LIBERALISM, CRISES, AND
STRUCTURAL ADJUSTMENT
IN CHILE
3/15/2010
What is “Liberalism”?

Classical Liberalism

Political
A theory emphasizing individual freedom and equality
 Policies tied to this idea include freedom of thought and
expression, and limitations on government power.


Economic
A theory that holds that free markets are more efficient than
managed ones and thus, in the long run, generate more prosperity
 The state retains a role in the system




as guarantor of rule of law and public goods
The state may intervene to correct market inefficiencies
Policies tied to this idea include:


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Free markets tied to property, supply and demand
Reduced trade restrictions tied to comparative advantage
The state as guarantor: fiscal discipline targeting social goods
What is “Liberalism”?

Neoliberal Theory
 The
Natural Laws of the Market: the market, once freed
of government and social distortions, is a largely selfregulating mechanism and will naturally seek
equilibrium.
 The market is more efficient than the government can
be and so should be widely relied upon to provide
goods and services.
 Free
flows in cross-border flows of goods, people, and
capital increase efficiency and are to be encouraged.
What is “Structural Adjustment”?

Making fundamental changes to the structures that
underpin economic functioning
 The
role of the state
 Property regime
 Mode of production
The process of moving from one mode of economic
organization to another.
In practice structural adjustment has been linked to
neoliberalism and the Washington Consensus; to
forced conditionality

What is “Structural Adjustment”?:
The Washington Consensus
Policy instruments associated with neoliberalism.
 Reduce fiscal deficits
 Realign public expenditure priorities
 Encourage broad but moderate taxation
 Let the market determine interest rates
 Achieve a competitive, export-oriented exchange rate
 Implement free trade policies
 Encourage FDI
 Privatize enterprises
 Deregulate industry
 Stabilize and enforce property rights
Williamson, 1990
What is “Liberalism”?

Neoliberal Theory
 The
intentional depression; atomizing
 Revolutionary intent: Bureaucratic rules distort not only
the economy but also individual choices and behavior;
neoliberalism would bring greater individual freedom
to pursue interests as well as prosperity. Renegotiating
the state-society relations changes behavior and,
eventually, values
 Shock Therapy: suddenness and speed of economic
shifts impacts the public reaction; quick and sudden
transformations facilitate adjustment.
Neoliberalism in Chile
Pinochet and the Chicago Boys
 Pinochet was interested in political developments, but
had little interest in economics
 Facing economic crisis in 1973, Pinochet turned to the
Chicago Boys and their neoliberal reform agenda
Training and travel made them conversant in international
financial matters
 Expertise and self-assuredness in an area in which the
military knew very little
 Technocrats with limited political loyalties
 They had a plan ready-made, drawn up in the months
before the coup

Neoliberalism in Chile:
The Seven Modernizations
A change to a pay your own way system in which quality
of life was determined by the individual’s ability to
pay.

Labor Reform


Social Security


1979 Labor Code: Deregulation of the labor market
Privatization of pensions and insurance
Health
Healthcare and cemeteries were privatized
 Shift control to municipalities

Neoliberalism in Chile:
The Seven Modernizations

Education
Change in curriculum
 Higher education is privatized
 Shift control to municipalities (1980s)

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Regional Decentralization
Local control was exercised by strongmen appointed by
Pinochet
 Redistricting led to many, small municipalities separated by
socioeconomic class
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

Agriculture
Justice
Neoliberalism in Chile: 1973 - 1980

Deregulation and Privatization
500+ state-owned companies and banks were privatized
 1975 Financial Administration Law: The executive has sole
authority to propose tax and budgetary legislation


Reduced Social Spending


By 1980 social spending was half what it had been under
Allende
Inequality
Steadily increasing through the 1970s
 Average wage plummeted in 1973 and only recovered in
the 1990s
 Today Chile is the 8th most unequal country (tracked by the
UN)

Neoliberalism in Chile: 1981 - 1982
The 1982 Debt Crisis
 Decline in imports, GDP, investment, and terms of
trade; increase in interest rates
 Increasing external debt from 40% of GDP in 1979
to 100% in 1983 (with interest payments rising
from 3% of GDP to 10%)
 Corporate Debt
 Privatization
had proceeded on borrowed money Chilean economic elites borrowed money internationally
and run up $14 billion in debt
Neoliberalism in Chile: 1983 - 1986
State Response to the Debt Crisis
 Divisions between the technocrats and the
businessmen
 The Chicago Boys lost their jobs; some were
investigated for fraud
 Softening of neoliberalism under Finance Minister
Hernán Büchi
 Re-nationalization
of some companies, briefly including
banks
 Rebound in public spending from around 10% of GDP
in the 1970s to around 14% in after 1982
Neoliberalism in Chile: 1987 - 1989

Turn towards pragmatic economic policy favoring macroeconomic
stability
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“People’s Capitalism”: continued privatization focuses on small investors
and capitalization through stock sales
Controlled fiscal expenditures
Debt-equity swaps convert external debt into domestic investment
Incentives to exports
Target social expenditures on the poor
Copper Stabilisation Fund, 1987: "The basic idea is to save
resources when the price of copper exceeds its long-term level so as
to use these savings when copper prices fall below the long-term
trend.” (OECD)
The economy resumed strong growth in the late 1980s, leading to
declining unemployment and increasing average real wages.

Neoliberalism in Chile:
1990 through today
In 1999 a survey by the UNDP found that “the results indicate
the preeminence of two grand themes: the demand for
economic security and well-being and the demand for
equality” (PNUD 2000, 99)


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Government guarantees reduce risk and facilitate private
investment
Transparency and higher accounting standards
Adoption of a counter-cyclical policy stance


Structural budget surplus rule, 2001: “Estimating revenue based on
trend GDP growth, so that expenditure can be calculated on the basis
of the government’s capacity to collect taxes over the medium term,
rather than on economic conditions each year. …[and] targeting a
structural budget surplus of 1% of GDP has allowed for countercyclicality.” (OECD)
Public debt-to-GDP ratio fell from 45% in 1990 to 3.8% in 2008
(est.)