The “Chilean Model”: Market regulation, not just liberalization, key to success

[Judi Lynn]

The “Chilean Model”: Market regulation, not just liberalization, key to success
Ricardo Ffrench-Davis, Guest Blogger

President Obama’s 4-day visit to Chile, Brazil, and El Salvador starts this Saturday and brings issues of trade and economic opportunity between Latin America and the U.S. to the fore. In this post, Ricardo Ffrench-Davis identifies the specific policies that have driven the Chile’s high economic growth since 1973, particularly the strict regulation of the country’s capital account in the 1990s.


Chile is frequently presented as a paradigmatic case of successful economic reforms, by quite different authorities. Usually, these accounts sustain the ill-informed belief that there is one “Chilean model” responsible for success in recent decades. The fact is that in the nearly forty years that have elapsed since 1973 there have been several sub-periods, with significantly different policy approaches, heterogeneous external environments, and notably diverse economic and social outcomes. There is neither only one model nor only one outcome, as we show in our recent book, Economic Reforms in Chile: From Dictatorship to Democracy.

The first stage of the reforms (1973-81), launched after the military coup of 1973, was characterized by the implementation of a neo-liberal model in its purest and most ideological form. Deep trade and financial liberalization, and the adoption of “neutral” economic policies, were accompanied by massive privatization. By 1981, success had been achieved in reducing inflation and eliminating the fiscal deficit, but at the expense of the external balance and a huge debt (with a notably low investment ratio). The consequence of this disequilibria of the real economy was a collapse in 1982, with a 14% drop in GDP, 30% unemployment, a huge increase in poverty, and a worsening income distribution.

The second stage (1982-89) was characterized by moves, by the same dictatorship, toward more pragmatic policies to overcome the deep crisis. It involved a series of public interventions (sharply criticized in the first stage), including tariff increases and “selective” export incentives, strict regulation of financial markets, and the take-over of collapsed private banks, and then privatizing them again when their balance sheets were in order thanks to public subsidies to banks and debtors (costing 35% of GDP). At the end of this period, the economy had recovered, while income distribution had worsened even further. During recovery, actual GDP grew vigorously, but after considering the 1982 recession, the average annual growth was a mediocre 2.9%.

More:
http://triplecrisis.com/the-chilean-model/