petras and vieux - the chilean 'economic miracle' - an empirical critique

Petras, James, The Chilean "Economic Miracle ": An Empirical Critique , CriticalSociology, 17:2 (1990:Summer) p.57

The Chilean “Economic Miracle” An Empirical Critique

James Petras and Steve Vieux

Abstra ct : The Pinochet regime in Chile has claimed numerous economic achievments, including vigorous growth, intelligent and innovative management of debt and poverty, and an exemplary approach to privatization. This paper examines empirically the historical record of the Pinochet regime in each of these areas. It concludes that the claims of the regime cannot be sustained. The neo-liberal policies of the post-Pinochet Aylwin government are described, together with the institutional context in which these policies are being carried out. Aylwin neo-liberalism is likely to produce economic and social outcomes similar to those of the Pinochet regime. The political consequences of this course are briefly explored.

In recent years a wide ranging number of academics, journalists, and policy makers — including many former critics of the Pinochet regime — have joined the Chicago Boys in publicizing the economic “success story” of the dictatorship. While most of these recent converts to the free- market, export-oriented model retained caveats about the authoritarian features of the regime and some of its “social costs,” most concluded that Chile’s economy was the most promising economic model in the region. Some writers likeNew York Times reporter Shirley Christian commended Pinochet’s economic counselors as especially well-equipped to advise the East Europeans and the rest of Latin America on the finer points of “privatization, debt management and fighting poverty” (Christian, 1990:D-4). In a more serious vein the economic team of the newly elected Aylwin regime has bought into the same set of assumptions — that the Pinochet economic model is the most promising approach to economic development — and they have implemented a whole range of economic policies based on the structures and assumptions of the preceding regime, setting aside almost all of their trenchant criticism over the past decade

Department of Sociology, State University of New York at Binghamton, Binghamton, NY 13901.

Copyright (c) 2004 ProQuest Information and Learning CompanyCopyright (c) Brill Academic Publishers, Inc

58 James Petros and Steve Vieux

and a half. Both overseas commentators and Chile’s newly converted practitioners argue that Pinochet-style free markets are the wave of the future — and suggest that other regimes in the East and South would do well to study the experience.

So just how seriously should we take their advice? What is the record of the Pinochet regime on these matters? Does the Pinochet model hold out the promise of miraculous growth to economies intent on expanding the free play of markets? In this essay we propose to subject the Pinochet experience to empirical scrutiny precisely in the areas in which it claims its greatest successes, as well as in areas that have been largely ignored by its celebrants. Our analyses and evaluations will focus on the following four dimensions: (1) growth, (2) debt management, (3) privatization, (4) poverty management. We will conclude with an analysis and critique of the current electoral regime’s decision to “manage the model” and the critical problems likely to ensue.

Growth

Has the Pinochet economic model produced the exceptional growth that its publicists claim? The Pinochet model produced growth rates well below the Chilean average established over the 1950-72 period. The average yearly GDP rate of growth in the latter period was 3.9 percent, while the Pinochet regime averaged 1.4 percent over the 1974-83 period. Even if we exclude 1974-75 in accordance with the reasonings of some regime apologists, use of the 1976-83 period yields a average yearly GDP growth rate of 3.2 percent, still below the 1950-72 average (Edwards and Edwards, 1987:3-11).

These figures mask the marked cyclical character of the Chilean economy in the period. There were spectacular economic contractions in 1975 and 1982 in which the rate of growth of real GDP fell 13 percent and 14 percent respectively (Ffrench-Davis and Raczynski, 1988:10, 20). In several years of the intervening period of economic recovery, real GDP grew sharply and it is upon these latter “miraculous” rates of growth that defenders of the regime have focused to vindicate regime policies. In fact, as numerous students have observed, these rates didn’t contribute to growth at all, properly speaking, but to the recovery of previously achieved levels of GDP (Ffrench-Davis and Raczynski, 1988:10). GDP growth rates averaged 8.5 percent per year from 1977 to 1980. But real per capita GDP did not reach the 1971 level until 1980 (Edwards and Edwards, 1978:11). The Pinochet regime required six years to achieve the economic levels of the previous decade. Such is the stuff of economic miracles.

The period following the 1982 crash has exhibited the same tendency. The crash itself is often described as the worst since the collapse of the 1930s, with unemployment rising to more than 20 percent. Again,


The Chilean “Economic Miracle ” 59

impressive growth rates were recorded after the steep GDP drop of 1982 and the much lesser drop of 1983. Once again the publicists of the free market evoked the religious metaphors in which recovery is mistaken for growth. But, again, overall growth throughout the 1980s has been far from miraculous: GDP per capita grew at a 1.2 percent average rate between 1980 and 1989, below the 1.7 percent average yearly rate for 1950-72 (El Mercurio, 1990a).

Particular areas of the economy have shown some dynamism, notably the export of primaiy products. Mining, fishing, forestry and agriculture accounted for 88 percent of total exports in 1987. Within each of these categories, export is concentrated upon a few commodities: copper in mining, grapes and apples in agriculture, fish meal in the maritime industry. In addition, this primary export activity tends increasingly to focus on productive processes that result in little value added to the product concerned. For example, the export of wood pulp grows more than the export of cellulose, which in turn grows faster than the export of paper. Foreign firms are strongly represented in each major sector of export activity: in fishing a Chilean-New Zealand consortium is prominent; American firms figure greatly in the organization of external sales of fruits; even in mining where the state copper company Codelco dominates copper exports, foreign firms — U. S., Swiss, Australian — have significant holdings. The point is that even where the economy shows some dynamism, the activity contributes little to the development of a complex and modern capitalist economy. In contrast, the successful export economies of the Pacific Rim have specialized in the production of manufactured goods. Moreover, the heavy representation of foreign firms in Chile, encouraged as we shall see by government debt management policies, signifies loss of sovereignty over, “disposition of natural resources (soil, subsoil, sea) which are part of the patrimony of the whole society” (Ominami and Madrid, 1990:130-135). Also, these export sectors dominated by primary products are veiy vulnerable to sharp world market fluctuations, both in terms of prices and demand, thus subjecting the economy to roller coaster effects. The addition of a limited number of “non-traditional” exports has not succeeded in diversifying the Chilean economy or even its export sectors — a problem that is obvious with the unfolding economic recession of the 1990s.

Debt Management

Given the size of the debt they had to manage, Pinochet’s bureaucrats certainly had the opportunity to become experts on debt management. Encouraged by the liberalization of imports and the deregulation of the banking system, Chilean foreign debt exploded during the late 1970s and the early 1980s, growing 300 percent between 1974 and 1986 (Remmer, 1989:172). Per capita bank debt in Chile was S1000 in 1982 compared


60 James Petras and Steve Vieux

with $600 for Latin America as a whole (Ffrench-Davis, 1988:115). Nor should it be imagined that the flow of bank credit into Chile greatly spurred investment in fixed capital. While gross investment amounted to 20 percent of GDP in the 1960s, it amounted to 16 percent between 1974 and 1981 (Parkin, 1983:114). The foreign debt seems to have been used to expand imports of consumer goods. The practical significance of all this is simply that a country devoting 5 percent of its GNP to debt service, as Chile was in the late 1980s, does not have those funds available for job investments in stable industrial employment or to spend on extensive social services.

The outstanding peculiarity of Chile’s approach to debt management has been the alacrity with which it has served the interests of banks, domestic and foreign. Evidence of this was the assumption of the private debt by the government, despite monetarist shibboleths. As Finance Minister de Castro proclaimed early in the 1981-82 crisis after some bank failures: “It is important not to forget that bankruptcies are the appropriate channel through which an economy gets rid of inefficient investments. If the government interferes in this process . . . the period of inefficiencies is lengthened” (Edwards and Edwards, 1987:79). Subsequently, huge subsidies were extended to the ailing institutions including, among others, disbursements from the Central Bank equal to 15 percent of the 1982 GDP (Remmer, 1989:167). As the crisis deepened, de Castro’s doctrinaire free market pronouncements were abandoned and the government took over or liquidated eight large banks, thus gaining control of 50 percent of credit in the Chilean financial system. It also took on the burden of massive amounts of formerly private, external debt (Foxley, 1986:29).

The Chilean government has been extraordinarily obedient in the transfer of resources abroad to satisfy creditor banks. The Chilean government has not used the particular features of Chile’s debt load to try to win concessions from the banks, as the Chilean economist Ricardo Ffrench-Davis has argued. The first of these features is simply the assumption of the private debt itself after the fact, the explicit guaranteeing of privately contracted debt in the financial sector by the government. Increasingly the creditor banks did not even ask for this. Other Latin American countries, notably Mexico, have been far less forthcoming in the matter of state subsidies to private banks (Griffith-Jones, 1988:366-367). The Chilean debt managers, so touted by Christian, failed to use obvious bargaining chips (the subsidy and the ex post guarantee) to win concessions from the creditors. Given the stakes involved — a net transfer of 4 percent of GNP abroad in 1988 and 1989, for example — this was indeed an extraordinary performance (Bitar, 1990:274).

The intricacies of debt figures are such that they lend themselves better to statistical than to economic management. It is quite possible to give an optimistic reading of the figures by their selective use. Thus one


The Chilean “Economic Miracle” 61

may, for example, point to the dramatic lowering of external debt with commercial banks in the 1980s from $14.3 billion to $6.5 billion in 1988, a drop of $7.8 billion. What this neglects is the astronomical growth of debt with multilateral lending institutions, such as the International Monetary Fund, the World Bank, etc., during the same period. Debt with the World Bank and the Inter-American Development Bank grew at an annual average of $600 million between 1983 and 1987, or about 40 percent per year (Ffrench-Davis and De Gregorio, 1985:24). This increase in multilateral debt made the giant payoffs to the commercial banks possible (Ffrench-Davis, 1988:129). Tliis debt will have to be repaid, cannot be restructured and cannot be expanded indefinitely (Somerville, 1990:297). No less a figure than Hernan Somerville, Pinochet’s chief debt negotiator during the mid-1980s, says that the multilateral debt is the “biggest external debt problem facing Chile.” He assures us that the problem is “perfectly manageable,” holding out the hope that the reduction of the debt with commercial banks will lead to fresh loans (Somerville, 1990:297). But early help from this quarter seems unlikely; commercial bank loans from abroad to Chile have been falling steadily throughout the 1980s (Ffrench-Davis, 1988:128).

Debt-equity swaps are singled out by Christian as an area of special expertise enjoyed by Chilean free marketeers. The principle involved in such swaps is familiar from corporate bankruptcy proceedings. Creditors to an enterprise in the process of reorganization may be given shares and of course claims on a portion of hoped-for future profits in exchange for the extinction of outstanding debt and interest payments. Latin American debtor nations, among others, have applied this principle to their own foreign debt obligations in the following way. Foreign debts of a given country are purchased in hard currency at a high discount rate, then sold at a lower discount rate for foreign currency of the debtor country; the debt purchased has been converted into local currency at the original rate. Funds obtained may be used to buy shares in an existing enterprise, or improve plant and equipment, etc. Theoretically, creditor banks benefit by reducing outstanding loans of dubious quality; debtor nations see their debt reduced; purchasers of the obligation receive local currency at a cost lower than could be expected from local financial markets or from bringing in foreign exchange (Lahera, 1987:104-105). By mid-1989, $7 billion of Chile’s external debt had been converted by various mechanisms (Riesco, 1989:318).

Despite all appearances, debt equity swaps are far from the unambiguously positive policy maneuver they are often assumed to be. For one thing, dubious debts, which may in the future be pardoned by the creditor banks, are being traded for real assets. Moreover the swaps do not offer a global solution to the debt problem. Riesco (1989:321) estimated the value of the 50 largest Chilean corporations in late 1986 at $4.6 billion, approximately one quarter of the total external debt! Hence even if the



pride of Chilean capitalism were creamed off and swapped, a solution to the debt problem would still be far out of reach, even putting aside the denationalization of the economy. Finally, debt-equity swaps improve the balance of payments by cutting the flow of interest but they worsen it down the road when the investments resulting from the swaps begin to produce earnings for repatriation (see Lahera, 1987:118-119; Ffrench- Davis, 1988:134).

Privatizations

Selling off the patrimony of the state has played a great role in the history of the dictatorship. In 1970 CORFO, the state development corporation, controlled 46 enterprises. The regime’s first task was to return to private hands the large number of firms which had been nationalized under Allende during 1970-73. By 1973 some 460 firms and 19 banks had been incorporated in CORFO (Renner, 1989:158). By the end of the Pinochet decade the process of privatization had gone well beyond the Allende interventions: by 1980 CORFO controlled roughly two dozen firms (Vergara, 1985:90).

This first wave of privatization involved large government subsidies for the purchasers. The firms were sold below their book value, in many cases to political allies of the regime in non-competitive circumstances. One researcher estimated that the subsidy averaged 40 percent of book value. Another found a range of subsidies between 23 percent and 37 percent (Edwards and Edwards, 1987:97). The cheap sell-off was driven by haste, the recession and high interest rates (Foxley, 1985:33). While the stated purpose, according to free market doctrine, was to break up state monopolies and stimulate competition, wealthy investors were the only ones able to take part in the purchase. Similar effects were produced in the agricultural sphere when the government sought to correct what they considered the state monopoly effects of agrarian reform. Some 30 percent of the expropriated land was returned to previous owners. Some 35 percent of the land went to small owners in small lots (Foxley, 1985:33). The small owner beneficiaries very frequently found themselves compelled to sell their plots for want of capital, technical assistance, etc. (Jarvis, 1985:151-152, 170-177). One estimate had it that by 1982, 40 percent of the beneficiaries had sold the«‘r parcels, mostly to medium and large owners (Jarvis, 1985:167-168). Reconcentration and recentralization of economic power, not free competition, was the real outcome of the free market policy.

Subsidized privatization flourished again in the mid-1980s under the supervision of Hernan Buchi, the Finance Minister under Pinochet. Enterprises valued at $2.8 billion were privatized between 1985 and 1988. As in the earlier bout of privatizations, subsidies were massive. One researcher concluded that the subsidies amounted to $600 million



between 1986 and 1987 (Delano and Traslavina, 1989:127-129). Further, it was estimated that between 1990 and 1997 the public coffers would stop receiving $100 and $165 million annually on average as a result of the privatizations (Delano and Traslavina, 1989:127-129). Some of these privatizations were the focus of public controversy. Shares in the Sociedad Quimica y Minera de Chile were sold in 1984 at 20 pesos. In 1988 they were valued at 350 pesos per share. The pre- and post-privatization president of the corporation was the son-in-law of Pinochet, a heavy contributor to the presidential candidacy of Hernan Buchi (Delano and Traslavina, 1989:129). Privatizations were based less on criteria of “economic efficiency’* and more on the goal of creating a new class of big business people with political and family ties to the regime.

Poverty Management

The Pinochet dictatorship must be credited not only with poverty management as his overseas publicists claim, but also with creating a great deal of poverty in need of management. The coup of September 11, 1973, marked the opening of a assault on the social organizations and the leadership of the Chilean working class: its unions, parties, press and civil liberties. The imposition of rigid monetarist policies had predictable results. Levels of unemployment rose dramatically after the coup to a peak of 21.9 percent in the crisis of 1976. By 1981 these unemployment levels were still high: 15.1 percent. Even this “low” point of the 1977-81 period was still more than double the rates at the end of the 1960s (Marin and Rozas, 1988:35). The crisis of 1982 drastically worsened the unemployment rate, which averaged 26 percent for the years 1982-85 (Ffrench- Davis and Raczynski, 1988:29).

Real wages followed a similar path. Using 1970 as a base year of 100, real wages fell to 62 in 1975, peaking at 96 in 1981 just before the crisis. By 1987 real wages stood at 84.7 — well below the 1970 base year (Marin and Rozas, 1988:35; Ffrench-Davis and Raczynski, 1988:31).

At the same time that the employment prospects and wages of ordinary Chileans had deteriorated relative to the late 1960s, wealth was becoming more and more concentrated. In 1984 the poorest 40 percent of the population received 9 percent of total income while the wealthiest 20 percent received 61 percent (Riesco, 1989:198). The concentration of wealth was, of course, not simply a matter of income. Ownership of the assets of private enterprises, of the capital and reserves of financial institutions, and access to foreign credit were all increasingly concentrated during the period. For example, six economic conglomerates controlled 54 percent of the assets of the 250 largest private enterprises in the country by the end of 1978 (Foxley, 1986:45-46). As noted above in the discussion of privatization, the same process of concentration was at work in



the countryside as the lesser beneficiaries of the destruction of agrarian reform found themselves compelled to sell out.

The effects of the decline of real wages and rising unemployment on the Chilean wage and salary earners were sharpened by reductions in state activity and expenditure during the period, in line with neo-liberal ideology. As Milton Friedman put it, “the real necessity is to reduce the size, scope and function of the government and to augment, improve and strengthen the free market, private enterprise and the economy based upon them” (Bitar, 1980:31).

The most obvious target of the dictatorship’s cuts in state activity was public sector jobs. Around 90,000 positions were eliminated between 1974 and 1979 (Remmer, 1989:170). Taking 1970 as a base year of 100, social spending overall on a per capita basis fell to 74 in 1985 (Ffrench- Davis and Raczynski, 1988:47). Regime apologists present social expenditure figures under the dictatorship as roughly comparable to those of the pre-coup period by presenting them as percentages of the state budget. But this is misleading, among other reasons, because, as Pilar Vergara has pointed out, overall state expenditure diminished substantially after the coup. Social expenditure represented a comparable percentage therefore of a smaller budget (Vergara, 1986:97).

Housing was especially hard hit as the state sharply reduced public investment. During the Allende period, 1971-73, the public sector built an average of 39,000 dwellings per year. This fell to an average of 795 per year for 1979-84 (Contreras, 1986:42). It was estimated that in 1986900,000 families were homeless in the country (Contreras, 1986:42). Overcrowding and the “allegado” phenomenon, in which one family shared dwellings with another or permitted another to construct a makeshift dwelling on a common site, became endemic. Research conducted by an organization affiliated with the Archbishopric of Santiago found 135,000 allegado families in that metropolitan region (Campero, 1987:31). Large numbers of those who went into debt to gain ownership of sites or dwellings were in danger of losing their property for lack of payment (Campero, 1987:31). One researcher found, for example, that 45 percent of such debtors in the poblacion (urban settlement of poor people) Jose Maria Caro were behind in their payments (Campero, 1987:31). The performance of the dictatorship in this area has left a massive deficit in low-income housing, especially if we take into account the growth of population and the deterioration of existing housing. This deficit has been estimated to have totaled 1.1 million houses by 1985 (Pozo and Vergara, 1990:171).

Health expenditures also fell during this period. Expenditure per person fell drastically from $29 in 1973 to $11 in 1988 (Delano and Traslavina, 1989:148). Significant improvements in infant mortality and life expectancy were made during the period. However, the incidence of certain infectious diseases readily associated with poverty, overcrowding,



poor hygiene, and inadequate sanitation underwent explosive growth. The rate of typhoid cases per 100,000 grew from 55 in 1970 to 122 in 1983. Chile accounted for 20 percent of all reported cases of typhoid in Latin America (Contreras, 1986:49). The rate of viral hepatitis per100.000 also grew explosively from 68.9 cases to 107.9 cases between 1982 and 1984 (Contreras, 1986:50). Researchers also found evidence of a “general deterioration of the mental health of Chileans” in line with political repression, high rates of unemployment and a generalized deterioration of living conditions during the period. Alcoholism — one of the highest rates in the world — an alarming increase in suicide, and an increase in the frequency and seriousness of mental ailments among the unemployed indicate some of the human suffering imposed by the Pinochet economic model (Contreras, 1986:52-53).

While social expenditures of the state were cut, other expenditures were not. Military spending reached unprecedented levels. Salary expenditures in the public sector increased 28.6 percent between 1970 and 1979, mainly as a result of a vast increase in military employment, which rose 120 percent from 1974 to 1979 at the same time that tens of thousands of employees were being expelled elsewhere in the state (Remmer, 1989:170-171). Between 1973 and 1982 military personnel grew from110.000 to 165,000 (Varas, 1987:188). Within the defense budget, those branches most concerned with repression — political police, national police, the army — enjoyed the highest rates of budget growth in spite of the fact that external dangers have usually been pointed to in justification of high defense expenditure (Varas, 1987:90).

Managing the Model

Much of the above data and critical analysis of the Pinochet free market model was drawn from researchers who have joined the Aylwin administration, and who now continue practicing precisely the same policies they rejected previously. In part these continuities can be attributed to the institutional constraints that remain as a legacy of a “negotiated” transition. However, in large part the new regime has not only conformed to the model’s general parameters, but sought to deepen and extend the model, even to the extent of increasing foreign investment access to strategic resources, dismantling state development institutions and pursuing the renewal of U. S. military ties to the Pinochet-commanded armed forces. In what is surely an excess of conformity, the Aylwin regime successfully fought to increase the military budget to compensate the ex- secret political police, which had been “dissolved” and reincorporated into the armed forces. In a word the new regime has presented itself as a continuation of the “restructured” neo-liberal managers of the model.

The state, according to monetarist doctrine, is excluded from interfering with the rational allocation of resources by the market. In an early


66 James Petras and Steve Viewc

interview in El Mercurio, de Castro remarked that the Pinochet team was “eliminating th e . . . perverse role played by the state in the past by discretionary management of the economic variables.” The only way to insure personal liberty (!) was the creation of a “really free economy in which the discretionary role of the state is minimal” (El Mercuric, 1976:25-26). Reducing the scope of state activity was not simply rhetoric at least insofar as privatizations, social spending and certain kinds of state employment were concerned. Such state reduction “constituted the most far- reaching action in the economic field carried out by the government of the armed forces,” in the view of Pablo Baraona, a former Minister of the Economy under Pinochet (Delano and Traslavina, 1989:162).

The institutional environment (the constitution, the armed forces, the courts, central bank, etc.) constructed by Pinochet around the Aylwin regime may be understood in large part as a set of constraints on any potentially “perverse discretionary management of the economic variables.” As one defender of the regime put it: “What is needed, here and now, is to institutionalize mechanisms which guard macroeconomic stability, to institutionalize . . . respect for fundamental macroeconomic equilibria” (Delano and Traslavina, 1989:138-139). Of course it is not simply a matter of objective constraints. Petras and Leiva (1988) have charted the formation of an opposition thoroughly “renovated” during the 1980s under the ideological and repressive supervision of Pinochet. The political leadership and the new economic team in the Aylwin administration are not merely “pressured” to conform to the new model; they are ideologically convinced of its superiority and of the correct course charted by the preceding economic ministers. As Foxley put it: “A country shows maturity when it is capable of taking advantage of the positive experiences which others have implemented, even when one doesn’t like the government which implemented these measures. 1 respect technically and professionally those who were in the previous government” (El Mercurioy 1990b:D-l). Even if the will existed to undertake a sweeping series of reforms affecting housing, medical care and education, such reforms would promptly lead to challenges to the preeminent role of the military in Chilean political life.

The military budget is written in stone. A floor has been established under it so that it can not fall below the 1989 level: 1.4 billion out of a total budget of 7.7 billion (Paginas Abiertas, 1990:20). In 1989 the military budget was $432 million higher than the housing, health and education budgets taken together. Toward this end Codelco, the state copper company, must hand over 10 percent of its sales of copper and other products to the military, to be supplemented by the state treasury if a specified yield is not produced. Remuneration of military personnel is indexed to the cost of living, unlike that of other state employees. This guaranteed income program for the military is tied to a state-run company whose sales in 1989 accounted for 40 percent of total exports


The Chilean uEconomic Miracle” 67

(Delgado, 1990b: 11). This source is unlikely to reduce the weight of the military's claim on its revenues by rapid growth nor provide increased discretionary income for social spending. Codelco’s expansion has been carefully limited by allowing foreign capital to develop projects in this sector. In five years private sector production is supposed to match Codelco’s (Riquelme, 1990:F-14). In short, the military budget demands a sizeable stream of state revenue, hedged against inflation, from a uniquely reliable source whose growth has been carefully restrained.

Privatizations have further limited the regime's room to maneuver. The once dynamic state development corporation, CORFO, has been stripped of most of its influence and assets in a vigorous process of privatization which accelerated after the 1988 plebiscite. CORFO had been savaged since the coup and by March of 1990 all but two of the remaining enterprises were privatized (Marin, 1990:19). Significantly a large number of shares (21 percent of all shares in Endesa, the largest of privatized enterprises) was sold to members of the armed forces (Marin, 1990:19). A smaller though still sizable chunk of the shares in the Compania de Telefonos was also sold to members of the armed forces. One estimate is that around 30,000 military personnel purchased shares (Delano and Traslavina, 1989:127).

After the Aylwin regime took power, it was discovered that CORFO was, for practical purposes, bankrupt. Among other liabilities it was $1.5 billion in debt. CORFO had absorbed the losses of privatized enterprises while at the same time losing between $130-200 million in dividends annually from the now privatized corporations. Debts in short were socialized and profits privatized (Delgado, 1990a:6). The Aylwin government’s response to this situation was to propose new privatizations to finance the CORFO deficit. In announcing this policy, Ominami emphasized “the creation of grand enterprises, a function fulfilled by CORFO in the past, is now exhausted” (El Mercurio, 1990c). The state has been saddled with CORFO debts while losing previous revenue from this quarter. CORFO, the government has made clear, is permanently out of the business of creating and operating enterprises. Further, substantial portions of the equity of other lucrative enterprises (the electric and telephone utilities) have been sold off to military personnel, giving them an obvious stake in the success of privatization.

It is plain that this debt, to both private and multilateral institutions abroad, is an additional powerful source of fiscal discipline. The past docility of the dictatorship before the demands of international lenders will serve to highlight the slightest recalcitrance by the Aylwin regime. Repayments of the principal on the multilateral loans have risen sharply in the 1980s from $24 million in 1983 to $260 million in 1990. The 1987 rescheduling of medium and long term debt called for 60 percent of the debt to be pa*d back between 1989 and 1995 (Ffrench-Davis, 1988:133). In the case of Codelco and CORFO, revenue streams flowing into the



state have been greatly reduced or eliminated. The previous regime’s external debt obligations, passively accepted by the Aylwin administration, compromise state expenditure, imposing a debt overhead which can’t be evaded.

The Central Bank plays a key role in the tutelage of the Aylwin regime. Three days before the presidential election which brought Aylwin to power, a law took effect that freed the Central Bank from the control of the Finance Ministry. The bank was endowed with extraordinary power by Latin American standards, exceeding in one respect that enjoyed by the U. S. Federal Reserve. The bank had the right to set foreign exchange policy (Christian, 1989a:D-14). The bank’s board was staffed with Pinochet appointees. The new head of the bank, Andres Bianchi, said he hoped “to assure that public spending does not exceed the limits imposed by the productive capacity of the economy and the available money” (Christian, 1989b:D-l). The initial response of the opposition to the bank was negative and critical, but acceptance came quickly. Finance Minister Foxley spoke as if accepting the bank board were a point of honor, a pledge of allegiance to existing economic arrangements. Support for the new board, according to Foxley, would “give a clear signal to the country, especially the private sector, and to the international financial community, that when we say we are committed to working with private business and political groups that now support other candidates, those are not just words” (Christian, 1989b:D-10). The key point here is the Aylwin regime’s overriding commitment to securing investor confidence as the centerpiece of any economic strategy, thus “internalizing” the major ideological premises of Pinochet’s supply-side doctrine.

In the run-up to the 1989 elections the Central Bank underwrote a monetary expansion that spurred an accelerating rate of inflation. In January of 1990, the plebiscite and the elections finally over, the time for a monetary contraction had arrived. The Aylwin team took responsibility for putting the monetary house in order — at the expense of its electoral base. The contraction of 1990 was unusually severe, comparable to the contraction engineered during 1982, though of course economic conditions in the country were clearly not comparable to the earlier year of collapse (Benitez, 1990:F-1, F-10). The Aylwin regime firmly supported this monetary “adjustment.” As Andres Velasco, a prominent functionary in Foxley’s Finance Ministry, put it, measures in support of the adjustment were “part of the politics stemming from March, an understanding that the treasury contributes to the adjustment.” He continued: “We sought to complement monetary policy with other instruments” (Garcia, 1990.F-1).

All these ideological commitments and constraints were visible in the tax reform. The government’s original plan was to raise the rate of the tax on profits to 20 percent. The Right would have none of this, successfully insisting that the rate could only rise temporarily to 15 pcrcent for the



years 1991-93 (Bustos, 1990:15). The government originally had no plans for raising the value added tax (IVA). But with the Right’s successful resistance to the direct tax, the government came around to an increase in the IVA from 16 percent to 18 percent (Bustos, 1990:17, 21). This outcome was fully in line with the tax policy of the dictatorship. As noted, the tax reform envisaged only a temporary increase in the tax on business income to be followed by reinstatement of the 10 percent rate established during the dictatorship. The permanent IVA increase, promoted by Foxley, also confirmed the taxing prejudices of the dictatorship. Under Pinochet the IVA was extended throughout the economy. The IVA contributed increasingly to total tax revenue (Vergara, 1986:103). The expected increases in social spending were therefore to be financed in large part by taxes which hit low-income citizens hardest. The conversion of the Aylwin economic team to neo-liberal policies and the existing economic and political constraints inevitably produced a regressive tax policy.

Unsurprisingly the Aylwin government does not project any upward spike in social spending in the near future. Social spending is to decline from levels established under the dictatorship to be followed by a gradual increase in later years. The expenditure itself seems likely to assume the forms prescribed by the dictatorship: attempts to introduce competition and private sector provision into the system. El Mercuriot using technocratic code words for neo-liberalism, congratulated Minister of Health Jimenez for “an analysis which assigns greater priority to technical and economic considerations.” After describing a plan to subsidize demand for health services by permitting competing nongovernmental health centers in poor areas, Jimenez commented: “We believe it is perfectly possible to successfully obtain the provision of social services by private providers” (El Mercurio, 1990d:A-3). The results of privatization are shown by the declining health conditions discussed earlier.

Pinochet’s opposition has been politically transformed by the lure of office and long years of ideological and repressive encounter with the dictatorship. In addition the dictatorship has spun an intricate web of constraints, institutional and budgetary, to minimize the danger of discretionary reforms. The Aylwin government is currently managing Pinochet’s model. What political consequences will the government face as a result of this undertaking?

The general point is that managing the model means taking political responsibility for the model’s cruelties, oversights and failures. This effect was visible in miniature when Foxley declined to meet with demonstrators in July. The demonstrators had become convinced, in part by the Ministry of Housing, that the root of the housing problem was budgetary and that nothing less than a meeting with Foxley himself was called for (Fortin Mapocho, 1990:9). A great many such embarrassing meetings will no doubt have to be cancelled, evaded or delegated to subordinates as the


70 James Petros and Steve Vieux

months pass and popular expectations are frustrated. Managing the model also means taking political responsibility for defending it with the armed power of the state. This is a task the Aylwin government is equipping itself to face, in part by increasing the Carabineros by 4,400 slots. This decision was partially inspired by a clash between the police and demonstrators at the poblacion La Bandera (El Mercuric, 1990e:A- 12). It also reflected a long term commitment by the Aylwin government to expand the size and better equip the national and political police, who were also carefully nurtured during the dictatorship, as we saw above (Fernandez, 1990:16). In November, 1990, the Aylwin regime successfully pressured the Bush administration to lift the ban on the sale of military equipment to Pinochet’s armed forces.

Accepting these responsibilities also means undermining popular support for the parties in power and possibly benefiting the parties of the far-right or the military, or a reconstituted coalition of left parties. If the principal function of the regime is largely to execute Pinochet’s economic policies with marginal increases in social spending, then many lower class voters could likely ask, why not put parties in power which wholeheartedly embrace the model? After all even these parties themselves agreed in March that social spending would have to undergo some expansion. The governing parties are laying themselves open to populist dema- goguery from the right. Then again, the frustration of popular demands can be expected sooner or later to re-ignite mass extra-parliamentary action, a development which will go a long way toward delegitimizing the regime in the eyes of the military. From the vantage point of a democratic process empty of social content, the reawakening of mass action can only be seen as a “threat.” As the Socialist deputy Camilo Escalona put it: “We think . . . that the greatest threat to the democratic process isn’t Pinochet. The greatest threat is that the people will not see its demands satisfied, that the people will be disenchanted with democracy, that millions of persons will turn their backs on the democratic process because it is not capable of responding to their enormous demands” (Luigi, 1990:D-8). If we can substitute the term “exclusive and oppressive electoral charade” for “democracy” we can come somewhat closer to the truth.

In this essay we have spelled out the reasons why the economic performance of the free market Pinochet regime is not only unworthy of emulation but that it has failed to meet its own claims, particularly in growth, debt and social terms. In discussing its successor we point to the probable failure of the electoral regime insofar as it operates within the same economic and institutional parameters. The underlying point is that political changes from military dictatorships to electoral regimes operating from the same neo-liberal assumptions do not alter the socioeconomic outcomes.



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LEFT CURVE no. 15T H E CASE OF PATRICK “ΠΟ ΟΤΥ” CROY & T H E STRUGGLE FOR NATIVE AMERICAN LIBERATION, articles by Paul Vanotu, Luis Talarnantez, Dannie Martin. A prison visit to N onna Jean Croy interview with Bia Dc Ocampo by Kathy Goss; DISPAR1T IKS ΛΝ1) C O N N E C T IO N SrT H E E X C L U D E D O N POSTMODERNISM: Till·: STEALING OF NOTHINGNESS by Elizam Escobar; PRESSU RE DROP PRESS by Martin Sprouse (with contributions by John Yates, Seth 'IV bocman, Peter Plate, Lydia Ely, etc.);TRUM AN N E L SO N ’S REVOLUTIONARY MORALITY by Shaun M cNiff, A REQUIEM FOR HIROSHIMA: text by Lee Baxandall, music by Leonard Lchrman; LEFT & RIGHT IN T H E C ULTUR E WARS: T H E BIG PICTURE by David Levi-Strauss; SUGARDADDY OR SUBTERFUGE? T H E NEA AT 25 by Anthony Marcus; GHASSAN ABDULLAH & PALES’! ΙΝΙΛΝ CULTUR E O F T H E INTIFADA by Jay Murphy, Culture Behind Bars by X-Dctainee 2858; FROM T H E AUTOBIOGRAPHY OF NELSON PEERY, Introductory N ote by Jack Hirschman; ANANDA K. COOMARASWAMY & MEDIEVAL SRI LANKAN ART by Geoffrey Cook; FREE FOOD NOW ! T H E POLITICAL PROGRAM OF FOOD N O T BOMBS by Alex S. Vitale; CRITIQUE, D O C U M EN TS, N O TES, ETC.: The Photojournalist and the Orange Card by Bertha Husband (Critique of Ed Kashi’s Photo’s) with response by Ed Kashi; Free Market Designer Chains (Graphic) by Doug Minlder; Letter About Cuba, The State of the World, and Things by Margot Pepper; poem by Efrain Huerta, translated by Jim Normington; The Structure and Functions of Elite A n and Various Underground Movements by Geza Perncczky; Las Vegas - Enter by Victoria Jaye; poem by HM; Extended Resume by Richard Olsen. “Building a Paradigm” (review) by Mat Schwarz.man & Mark O ’Brien.

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