Chile's Economic Revolution

An eye-opening, first-hand look at the world's most radical attempt at economic decontrol

A Note to Our Readers: Aware of the controversial nature of this article, we are taking the unusual step of explaining why we are publishing it. We are not among those who hold that Chile's ruling military junta can hardly do wrong because it overthrew a socialist government. Yet we think it equally narrow-minded to believe that there could be no good news coming out of Chile.

Having gleaned snippets of seemingly good news about the economic reforms in the country, and aware of the impending travels of our author to Chile to work on a book on the country's economic policies, we asked her to investigate. What she found, during months of living in Chile and interviewing everyone from government officials to poor children on the streets, is a remarkable economic turnaround for Chileans under a government that has explicitly moved in a free-market direction on the economic front—and bold moves to let people handle privately some economic decisionmaking that many Americans are afraid even to consider removing from Big Brother.

The moral of Chile's economic success story, and the reason we are publishing this article, is the vast possibilities that are unleashed when an economy is not subjected to government meddling. Can such decisive moves only be made by an iron-fisted government? Ms. Rosett addresses that issue. For the record, however, neither we nor she condone whatever repression is also perpetrated by Chile's regime. But it would be too bad if, because of condemnable political policies, Chile's economic success story remained a secret that people don't want to know.
—THE EDITORS

Twelve years ago Chileans went looking for a free lunch and instead found themselves moving toward a free market. Between Salvador Allende's radical socialism and Augusto Pinochet's ambitious capitalism, Chile's recent history looks like a laboratory experiment dreamed up by an insane economist. The results, however, deserve close attention. Even those sympathetic to Allende's regime admit that Chile's socialist economy was a crashing disaster; those who deplore Pinochet's rule must concede that the substantially capitalist economy is working, and working well.

Among Chile's more original free-market features are private social security and a deregulated transportation industry; and a school voucher system has brought effective competition to education services at the grade-school level. Inflation is under control, and trade is growing. A common Chilean complaint is that too many cars are on the road these days—usually said while turning a key in the ignition of a new Datsun or Suzuki.

In downtown Santiago the shops are crammed with imported Japanese radios and TV sets, Italian shoes, and American jeans. Ads exhort customers to buy at off-season sales and to sign up for private health insurance. Even in the tiny lumber-village of Chanco, where electricity is a novelty of the last decade, more than half the children playing in the town square report that they have TV sets at home. Infant mortality has dropped from 71.1 per 1,000 live births in 1972 under Allende to 36.3 in 1979, and the percentage of families living below the poverty line fell from 20 percent to 13.6 percent in the six years following Allende's overthrow.

The abundance of consumer goods and improvements in well-being make a dramatic contrast with the Allende period, when women marched through the streets of Santiago, banging on pots and pans to protest shortages of bread, meat, fuel, and almost everything else. These demonstrations marked the beginning of the end for Allende, whose three-year government tore the economy apart and brought Chile to the edge of civil war.

When Allende was voted into office on a 36.2 percent plurality in 1970, a popular magazine called Ercilla wondered whether he "would be able to carry out his socialist experiment without destroying the traditional democratic fabric of the country." Three years later the answer came in the form of a military coup that averted economic collapse and civil war—but at the expense of imposing dictatorship on one of the world's oldest democracies.

A 1980 World Bank report on Chile concluded that, by the end of Allende's presidency, real gross domestic product per capita and real wages were lower than in early 1970, and agricultural output had fallen to the level of the early 1960s. The socialist recipe for disaster was straightforward. Allende proposed to turn Chile into a worker-owned state by nationalizing industry and encouraging a brand of violence that he tagged as "class struggle." The strategy entailed illegal importation of arms from Cuba and an official open-door policy toward foreign nationals. Estimates of the number of activists from places like Cuba, Argentina, and the Soviet Union, allowed entry to help with the takeover of farms and businesses, range as high as 13,000. In 1971 alone, Allende nationalized more than 80 companies and sharply accelerated a land-reform program begun under previous administrations (almost 1,300 land seizures were reported in 1971; 340, in 1969 and '70 combined).

For the first year, all seemed well. Chile lived off its capital, and GNP rose 5.2 percent in real terms. Inflation dropped from nearly 35 percent to 22 percent in response to tight price controls and a fixed exchange rate. Allende seemed to be providing a glorious confirmation that socialism could work.

Then, in 1972, the bills began to come due. The government was running out of international reserves; inflation had rocketed to 163 percent; and price controls had created official shortages, along with a booming black market.

By 1973 the government had expropriated more than 450 corporations, and most of them were running at a loss. The black-market exchange rate had soared to more than 10 times the official rate. More than half of government spending was financed by printing money, and by August 1973 inflation had reached an astronomical annual rate of 1,000 percent. Chile was unable to repay its foreign debts and could no longer obtain loans from non-Communist countries.

Allende had proposed rationing to handle the shortages, and protest demonstrations, along with clashes between right and left, had become almost a daily event. In August 1973 Congress issued a declaration condemning the regime for its attempt to "take total power in order to…achieve the installation of a totalitarian system which is absolutely opposed to the representative, democratic system established in the constitution." In Santiago, Chilean women sprayed military officers with yellow paint as a protest, they proclaimed, against their cowardice in refusing to intervene to save the country from civil war.

Yet intervention was not a simple solution. While the military might be able to overthrow Allende, they were not trained to handle nationwide economic catastrophe. Shooting rockets at the Central Bank was, at best, a short-term solution.

Recognizing the need for an economic cure, a retired naval captain, Roberto Kelly, arranged in late 1972 for a group of professors at Chile's major private university, the Catholic University of Chile, to prepare a recovery plan for the country. Although the venture was billed as an academic exercise, the plan was clearly intended to have practical application when the time was ripe. (An American economist, who prefers to remain anonymous, claims that the CIA funded at least part of the project. He would not give details, and Chileans involved deny any knowledge of this.)

The group of professors who worked on the plan would later become known as "the Chicago boys," for their recovery strategy was based largely on the free-market economics they had learned as graduate students in economics at the University of Chicago. Since 1955, Chicago had accepted Chilean students under an arrangement with the Agency for International Development set up by Nobel Prize–winning economist Theodore Schultz. The students would study at Chicago with free-market expositors and advocates such as Milton Friedman, Gary Becker, and Arnold Harberger, then return to Santiago as professors of economics in their own right. The group that worked on the economic plan in 1973 included Sergio de Castro, who is Chile's minister of finance today; Juan Carlos Mendez, who was director of the budget until 1981; and about 10 others, most of whom have since held policymaking positions with the Pinochet government.

By early August 1973 the plan was finished and in the hands of the military. On September 11, the day of the coup in which Allende died and Pinochet took over Chile's government, Kelly reportedly burned out a Xerox machine copying the plan to distribute to still more new government officials.

Pinochet's military government, however, was still trying to assess the economic situation, cope with pockets of armed resistance, and decide generally what to do next with the country. There was little emphasis on an overall economic plan. Some of the Chicago boys were appointed to second- or third-level positions in the ministries of Finance and Economics, and Kelly became director of the Office of Central Planning, with some Chicago boys as research assistants. But the over-all free-market plan initiated by Kelly in 1972 did not come into its own for three years.

For a while Chile wobbled along, with a large measure of its stability supplied by the high price of copper, which accounted for 83 percent of exports. All the copper companies had been nationalized under Allende, bringing large revenues to the government but also making enemies abroad. Allende's method of nationalization had involved offers of payment to large foreign companies, which he then canceled out by imposing a retroactive tax on "excess profits." This move, among others, had made Chile a very poor credit-risk to foreign investors and left the Chilean economy dependent on a product with a highly volatile price.

In 1975 came OPEC and world recession, and the price of copper dropped through the floor and went on dropping. One economist who was making budget projections for that year recalls that they would revise the budget week by week as the price of copper went lower and lower, until it stabilized at about half the old price. The economic situation went from critical to almost ridiculous. GNP growth dropped from 4 percent in 1974 to -14 percent in 1975, and unemployment rose from the already worrisome rate of 9.2 percent to 16.2 percent.

Again, Roberto Kelly took the initiative and approached Pinochet with an assessment of the crisis. Kelly was given 48 hours to propose a general plan for economic recovery, and after less than a week of hurried consultation, Pinochet took the leap of faith that vaulted the Chicago boys to at least national, if not world, fame (or, for some, notoriety) and became the turning point for Chile's stumbling economy.

Some of the free-market policies proposed in the economic recovery plan drawn up by Kelly's team were already halfway in place. Almost immediately after the coup in September 1973, Vice-Admiral Lorenzo Gotuzzo, who became minister of finance, had gone on television to announce a new set of policies. Price controls were removed from the more than 3,300 regulated goods. Tariffs were reduced. (By the end of Allende's government, tariffs averaged 105 percent on 5,125 protected goods—a level that effectively prohibited many industrial imports at the expense of the agricultural sector.)

The military government also moved immediately to establish a single exchange rate, instead of the multiple rates Allende had used to try to manipulate trade. And it began returning the roughly 300 corporations that had been nationalized outright and auctioning to the private sector those that had been bought by the government after Allende's policies had driven down their value.

These policies were not drastic or pervasive enough, however. The government budget continued to run a deficit, and inflation stayed painfully high—375 percent in 1974 and 340 percent in 1975.

When Pinochet decided to put his money on the Chicago boys' card in 1975, he appointed several of them to top positions in the government. In putting together a recovery plan, the Chicago boys had the advantage that almost all of them had been educated at the same place and had come out with the same economic philosophy: that the market operates most efficiently, to the benefit of the most people, with minimal government interference. Today they are still called in Chile the "equipo Economico," or "Economic Team"—a name that reveals a lot about how they operate.

The first priority of the plan was to balance the government's budget. This was no easy job, but Chile could not reduce its inflation rate, they maintained, unless it could find another way to cover or eliminate its still enormous deficit, either by borrowing or by reducing spending. Borrowing was almost impossible, explains Sergio de la Cuadra, a Chicago boy who is today president of the Central Bank. "In 1975 the Central Bank suffered a real trauma. We were not able to raise a single dollar abroad."

Faced with this situation, newly appointed budget director Juan Carlos Méndez went to work in a way that makes David Stockman look timid. Méndez made across-the-board cuts of 15 percent in all government spending on domestic goods and 25 percent on all imports. "It's not a very scientific way to do it, but it was important to do something right away," recalls Méndez. "After that we began to fine-tune."

To make the budget cuts work, the government continued the process of auctioning off State-owned corporations and embarked on a divide-and-conquer campaign that forced those that were still publicly held—about 20—to behave more like private corporations. Kelly illustrates the strategy with the case of ENAP, the Chilean oil monopoly that is still in State hands. "ENAP became a holding company with three or four subsidiaries. When they were all lumped together, no one could distinguish where the inefficiencies were. Today, each department must demonstrate its profits. The refineries can buy oil from outside or from Chile, and the company must pay taxes and issue dividends to its shareholder, the government, or management will be changed, just as in a private company."

One government official adds another example of how Chile reduced spending on inefficient companies. LAN Chile, the State-owned airline, was cut off from subsidies and forced to compete with privately owned airlines on equal terms. After learning its lesson the hard way, when the government refused to bail out LAN Chile on an unpaid fuel bill, the airline renegotiated its loans and revised its schedules and routes. Today it is one of three competing major domestic carriers. The other two belong to the private sector, and all are responsible for their own profits and losses.

For six years the Chilean government maintained a policy of denying subsidies to private corporations. In October 1981 Sergio de Castro, minister of finance, made a brief speech in which he reminded the nation's businessmen: "It is not the case, as some people seem to think, that profits are for the companies and losses are for the State. Profits and losses are both for the companies." Unfortunately, in that same month the government succumbed to recessionary pressures and bailed out eight financial institutions that were reportedly on the brink of collapse.

The budget-cutting strategy, coupled with careful control of the money supply, was radically successful at bringing inflation down from 340 percent in 1975 to 39 percent in 1979 to less than 10 percent in 1981—a level well below the average Chilean rate of 25 percent even before Allende. To further help the economy recover as fast as possible from the damage of inflation, the government introduced an indexing system for wages and taxes, home mortgage rates, and even parking tickets. Today, daily fluctuations in the consumer price index are published in the newspapers, and even the maids expect the quarterly inflation readjustments that help Chileans maintain their purchasing power.

Returning companies to the private sector was not enough to introduce market efficiency, however, as long as prohibitive tariffs were still in place. Under the recovery plan, the government continued to reduce tariffs until in 1979 they were stabilized at a uniform 10 percent on all imported goods except large cars, which are on a gradually decreasing schedule that is also slated to reach 10 percent over the next few years.

A government economist explains that some of the team favored dropping tariffs to zero but agreed that too many people would be terrified by such a move; better to give them a radically revised version of a familiar old policy. This is typical of how the Economic Team has managed to work with the rest of the government. Where the recommendations of a free-market purist would be blocked by the military or other powerful interest groups, the team at least attempted some compromise that could move the country further toward a free market.

The 10-percent tariffs mean that Chilean companies can compete effectively in a world market. Many of the formerly fat, protected industries were obliged to trim costs in order to survive. And domestic producers who had been up against subsidized imports of such goods as grain were now able to compete on a fair basis in the world market. Chile is thus moving toward a more efficient use of its resources. Instead of taxing people to provide subsidies for inefficient industries, the government is now allowing Chilean producers to find out what they can do most efficiently and offer those services in the world market.

The result has been healthy in a number of ways. Not only are Chileans able to choose from a large variety of goods available on the world market, from small Japanese cars to different brands of toothpaste to Coca-Cola from the United States and fruit-flavored soft-drinks from Brazil, but the composition of exports is also far less lopsided and hence less risky. Although copper was 83 percent of exports in 1973, today it is only 34 percent, with the difference supplied by new exports such as fruit and manufactured goods. Chile is suffering again from world recession, as it did in 1975, and the price of copper today is at an all-time low in real terms of about 73 cents per pound. Yet GNP growth has merely slowed from 8 percent to an estimated 4–5.5 percent for 1981, since the copper losses are a far smaller part of Chile's overall export earnings.

A more controversial part of the government's recovery strategy, from the point of view of economic liberty, has been its labor plan. Effective since 1979, the plan allows unions to organize at the firm level but mandates open shops (workers cannot be required to join the union in order to be employed). Sympathetic strikes as well as industry-wide strikes are prohibited.

Workers are allowed to strike, and firms are allowed to engage in lock-outs, only after a 45-day negotiation period since the presentation of a new contract. If workers choose to strike they have 60 days either to sign a new contract or to return to guaranteed old jobs at, as a minimum, their former salaries plus a 100-percent cost-of-living adjustment. Once the strike has gone past 60 days, workers are no longer guaranteed their jobs back and the company may hire new people and negotiate new wages.

While Chile's labor plan lays down the rules of the game for labor-management relations, it does allow the government to avoid getting into the thick of contract negotiations because there are incentives for both employers and employees to work things out. During the first six months of the plan, approximately 2,000 draft contracts were presented, and agreement was reached on 97 percent of them before the end of the 45-day negotiation period, according to ex-Labor Minister José Piñera.

Recently the labor plan was put to a strong test. The longshoremen's union, a traditionally strong union in almost all countries, had been given a temporary exemption from the open-shop requirement, but it was required to comply with the labor plan as of September 25, 1981.

The government began issuing licenses to any able applicant who wanted to work in the ports. The union, which had long enjoyed the privilege of naming all dock-workers and charging monopoly rates to shipping companies, protested loudly to the president and the press but was unable to muster enough support or a credible argument for maintaining its privileged status. Today the ports are staffed by both union and nonunion workers, and a port authority spokesman, Diego Sepúlveda, estimated in October 1981 that costs of cargo handling in Chilean ports would fall at least 20 percent.

Perhaps the most radical of the Chicago boys' moves was their attack on Chile's ancient and monstrous social security system, which had been a pay-as-you-go transfer plan, similar to that now in the United States although even less sound, and discriminatory with respect to occupation. (Blue-collar workers' pensions were a far smaller percentage of their income than were benefits for government officials, bank officials, and the military.)

The result, in place since May 1981, is a private social security system, in which workers must pay a tax-free minimum of 10 percent of their salaries up to $1,800 per month into pension funds managed by private, competing companies. Within six months of privatization, 12 firms had entered the market, and upwards of a million people, more than one-third of Chile's labor force, had voluntarily enrolled.

The companies charge fees for handling the monthly payments, managing the funds, and eventually administering the accumulated pension benefits. Any firm with a minimum capitalization of $600,000 and a viable plan can go into the pension business. Workers are allowed to transfer their savings from one company to another with 30 days' notice, and companies must give 60 days' notice before raising their rates. The firms are so competitive that several of the largest ones engaged in an all-out price war during the first two months of the system, which, as Labor Minister Miguel Kast points out, "only benefits the customer."

Kast also gives their rationale for the government's having instituted a few fail-safe mechanisms: it is hard at first to persuade people to trust free enterprise with their pensions. So pension funds may only be invested in fixed-income instruments such as mortgage bonds and short-term certificates of deposit, and portfolio diversification is required. In addition, the government receives daily reports on the performance of each fund, and every pension company is required to put up margin deposits against drops in performance below that prescribed by a formula based on average returns to all the pension funds. The investment instruments are indexed to inflation, and the expected real rate of return is about 4 percent.

Current workers are not required to register with the new system. They have a choice of staying with the old transfer plan or switching to the new system, although anyone who switches to the new system is not allowed to switch back. By the end of 1982 all new workers will have to join the private system, and the government will continue to make appropriate payments to those who remained with the old plan, drawing on general government revenues as the number of workers-contributors declines to zero. For those who were paying into the old plan and decide to switch, the government will pay into their new account a pro-rated amount of the benefits they would have received.

The private savings plans have had an interesting side effect, as Jorge Cauas, ex-minister of finance and chairman of the board of the largest private social security company, called Provida, points out: "Having their own tangible accounts gives the people a sense of private property, which is important to the future well-being of the country." Chileans who save with a private company are issued monthly statements recording each of their payments and bringing their pension accounts up to date. When one of the companies was late issuing the statements, a lot of savers protested to both the management and the government. "Ten years ago that never would have happened," says Cauas. "They would not have expected to see the money again. Today they view it as their personal property, and they care very much how it is managed."

Private competition is also coming to education, where the government provides subsidies for schoolchildren that can be used as tuition in private schools, in what amounts to a voucher plan for grade-school education. Chile has had such a subsidy system since 1951, but only since 1978 has the amount of the subsidy become large enough to have a practical effect. Formerly, payments were made six months to a year after a student enrolled in a private school and were not indexed to inflation.

Today, the government allows any child to enroll tuition-free in a public school or, if he enrolls in a private school, reimburses the school directly for about 100 percent of the cost of educating a child in a public school. For that amount a large number of new private schools are going into the education business. In the Santiago area alone, more than 400 applications to start new schools were approved during the first half of 1981. Since subsidy-per-child is the same across schools, and the profits of running a private school come out of whatever can be saved on costs, there is an incentive for private schools to start first in the lower-rent districts, which means poor people will benefit most from the competitive incentives faced by such entrepreneurs.

Since the private schools are competing with both the public system and one another, they must be good in order to attract students. Mrs. Olga Arias Muñoz, a former public school teacher, started her own school a year ago in one of Santiago's poorest neighborhoods, Pudahuel—one of Allende's strongest centers of support in the early 1970s. When she opened the doors of her school on the dirt roads of her Pudahuel neighborhood, she received 350 applications for 250 places. "You have to have good teachers," she explains. "If you do, it's easy to get students. If you don't, you might as well close the school."

To ensure that students receive the education they are paying for, the state bases the subsidy not only on the number of students but on the total number of days of attendance, which gives the schools incentives to encourage attendance. To try to promote equality of opportunity, the government also makes it expensive for private schools to charge more than the government subsidies: schools that do so lose all government money, so parents who are willing to pay more for an even better school must pay the entire amount of the tuition.

There is evidence that the private schools are in great demand: while the total number of students in the Chilean school system increased by only 3.5 percent between 1976 and 1980, the number of students enrolled in the subsidized private schools jumped by 31.7 percent. Test scores show that students in these schools receive a better education than those in public schools. Each year the graduating class takes a national, standardized exam, and students from the subsidized private schools have been consistently outscoring the public school students by a statistically significant amount.

Also in the works at the Ministry of Education is a plan to turn over public school administration from national to regional authorities. The Ministry of Education will continue to make general policy, but actual management will be carried out at a local level, where parents have far more input into what is done. More than half the public schools have already been turned over to local management, and eventually all the schools will be in regional hands. Not only should this improve the quality of schools but, by doing so, will spur higher-quality education in the private schools, which must compete with public schools in order to make a profit.

Some critics of the system argue that it is a mistake to leave education to businessmen with profit motives. This argument ignores the advantage of good management, which will look for professionals in education to manage the schools, just as the owner of a baseball team hires a professional coach instead of letting his accountants run the team, and the coach trains the players while the owner takes care of the accounts.

Another area where private incentives are working wonders is the transportation industry. Taxis, intercity buses, and airlines, all heavily regulated six years ago, have been allowed to set their own rates and run whatever routes they choose.

Taxis now abound on city streets. Their number had dropped from some 19,000 in 1974 to 16,500 two years later. But after deregulation in 1978, nearly 24,000 taxis were working the streets, and by 1979 the number had jumped to 34,890. Prices are reasonable, probably even low given the current Chilean price level—$1.00 initial fee in most cities, and about 41 cents for each additional mile.

Since the number of licenses is unlimited and anyone with a clean record can get one, most taxi drivers own their cabs and use them as private cars when they are not in service. Any car can become a cab; the owner need only get a taxi license and paint the car black and yellow. Taxi drivers are also allowed to operate their cars as jitneys, running an advertised route and picking up passengers like a small bus. Drivers can run whatever route they please, whenever they please, and the resulting taxi traffic accommodates rush hour nicely—with no government planning! When traffic is heaviest, a lot of the cabs put signs on top advertising their routes and operate as jitneys until traffic thins out, when they become cabs again.

In intercity busing much the same free-wheeling adjustment to demand has occurred. Anyone is allowed to buy a bus and operate it between cities at whatever rates he wants to set. Within cities the rates are fixed, but anyone is allowed to run a route. With this policy, the total number of buses operating in the country has risen from less than 16,000 in 1974 to more than 20,000 in 1979, at no cost to the government.

The most modern buses are those that operate between cities, where private enterprise has produced cheaper, more frequent service along the most popular routes. It is safe to assume that a bus will be available from Santiago to the cities of Valparaíso and Viña, about 80 miles away, at almost any hour of the day, and prices are low enough to attract considerable business.

In airlines the effect of deregulation has also been impressive. Formerly, international flights were limited by law to the carrying capacity of Chile's nationalized airline, LAN Chile. Since deregulation, effective in 1979, both the number of companies operating in and out of Chile and the number of flights offered by each company has grown substantially.

Among the international carriers operating out of Chile since the free-skies policy was introduced are Pan Am, Alitalia, Lloyd Aereo Boliviano, and Aereo Uruguay. Argentinians and Uruguayans, whose countries regulate their air industries, have started flying into Santiago in order to save money with Chile's cheaper rates and to take advantage of the new routes. On the national level, seven new companies have become significant competitors in specialized markets, where before almost all traffic was handled by LAN Chile.

Jaime Latorre, a travel agent who works in Santiago, complains that he has had almost too much business since deregulation. "It gives us a problem because we work on commission, and people are using the airlines much more for the shorter, cheaper flights. Those are more work and less money for us," says Jaime. But few of the travelers are complaining, he is willing to admit. "Deregulation created a new market. People who never traveled before are now traveling."

On the low end of the economic scale, Chile has also done a lot in the way of providing the poor with subsidies that maintain work incentives, unlike US welfare plans. Chief among these subsidies is a plan called PEM, a Spanish acronym for "Program for Minimal Employment." PEM was initiated at the suggestion of Chicago boys Kast and de Castro, in 1975, to cope with the worst effects of the unemployment crisis during the recession.

PEM guarantees a job at below the minimum wage to anyone who shows up at the local PEM office in any region of the country. The work usually involves cleaning streets, tending parks, or some similar activity that local authorities need done. While the wages are too low to be regarded as more than supplementary income on a long-run basis, it is a way for the government to funnel money to the poor without taking away their incentives to find more socially productive work at higher wages.

Today the make-up of PEM workers is far different from what it was in 1975; during the economic crisis about 91 percent of PEM employees were men, and almost all of them had worked previously. Today only about 48 percent are men, and most of those working have never held jobs before, which means that PEM has become more of a training ground for employment and a supplementary source of income than a few years ago. Previous participants who had training but were unable to find work have moved on to better jobs, and women, students, and inexperienced workers from other groups receive government subsidies in a form that does not permanently swell the public payroll and does not block the search for better jobs.

PEM has had administrative problems, and one government analyst charges that the distribution of funds has been too loose and budgets are probably padded in some regions, where there is no strict watch over how many people actually work once they have signed up with PEM. Overall, though, the cost of mismanaged funds is probably lower to the country than the cost of permanently maintaining large numbers of unnecessary employees in government service, as was the case under Allende, or the cost of discouraging the search for work, as is the case in the United States.

While the Pinochet government's economic policies tend to minimize the role of the state and leave as much as possible to the free market, in the area of political liberty its record is another story altogether. State control is loose enough for a group of professors to run a signed ad in a large newspaper disagreeing with government policy and suffer no adverse reaction. People will talk: a casual acquaintance at a soup-stand in the Santiago fish-market criticizes the government at length, even though he adds, "Please don't repeat this to anyone, or I will lose my job."

Socialist activity is severely punished, however, and is expressly outlawed in the new constitution, which was approved by a two-thirds majority in a 1980 plebiscite. It is legitimate to doubt the significance of the figures on the constitutional vote. People are sometimes afraid to say what they think, and there is no question that the press, as one reporter from Santiago's major newspaper, El Mercurio, explained, "engages in a lot of self-censorship."

The secret police are active and not always obviously under the control of the Pinochet government. International press services complain that their wires are tapped and antigovernment stories sometimes provoke late-night death-threats over the telephone and impromptu visits from disapproving government officials.

Four dissidents were recently expelled from the country, with no clear evidence against them presented to the public, and without trial. Several thousand Chileans are in permanent exile because of their political beliefs, not allowed to return home while the Pinochet government is in power.

Newspapers would be closed down if they were to run explicitly socialist editorials or calls for overthrow of the government, but they are free to comment on the government's economic policies. The Economic Team has been caricatured and criticized with no government retribution.

Some of the biggest critics of government policy are the very businesses that have benefited most from a free market, in displays of the common sentiment that "competition is good for everyone but me." The private social security companies, not the public, called for price controls on the private pension plans out of fear that new competitors would underprice them and lure away business.

Elections are currently scheduled for 1989, when Pinochet is to propose a candidate for president and allow political parties to organize and propose their own candidates. That date may be too far in the future for the good of the country, as many Chileans say.

The last generation came of age under Allende, and out of that chaos came the Chicago boys and an overwhelming belief that the important work of the time was to cure Chile's economic ills. The current generation is far better off economically; those in college today were just children when people lined up in the streets to wait for bread, and they only dimly remember the armed clashes between left- and right-wing forces in the city streets. For these Chilean youth, the urgent problem is political; restoration of democracy is the important work of their generation. "What Pinochet did with the Economic Team is good," says one business student at a Santiago university, "but it is not good that we have this political system today."

Those on the Economic Team say that the major economic changes they favor have almost all been put into place. There is talk of deregulation of the first-class mail industry, which may occur this year. But the big problem is to keep the system running with a minimum of government interference and, in the future, to stave off the creep of government regulation that seems inevitable in a democracy. The biggest danger, according to several of the team members, comes from the large state-owned corporations. Currently run by military officers, they provide shells for government interference in the economy that may expand again when Pinochet is no longer in power.

The overall economic picture is gratifying, although it is not the utopian free market that it sounds after a litany of deregulated industries and privatized businesses. Chile still has its share of regulation, and many of the free-market measures have been introduced only after prolonged struggle and negotiation between the Economic Team and other government elements, such as some military officers who favor government regulation of almost every sector. One retired officer explains that the military mentality naturally favors government interference. "For them, the government has always been the source of everything, from policy to supplies to salaries, and they see no reason why that should be different for the rest of the country."

Not all military officers share this opinion. The most notable exception, of course, is Pinochet, who has backed the Chicago boys on almost every major policy question. But that backing has been a tricky process, and all policies must be approved unanimously by the four-man junta that governs Chile today.

So the criticism can be leveled that Chile still has an enormous state-owned mining sector, government-regulated utilities, and a many-tentacled bureaucracy that inhabits dozens of downtown Santiago buildings and generates piles of paperwork and bureaucratic delays.

The important thing to remember, however, in evaluating Chile's free-market policies is how far the country has come since Allende, both in terms of opening up markets and in terms of economic growth, which has averaged 7.2 percent for the last five years, while unemployment dropped to 11 percent in 1981 from its peak of 19.8 percent in 1976. By the criterion of economic growth and well-being, the success of the capitalist measures is clear. As University of Chicago Prof. Arnold Harberger said on a recent visit to Chile, "For anyone who comes here with any sense of economics, any feel for how an economy works, it just blows his mind."

Miguel Kast, minister of labor, says the same thing more explicitly in evaluating the work of the Economic Team: "If you do the right things, and do them all the way, the ability of the economy to recover is beyond the imagination of even the craziest economist."

More popular than the criticism that Chile still has substantial government involvement in the economy—and certainly the better known in the world press—is the charge that the current economic system could never have been put in place without the aid of a military dictatorship and should therefore be condemned along with the political system. "The economic policies could not have been carried out without repression," says a member of a prominent antigovernment research institute, who wishes to remain unidentified. "I would love to separate them, but you can't do it."

This same criticism is repeated over and over again, from a professor at the State-run University of Chile, where a general heads the faculty, to a successful businessman who studied economics at Chicago along with the government team. Many members of the Economic Team agree that they could not have gone as far with most of their policies in a democratic state.

Yet consider: whether a man takes medicine voluntarily or at gunpoint does not affect the medicine's ability to kill or cure. The case to be made is not that dictatorship is necessary for a truly free market or that the two are inextricably linked in Chile's case, but that Chile's dictatorship chose an economically successful path—something that cannot be said for such dictatorships as Cambodia, Argentina, or Cuba.

The world could profit more by looking at Chile's economic system as an example of the power of free markets to aid an economy than by condemning wholesale anything associated with the Chilean dictatorship. While it might have been impossible to vote in many of the Economic Team's policies in Chile, it may be possible in countries more predisposed toward free markets, such as the United States.

Chile undeniably has a long way to go to restore political liberty. It is still a considerable distance from the level of economic development possible for a country with its rich natural resources. Yet a lot of work and courage and plain economic sense has gone into taking it from the politically chaotic, economically catastrophic Allende era to the current level of economic growth and stability. It is time for the rest of the world to take a look at how much free-market policies can do for a country and to learn cheaply a lesson that Chile learned only after great expense, much suffering at home, and widespread condemnation in the world press.

There is more here than a cloud with a silver lining. There is a gold mine of economic information.

Claudia Rosett recently completed a master's degree in business administration from the Graduate School of Business of the University of Chicago. She is, with coauthor Daniel Gressel, writing a book on Chile under a grant from the Manhattan Institute for Policy Research.