Free Markets in Chile

Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He’s s noted writer and lecturer on economic, political and monetary affairs.

Ever since September 1973, when a military junta seized power in Chile, the world has been treated to the rare spectacle of an unexpected restoration of the market order by military fiat. Socialism with many of its ramifications was summarily replaced with an individual enterprise order. National borders were opened to international trade and commerce, markets and prices were set free from bureaucratic restraints and restrictions, government learned to live within its means, that is, balance its budgets, the national currency was reformed, and many public enter prises were returned to private ownership. Even in such fields as education and old age insurance, government beat a hasty retreat and made way to the private property order.

And yet, all these remarkable achievements, admired by the friends of individual enterprise everywhere, are seriously flawed. They were attained by order of a military junta and are safeguarded by armed power and might, that is, by an authoritarian state, which is denying basic human rights to thousands of its citizens and repressing important political rights to all. To most observers, Chile stands condemned as an outcast in the family of nations, a pariah country run by generals and colonels who lord over their subjects. In the world press and the international news media, Chile is a primary target of severe censorship and bitter condemnation.

The friends of the market order are bewildered and perplexed by the Chilean situation. If they hail the restoration of the enterprise system and the restitution of many property rights, they face the biting criticism of being “anti-democratic” and supportive of a regime imposed by brute force. They are chastised for their ideological bias that allegedly surrenders basic human rights in order to achieve a particular economic order. But if they choose to disapprove of the Chilean system they find themselves in the uncomfortable company of communists and socialists everywhere, and in agreement with radical critics and commentators.

Allende Deposed

Communists and socialists the world over spurn and despise the military regime because it overthrew the Marxist-dominated government of President Allende. On September 11, 1973, the armed forces arrested some 6000 known Marxist activists in the country, including several hundred foreigners. All resistance by partisans of the Unidad Popular coalition of communist and socialist parties was crushed. Allende died in the national palace, refusing to surrender.

Salvador Allende had been the first freely elected Marxist president in the Western hemisphere. As candidate of the Unidad Popular he had won over two opponents with 36.3% of the vote in the September 1970 elections. In the March 1973 congressional elections, the UP had won 44% of the vote. But Allende never won majority control over the legislature, which kept the Marxist executive branch at odds with a congress dominated by the opposition parties. Nevertheless, he proceeded to socialize Chile. He expropriated the U.S.-owned copper companies and ordered wage increases of up to 40%. He imposed stringent price controls and ordered production to be doubled. He inflated the currency at accelerating rates. In 1973 inflation reached almost 1000% and the wholesale price index increased 1,147%.[1] When the government exhausted its financial reserves it defaulted on international obligations and sought aid and support from the Soviet Union and other communist countries.

As students of economics would expect, economic chaos soon descended on Chile. Strikes and demonstrations were crippling the country, and food shortages brought mass exodus from the cities. Farmers stopped producing for fear of either legal nationalization of their products or illegal seizure by roaming hungry workers. Businesses were failing by the thousands, unemployment was soaring, and living conditions were deteriorating everywhere. In short, the division of labor, which is an essential condition of human existence, was disintegrating rapidly, giving way to economic chaos and civil strife.

Economic Reconstruction

After the 1973 coup the junta headed by General Augusto Pinochet Ugarte hastened to make peace with Chilean businessmen and foreign investors. The nationalization of American copper companies was declared irreversible, but the compensation claims of Cerro Corporation, Anaconda Company and Kennecott Copper Corporation were settled amicably. A new foreign in vestment law was designed to lure foreign investors by guaranteeing remittance of profits and safeguarding their property. The government also began to return private companies, seized by the previous regime, to their owners. In September 1975 Chile conducted a currency reform introducing a new monetary unit, the peso, equal to 1000 old escudos.

Gradually the government budget was balanced and the rate of inflation reduced. In 1974, prices rose 375.9%, in the following year 340.7%, then 174.3%, 63.5%, 30.3%, 38.9%, 27.5%, and an estimated 10% in 1981. The central bank’s stock of money, which stood at some 200 billion escudos at the time of the coup, rose to 836.7 billion in December 1974, to3,279 billion escudos (or 3.279 billion new pesos) in 1975, 9.6 billion pesos in 1976, 18.3 billion pesos in 1977, 30.5 billion pesos in 1978, 47.4 billion pesos in 1979, and 50.3 billion in 1980.[2]

At its best, such statistical evidence is rather dubious and inconclusive. When offered by government it is especially suspect of crude political manipulation and interpretation. Nevertheless, it may be concluded without much contradiction that the Pinochet junta indulged in rampant inflation throughout most of the 1970s. It reported its first balanced budget in 1979.

When labor unions all over the Western world threatened to block shipments to and from Chile the junta hastened to make peace with the labor union movement. It enacted the 1979 labor code which restored the right to form labor unions. But the code also established the right to work without labor union affiliation, and made union dues voluntary. It allowed collective bar gaining although negotiations were restricted to individual plant and company level. Labor agreements were made legally binding and had to be made for at least two years. Strikes were permitted after a secret ballot, but only for 60 days after which workers would be assumed to have quit their jobs. The new code immediately led to a number of ugly strikes by unions protesting against the “union-busting” provisions in the code.

Welfare State à la Junta

The friends of the individual enterprise order who may rejoice about the return of some property to the legal owners and the restoration of some goods markets must not overlook other junta policies that were designed to restore and strengthen the welfare state. Soon after the September 1973 coup the regime set out to make the tax system “more efficient and equitable.” It proceeded to extract a larger share of tax revenue from the “wealthier sectors.” It repealed a great number of so-called “development” laws that were said to discriminate in favor of capital. It eliminated the tax exemption on undistributed corporate profits, thereby including them in the taxable income base. While it was raising the minimum levels of tax exempt incomes it collected ever higher shares from larger incomes. While it lowered its real estate taxes on many property units it raised them significantly on more valuable properties. While it lowered most tariff rates to 10%, it raised them on capital goods by eliminating their previous exemption from customs duties. It imposed a general system of monthly tax indexation which made it possible to extract more revenue from business more quickly. It added a Value Added Tax which made collections from business more efficient and easy to manage. It era-barked upon an intensive campaign to crush tax evasion by businessmen. Altogether, it worked feverishly “to enhance the equity of the tax system” by redistributing the tax burden from the poor to the more affluent, from workers to businessmen and capitalists.

The Burden Increases

It is significant that the fiscal burden of the junta state has risen markedly since the 1973 coup. In 1977 the gross national product of Chile was estimated at 313 billion pesos. Government revenue amounted to 120 billion pesos, or 38.5% of GNP, which probably came to some 45% of net national income. That is, the military regime of General Pinochet is consuming some 45% of all goods and services legally produced in Chile. In 1972, the last full year of the Allende Administration, the government reported expenditures of some 40.689 billion escudos of a gross national product of 228.64 billion, or 17.8% gross and 21-22% net.

Even official junta statistics reveal that economic activity after the junta tax reform in 1974 contracted severely. In 1975 GNP declined by 12.9% and output per capita by 14.4%. The latter remained below the 1972 per capita product until 1980.[3]

Transfer expenditures have changed little since the Allende Administration. However, the source of revenue probably changed significantly. While Allende supplemented his tax revenue with generous helpings from the printing presses (40.9% of 1972 spending), the generals were laboring successfully to rely increasingly on taxation. Allende was seizing income and wealth from the middle classes, the primary victims of inflation, while in 1978 Pinochet was extracting ever more revenue from businessmen and capitalists.

Social Spending[4]
(Millions of U.S.
1976 Dollars)

      Allende       Pinochet
      (1972)       (1978)

Health       242.36       172.75
Social Asst.       41.14       179.20
Housing       156.20       67.58
Welfare       372.75       341.56
Education       502.98       456.12
Regional Dev.       17.91       51.34
Total       1,333.34       1,268.55

Bitter Fruits

It was no surprise to the impartial observer that in 1981 the Chilean economy ran into new trouble, the worst in its eight years of “restoration.” Thousands of enterprises went bankrupt, mines and factories were closed and farms sold at public auctions. Many banks and financial in stitutions are insolvent; the government had to save eight in November. Unemployment is soaring and is expected to exceed 20% in 1982. According to Cardinal Raul Silva Henriquez, head of Chile’s Roman Catholic Church: “I could be wrong, but never in my long life have I seen such a disastrous economic condition.”

Government economists blame the disaster on the world recession with its slump in commodity prices, including Chilean export prices for copper, timber, fresh fruits, and so on. But critics point out that the monetarist policies of the economic team called “the Chicago boys” (because many studied at the University of Chicago under Nobel Laureate Milton Friedman) contributed to the disaster. The monetarists insist in affixing their national currencies to the U.S. dollar which, in their belief, affords international monetary stability and order. They fixed the peso-dollar exchange rate at 39 to 1 in 1979 and then clung to it although Chilean prices subsequently rose 60% while U.S. prices rose less than half that rate.

In time the peso became greatly overvalued, which did double damage. It made Chilean products more expensive abroad, while it made imports cheaper. The overvalued peso brought devastation to Chilean exporters. Hundreds of small mines and smelters were forced to close, throwing thousands of miners out of work. But at the same time Chilean consumers went on an import binge, buying foreign cars, home appliances and television sets.

The binge was financed primarily by foreign credits extended to Chilean banks and consumer- finance companies. Chile’s foreign debt, which for years had been the concern of foreign lenders, being the second highest per capita in the world after that of Israel, increased by $4 billion in 1981, to $15 billion. Under President Allende Chile had gone bankrupt with a debt of just $3 bil lion.

Many Chilean banks are in grave difficulty today. The deepening recession is frightening foreign bankers, causing them to go slow with new credits. They are beginning to have second thoughts about Chilean lending practices and on the future of the junta order itself. Struggling to survive the liquidity pressures the Chilean banks have raised their interest rates on 30-day loans to 4.6% a month, which is hastening the demise of many industrial and commercial enterprises.

For a while there was a feeling of hope and optimism, which came with the restoration of some features of the market order and its easy access to the world credit markets. Moreover, the peso pegging to the dollar à la monetarist recipe permitted the Chilean people to live far beyond their means. But, as always, over-consumption can only be temporary; it must come to an end as soon as the limits of credit are reached. It is obvious that Chile has reached its limit and therefore faces the strenuous task of consolidation and repayment. Chilean levels of living must fall not only by the rate of previous overconsumption, but also by the amounts of necessary repayment. The deterioration in living conditions now clearly visible throughout Chile is putting new strains on the credibility and popularity of the junta regime.

Transgressions Against Human Rights

To most observers of the Chilean dilemma such economic deliberations have much lesser import than the consideration and observation of basic human rights. American liberals who may even be tempted to applaud the restoration of the Chilean welfare state and the redistribution of income through progressive taxation, are objecting strenuously to the junta denial of human rights and political rights. To them, property rights must always give way to the political rights of democratic majorities. If a popular majority acting through a democratic election process desires to seize income and wealth from entrepreneurs and capitalists, or wishes to control prices and wages by political force, no property right must stand in their way. The political rights to seize and confiscate private property must be supreme. The junta’s return of some business property seized by the Allende Administration obviously violates their democratic maxim.

Property rights actually are basic human rights. They are derived from the God-given right to life that must be sustained by man’s labor and effort. To deny the right to the fruits of one’s labor and effort is to deny his right to life. To create a political right to seize or confiscate private property not only negates this basic right to sustain life through labor and effort but also creates an insoluble conflict. When political rights are pitted against property rights, social conflicts arise that cannot be solved by majority vote.

On the contrary, a society bent on seizing and confiscating the property of its minorities must brace for a bitter economic, social and political struggle not only with its minorities but also among the beneficiaries themselves. Ugly political battles are likely to erupt about access to the public trough at which the beneficiaries hope to partake of the transfer. The magnitude of the transfer tends to determine the severity of the battle. When economic transfer by political might finally assumes ultimate desperate significance to the victims as well as the beneficiaries, the political battle tends to erupt into bloody confrontations. When society disintegrates into fighting mobs, the time has come for Caesar as the bringer of peace.

Political Dictatorship

Thinkers and writers who would deny property rights or create political rights over private property, are the ultimate heralds and harbingers of dictatorship. Most nations of the world are led by dictators of one color or another because they worship political might that negates property rights. To them, political freedom means the right to seize and plunder, to inflict harm on each other by majority vote. It does not matter whether they are guided by hatred, envy, greed, resentment, or merely by popular transfer ideologies; they all are heading toward the final battle in the streets where the biggest guns determine the outcome.

Human tragedy reaches its climax in civil strife. All the political transgressions committed in years of peace are mere trifles compared with the evils stalking the streets in revolts and revolutions. Their outcome does not materially change the transfer system but merely readjusts the order at the public trough. For as long as political rights negate property rights and the transfer ideology leads men to prey on each other, the conflict will rage on in one form or another.

The military coup of September 1973 was the first experienced by Chile in 49 years, which in South America was a long record of military neutrality in political affairs. Chile was going from crisis to crisis, with chaos in the streets, daily demonstrations, strikes, and bloody riots. There was hunger, deprivation and desperation in the homes and illegal seizures and confiscations of property. For many people these events were raising the question of survival in Chile. Under such conditions a few individuals may turn their backs on society so bent on self-destruction, and emigrate to safer shores. But most people do not have this opportunity for lack of mobility, flexibility, knowledge, or the necessary means. Moreover, even if they would want to leave their country, they are not welcome abroad. In desperation they may call on the armed forces to restore order and social cooperation. When the military finally strikes, the people usually welcome and hail it as the restorer and guardian of peace.

For the generals the coup may be a patriotic duty which they reluctantly assume in order to save the country. The multitudes may applaud their courage and devotion to duty, and admire their example of leadership, which in time may actually corrupt them and finally destroy them. After all, they are not intellectual leaders who through patient teaching and preaching can change the hearts and minds of the people so that they discard their economic and social conflict notions and embrace the philosophy of individual freedom and social harmony. The generals themselves usually cling to the Very ideas that are tearing society apart. They, too, favor economic redistribution by political force. But they want it in an orderly fashion without the fighting in the streets. The Chilean junta immediately reconstructed, with minor variations, the Allende transfer- conflict system.

Changing of the Guard

A junta regime usually comes to a violent end when it loses the support of public opinion. When economic conditions deteriorate again for any reason, or when public sentiment strenuously disapproves of the benefit order at the public trough, a violent reaction is likely. It may come from another general or colonel who senses the junta loss of popularity and, when successful, promises to be carefully guided by the popular will. Some juntas may even resist the temptation and corruption of power and relinquish it as soon as they sense a loss of public support. They may return the instruments of political power to the democratic transfer state and then wait patiently for the coming chaos when they will be needed again. By their timely withdrawal they manage to safeguard the public esteem for the armed forces as the ultimate guardian of law and order.

The seizure of power by the military always entails the risk of violence and bloodshed. The risk is minimal when the administration in power has lost all respect and support by the disillusioned public. But it is serious as long as some elements of public opinion continue to give the administration their loyal support. Many communists and socialists held to their Presidente to the bitter end. Thousands of them were incarcerated for several years, hundreds lost their lives, many were later expelled from the country. Political parties were dissolved, the news media placed under censorship, the public subjected to rigid curfew.

In every case of civil rebellion the victor is quick to point at the sum total of social benefits created by his rebellion. When communists or socialists prevail they may speak of a liberation of the proletariat from capitalist exploitation. When defenders of the private property order prevail they may point at the restoration of private property and free markets. Both invariably propose to weigh their open violations of human rights against the economic and social rights which their violent actions are presumed to have gained. Both regularly conclude that their actions were justified by the sum total of benefits to society.

There surely is such a scale in the realm of political rights that negate individual rights, especially property rights. But, by its very nature, it is an arena of perpetual social conflict that ultimately brings forth the strong man. A society that routinely weighs political rights against property rights and finds them wanting ultimately will weigh the loss of human lives in revolution and rebellion against the sum total of collective benefits.

There is no such scale in morality which is religion with its face toward man. No sum total of social utility and benefit whatever can outweigh the death of one human being or any suffering inflicted on him. No man or assembly of men can secure well-being or happiness by violence against a single individual. Violence breeds violence and is an offense against God even when committed in the name of majorities.

A Shadowy Future

The ideological forces of social and economic conflict that led to the 1973 disintegration of Chilean society continue to be alive and active at home and abroad. Under their spell the junta hastened to restore the conflict system that forcibly redistributes income and wealth from the more productive members of society to its favorite beneficiaries. In fact, the junta’s fiscal policies were designed to impose ever larger burdens on the business community, which for most of the seven years of junta regime has lingered in stagnation or recession. Wages and salaries throughout most of the decade have been lower than before. Some 20% of the working people now are walking the streets in idleness and despair. Foreign credits have been squandered and must now be repaid. And there is not a single voice of dissent that is explaining the road toward a brighter future.

Surely, the political dissidents who escaped or were expelled are vocal enemies of the junta. Many Christian Democrats now are making common cause with the parties of Allende’s former Marxist coalition. The Communist Party and the Socialist Party in exile are calling upon the people of Chile to continue their armed struggle against the junta. They have nowhere to go, they are told, but the Unidad Popular.

All along, the “Chicago Boys” in the inner councils of government are keeping in touch with the world by writing glowing reports and projections about growing GNP’s and rising incomes from work and pensions. But the results of their efforts are surely disappointing. It seems that they are rejecting or ignoring the fruitful lessons learned in Chicago, but are applying diligently the errors of monetarist thought.

General Pinochet and his men are probably evaluating the situation correctly: there has been little or no progress in economic and social thought since 1973. The only dissenting voice they hear is abroad, that of the Unidad Popular. They still loathe it and will not bear it. Therefore, they have been clinging to the reins of power as long as possible. And in lieu of promoting meaningful changes in social ideology and political morality, which alone would change the course of the future, they have busied themselves—as well as many jurists and lawyers—with reshaping the form of government by rewriting the constitution. In 1980, on the seventh anniversary of the military coup that overthrew the Allende government, they submitted a new constitution to a national plebiscite. Of the votes cast, 67.5% approved of the constitution, which strengthened the presidential powers, created an eight-year nonrenewable term for the president, and restored the bicameral Congress composed of a Senate and a Chamber of Deputies. General Pinochet was elected the first president.

But no matter what we may think of the Pinochet junta we must not forget that the generals always have been, and continue to be, viscerally opposed to the Unidad Popular anti-U.S., pro-Soviet attitude. They are looking upon Chile as a Christian nation and a loyal member of Western society, a willing friend and ally of the U.S. They are resenting American criticism of their barracks rule and denial of human rights. After all, their intentions were so noble, restoring law and order and returning their country to the Western camp.

Continuing Threats

Dark clouds are hanging over the future of Chile. Ideologies of economic and social conflict are tearing at the roots of society, straining social cooperation and the division of labor. The doctrines of conflict are permeating every aspect of social life. Similar conflicts springing from identical causes are visible also in neighboring countries, which is aggravating the uncertainties of life in Chile.

Old wounds are festering and may break open at any time. Territorial disputes with both Bolivia and Peru frequently raise border tensions and threaten to erupt into open hostility. Bolivia wants access to the Pacific Ocean which it lost to Chile in the War of the Pacific in 1883. Peru demands the return of its provinces lost in the same war. Chile’s powerful neighbor, Argentina, is claiming territorial rights to the islands of Picton, Lennox and Nueva, south of the Beagle Channel. They all are awaiting their opportunity for moving on Chile, which often sends the Chilean government scrambling for more planes and tanks from the U.S. and other countries. Chilean weakness through social disintegration may someday offer this opportunity.

Ideas and beliefs are the invisible powers that govern man’s actions. Ideas of economic, social, and national conflict have made their way in silence and swept around the globe. The Chilean situation does not differ materially from that of other countries.

There is an alternative other than Unidad Popular and its armed struggle against the junta. There is the road to individual freedom, which step by step retrieves the freedom of each and every individual to pursue his own good, in his own way, as long as he does not deprive others of theirs. On that road, no political party or pressure group seeks to enrich its members at the expense of others. There is no transfer program, in fact, no government that seizes income and wealth from some people in order to benefit itself and others. There is no public trough at which political right and might determine not only who shall feast at the trough but also who shall labor to keep it ever well-filled and bountiful. There is harmony and peace on the road to freedom. []

1.   Juan Carlos Mendez G., Chilean Socioeconomic Overview, Santiago, 1980, p. 15; also Chilean Economic Policy, edited by Juan Carlos Mendez G., Santiago, 1979.

2.   Encyclopaedia Britannica, Books of the Year, 1974-1981.

3.   Juan Carlos Mendez G., ibid., pp. 40, 41.

4.   Ibid., p. 71.