Investors’ Elaborates on the Chile “Miracle”
On the occasion of President Obama’s South American tour, for which he has taken much undue flak, Investors’ Business Daily has an editorial out elaborating on the so-called “Chile Miracle.” I have long been a cheerleader for Chile, and even pointed it out when this blog was very young. Chile has been called “the Switzerland of Latin America.” Switzerland should be so lucky.
It is nice to see renewed attention being paid to places like Chile, and far from berating Obama for doing “unimportant” things, I believe that deepening positive relationships and free trade in Latin America is critical to this country’s future. What’s the alternative? He could sit in Washington and plan how he wants to bomb the Maghreb. I’d suggest that he strap on a cape and fly over to Japan, but it’s not 2008 anymore.
But back to Chile. In a nutshell:
Chile’s reforms not only enabled it to emerge from dictatorship in 1980, but to become the success story much of the world seeks to imitate.
In 30 years, Chile has gone from being a Third World country to a developed one, raising per capita income to $17,000, achieving 6% to 7% GDP growth most years, and attracting billions in foreign investment.
In fact, I think this is far from a miracle. The seemingly incredible increase in wealth is due to two things. First, Chile started in abject poverty and so had a long way to go upwards. Second, and far more importantly, Chile decided to experiment with freedom. Under the influence of Milton Friedman and the “Chicago Boys,” Chile liberalized markets, privatized social safety nets, and instituted monetary controls.
I have been broadly critical of Friedman’s methodology in the past, but put into disciplined practice, it is clear that Friedman’s brand of free-market oriented monetarism has much better results than the mainstream Keynesianism one finds elsewhere in the developed world.
Note, however, that I am still critical of Friedman’s methodology, quite simply because – Chile’s example notwithstanding – proper monetarism requires discipline. This discipline is something I think most politicians are incapable of over the short term, and something I think every politician is incapable of over the long term.
But that is neither here nor there; let’s look at some of the reforms Chile has found useful. First, fiscal control:
First, Finance Minister Sergio De Castro made the central bank independent. He ended subsidies and cut government spending. He slashed bureaucrats from 700,000 to 550,000. It was a painful austerity in the absence of a big private sector.
In the first four years of the new government, Chile’s economy surged 32%.
Ending subsidies – check. Cutting spending – check. Slashing bureaucrats – check. If I have one quibble, it would be about making the central bank independent when it is fairly obvious from our own experience in the United States that a central bank, ostensibly independent or not, should not exist at all. But, the good is not always the enemy of the ideal, and an independent central bank is clearly preferable to a government-run one.
Next, economist Jose Pinera, Chile’s Labor and Social Security Minister, privatized social security. The plan helped the government balance its books and let workers choose between personal retirement accounts or the bankrupt state-run pension system. Workers could keep their own money, invest it, decide when to retire, and, best of all, owned their pensions as property they could leave to heirs. Some 97% of Chileans switched.
Pinera’s privatized accounts not only outperformed the state system by a factor of 10, but the savings they created provided capital to rebuild the country.
At this point, nobody who is not already receiving Social Security is seriously counting on it. The system self-perpetuates, however, because after spending so many years paying into the system, everyone expects to at least get something out of it.
However, my contention has always been that those of us who are productive payors into the system will have to accept an unfair deal in order to unwind our untenable position in this vast Ponzi scheme. I would be willing to give up my “benefits” in a second if it meant that I never had to pay anything else into the system. And they can keep all they’ve taken from me up to this point.
But offering citizens a choice of money managers (i.e. state or self) is simply a no-brainer. I’d say that anyone who believes politicians will do better with other people’s money than those people would themselves deserves to die broke. On the other hand, the people who trust said politicians seem to be the voters who take realistic people to bankruptcy with them.
The last step came as Chile slashed tariffs and opened itself to the world. It signed more free-trade pacts than any nation, 58 at last count, which gave it access to 2 billion customers, an outsize market to swim in for a relatively small nation.
That enabled the country to specialize in what it did best — seafood, fruit, wine and its traditional mining exports. Its citizens got rich.
Free trade and the resultant division of labor is economics 101, but despite the clear benefits – and the pending free trade agreements in Colombia and Panama – Obama continues to dither. Chile has opened itself up the world with incredible results (if I had one more quibble, I would point out that an FTA is unnecessary when free trade should be declared unilaterally).
My hope is that Pinera et al are convincing enough to push Obama past whatever misgivings he has. Of course, union opposition at home won’t help, but the data are there. Liberalizing trade helps citizens at home, and Chile is proof.
I do spend a good bit of time criticizing Obama on this blog, and to be fair, he mostly deserves it. But this is not a partisan forum, and I believe that the president has the opportunity to do something incredibly productive here. I won’t hold my breath for Social Security privatization under Obama, but loosening some of the draconian restrictions we have on borders and trade with Latin America would be a truly meaningful step. NAFTA remains one of Clinton’s best legacies, and trade relations with our neighbors have never been stronger. Obama has the opportunity to extend that legacy, and I hope he seizes it.