian
reform in cases in which it had been applied according to law. In cases in
which the expropriations or interventions had been illegal, the lands were
restituted without delay. For the farmers grouped in cooperatives or in
Hernn Bchi 63
intended to sever the traditional connections between agricultural
employers and workers. In this, it was undeniably successful.
It was not agrarian reform that modernized the Chilean countryside.
Modernization came about entirely and exclusively as the result of
confidence in market mechanisms, the re-establishment of property
rights, and the work of a farsighted government that did all that it
couldin relation to ports, transport, health policy, export incentives
to facilitate Chilean agricultures entry into new markets. The change in
relative prices in agriculture opened up new economic and mental
horizons in the sector. Rural areas became industrialized. Change was
swift and it relegated to the past experiences that had been common
during Allendes timesuch as, for example, the price of a television
being equivalent to the price of several cows. This situation was soon
reversed. Today it is not unusual for a small agricultural producer to own
a car. Today, cars can be found in rural areas, and they do not belong
only to the employers. Rural workers no longer wear the once-common
ojotas-improvised footwear made out of tire rubberand can frequently
be seen riding bicycles, as they do in Argentina, a fact that impressed me
the first time I visited that country.
The military government incorporated agriculture into the VAT
general tax system. This sector is also subject to a land tax that finances
the cost of the legal system for property protection. These contributions
help remind landowners that real estate has a social cost. This tax
benefits local municipalities. The sector is also subject to an income tax,
although in certain cases farmers are allowed to opt for a presumed
income tax, designed to save taxpayers from the costs of a full
accountancy.
In terms of results, the country recovered its agricultural production
capacity quite swiftly. Food imports, which had reached $511 million in
1973, decreased to $361 million two years later. Everything happened
very quickly. The transformation of agriculture took much longer, and
encompassed the emergence of the fruit and forestry businesses, which
definitively changed the profile of Chilean agriculture. In 1992, fruit
Mining
Mining is one of the Chilean economys most important sectors. For
many years, copper was the main export, and Codelco, the state company
that controlled the main copper deposits, was the largest company in
Chile.
In the Chilean mining sector, state control had gone quite far; its
roots went all the way back to colonial times, when legislation had an
openly centralizing and legalistic bias. Although the Mining Code, issued
in the thirties, welcomed private participation in the sector reasonably
well, it was by no means isolated from the socialist intellectual currents
being voiced in the public arena at the time. Later on, the situation
gradually became even more radicalized. By the late sixties, the
dominant opinion was that mining was far too important to be left in the
hands of private enterprise.
The numbers underscore the sectors importance. Known as Chiles
salary, in 1970 the copper industry represented 70 percent of the
countrys trade. Many believed that the $120 million yearly revenue that
it brought belonged to the state and should benefit the whole population7.
Therefore, some sectors argued, the state itself should be in direct
charge of the countrys most important deposits. And so, in 1971, all of
the parties represented in the Chilean Congress endorsed the
constitutional amendment that nationalized the countrys main copper
mines, which today are run by North American companies.
Hernn Bchi 65
The 1980 Constitution did nothing to improve this state of affairs.
The five clauses on miningundoubtedly too manyunder article 19,
subsection 24 of the Constitution, which guarantees the right to property
right, are better suited to a set of rules and regulations than to a
constitution. Their wording does not exactly endorse the market or
private enterprise. Statism comes across in the text and between the lines.
Property seems to have been reduced to a system of administrative
concessions, subject to the moods of government bureaucrats, and as
vulnerable as everything that can be given or taken away by the state.
But that is not all. In some working drafts of the constitutional text,
state intervention and interference in the sector were even stronger.
Fortunately, internal debate managed to lower the states profile
somewhat. My impression of this preliminary wording was very
unfavorable. At my first opportunity, I discussed the issue with Sergio de
Castro. It is important to note that in addition to the Chilean public
opinion of the sixties and seventies, many military officers, who were in
charge of running Codelco, saw mining activities as inextricably linked
with national security.
The military regime, in a stark exception to its own reform efforts,
going against everything that it had done in other areas, came very close
to establishing more state control in mining than had existed in 1973.
There was even a moment in 1980 when it was feared that in this area
things would not only remain unchanged, but would actually backslide.
Fortunately, cooler heads later prevailed, and important amendments
were made to the original text. But even so, the final result was far from
optimal.
The situation began to improve when, during Jos Pieras term in
office as Minister of Mines, the Mining Law (1981) was passed, which
rose to the level of constitutional amendments, finally achieving what the
Constitution had not: complete recognition of property rights in the
sector. The new Mining Code, issued at a later date, completed the
framework that would guarantee the participation of private companies.
In this sector, as in others, property is fundamental. There was general
Hernn Bchi 67
Another triumph for modernization in this area was the integration of
mining activities into the general tax system, mainly by means of the
value-added tax and the income tax. There were those who, in view of
the solidity that had been conferred on mining property, suggested that it
would be convenient to establish a royalty on what was considered
national wealth. On the basis of these arguments, a royalty on mining
companies was set up in Chile in 2005, which in my opinion, was a step
back in the countrys economic liberalization. A clear decision is crucial
regarding whether we want to move toward clearly defined rights or
open up the arena to collective discussions that will end up eroding the
concept of property rights.
Experience shows that this kind of tax has deplorable distorting
effects. Mining in Argentina has developed at a slower pace than would
have been expected due to the effect of these taxes, among other reasons,
which vary from province to province.
The Argentine case is not an exception. Royalties is a major topic in
mining policy around the world. The United States Congress has
discussed proposals to introduce such a system, which could eventually
make that industry competitive.
Other institutional changes were also important in the development
of mining in Chile in the eighties. For example, water rights regulations
played a decisive role, especially in the northern regions of the country.
In short, the main accomplishments in the sector were to guarantee
property rights; to deregulate, so that everyone could produce freely; to
open up the sector along with the entire economy to foreign investment;
and to liberate prices, supplies, and the entire mining ancillary support
structure. This was enough for the sector to achieve unprecedented and
spectacular growth. Huge investments have been made in the Chilean
mining sector; mining operations occur in conditions that would have
been unimaginable before the reforms. Private enterprise has reached
places that previously no one thought could be reached.
At El Indio and La Coipa, gold was extracted at an altitude of 4,000
meters. At La Escondida, copper that had never risen to the surface is
Hernn Bchi 69
Energy
The energy sector became extremely important shortly after the military
government took over. This was during the oil crisis, when the
international market registered a jump in the oil price that seriously
threatened the large Western economies. The main mechanism applied to
address this crisis was the price system. After much discussion, the
alternative of an emergency program to force the substitution of one fuel
for another was abandoned. Instead, the government opted for a policy to
allow the price of oil-derived fuels to reach levels that would reflect the
real cost of fuel. This comprised several factors: the cost of importing the
product (Chile is a net importer), the real costs of distribution, the valueadded tax, and specific taxes applied on gasoline and diesel, to pay for
use of the transport infrastructure.
Completing this structural reform took time. The Chilean fuel market
had previously included a vast amount of cross-subsidies. For example,
subsidies to reduce the price of kerosene meant an increase in the price
of premium gasoline. This set a correlation, which, contrary to the
conventional wisdom, benefited wealthier people, since it offered them
cheaper fuel with which to heat their homes, and in the long run was
detrimental to the maintenance of the countrys car fleet. Subsidies also
favored inhospitable and remote regions. During an intermediate stage,
great care was taken to calculate, as precisely as possible, the subsidies
that, when deducted from the price of different products, allowed the
National Oil Company (Empresa Nacional de Petrleo) to sell some
products at reduced prices in certain regions.
The idea of organizing the market in these terms was not born of an
obsession with accounting rules. Clearly, until the price system had been
allowed to function, it had been very difficult for private individuals to
import products. Argentina understood this and achieved stabilization in
a very short period, notwithstanding the backsliding that took place after
2000. In Peru and in other countries, the process has gone along at its
own pace.
Hernn Bchi 71
well-functioning company. This estimation is binding on the distributor
during a certain number of years, after which the evaluation is repeated.
Energy production costs of the energy, on the other hand, are calculated
through a much more complex mathematical model, based on marginal
cost.
This approach received no end of criticism. Why use a system, some
people asked, that is so complicated and hard to understand? That was a
strange reaction. Since when do consumers need to understand the
means by which the goods and services they purchase are priced?
Whoever wishes to analyze this can do so, but to argue that
understanding of prices must precede usage or consumption is absurd.
Must one understand how the electrical grid and a light bulb work in
order to turn a light on or off?
By implementing the new rates system, the government attained
much higher energy efficiency levels. Each individual and every
company knows better than any bureaucrat when and at what time it is
convenient to consume more electricity, as well as where, how, and at
what time it is convenient to save.
But the government went farther than simply rationalizing prices. It
also reformed the sectors corporate structure. In order to make the
system better reflect market reality, some companies were divided into
generators, transmitters, and distributors. The reorganization was far
from perfect, because political problems cropped up in the interim.
Endesa, the large electric company, was never broken up. It merely spun
off a few small distribution companies. But Chilectra (Compaa Chilena
de Electricidad), which is the private enterprise that distributes electric
energy, was divided into generation and distribution. Distribution, in
turn, was subdivided geographically. All of this work greatly simplified
the subsequent privatization of these enterprises. That was the aim of the
sectors restructuring process, which made it possible to put an end to the
arbitrariness that forced companies to charge higher industrial rates in
order to compensate for lower residential rates. The intent behind these
rate subsidies had been to benefit the poor, but it was the wealthiest who
Hernn Bchi 73
in exploiting this resource, but who also believed in the stability of the
policies announced by the authorities.
Of course, the market cannot fix everything overnight, and enabling
and liberalizing markets is no easy task. In fact, the task is still
incomplete. The end of the story has yet to be written. There are still
issues pending, for instance, in the electricity sector. The government has
an important task ahead, not only to make the development of the
economy viable, but also to reinforce the credibility of the associated
institutional framework.
There has been significant backsliding in this area. Beginning in the
late nineties, the government began intervening unnecessarily in the price
system and in electric contracts. These interventions, still unresolved, are
at the root of the problems that the country faces today, which are
exacerbated by the ill-conceived interventions in the Argentine natural
gas market and by the global rise in the price of oil.
Forestry
The development of forestry during the military government is a very
good example of how implementation of the right policies allows a
countrys comparative advantages to emerge. Law Decree 701, issued
during the first years of the military government, set up a forestation
subsidy that was important in helping the development of the sector.
However, the key factor was the comparative advantage that the country
enjoyed in its forest industry, but that had been repressed by state
regulation. The subsidy was based on compensating for the difference
between the amount received by a private enterprise and the amount
received by the government, vis--vis the decision whether or not to
reforest. The level of public assets committed to this program was
sufficiently low as to make it justifiable as an incentive to employment.
Several of the arguments that initially surrounded the development of
policies in this sector can still be heard today in other countries. Was
Hernn Bchi 75
because, within the existing budget constraints, the administration did an
excellent job in the national parks through the National Forestry
Corporation (Conaf). Unfair because in order to protect the native forest
effectively, adequate incentives needed to be created. If citizens or the
government want to create forest reserves, there is nothing stopping
them, but naturally they must pay for them. Peoples appreciation of the
native forest should not work to the detriment of property rights.
Unfortunately, today the environmental movement has provided a
new home for opponents of the free market. Environmental protection
itself is a laudable goal, and there are people who have been advancing it
honestly for years. The world of nature is, by the way, one that I know
well, and few people can teach me anything in this area. I mention this
because these days too many recent converts to environmentalism appear
to have shifted from red to green with suspicious ease. These are
advocates of formulas that have failed in every place that they have been
tried, and who see in environmental ideology their last chance to gain
power in order to impose central planning. The Rio Earth Summit
(1992) was a sorry spectacle in this regard. When faced with evidence of
the planets environmental degradation, the last thing the environmental
experts will propose is to implement rules, regulations, and
mechanisms to make ecological recovery compatible with the market.
The same standards that were raised by the Chilean government in many
areascreating clear property rights and deregulating wiselycould be
used today to gain ground in this area, which has been beset by state
control and statist rhetoric. In this field, socialism has also been a failure:
environmental problems in the former Eastern bloc are far more serious
than those in the West. By the same token, it is not true that development
is the main culprit behind ecological degradation. Ultimately, the
problem turns up whenever incentives are distorted. It makes no sense
for environmental activists to ask for more state intervention to protect
the araucaria (monkey puzzle tree, national tree of Chile) or the pud
(South American deer), while turning a blind eye to the serious
environmental problems in Santiago and Valparaiso, which are derived
Water Management
Government action in water management was guided by the same
principles as in forestry: to create solid property rights, not on the water
itself but on its use, and to make it feasible by all means at our disposal
for the market to operate in an orderly way.
The regulations issued made the distinction between consumptive
rights and non-consumptive rights. Consumptive rights apply to water
that is consumed and is therefore permanently extracted from the natural
water supply. Non-consumptive rights apply to water that is used but is
then returned to its source, in the way that hydroelectric plants function,
for example.
Hernn Bchi 77
The water issue suffered at the time from the same inertia that
hindered the development of mining. It faced the same arguments: that
water should be a public good that belongs to everyone, and one that the
state should be in charge of administering. Such rhetoric leads only to
squandering and underuse of resources. Where is the benefit for a farmer
who installs drip irrigation if he cannot then sell the water that he would
save with this system to a third party?
A full understanding of free market principles and mechanisms was
not easy to introduce in this field, either. Introducing these principles was
hard work, so much so that in 1992 the Chamber of Deputies reverted
reforms. These changes became law during President Lagoss
administration. The law establishes that the right to use water lapses if it
is not exercised for a five-year period. This cause for lapse seems
reasonable, but it reflects the same kind of motivation that in darker
times led to expropriations, whenever some government official
considered that the land was not being properly exploited. Again, the
same old story: the cause for lapse is based on the belief that government
officials know better than the market. This hubris has been proven a
failure the world over. Why would a government officials reasons
benefit the community more? If someone is not exercising his right of
use, it is because he is waiting for a better opportunity, which may
ultimately benefit the community more.
The debate on the use of water is relevant in many parts of the world.
In Mexico, several reforms were carried out in this area during the
nineties. In California, during the drought just before winter 1992, the
debate on local water rights did not even consider the private ownerships
of the rights to exploit this resource. The outcome of collective water
rights schemes is waste of water and a lack of incentives to invest. For
example, farmers end up sowing alfalfa, which uses up great amounts of
water, and discarding crops that could optimize the resource. The facts
are undeniable. The problem will persist until the market is allowed to
function. For this to happen, a full acknowledgment of property rights
Fishing
In the fishing sector, the military government met only partial success.
The market was set in motion, products were diversified, a climate of
great competitiveness prevailed, and fishing companies took advantage
of liberalization to expand their business internationally. They exported
sea products in various forms for approximately $1.3 billion in 1992,
compared to only $15 million in 1973. Butand herein lies the
problemproperty rights were never satisfactorily defined. When goods
are relatively abundant, this may not cause serious problems. But when
the resources are at risk of depletionas is the case with some fish
speciesthe problem can become very serious.
I am convinced that if the government had found a way to define
fishing property clearly and solidly, the country would not have had to
ban fishing of abalone, due to overexploitation. The Fishing Law issued
during the final years of the military regimeand modified, after much
debate by the following governmentwas a belated attempt to amend
Hernn Bchi 79
the omission, but it was far from perfect and did not address the real
problem.
It is true that it property rights of fishing resources are a difficult
concept to convey. However, the Spanish conquistadores found it even
harder to define property rights over the waters of the Mapocho River, as
currents change constantly, and yet they finally managed to do so. The
challenge still stands. A system based on bans leads to distortions and
overexploitation. As soon as the ban is lifted, everyone rushes to extract
as much as possible before anyone else does. From overinvestment in
larger boats to industrial capture technologies, this is a very dangerous
and destructive zero-sum game. What I win, others losewhat others
win, I lose.
If the military government was only partially successful in defining
property rights in fishing, it was not only because this was a complex
task, but because a major mistake was made. The first efforts did not
acknowledge the participation and preference of those who were already
engaged in the fishing industry and had a track record to show for it.
When property rights are first defined in an area where they did not
previously exist, it is important to assign some value to the experience
and expertise of those already in the business. One cannot start from
scratch, and a basic sense of justice should make one wary of any statute
that treats someone who has been in the business for many years the
same way that it treats a newcomer. This was not fair, and it made
political consensus more difficult, thwarting better and more modern
regulations.
Telecommunications
The greatest difficulty in this area was setting the market in motion. One
would think that the challenge was relatively simple, having
accomplished what we did in the electricity sector. But here the issue is
more complex, because the country had fallen behind in this areaits
Hernn Bchi 81
had a strong private industry. Chile appears to be one of the countries
with the widest variety in radio programming, especially on FM.
The
basic
instruments
used
to
modernize
Chilean
telecommunications were the rates system and the regulations regarding
interconnection. These regulations succeeded in breaking the vicious
circle that made every natural monopoly into a legal monopoly. This
logic was the key step to liberalize the sector, open the telephone market,
create competition between companies, and, above all, recover the legal
concept of easements, which enabled a company interested in providing
services to use another companys infrastructure.
The problems arising from competition and from the overlap of
companies in the same geographic area are not easy to solve. It is much
simpler to have just one company. But I am convinced that competition
works even through simple presence. The governments role is to make
sure that the market works despite the difficulties involved. A natural
monopoly need not necessarily become a legal monopoly. On the
contrary, competition, even if only potential, should be the policy
makers main concern. The effort is absolutely worthwhile. The
incentives to deliver good service at lower costs are incomparably greater
in a market scenario.
In Chile, the telephone system used to be very inefficient. Waiting
lists to get a line installed were as long as the phone book. Just the fact
that the telephone market needed to be opened describes the absurdity of
the situation. If the state phone company had worked well, installing
telephone lines should have imposed practically no costs on consumers,
since companies profit from the use of the lines, not from any inability to
cover the demand.
There was constant pressure on the government to back out of all of
this. Until 1993, CTC and Entelone company delivered local telephone
service and the other long-distance serviceeach refused to let the other
compete on its own turf. This made no sense; multi-carrier technology
allows multiple long-distance providers to operate simultaneously. It is
up to users to choose the supplier that they prefer. Companies have no
Transportation
In all areassea, land, local, long-haul, freight, and passenger
transport was an overregulated sector in which the state had accumulated
an increasing amount of power, led by bureaucrats who thought they
knew how to safeguard the interests of the public better than the market.
There was another problem: the constant pressure from transport unions
for more power. Fortunately, since the notion of property was quite a bit
Hernn Bchi 83
stronger here than in other fields, the governments first concern was to
get the market to function. Ports were the only area in which private
property was unheard of.
After selling the assets of the State Public Transport Company
(Empresa de Transportes Colectivos del Estado) in the governments
early days, and repeatedly postponing the total privatization of the State
Railway Company (Empresa de Ferrocarriles del Estado)which was
finally never carried through, perhaps because Chiles geography makes
railways less critical than in other placesthe task consisted of revising
regulations to make them market friendly. This was not hard to do,
because fortunately the sector was quite competitive by nature. However,
convincing the unions that competition, which they feared, would benefit
everyone in the long run was more difficult. Few union leaders could
understand that public transport working with competitive prices would
not be the end of the world. Older people remembered a time when
Chiles government had come very close to collapsing as a result of a
rise in the public transport fare to one chaucha (a 20 cent coin, in the old
peso currency).
In the end, competition worked. It worked well in freight transport
and in long-distance passenger transport. Local public transit, while not
optimal and inferior in quality compared to that of developed countries,
saw definite improvements in relation to what it had been twenty years
before. I say this because today there are those who cite deregulation of
public transport in Santiago as proof of the failure of free market
policies. One needs to have traveled on a bus the way most Chileans did
in the sixties and seventies in order to know what a disaster the system
was back then. The experience was almost degradingan obsolete and
inadequate bus fleet, vehicles that were dangerous to travel in,
insufficient routes, infrequent scheduling, terrible service. I have no
patience with nostalgia for the past in this area. I, like most Chileans,
experienced the public transport disaster firsthand. I spent all of my
youth hanging on to the steps of buses trying to get to school and later to
the university on time.
Hernn Bchi 85
The most important problem that the military government met in
ports was labor related, and it translated into very high rates and anticompetitive regulations. For example, the rates system resulted in a
situation in which it made no difference to a ship owner whether he used
his own ships crane boom or that of the port to load and unload cargo. I
first discovered this absurdity when I joined the government in 1975. The
ship owners chose to use the port cranes, which were obviously
insufficient to serve all of the ships within an adequate time frame. This
circumstance created an urgent need to invest in equipment; I remember
how vehemently government port officials demanded it. The sector was
riddled with distortions of this kind. Behind each such distortion there
were always favors being handed out to the detriment of the majority,
while benefiting a specific person or group. Showing great resolve, a
government team headed by Miguel Kast ended the labor monopoly in
the ports and incorporated the port labor system into the one for all
Chilean workers.
Despite all of the reforms introduced in the sector, despite all the
improvements achieved in operations, considering that trade increased
five-fold in this period, and in spite of the important reforms introduced
in the sectors labor legislationa subject that will be taken up later
onthe military government was unable to create property rights or
privatize state-run ports. This final step was simply not taken.
Air transport went through a similar process as that of maritime
shipping, which in addition coincided with deregulation in the sector.
Industrial property and intellectual property faced a similar situation,
but in these areas the conflicts tended to be fewer and less intense
compared to those in other sectors. Consequently, the governments
critical mission was to deregulate. Quotas purported to prevent industry
overcapacity were scrapped. Chilean industrial legislation was overrun
with socialistic laws and regulations, many dating from the thirties. The
content of the regulations was openly interventionist, and it was my
responsibility, as sub secretary of Economy, to take advantage of the
passing of several miscellaneous laws and to advance toward their being
Hernn Bchi 87
Government Reform
On reviewing the modernizations introduced into the states
provision of infrastructure and public works, the importance of having a
system by which to evaluate public investment projects stands out. The
military government, through Odeplan, in collaboration with the
Economics Faculty of the Universidad Catlica and especially with
professor Ernesto Fontaine, created a complete system for the economic
evaluation of projects that, because they were financed and run by the
government, were not subject to the automatic profitability control that
surrounds private projects.
Thousands of government officials, from a wide range of agencies,
were trained in project preparation and evaluation techniques. This was
done so successfully that to this day it is not the governments
specialized agency that evaluates projects, but the officials of the public
institutions who themselves facilitated the investments, with Odeplan
acting solely as inspector and regulator. This model has been transferred
to other Latin American countries through state-financed courses run by
the Universidad Catlica and through the work of international entities
like the United Nations Development Program and the Latin American
Institute for Economic and Social Planning, which finance the training of
public officials from various countries in these techniques, with the
participation of Chilean consultants. A framework for private financing
of public infrastructure projects exists in Chile today, thanks to the
approval of a concessions lawa positive move made by President
Aylwins government that emerged from this task.
In this same area, regionalization, which began through studies
carried out by the State Administrative Reform Commission
(CONARA), was an important step toward decentralizing government
activities. This brought people closer to governing institutions by
creating regional governments. An essential complement to this was the
redefinition of the role of municipalities, which were provided with
greater financial resources at the expense of central government, to
CHAPTER FIVE
Hernn Bchi 91
settle for less. This is the best way to kill any incentive to improve and
the best way to neutralize the motivation for individual creativity.
The dogmas of trade unionismthe unity of workers against
employers at all costs, the loss of individual freedom for the benefit of
the group, and the maximization of the political power of labor unions to
improve their negotiating capacityderive from a combination of errors,
distortions and myths. Nearly all of those who shaped labor legislation
during the twentieth century have subscribed to these grave errors to
varying degrees. It is no accident that these distortions are cultivated with
devotion by Marxism.
Truth lies precisely in the opposite direction. Workers will do well
only if the company does well, if the economy is growing, and if new
work opportunities arise on a permanent basis.
For this to happen, freedom and flexibility are fundamental. Without
freedom and flexibility, economic growth is impossible. The security and
stability that people seek will yield to stagnation and instability when
those goals are sought through coercive and collectivist means. The
attempt to nail down the wheel of fortune only leads to nailing the
country down to economic prostration and poverty.
This being the case, what labor legislation must safeguard is the
freedom and flexibility to adapt to changes in the market, since this is the
waythe only wayin which workers interests are effectively
protected. It has been proven that measures whose primary goal is to give
workers greater stability always end up harming them.
Labor legislation should be limited to fulfilling the objective to
which all laws adhere: to preserve as much as possible of the tradition,
the natural sense, and common practice of social and economic activities,
while establishing mechanisms to address future conflicts that may arise.
This is what sets the path for progress. The laws themselves need not be
progressive, only functional and fair. The energy that drives progress
comes from the people, not the laws.
Regulations that undermine job mobility or make it mandatory to
belong to a certain union are completely counterproductive, both for the
Hernn Bchi 93
long run, this threat benefited the government, inasmuch as it made the
need to liberalize the labor market more urgent.
The effect of the extensive labor reforms introduced into legislation
was soon felt in the marketindividual work contracts, collective
contracts, trade unions, use of contractors and subcontractors, collective
bargaining, and the right to strikewere secured. However this was done
at company level and without restricting the employers right to continue
operating his company with third parties if necessary. Until 1973,
employment in Chile grew basically as a function of the growth of the
public sector. The economic liberalization launched in 1974 marked the
beginning of change in the nature of the workforce. Later changes
brought about by the liberalization of the labor market were beyond what
anybody could have imagined. Chile, at the time that I left for the United
States for my post-graduate studies, was a rigid country, where the only
major employer was the state, and university-educated professionals
positions were virtually guaranteed. In the country I had helped to
change, these things already belonged to the past by the time I returned.
Another problem was caused by the 19821984 debt crisis, which
led to high unemployment throughout Latin America. Wages fell as well.
But in the medium term, they fell less in Chile than in Mexico and other
countries in the region. Contrary to what some demagogic critics
suggested, the situation had not been brought on by liberalization. By
1985, when the opposition held that Chile would not be able to leave
two-digit unemployment behind, the facts quickly proved them wrong.
By 1989, the country had a 5 percent unemployment rate. This recovery
would never have taken place under rigid socialistic labor legislation.
The stubbornness of the opposition on this matter was enormous.
When, as a presidential candidate in 1989, I put forward the goal of
creating a million jobs in four years, my opponents said there would not
be enough Chileans to fill those jobs. Between 1985 and 1989 an average
of 239,000 jobs were created annually, which was unprecedented at the
time. One million new jobs in four years were certainly achievable.
However, plenty of people remain out of work, and there are thousands
active
working
populationcurrently
around
35
Hernn Bchi 95
and beyond the content of the political decision, the dismantling of union
privileges in Chiles shipping industry included compensation for those
affected. This cost the country around $50 million, but the expense was
worth it. However, the matter did not end there. Old habits die hard, and
so many privileges remain entrenched today.
After moving in one direction for decades, turning in the opposite
direction is not easy. It is not easy to internalize that yesterdays truths
and core concepts were mistaken. I remember a question asked by a
Chilean labor lawyer to a government official in Hong Kong during a
visit by a Chilean government and business mission to that country in the
late seventies. They showed us impressive evidence of the economys
dynamism, and the lawyer asked, Yes, thats all very well, but what is
the minimum wage and where are the laws protecting workers? The
official, without batting an eyelid, answered with another question: Do
you want us to suffer unemployment? With the enormous amount of
Chinese immigrants that we have annually, and the terrible poverty
conditions in which they come to our country, our challenge is to expand
employment, not obstruct it.
Even though I cannot help but believe that many union leaders will
eventually come around, I am not particularly optimistic regarding the
future of labor reform in Chile. The foundations have already been
undermined in some fields; for example, today it is possible to have
sector-side collective bargaining, which in a small and open economy
such as that of Chile can be very damaging.
On the other hand, some projects presented in Congress during the
Concertacin government give cause for apprehension, as do the actions
of labor authorities, based on certain potentially damaging administrative
interpretations. Unfortunately, the tendency to grant by law benefits that
only economic growth can provide remains deeply ingrained in the
countrys political class. Today, pressure groups remain very powerful
and have extraordinarily effective weaponstheir organizational
capacity and the public perception of them as representatives of the
downtrodden, which is far from true.
Hernn Bchi 97
concept was very hard to advance politically, because it meant
transferring power from the union leadership to the people, while it also
involved dismantling the false social gains obtained at the cost of
inequities and disadvantages imposed on the least powerful and the
poorest.
Labor reform vindicated the freedom to work in a comprehensive
sense. The changes in labor legislation were complemented with
resolutions to further freedom of association and to do away with
mandatory association as a requirement for employment, giving shape to
a set of regulations appropriate to a truly free society and a truly open
economy. The right to work was reinforced by eliminating the number of
registrations, identification cards, and licenses established by political
pressure over the course of many years. The task was neither simple nor
well understood, but it benefited millions who found a job. The
backsliding in this area, which has occurred gradually throughout the
nineties and this decade, partly explains the reduced dynamism in the
Chilean economy after 1997. This is why, in spite of economic growth,
the proportion of the population that is active in the labor force has not
increased as it would have if the pro-employment vision had been
sustained. This has serious negative consequences, especially for the
younger, lower-income population and for women.
Pension Reform
The pension reform, launched in 1980, is related to both labor reform on
the one hand, and to the capital market on the other. In Chile, the pension
system had so drastically severed the connection between work and
benefits that retirement contributions had become a tax on work. In some
cases, contributions were as high as 60 percent of wages.1 In theory, this
correlation gap should have advanced the social welfare goal of
1
Hernn Bchi 99
half active workers. This ration, combined with other deficiencies in the
system, inevitably meant that the vast majority of workers were retiring
on very low pensions. In a population whose life expectancy was
increasing, there were ever fewer active workers financing each
beneficiarys pension. While in 1995 there were 12.2 active workers for
every pensioner, in 1979 only 2.5 active workers financed each
pensioner.3
Politically, that may have been the hardest part of pension reform,
because what people thought of as the root of the crisisthe miserable
level of pensionswas not really the root but the consequence of the
problem, and therefore very difficult to solve for current pensioners. To
begin with, it had nothing to do with a pension reform, because pension
reform simply means devising a system free of perverse incentives that
could jeopardize it in the future. To fix problems in the old system,
policy makers have no room for action outside the political and tax
expenditure decisions they make, based on the tax resources generated
by economic growth.
In addition to discouraging saving and considerably raising the cost
of labor, the old pension system also weakened the private measures that
people would take to anticipate possible emergencies and times of need.
In the end, the magnitude of pension contributions reduced workers
savings capacity even more, and the system ended up nationalizing most
private savings. But the problem did not end there, because everything
was set up for the state to transform those savings into spending.
The route chosen by the military government to carry out the pension
reform had three major elements.
The first consisted in introducing some rationality into the old
system. For example, equitable age requirements for retirement were
established and privileges were eliminated. A case in point are the
pensions known as perseguidoras (chasers), which granted some lucky
Education
The government, in its approach to reforming education, recognized two
levels from the outset. One comprised preschool, elementary, and
secondary education, which the vast majority of the population goes
through. The other involved higher education, which only a very small
percentage of the population attains.
Establishing priorities was easy and required little thought. Yet many
still cannot forgive the military government for turning its back on the
university-for-all utopia. Perhaps the reason why they cannot forgive the
government is that it revealed the fact that most of the education budget
was being spent on minority populationsand in very uncompetitive
conditions, to boot. Higher education circles still exerted the greatest
pressure on the education budget, even though it comprised only
minority segments of the population.
Health Freedom
At the time changes were made in the cabinet in 1980, the stage had been
set for me to be named Undersecretary of Health. At the last minute,
however, the President let me know that he would prefer that I assume
the position of Undersecretary of Economy. The following year, exactly
the opposite happened: I thought I would be staying on at Economy, but
at the last minute, the President asked me to take over as Undersecretary
of Health. This move was actually decisive in my survival in the
government, since I did not belong to any of the teams that were blamed
for the 19821984 crisis. I was working elsewhere at the time. What had
CHAPTER SEVEN
Perverse Legislation
It is often the case with laws and regulations that the intended meaning
of the laws at the time that they were drafted is not always the sense that
prevails when they are applied. I had the chance to follow a series of
trials closelyon agrarian reform, on pension system issues, among
other mattersand was very often surprised by the courts interpretation
of regulations whose meaning, at least to me, seemed unequivocal. But
clearly they were open to other interpretations.
Although I have always understood that legislating meant
establishing the rules of the game so that everyone knew where they
stood in the future, it became very clear to me early on that to politicians
and legislators redistributing wealth today, it presents a more appealing
option for gaining voter support. For example, in the case of legislators
working on a rental contracts law, the incentive to set a maximum rent or
to freeze rental payments nowand earn renters approvalis much
stronger than it is to lay down guidelines for future rental contracts. The
problem with this behavior is that these regulations become a hindrance
to the people who hope to make a reasonable profit out of buying houses
and renting them, and consequently reduce the supply of this service,
which means that rental properties in the future will be fewer and more
expensive. It is, of course, a perverse incentive, which in a way
explainsespecially in the case of laws regulating economic issuesthe
gradual intrusion of legislation into areas that previously had been left to
the parties involved.
If legislators were made to forget the present and look toward the
future, their perspective would necessarily change. No one would want to
Isolated Observations
One of the most long-lasting contributions made by the Constitution on
the economic plane is undoubtedly the cash compensation, in the absence
of an agreement between the parties, in cases of expropriation. This
obligation was also in force under the old 1925 Constitution, but the
indemnity could be paid in installments subject to undefined adjustability
mechanisms. In a country with the rates of inflation that Chile had, this
would make a mockery of the payment.
Times of Crisis
The eighties began with a world in upheaval. In the United States,
Ronald Reagan was launching his conservative revolution and was to
find his strongest ally in Margaret Thatcher.
Chile, in turn, was experiencing an economic boom. Growth rates
were close to 8 percent, real wages were up 9 percent, and everything
seemed to confirm that General Pinochet had made the right decision in
1973 when he adopted the principles of economic liberalization
articulated in El Ladrillo. The countrys first shopping mall and first
private university were both about to open, and the private health care
system institutions were beginning to operate.
Storm clouds began to gather on the economic horizon in 1981.
Pressure on the exchange rate, which had been frozen at 39 pesos to the
dollar in mid-1979, was strong, because during two consecutive years,
inflationthough it was decreasinghad caused domestic production
costs to increase. In this context, exporters returns were becoming less
and less attractive.
Many Latin American economies have gone through this
predicament. Applying exchange policy as an instrument toward
stabilization is more common than people in Chile thinkexamples
include Argentina during President Carlos Menem and Minister
Domingo Cavallos time, and Mexico during President Carlos Salinas de
Gortaris time in office. In both countries, the exchange rate was used as
an anchor mechanism to slow inflationary momentum (although that was
in the context of the early nineties, not the late seventies).
In 1981, in any case, debate over the exchange rate gathered
momentum in Chile. Nobody could say that there was no awareness of
the behavior of this crucial economic variable, or that it was not being
analyzed.
Dollar Inflows
The economic situation that the country faced in 1982 was less
reassuring. That year was marked by strong and intense debateboth
within and outside the governmentover the advisability of devaluating
against the dollar, which was being kept at 39 pesos, or reducing salaries
directly. The crisis hit rock bottom when the decision was made to
devaluate by 18 percent.
On the one hand, there were evidently problems in the private sector,
especially for commodities, because the government was resorting to the
exchange rate to stabilize the economy. The idea was to eradicate
inflation, and this is not easy, especially in a country in which wages are
adjusted by inflation. On the other hand, the government was working in
the context of a large amount of foreign investment that did not go into
the Treasurythe Treasury actually had a surplusbut into the private
sector, especially the financial sector. The authorities did not foresee any
major problem with this because, in the event of credit flow coming to an
end, the problem would be between foreign and domestic private parties.
As it turned out, the situation was not that easy. The problem of
stabilizing the financial system in order for it to be able to answer to
depositors was not a matter of importance to private individuals only; it
concerned the state as well. Therefore, when credit inflows came to an
end in 1982, the problem, which had been private, became public. The
Two Factors
The two main factors that explain the Chilean crisis are, first, a very
strong external shock and, second, the interaction of this external shock
with the fixed exchange rate mechanism. When Mexican Minister of the
Unanswered Questions
The Chilean economic crisis during those years raises many questions.
How was it that the authorities did not react in time? Why did the
measures to face the emergency take so long to implement? On the other
hand, it is only fair to recognize that there was no easy way out.
Devaluation, which seemed such a sensible measure and was finally
adopted, entailed huge costs. The rise in the exchange rate made the
situation of debtors in the financial system more critical and brought to
question the health of practically the entire banking system.
That there was no easy way out was made very clear not only in
Chile, but throughout Latin America, and violently so. Chilean GDP fell
CHAPTER NINE
The Diagnosis
The challenge that I faced was complex and the responsibility enormous.
We had made great progress in matters related to structural reforms. We
had transformed the economy into something entirely new. We were also
facing a new social situation, and were making significant reforms to
help the poor. But, in the short term, we faced a major crisis, the end of
which no one in Latin America could foresee. The Chilean economys
terms of trade continued to deteriorate. The numbers for 1985 show
Outcomes
In the end, our efforts led to a vigorous economic recovery and a healthy
growth trend that lasted nearly a decade.
The structure of government expenditures changed. Although they
now represent only 20 percentnot 30 percentof GDP, actual
revenues are much greater because there has been spectacular GDP
growth.
The improvement in employment was remarkable. At the end of
1989, unemployment stood at 5 percent and emergency jobs programs
had completely disappeared. Social spending, on the other hand, was
increasing at an unprecedented rate, even as the government began the
twin processes of decentralization and regionalization in this area. The
flexibility introduced by the labor laws passed in the early eighties was
vital in improving the employment situation. As foreseen, the recovery of
the purchasing power of wages held back until 1988, but it finally
showed, and since then real wages have shown sustained improvement. It
became clear that nothing has more damaging consequences for workers
than inflexibility. Chile actually needs to go much farther still. Our
workforcearound 35 percent of the populationneeds to grow. Rates
of workforce participation in developed countries are higher. Achieving
that requires greater labor market flexibility.
Exporters response was equally encouraging. Between 1985 and
1989, Chilean exports jumped from $3.8 billion to $8.1 billion. The
projects involving greater production capacity were in the mining, fruit,
forestry, and fishing sectors.
What the country experienced starting in 1985 was not a boom, but a
process of orderly and gradual recovery. It was a healthy process,
grounded in the improvement of savings and investment rates. Without
Two Minds
Although it has maintained the countrys macroeconomic stability, the
coalition that has governed Chile since 1990 has exhibited a conflict
between two opposing worldviews, in effect two mindsone pragmatic,
the other ideological. This conflict has prevented the swift, decisive
action required in order to make further progress in the reforms that the
country needed. As well as curbing the progress needed to uphold
growth, Concertacins ideological mind has brought into the debate a
constant questioning of the pillars of the free market, which has ended up
shifting economic policy in the wrong direction. For many public figures
in the country, the entrepreneur is an enemy to be distrusted and whose
work therefore must be hampered with obstacles, taxes, and mandates.
So, entrepreneurs who want to start a new business today face everincreasing costs, energy shortages, and an increasing number of
regulations that increase their costs and make all aspects of running a
business more complicated. Fortunately, there are voices within the
Concertacin that have expressed concern about this trend.