On the 11th of September 1973, a new and historic chapter began in Chile, a chapter that brought not only dramatic political changes to the country but also an economic revolution.
Augusto Pinochet’s regime began at an economically bad time for Chile; inflation was at 800%, and strikes ravaged Chile on a daily basis. To deal with the crisis, the government took decisive measures that were seen as brave and innovative by his supporters, but as unnecessary and cruel by his opponents.
What made this policy, known as ‘shock therapy‘, unusual is that Chile was a pioneering nation; ever since the great depression, more and more economically-liberal administrations pursued Keynesian counter-cyclical policies (budget deficits at downturns, and recessions and budget surpluses at strong booms), and even the more conservative administrations never doubted the importance of an active government-led industrial policy. This standard was in part developed by a famous Argentinian-Chilean economist named Paul Prebisch, whose ideas were quite popular across Latin America at the time.
All of that changed drastically when the Chilean junta came into power and enacted radical reforms to and from within the Chilean government; they re-privatized the lands which were expropriated during the reign of Allende, price controls were abolished, trade finance and capital flows were deregulated, labour unions were suppressed, and wholesale privatization of national companies had begun.
The taxation policy of the Chilean government took an unsurprisingly conservative approach on the issue of taxes as well. The Chilean government slashed progressive direct taxes, such as the income tax, and hiked regressive indirect taxes such as sales taxes.
The only area where the government took a truly interventionist approach towards economics was in its fight with inflation, leading to the central bank of Chile raising interest rates from 48% to 178%.
The radical reforms implemented by the Chilean Junta completely shifted the economic landscape in Chile, and transformed the socialist economy of Allende into a market-led economy, almost overnight; thus, the great experiment into right-wing economic populism had begun in Chile.
The experiment lowered inflation as it had promised; inflation came down from 508% in 1973 to 376% in 1974, and further to 340% in 1975, however; the tight economic policy of the government and the Chilean central bank started a wave of bankruptcies which diminished manufacturing activity by 26%, and raised the unemployment rate to 15%, causing the economy to continue to deteriorate until 1977.
In 1977, the economy started to improve quickly from the stagnation it experienced earlier; Milton Friedman famously called it the miracle of Chile, however; the remarkable growth Chile experienced was short-lived, and was based on a financial bubble that developed out of financial deregulation and pension privatization. The bubble’s presence became clearer in 1982 when the Chilean economy took the hardest hit (relative to other Latin American countries) during the infamous 1982 Latin-American debt crisis.
In the end, the period of right-wing populism implemented by the Junta ended with no improvement in Chilean economic performance. Chile was the second-worst performing economy in Latin America, and poverty rates increased sharply, as did the unemployment rate. Out of this economic depression began another, less famous period of Pinochet’s rule, one that played a vital role in Chile’s later, now current, economic success.
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