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Thursday, May 26, 2011

Milton Friedman and the Chilean Experiment

A CULTURE OF DEFIANCE: History of the Reform-Conservative Party of Canada

In 1970, Salvador Allende, was elected President of Chile, a progressive nation enjoying the rewards of an intellectual movement. Poets, artists, thinkers, all contributed to the culture of a socialist society.

But Allende made a huge mistake. He had campaigned on the promise of nationalizing his country's natural resources, raising concern with foreign business interests. A concern that would bring about radical and unwelcome changes, initiated by corporate giant International Telephone and Telegraph (ITT).
In the wake of the Allende victory ITT established close contacts with the State Department, the National Security Council, the U.S. Information Agency, the CIA, the Inter-American Development Bank, the Senate Foreign Relations Committee, and other agencies with the purpose of pushing the U.S. to intervene covertly in Chile. Efforts were made to prevent Allende from taking power, which he could do only with the help of the centrist Christian Democrats. The CIA immediately implemented a program of economic destabilization to demonstrate to the Christian Democrats the folly of supporting the inauguration of Allende as president. When that failed, tactics changed. An ITT memo from field operatives in Chile read: "A more realistic hope . . . is that a swiftly deteriorating economy (bank runs, plant bankruptcies, etc.) will touch off a wave of violence resulting in a military Coup." (1)
ITT had already stated that they were "prepared to assist financially in sums up to seven figures." The tactic worked, and the civil unrest caused by the destabilization, resulted in the predicted military coup.

Finally, on September 11, 1973, as President Allende watched the tanks roll in to lay siege to the presidential palace, he made one final radio address, still defiant though clearly beaten:
"I am certain that the seed we planted in the worthy consciousness of thousands and thousands of Chileans cannot be definitively uprooted. They have the strength; they can subjugate us, but they cannot halt social processes by either crime or force. History is ours, and the people make it." (2)
Sadly, he was unaware of the force of a 5' 2" bundle of evil, Milton Friedman, and his disciples at the Chicago School of Economics.

Friedman had been waiting for just such an opportunity to test his free market theories.
Friedman advised Pinochet to impose a rapid-fire transformation of the economy—tax cuts, free trade, privatized services, cuts to social spending and deregulation. Eventually, Chileans even saw their public schools replaced with voucher-funded private ones. It was the most extreme capitalist makeover ever attempted anywhere, and it became known as a "Chicago School" revolution, since so many of Pinochet's economists had studied under Friedman at the University of Chicago. Friedman predicted that the speed, suddenness and scope of the economic shifts would provoke psychological reactions in the public that "facilitate the adjustment." He coined a phrase for this painful tactic: economic "shock treatment." In the decades since, whenever governments have imposed sweeping free-market programs, the all-at-once shock treatment, or "shock therapy," has been the method of choice. (3)
And Pinochet was the perfect authoritarian leader to impose these radical changes. Torture and massacres were the remedy for dissent.

And though fully aware of this, Friedman felt no compassion for the victims. According to Naomi Klein in The Shock Doctrine:
After his meeting with Pinochet, Friedman made some personal notes about the encounter, which he reproduced decades later in his memoirs. He observed that the general "was sympathetically attracted to the idea of a shock treatment but was clearly distressed at the possible temporary unemployment that might be caused."

At this point, Pinochet was already notorious the world over for ordering massacres in football stadiums; that the dictator was "distressed" by the human cost of shock therapy might have given Friedman pause. Instead, he pressed the point in a follow-up letter in which he praised the general's "extremely wise" decisions but urged Pinochet to cut government spending much further, "by 25 per cent within six months ... across-the-board," while simultaneously adopting a package of pro-business policies moving toward "complete free trade." Friedman predicted that the hundreds of thousands of people who would be fired from the public sector would quickly get new jobs in the private sector, soon to be booming thanks to Pinochet's removal of "as many obstacles as possible that now hinder the private market. Friedman assured the general that if he followed his advice, he would be able to take credit for an economic miracle ... he "could end inflation in months" while the unemployment problem would be equally "brief—measured in months—and that subsequent recovery would be rapid." Pinochet would need to act fast and decisively; Friedman emphasized the importance of "shock" repeatedly, using the word three times and underlining that "gradualism is not feasible.""
Friedman was wrong however, and it would be several years before the employment situation improved.

But that was not really his concern. Nor were the 30,000 people killed, in order to implement his plan.

It's interesting how neoconservative disciples, view the Chilean experiment. In her memoirs, Margaret Thatcher acknowledges the "authoritarian" style of Pinochet, but marvelled at how easy it was for the country to return to normal under a free market system. Of course she credits Friedman for the transformation.

Praise is still being given three decades later. But is it earned? Not according to Klein.
The facts behind the "Chilean miracle" remain a matter of intense debate. Pinochet held power for seventeen years, and during that time he changed political direction several times. The country's period of steady growth that is held up as proof of its miraculous success did not begin until the mid-eighties, a full decade after the Chicago Boys implemented shock therapy and well after Pinochet was forced to make a radical course correction.

That's because in 1982, despite its strict adherence to Chicago doctrine, Chile's economy crashed: its debt exploded, it faced hyperinflation once again and unemployment hit 30 percent—ten times higher than it was under Allende. The main cause was that the piranhas, the Enron-style financial houses that the Chicago Boys had freed from all regulation, had bought up the country's assets on borrowed money and run up an enormous debt of $14 billion.

The situation was so unstable that Pinochet was forced to do what Allende had done: he nationalized many of these companies. In the face of the debacle, almost all the Chicago Boys lost their influential government posts. (2)
Today Chile's economy is stable, but the country suffers from very high income inequality. Many Chileans live well below the poverty line, a situation that the government is looking to eradicate.

Salvador Allende died on September 11, 1973, the day the tanks rolled in, and his death was put down to suicide, something his family never accepted. His remains are now to be exhumed and we may finally learn what happened on the fateful day.

However, despite the obvious failure of Friedman's Chilean experiment, others are trying to replicate the disaster, including it would seem, our own government.

We now have an authoritarian in complete control, and our record debt and deficit, presents a perfect situation to begin to implement a bit of "shock therapy".

Relax. It won't hurt a bit.


1. The Myth of the Good Corporate Citizen: Canada and Democracy in the Age of Globalization, By Murray Dobbin, James Lorimer & Company, 2003, ISBN: 1-55028-785-0, Pg. 77-79

2. The Shock Doctrine: The Rise of Disaster Capitalism, By Naomi Klein, Vintage Canada, 2007, ISBN: 978-0-676-97801-8, Pg. 123

3. Klein, 2007, Pg. 8

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