Critical Sociology

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The Chilean "Economic Miracle": An Empirical Critique

James Petras and Steve Vieux
Crit Sociol 1990 17: 57
DOI: 10.1177/089692059001700203

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The Chilean "Economic Miracle":
An Empirical Critique

James Petras and Steve Vieux

ABSTRACT: The Pinochet regime in Chile has claimed numerous

economic achievments, including vigorous growth, intelligent and
innovative management of debt and poverty, and an exemplary
approach to privatization. This paper examines empirically the
historical record of the Pinochet regime in each of these areas. It
concludes that the claims of the regime cannot be sustained. The
neo-liberal policies of the post-Pinochet Aylwin government are
described, together with the institutional context in which these
policies are being carried out. Aylwin neo-liberalism is likely to
produce economic and social outcomes similar to those of the
Pinochet regime. The political consequences of this course are
briefly explored.
In recent years a wide ranging number of academics, journalists, and
policy makers - including many former critics of the Pinochet regime -
have joined the Chicago Boys in publicizing the economic &dquo;success story&dquo;
of the dictatorship. While most of these recent converts to the free-
market, export-oriented model retained caveats about the authoritarian
features of the regime and some of its &dquo;social costs,&dquo; most concluded that
Chile’s economy was the most promising economic model in the region.
Some writers like New York Times reporter Shirley Christian commended
Pinochet’s economic counselors as especially well-equipped to advise the
East Europeans and the rest of Latin America on the finer points of
&dquo;privatization, debt management and fighting poverty&dquo; (Christian,
1990:D-4). In a more serious vein the economic team of the newly elected
Aylwin regime has bought into the same set of assumptions - that the
Pinochet economic model is the most promising approach to economic
development - and they have implemented a whole range of economic
policies based on the structures and assumptions of the preceding regime,
setting aside almost all of their trenchant criticism over the past decade

Department of Sociology, State University of New York at Binghamton, Binghamton,

NY 13901.

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58

and a half. Both overseas commentators and Chile’s newly converted

practitioners argue that Pinochet-style free markets are the wave of the
future - and suggest that other regimes in the East and South would do
well to study the experience.
So just how seriously should we take their advice? What is the record
of the Pinochet regime on these matters? Does the Pinochet model hold
out the promise of miraculous growth to economies intent on expanding
the free play of markets? In this essay we propose to subject the Pinochet
experience to empirical scrutiny precisely in the areas in which it claims
its greatest successes, as well as in areas that have been largely ignored by
its celebrants. Our analyses and evaluations will focus on the following
four dimensions: (1) growth, (2) debt management, (3) privatization, (4)
poverty management. We will conclude with an analysis and critique of
the current electoral regime’s decision to &dquo;manage the model&dquo; and the
critical problems likely to ensue.

Growth .

Has the Pinochet economic model produced the exceptional growth

that its publicists claim? The Pinochet model produced growth rates well
below the Chilean average established over the 1950-72 period. The aver-
age yearly GDP rate of growth in the latter period was 3.9 percent, while
the Pinochet regime averaged 1.4 percent over the 1974-83 period. Even
if we exclude 1974-75 in accordance with the reasonings of some regime
apologists, use of the 1976-83 period yields a average yearly GDP growth
rate of 3.2 percent, still below the 1950-72 average (Edwards and
Edwards, 1987:3-11).
These figures mask the marked cyclical character of the Chilean econ-
omy in the period. There were spectacular economic contractions in 1975
and 1982 in which the rate of growth of real GDP fell 13 percent and 14
percent respectively (Ffrench-Davis and Raczynski, 1988:10, 20). In
several years of the intervening period of economic recovery, real GDP
grew sharply and it is upon these latter &dquo;miraculous&dquo; rates of growth that
defenders of the regime have focused to vindicate regime policies. In fact,
as numerous students have observed, these rates didn’t contribute to

growth at all, properly speaking, but to the recovery of previously

achieved levels of GDP (Ffrench-Davis and Raczynski, 1988:10). GDP
growth rates averaged 8.5 percent per year from 1977 to 1980. But real
per capita GDP did not reach the 1971 level until 1980 (Edwards and
Edwards, 1978:11). The Pinochet regime required six years to achieve the
economic levels of the previous decade. Such is the stuff of economic
miracles.
The period following the 1982 crash has exhibited the same tendency.
The crash itself is often described as the worst since the collapse of the
1930s, with unemployment rising to more than 20 percent. Again,

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 59

impressive growth rates were recorded after the steep GDP drop of 1982
and the much lesser drop of 1983. Once again the publicists of the free
market evoked the religious metaphors in which recovery is mistaken for
growth. But, again, overall growth throughout the 1980s has been far
from miraculous: GDP per capita grew at a 1.2 percent average rate
between 1980 and 1989, below the 1.7 percent average yearly rate for
1950-72 (EI Mercurio,1990a).
Particular areas of the economy have shown some dynamism, notably
the export of primary products. Mining, fishing, forestry and agriculture
accounted for 88 percent of total exports in 1987. Within each of these
categories, export is concentrated upon a few commodities: copper in
mining, grapes and apples in agriculture, fish meal in the maritime indus-
try. In addition, this primary export activity tends increasingly to focus on
productive processes that result in little value added to the product
concerned. For example, the export of wood pulp grows more than the
export of cellulose, which in turn grows faster than the export of paper.
Foreign firms are strongly represented in each major sector of export
activity: in fishing a Chilean-New Zealand consortium is prominent;
American firms figure greatly in the organization of external sales of
fruits; even in mining where the state copper company Codelco domi-
nates copper exports, foreign firms - U. S., Swiss, Australian - have
significant holdings. The point is that even where the economy shows
some dynamism, the activity contributes little to the development of a

complex and modern capitalist economy. In contrast, the successful

export economies of the Pacific Rim have specialized in the production
of manufactured goods. Moreover, the heavy representation of foreign
firms in Chile, encouraged as we shall see by government debt manage-
ment policies, signifies loss of sovereignty over, &dquo;disposition of natural
resources (soil, subsoil, sea) which are part of the patrimony of the whole
society&dquo; (Ominami and Madrid, 1990:130-135). Also, these export sectors
dominated by primary products are very vulnerable to sharp world
market fluctuations, both in terms of prices and demand, thus subjecting
the economy to roller coaster effects. The addition of a limited number of
&dquo;non-traditional&dquo; exports has not succeeded in diversifying the Chilean
economy or even its export sectors - a problem that is obvious with the
unfolding economic recession of the 1990s.
Debt Management

Given the size of the debt they had to manage, Pinochet’s bureaucrats
certainly had the opportunity to become experts on debt management.
Encouraged by the liberalization of imports and the deregulation of the
banking system, Chilean foreign debt exploded during the late 1970s and
the early 1980s, growing 300 percent between 1974 and 1986 (Remmer,
1989:172). Per capita bank debt in Chile was $1000 in 1982 compared

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60

with $600 for Latin America as a whole (Ffrench-Davis, 1988:115). Nor

should it be imagined that the flow of bank credit into Chile greatly
spurred investment in fixed capital. While gross investment amounted to
20 percent of GDP in the 1960s, it amounted to 16 percent between 1974
and 1981 (Parkin, 1983:114). The foreign debt seems to have been used to
expand imports of consumer goods. The practical significance of all this is
simply that a country devoting 5 percent of its GNP to debt service, as
Chile was in the late 1980s, does not have those funds available for job
investments in stable industrial employment or to spend on extensive
social services.
The outstanding peculiarity of Chile’s approach to debt management
has been the alacrity with which it has served the interests of banks,
domestic and foreign. Evidence of this was the assumption of the private
debt by the government, despite monetarist shibboleths. As Finance
Minister de Castro proclaimed early in the 1981-82 crisis after some bank
failures: &dquo;It is important not to forget that bankruptcies are the appro-
priate channel through which an economy gets rid of inefficient invest-
ments. If the government interferes in this process ... the period of
inefficiencies is lengthened&dquo; (Edwards and Edwards, 1987:79). Subse-
quently, huge subsidies were extended to the ailing institutions including,
among others, disbursements from the Central Bank equal to 15 percent
of the 1982 GDP (Remmer, 1989:167). As the crisis deepened, de
Castro’s doctrinaire free market pronouncements were abandoned and
the government took over or liquidated eight large banks, thus gaining
control of 50 percent of credit in the Chilean financial system. It also
took on the burden of massive amounts of formerly private, external debt
(Foxley, 1986:29).
The Chilean government has been extraordinarily obedient in the
transfer of resources abroad to satisfy creditor banks. The Chilean
government has not used the particular features of Chile’s debt load to
try to win concessions from the banks, as the Chilean economist Ricardo
Ffrench-Davis has argued. The first of these features is simply the
assumption of the private debt itself after the fact, the explicit guaran-
teeing of privately contracted debt in the financial sector by the govern-
ment. Increasingly the creditor banks did not even ask for this. Other
Latin American countries, notably Mexico, have been far less forthcom-
ing in the matter of state subsidies to private banks (Griffith-Jones,
1988:366-367). The Chilean debt managers, so touted by Christian, failed
to use obvious bargaining chips (the subsidy and the ez post guarantee) to
win concessions from the creditors. Given the stakes involved - a net
transfer of 4 percent of GNP abroad in 1988 and 1989, for example - this
was indeed an extraordinary performance (Bitar, 1990:274).
The intricacies of debt figures are such that they lend themselves
better to statistical than to economic management. It is quite possible to
give an optimistic reading of the figures by their selective use. Thus one

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 61

may, for example, point to the dramatic lowering of external debt with
commercial banks in the 1980s from $14.3 billion to $6.5 billion in 1988,
a drop of $7.8 billion. What this neglects is the astronomical growth of
debt with multilateral lending institutions, such as the International
Monetary Fund, the World Bank, etc., during the same period. Debt with
the World Bank and the Inter-American Development Bank grew at an
annual average of $600 million between 1983 and 1987, or about 40
percent per year (Ffrench-Davis and De Gregorio, 1985:24). This
increase in multilateral debt made the giant payoffs to the commercial
banks possible (Ffrench-Davis, 1988:129). This debt will have to be
repaid, cannot be restructured and cannot be expanded indefinitely
(Somerville, 1990:297). No less a figure than Hernan Somerville,
Pinochet’s chief debt negotiator during the mid-1980s, says that the
multilateral debt is the &dquo;biggest external debt problem facing Chile.&dquo; He
assures us that the problem is &dquo;perfectly manageable,&dquo; holding out the

hope that the reduction of the debt with commercial banks will lead to
fresh loans (Somerville, 1990:297). But early help from this quarter seems
unlikely; commercial bank loans from abroad to Chile have been falling
steadily throughout the 1980s (Ffrench-Davis, 1988:128).
Debt-equity swaps are singled out by Christian as an area of special
expertise enjoyed by Chilean free marketeers. The principle involved in
such swaps is familiar from corporate bankruptcy proceedings. Creditors
to an enterprise in the process of reorganization may be given shares and
of course claims on a portion of hoped-for future profits in exchange for
the extinction of outstanding debt and interest payments. Latin American
debtor nations, among others, have applied this principle to their own
foreign debt obligations in the following way. Foreign debts of a given
country are purchased in hard currency at a high discount rate, then sold
at a lower discount rate for foreign currency of the debtor country; the
debt purchased has been converted into local currency at the original
rate. Funds obtained may be used to buy shares in an existing enterprise,
or improve plant and equipment, etc. Theoretically, creditor banks bene-
fit by reducing outstanding loans of dubious quality; debtor nations see
their debt reduced; purchasers of the obligation receive local currency at
a cost lower than could be expected from local financial markets or from

bringing in foreign exchange (Lahera, 1987:104-105). By mid-1989, $7

billion of Chile’s external debt had been converted by various mecha-
nisms (Riesco, 1989:318).
Despite all appearances, debt equity swaps are far from the unambigu-
ously positive policy maneuver they are often assumed to be. For one
thing, dubious debts, which may in the future be pardoned by the creditor
banks, are being traded for real assets. Moreover the swaps do not offer a
global solution to the debt problem. Riesco (1989:321) estimated the
value of the 50 largest Chilean corporations in late 1986 at $4.6 billion,
approximately one quarter of the total external debt! Hence even if the

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62

pride of Chilean capitalism were creamed off and swapped, a solution to

the debt problem would still be far out of reach, even putting aside the
denationalization of the economy. Finally, debt-equity swaps improve the
balance of payments by cutting the flow of interest but they worsen it
down the road when the investments resulting from the swaps begin to
produce earnings for repatriation (see Lahera, 1987:118-119; Ffrench-
Davis, 1988 :134).
Privatizations

Selling off the patrimony of the state has played a great role in the
history of the dictatorship. In 1970 CORFO, the state development
corporation, controlled 46 enterprises. The regime’s first task was to
return to private hands the large number of firms which had been nation-
alized under Allende during 1970-73. By 1973 some 460 firms and 19
banks had been incorporated in CORFO (Renner, 1989:158). By the end
of the Pinochet decade the process of privatization had gone well beyond
the Allende interventions: by 1980 CORFO controlled roughly two
dozen firms (Vergara, 1985:90).
This first wave of privatization involved large government subsidies for
the purchasers. The firms were sold below their book value, in many cases
to political allies of the regime in non-competitive circumstances. One
researcher estimated that the subsidy averaged 40 percent of book value.
Another found a range of subsidies between 23 percent and 37 percent
(Edwards and Edwards, 1987:97). The cheap sell-off was driven by haste,
the recession and high interest rates (Foxley, 1985:33). While the stated
purpose, according to free market doctrine, was to break up state monop-
olies and stimulate competition, wealthy investors were the only ones
able to take part in the purchase. Similar effects were produced in the
agricultural sphere when the government sought to correct what they
considered the state monopoly effects of agrarian reform. Some 30
percent of the expropriated land was returned to previous owners. Some
35 percent of the land went to small owners in small lots (Foxley,
1985:33). The small owner beneficiaries very frequently found themselves
compelled to sell their plots for want of capital, technical assistance, etc.
(Jarvis, 1985:151-152, 170-177). One estimate had it that by 1982, 40
percent of the beneficiaries had sold the’r parcels, mostly to medium and
large owners (Jarvis, 1985:167-168). Reconcentration and recentraliza-
tion of economic power, not free competition, was the real outcome of
the free market policy.
Subsidized privatization flourished again in the mid-1980s under the
supervision of Hernan Buchi, the Finance Minister under Pinochet.
Enterprises valued at $2.8 billion were privatized between 1985 and 1988.
As in the earlier bout of privatizations, subsidies were massive. One
researcher concluded that the subsidies amounted to $600 million

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 63

between 1986 and 1987 (Delano and Traslavina, 1989:127-129). Further,

it was estimated that between 1990 and 1997 the public coffers would
stop receiving $100 and $165 million annually on average as a result of
the privatizations (Delano and Traslavina, 1989:127-129). Some of these
privatizations were the focus of public controversy. Shares in the
Sociedad Quimica y Minera de Chile were sold in 1984 at 20 pesos. In
1988 they were valued at 350 pesos per share. The pre- and post-privati-
zation president of the corporation was the son-in-law of Pinochet, a
heavy contributor to the presidential candidacy of Hernan Buchi (Delano
and Traslavina, 1989:129). Privatizations were based less on criteria of
&dquo;economic efficiency&dquo; and more on the goal of creating a new class of big
business people with political and family ties to the regime.

Poverty Management ,

The Pinochet dictatorship must be credited not only with poverty

management as his overseas publicists claim, but also with creating a
great deal of poverty in need of management. The coup of September 11,
1973, marked the opening of a assault on the social organizations and the
leadership of the Chilean working class: its unions, parties, press and civil
liberties. The imposition of rigid monetarist policies had predictable
results. Levels of unemployment rose dramatically after the coup to a
peak of 21.9 percent in the crisis of 1976. By 1981 these unemployment
levels were still high: 15.1 percent. Even this &dquo;low&dquo; point of the 1977-81
period was still more than double the rates at the end of the 1960s (Marin
and Rozas, 1988:35). The crisis of 1982 drastically worsened the unem-
ployment rate, which averaged 26 percent for the years 1982-85 (Ffrench-
Davis and Raczynski, 1988:29).
Real wages followed a similar path. Using 1970 as a base year of 100,
real wages fell to 62 in 1975, peaking at 96 in 1981 just before the crisis.
By 1987 real wages stood at 84.7 - well below the 1970 base year (Marin
and Rozas, 1988:35; Ffrench-Davis and Raczynski, 1988:31).
At the same time that the employment prospects and wages of ordi-
nary Chileans had deteriorated relative to the late 1960s, wealth was
becoming more and more concentrated. In 1984 the poorest 40 percent of
the population received 9 percent of total income while the wealthiest 20
percent received 61 percent (Riesco, 1989:198). The concentration of
wealth was, of course, not simply a matter of income. Ownership of the
assets of private enterprises, of the capital and reserves of financial insti-
tutions, and access to foreign credit were all increasingly concentrated
during the period. For example, six economic conglomerates controlled
54 percent of the assets of the 250 largest private enterprises in the coun-
try by the end of 1978 (Foxley, 1986:45-46). As noted above in the discus-
sion of privatization, the same process of concentration was at work in

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64

the countryside as the lesser beneficiaries of the destruction of agrarian

reform found themselves compelled to sell out.
The effects of the decline of real wages and rising unemployment on
the Chilean wage and salary earners were sharpened by reductions in
state activity and expenditure during the period, in line with neo-liberal
ideology. As Milton Friedman put it, &dquo;the real necessity is to reduce the
size, scope and function of the government and to augment, improve and
strengthen the free market, private enterprise and the economy based
upon them&dquo; (Bitar, 1980:31).
The most obvious target of the dictatorship’s cuts in state activity was
public sector jobs. Around 90,000 positions were eliminated between
1974 and 1979 (Remmer, 1989:170). Taking 1970 as a base year of 100,
social spending overall on a per capita basis fell to 74 in 1985 (Ffrench-
Davis and Raczynski, 1988:47). Regime apologists present social expendi-
ture figures under the dictatorship as roughly comparable to those of the
pre-coup period by presenting them as percentages of the state budget.
But this is misleading, among other reasons, because, as Pilar Vergara
has pointed out, overall state expenditure diminished substantially after
the coup. Social expenditure represented a comparable percentage
therefore of a smaller budget (Vergara, 1986:97).
Housing was especially hard hit as the state sharply reduced public
investment. During the Allende period, 1971-73, the public sector built
an average of 39,000 dwellings per year. This fell to an average of 795 per

year for 1979-84 (Contreras, 1986:42). It was estimated that in 1986

900,000 families were homeless in the country (Contreras, 1986:42).
Overcrowding and the &dquo;allegado&dquo; phenomenon, in which one family
shared dwellings with another or permitted another to construct a
makeshift dwelling on a common site, became endemic. Research
conducted by an organization affiliated with the Archbishopric of Santi-
ago found 135,000 allegado families in that metropolitan region
(Campero, 1987:31). Large numbers of those who went into debt to gain
ownership of sites or dwellings were in danger of losing their property for
lack of payment (Campero, 1987:31). One researcher found, for example,
that 45 percent of such debtors in the poblacion (urban settlement of
poor people) Jose Maria Caro were behind in their payments (Campero,
1987:31). The performance of the dictatorship in this area has left a mas-
sive deficit in low-income housing, especially if we take into account the
growth of population and the deterioration of existing housing. This
deficit has been estimated to have totaled 1.1 million houses by 1985
(Pozo and Vergara, 1990:171).
Health expenditures also fell during this period. Expenditure per
person fell drastically from $29 in 1973 to $11 in 1988 (Delano and
Traslavina, 1989:148). Significant improvements in infant mortality and
life expectancy were made during the period. However, the incidence of
certain infectious diseases readily associated with poverty, overcrowding,

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 65

poor hygiene, and inadequate sanitation underwent explosive growth.

The rate of typhoid cases per 100,000 grew from 55 in 1970 to 122 in
1983. Chile accounted for 20 percent of all reported cases of typhoid in
Latin America (Contreras, 1986:49). The rate of viral hepatitis per
100,000 also grew explosively from 68.9 cases to 107.9 cases between 1982
and 1984 (Contreras, 1986:50). Researchers also found evidence of a
&dquo;general deterioration of the mental health of Chileans&dquo; in line with
political repression, high rates of unemployment and a generalized
deterioration of living conditions during the period. Alcoholism - one of
the highest rates in the world - an alarming increase in suicide, and an
increase in the frequency and seriousness of mental ailments among the
unemployed indicate some of the human suffering imposed by the Pino-
chet economic model (Contreras, 1986:52-53).
While social expenditures of the state were cut, other expenditures
were not. Military spending reached unprecedented levels. Salary expen-
ditures in the public sector increased 28.6 percent between 1970 and
1979, mainly as a result of a vast increase in military employment, which
rose 120 percent from 1974 to 1979 at the same time that tens of thou-
sands of employees were being expelled elsewhere in the state (Remmer,
1989:170-171). Between 1973 and 1982 military personnel grew from
110,000 to 165,000 (Varas, 1987:188). Within the defense budget, those
branches most concerned with repression - political police, national
police, the army - enjoyed the highest rates of budget growth in spite of
the fact that external dangers have usually been pointed to in justification
of high defense expenditure (Varas, 1987:90).

Managing the Model

Much of the above data and critical analysis of the Pinochet free
market model was drawn from researchers who have joined the Aylwin
administration, and who now continue practicing precisely the same poli-
cies they rejected previously. In part these continuities can be attributed
to the institutional constraints that remain as a legacy of a &dquo;negotiated&dquo;
transition. However, in large part the new regime has not only conformed
to the model’s general parameters, but sought to deepen and extend the
model, even to the extent of increasing foreign investment access to
strategic resources, dismantling state development institutions and
pursuing the renewal of U. S. military ties to the Pinochet-commanded
armed forces. In what is surely an excess of conformity, the Aylwin regime
successfully fought to increase the military budget to compensate the ex-
secret political police, which had been &dquo;dissolved&dquo; and reincorporated
into the armed forces. In a word the new regime has presented itself as a
continuation of the &dquo;restructured&dquo; neo-liberal managers of the model.
The state, according to monetarist doctrine, is excluded from inter-
fering with the rational allocation of resources by the market. In an early

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66

interview in El Mercurio, de Castro remarked that the Pinochet team was

&dquo;eliminating the ... perverse role played by the state in the past by discre-
tionary management of the economic variables.&dquo; The only way to insure
personal liberty (!) was the creation of a &dquo;really free economy in which
the discretionary role of the state is minimal&dquo; (El Mercurio, 1976:25-26).
Reducing the scope of state activity was not simply rhetoric at least inso-
far as privatizations, social spending and certain kinds of state employ-
ment were concerned. Such state reduction &dquo;constituted the most far-
reaching action in the economic field carried out by the government of
the armed forces,&dquo; in the view of Pablo Baraona, a former Minister of the
Economy under Pinochet (Delano and Traslavina, 1989:162).
The institutional environment (the constitution, the armed forces, the
courts, central bank, etc.) constructed by Pinochet around the Aylwin
regime may be understood in large part as a set of constraints on any
potentially &dquo;perverse discretionary management of the economic vari-
ables.&dquo; As one defender of the regime put it: &dquo;What is needed, here and
now, is to institutionalize mechanisms which guard macroeconomic
stability, to institutionalize respect for fundamental macroeconomic
...

equilibria&dquo; (Delano and Traslavina, 1989:138-139). Of course it is not

simply a matter of objective constraints. Petras and Leiva (1988) have
charted the formation of an opposition thoroughly &dquo;renovated&dquo; during
the 1980s under the ideological and repressive supervision of Pinochet.
The political leadership and the new economic team in the Aylwin
administration are not merely &dquo;pressured&dquo; to conform to the new model;
they are ideologically convinced of its superiority and of the correct
course charted by the preceding economic ministers. As Foxley put it: &dquo;A

country shows maturity when it is capable of taking advantage of the

positive experiences which others have implemented, even when one
doesn’t like the government which implemented these measures. I
respect technically and professionally those who were in the previous
government&dquo; (El Mercurio, 1990b:D-1). Even if the will existed to
undertake a sweeping series of reforms affecting housing, medical care
and education, such reforms would promptly lead to challenges to the
preeminent role of the military in Chilean political life.
The military budget is written in stone. A floor has been established
under it so that it can not fall below the 1989 level: 1.4 billion out of a
total budget of 7.7 billion (Paginas Abiertas, 1990:20). In 1989 the mili-
tary budget was $432 million higher than the housing, health and educa-
tion budgets taken together. Toward this end Codelco, the state copper
company, must hand over 10 percent of its sales of copper and other
products to the military, to be supplemented by the state treasury if a
specified yield is not produced. Remuneration of military personnel is
indexed to the cost of living, unlike that of other state employees. This
guaranteed income program for the military is tied to a state-run
company whose sales in 1989 accounted for 40 percent of total exports

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 67

(Delgadu, 1990b:ll). This source is unlikely to reduce the weight of the

military’s claim on its revenues by rapid growth nor provide increased
discretionary income for social spending. Codelco’s expansion has been
carefully limited by allowing foreign capital to develop projects in this
sector. In five years private sector production is supposed to match
Codelco’s (Riquelme, 1990:F-14). In short, the military budget demands a
sizeable stream of state revenue, hedged against inflation, from a
uniquely reliable source whose growth has been carefully restrained.
Privatizations have further limited the regime’s room to maneuver.
The once dynamic state development corporation, CORFO, has been
stripped of most of its influence and assets in a vigorous process of priva-
tization which accelerated after the 1988 plebiscite. CORFO had been
savaged since the coup and by March of 1990 all but two of the remaining
enterprises were privatized (Marin, 1990:19). Significantly a large
number of shares (21 percent of all shares in Endesa, the largest of priva-
tized enterprises) was sold to members of the armed forces (Marin,
1990:19). A smaller though still sizable chunk of the shares in the
Compania de Telefonos was also sold to members of the armed forces.
One estimate is that around 30,000 military personnel purchased shares
(Delano and Traslavina, 1989:127).
After the Aylwin regime took power, it was discovered that CORFO
was, for practical purposes, bankrupt. Among other liabilities it was $1.5
billion in debt. CORFO had absorbed the losses of privatized enterprises
while at the same time losing between $130-200 million in dividends
annually from the now privatized corporations. Debts in short were
socialized and profits privatized (Delgado, 1990a:6). The Aylwin govern-
ment’s response to this situation was to propose new privatizations to
finance the CORFO deficit. In announcing this policy, Ominami empha-
sized &dquo;the creation of grand enterprises, a function fulfilled by CORFO
in the past, is now exhausted&dquo; (El Mercurio, 1990c). The state has been
saddled with CORFO debts while losing previous revenue from this quar-
ter. CORFO, the government has made clear, is permanently out of the
business of creating and operating enterprises. Further, substantial
portions of the equity of other lucrative enterprises (the electric and
telephone utilities) have been sold off to military personnel, giving them
an obvious stake in the success of privatization.
It is plain that this debt, to both private and multilateral institutions
abroad, is an additional powerful source of fiscal discipline. The past
docility of the dictatorship before the demands of international lenders
will serve to highlight the slightest recalcitrance by the Aylwin regime.
Repayments of the principal on the multilateral loans have risen sharply
in the 1980s from $24 million in 1983 to $260 million in 1990. The 1987
rescheduling of medium and long term debt called for 60 percent of the
debt to be paid back between 1989 and 1995 (Ffrench-Davis, 1988:133).
In the case of Codelco and CORFO, revenue streams flowing into the

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68

state have been greatly reduced or eliminated. The previous regime’s

external debt obligations, passively accepted by the Aylwin administra-
tion, compromise state expenditure, imposing a debt overhead which
can’t be evaded.
The Central Bank plays a key role in the tutelage of the Aylwin
regime. Three days before the presidential election which brought Aylwin
to power, a law took effect that freed the Central Bank from the control
of the Finance Ministry. The bank was endowed with extraordinary power
by Latin American standards, exceeding in one respect that enjoyed by
the U. S. Federal Reserve. The bank had the right to set foreign exchange
policy (Christian, 1989a:D-14). The bank’s board was staffed with
Pinochet appointees. The new head of the bank, Andres Bianchi, said he
hoped &dquo;to assure that public spending does not exceed the limits imposed
by the productive capacity of the economy and the available money&dquo;
(Christian, 1989b:D-1). The initial response of the opposition to the bank
was negative and critical, but acceptance came quickly. Finance Minister

Foxley spoke as if accepting the bank board were a point of honor, a

pledge of allegiance to existing economic arrangements. Support for the
new board, according to Foxley, would &dquo;give a clear signal to the country,

especially the private sector, and to the international financial commu-

nity, that when we say we are committed to working with private business
and political groups that now support other candidates, those are not just
words&dquo; (Christian, 1989b:D-10). The key point here is the Aylwin
regime’s overriding commitment to securing investor confidence as the
centerpiece of any economic strategy, thus &dquo;internalizing&dquo; the major
ideological premises of Pinochet’s supply-side doctrine.
In the run-up to the 1989 elections the Central Bank underwrote a
monetary expansion that spurred an accelerating rate of inflation. In
January of 1990, the plebiscite and the elections finally over, the time for
a monetary contraction had arrived. The Aylwin team took responsibility
for putting the monetary house in order - at the expense of its electoral
base. The contraction of 1990 was unusually severe, comparable to the
contraction engineered during 1982, though of course economic condi-
tions in the country were clearly not comparable to the earlier year of
collapse (Benitez, 1990:F-1, F-10). The Aylwin regime firmly supported
this monetary &dquo;adjustment.&dquo; As Andres Velasco, a prominent functionary
in Foxley’s Finance Ministry, put it, measures in support of the adjust-
ment were &dquo;part of the politics stemming from March, an understanding
that the treasury contributes to the adjustment.&dquo; He continued: &dquo;We
sought to complement monetary policy with other instruments&dquo; (Garcia,
1990:F-1 ).
All theseideological commitments and constraints were visible in the
tax reform. The government’s original plan was to raise the rate of the tax
on profits to 20 percent. The Right would have none of this, successfully

insisting that the rate could only rise temporarily to 15 percent for the

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 69

years 1991-93 (Bustos, 1990:15). The government originally had no plans

for raising the value added tax (IVA). But with the Right’s successful
resistance to the direct tax, the government came around to an increase
in the IVA from 16 percent to 18 percent (Bustos, 1990:17, 21). This
outcome was fully in line with the tax policy of the dictatorship. As noted,
the tax reform envisaged only a temporary increase in the tax on business
income to be followed by reinstatement of the 10 percent rate established
during the dictatorship. The permanent IVA increase, promoted by
Foxley, also confirmed the taxing prejudices of the dictatorship. Under
Pinochet the IVA was extended throughout the economy. The IVA
contributed increasingly to total tax revenue (Vergara, 1986:103). The
expected increases in social spending were therefore to be financed in
large part by taxes which hit low-income citizens hardest. The conversion
of the Aylwin economic team to neo-liberal policies and the existing
economic and political constraints inevitably produced a regressive tax
policy.
Unsurprisingly the Aylwin government does not project any upward
spike in social spending in the near future. Social spending is to decline
from levels established under the dictatorship to be followed by a gradual
increase in later years. The expenditure itself seems likely to assume the
forms prescribed by the dictatorship: attempts to introduce competition
and private sector provision into the system. El Mercurio, using techno-
cratic code words for neo-liberalism, congratulated Minister of Health
Jimenez for &dquo;an analysis which assigns greater priority to technical and
economic considerations.&dquo; After describing a plan to subsidize demand
for health services by permitting competing nongovernmental health
centers in poor areas, Jimenez commented: &dquo;We believe it is perfectly
possible to successfully obtain the provision of social services by private
providers&dquo; (El Mercurio, 1990d:A-3). The results of privatization are
shown by the declining health conditions discussed earlier.
Pinochet’s opposition has been politically transformed by the lure of
office and long years of ideological and repressive encounter with the
dictatorship. In addition the dictatorship has spun an intricate web of
constraints, institutional and budgetary, to minimize the danger of discre-
tionary reforms. The Aylwin government is currently managing
Pinochet’s model. What political consequences will the government face
as a result of this undertaking?
The general point is that managing the model means taking political
responsibility for the model’s cruelties, oversights and failures. This effect
was visible in miniature when Foxley declined to meet with demonstrat-
ors in July. The demonstrators had become convinced, in part by the

Ministry of Housing, that the root of the housing problem was budgetary
and that nothing less than a meeting with Foxley himself was called for
(Fortin Mapocho, 1990:9). A great many such embarrassing meetings will
no doubt have to be cancelled, evaded or delegated to subordinates as the

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70

months pass and popular expectations are frustrated. Managing the

model also means taking political responsibility for defending it with the
armed power of the state. This is a task the Aylwin government is
equipping itself to face, in part by increasing the Carabineros by 4,400
slots. This decision was partially inspired by a clash between the police
and demonstrators at the poblacion La Bandera (El Mercurio, 1990e :A-
12). It also reflected a long term commitment by the Aylwin government
to expand the size and better equip the national and political police, who
were also carefully nurtured during the dictatorship, as we saw above

(Fernandez, 1990:16). In November, 1990, the Aylwin regime successfully

pressured the Bush administration to lift the ban on the sale of military
equipment to Pinochet’s armed forces.
Accepting these responsibilities also means undermining popular
support for the parties in power and possibly benefiting the parties of the
far-right or the military, or a reconstituted coalition of left parties. If the
principal function of the regime is largely to execute Pinochet’s economic
policies with marginal increases in social spending, then many lower class
voters could likely ask, why not put parties in power which wholeheart-
edly embrace the model? After all even these parties themselves agreed
in March that social spending would have to undergo some expansion.
The governing parties are laying themselves open to populist dema-
goguery from the right. Then again, the frustration of popular demands
can be expected sooner or later to re-ignite mass extra-parliamentary
action, a development which will go a long way toward delegitimizing the
regime in the eyes of the military. From the vantage point of a democratic
process empty of social content, the reawakening of mass action can only
be seen as a &dquo;threat.&dquo; As the Socialist deputy Camilo Escalona put it:
&dquo;We think... that the greatest threat to the democratic process isn’t
Pinochet. The greatest threat is that the people will not see its demands
satisfied, that the people will be disenchanted with democracy, that
millions of persons will turn their backs on the democratic process
because it is not capable of responding to their enormous demands&dquo;
(Luigi, 1990:D-8). If we can substitute the term &dquo;exclusive and oppressive
electoral charade&dquo; for &dquo;democracy&dquo; we can come somewhat closer to the
truth.
In this essay we have spelled out the reasons why the economic
performance of the free market Pinochet regime is not only unworthy of
emulation but that it has failed to meet its own claims, particularly in
growth, debt and social terms. In discussing its successor we point to the
probable failure of the electoral regime insofar as it operates within the
same economic and institutional parameters. The underlying point is that

political changes from military dictatorships to electoral regimes operat-

ing from the same neo-liberal assumptions do not alter the socioeco-
nomic outcomes.

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 71

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