Monday, November 8, 2010

Chile's Chicago Boys

In one of my b-school courses we took a look at Chile's economic development.  Lots of stuff on Wikipedia you can look at (here, here, and here).  Fans of economist Milton Friedman like to use Chile as an example of how neo-liberal (liberal in the classical sense of the term) economic policies "work".

For a homework assignment I plotted both real per capita GDP and the Gini coefficient over time, and I overlayed relevant policy eras.  The Gini coefficent measures income inequality where the higher the number the more polarized the income distribution.  

Many economists think that income inequality rises during periods of intense economic development but then returns to more normal levels once the economy matures.  During the reign of the Chicago Boys, the Gini coefficient did rise but per capita GDP did not demonstrate any sustainable progress.  After a Latin American debt crisis in 1982 that hit Chile hard even though its finances were largely in order, Chilean dictator Pinochet replaced the Chicago Boys with a more moderate and pragmatic economic team.  Since then Chile has experienced sustainable growth in real per capita GDP, but stubbornly high (though flat) income inequality as measured by the Gini coefficient.  Chile had been tacking to the left politically until earlier this year and had been very gradually moderating its economic policies since Pinochet departed.  Recently, income inequality is thought to have moderated as a result of these policies, though the CIA still ranks Chile 14th highest income polarization in the world.

The interesting thing about the course is that it points out how unique the US is in that it was able to develop economically while being politically free.  This is quite rare.  Most countries need to get lucky with a benevolent dictator who imposes economic order for a period (even if there is a massacre here or there) and then peacefully steps aside at just the right time.  Once the country achieves a certain degree of stability under authoritarian rule, then in order for growth to continue legitimacy is needed - the kind that only comes from a freely elected government - and its richer population can afford to give itself the privilege of increasing political and social freedoms.