The Myth of the Chilean Miracle

by Stephanie Rosenfeld

SANTIAGO, CHILE - A major labor demonstration here on July 11 brought an end to the long labor-government honeymoon since Chile's 1990 transition to democracy. The demonstration, called by the CUT, Chile's principal labor union confederation, was the largest since the massive rallies that accompanied the downfall of the Pinochet dictatorship in the late 1980s.

Since the transition to democracy, Chilean politics has been marked by a desire to maintain stability and consensus. While there have been a series of sectoral conflicts, this was the first broad-based labor protest.

The demonstrators demanded the restoration of labor rights stripped away during the 16-year dictatorship of General Augusto Pinochet. The 1973 military coup which brought Pinochet to power ended Chile's experiment with the "democratic road to socialism," leaving President Salvador Allende dead in the bombed-out presidential palace.

Pinochet ushered in a very different experiment. A group of Chilean economists started applying the neoliberal economic model to Chile in the mid-1970s, years before the International Monetary Fund (IMF) and World Bank began forcing such policies on Chile's neighbors. These economists came to be known as the "Chicago Boys," since many of them had studied at the University of Chicago under Milton Friedman.

 The Chicago Boys claim their ideology is based on freedom, especially freedom from government intervention in the economy. Their reform program included selling off state-owned companies, lowering taxes and tariffs, "freeing" prices by eliminating government subsidies, and privatizing government social services such as health, education and social security [see "Pinochet's Giveaway: Chile's Privatization Experience," Multinational Monitor, May 1991].

These economic policies mainly benefitted big business, which enjoyed the virtual giveaway of profitable state enterprises and harsh repression of labor. The Pinochet regime banned political parties of the Left, and jailed, tortured, killed and exiled many union leaders and others opposed to the dictatorship. "People were in prison so the prices could be free," said historian Eduardo Galeano about similar reforms that took place in Uruguay.

Restructuring the economy was a key element of the dictatorship's larger project to transform Chilean society and eliminate the possibility of another Allende-style government. The military and its civilian allies reworked the institutions of Chilean society, rewriting everything from labor laws to the Constitution and the rules of the electoral system.

Pinochet's 1979 Labor Plan banned union confederations, prohibited unions from requiring members to pay dues and made it optional for companies to collectively bargain with unions that represent workers in more than one firm. It also encouraged the formation of competing unions and placed a 60-day limit on strikes, all in the name of increased "freedom" for workers and employers.

The 1980 Constitution created a "protected democracy," expanding the political role of the military, and skewing the electoral system to favor representatives of the Right and the military. It also specifies the "unremovability" of the commanders in chief of the armed forces, which allows General Pinochet to remain Commander in Chief of the Army through 1997.

Corporate socialism

 In the late 1970s and early 1980s, the Chilean economy recovered from the recessionary shock of the neoliberal reforms, and began to grow at a moderate rate, enjoying brief fame as a neoliberal "miracle" economy. But much of the economic growth was based on foreign debt and financial speculation, and when the speculative bubble burst in 1982, Chile's gross national product plunged 14 percent. Unemployment reached 30 percent, and Chile's debt crisis sparked three years of national protests against General Pinochet and the Chicago Boys.

What made Chile's debt crisis different from that of the rest of Latin America was that private companies, not the government, held most of most of Chile's foreign debt. The fact that the government was not legally responsible for repayment could have been an important source of bargaining power as the government entered negotiations with the IMF over the conditions attached to new loans to help pay back the old. However, private interests took precedence over public good, and the Chilean government promised to back the private debt.

While both the IMF and the Chicago Boys preached free markets and disparaged state intervention in the economy, the IMF was happy to have the Chilean government bail out private debtors, if that meant guaranteed repayment of loans. Interestingly, Rolf Lüders, Pinochet's minister of economy and finance who agreed to government backing of the loans, had only a few months earlier been an executive of one of Chile's most indebted economic conglomerates, the Grupo Vial.

The IMF adjustment program was structured to protect the conglomerates and the international banks, at the expense of the country's poor, argue Chilean economist Patricio Meller and others. One of the standard austerity measures proposed by the IMF is the elimination of government subsidies to basic goods and services. But when the IMF program was implemented in Chile, the Central Bank provided subsidies, or bailouts, to some 2,000 wealthy debtors, a sum equivalent to 4 percent of gross domestic product (GDP); it is not clear what rationale the IMF used to exclude these subsidies from the austerity adjustment program. At the same time, some 600,000 out-of-work Chileans received only 1.5 percent of GDP as an unemployment subsidy.

 Ironically, although much of the neoliberal reform package that the IMF imposed on other countries in the wake of the debt crisis had already been implemented by the Chicago Boys in Chile, it did not prevent Chile from accumulating one of the highest per capita debts in South America.

From dictatorship to democracy

 The 1990 transition to democracy marked the beginning of a period of political reform, with the new government run by a coalition of political parties dominated by the Christian Democratic Party in the political center, and including the center-left Party for Democracy and the Socialist Party. But the coalition, called the Concertación, has focused its reform efforts on the consolidation of electoral democracy, and the neoliberal economic policies of the Pinochet years remain largely intact.

 Observers attribute the ongoing vitality of the neoliberal model to several factors, including the growth spurt the country has recently experienced. Authoritarian legacies of the dictatorship, such as the "designated" senators, who represent institutions such as the armed forces rather than electoral districts, play a decisive role in the legislature, tipping the scales against major reforms. The social movements, which had led the struggle for democracy during the darkest years of the dictatorship, have had little influence or bargaining power with the new government. Elite party politics marginalized organized labor, which had been decimated by years of repression and neoliberal economic restructuring, along with the women's and other popular movements.

But perhaps the most important reason for the neoliberal model's persistence is that the economic thinking of important sectors of the center-left opposition to the dictatorship and the neoliberals began to converge in some aspects in the 1980s. In broad strokes, both the Chicago Boys and the center-left agree that the market and the private sector should lead the development process. Both emphasize economic growth as the key to the elimination of poverty and reject government measures aimed at reducing inequality or which might risk causing inflation. Both agree that export growth is fundamental to Chile's development, and therefore both support maintaining an open economy.

In economic policy, the Concertación has differed from the neoliberals mainly in its attention to poverty and social policy, increasing the government spending in these areas by some 30 to 40 percent over the levels at the end of the dictatorship.

The Concertación also rejects the neoliberal view of the state. In the Concertación's view, the government should play an important role in regulating business and the market, as well as insuring a minimum level of welfare. Under President Patricio Aylwin, the government halted the rush of privatizations of state-owned firms, but did not review the privatizations that occurred during the dictatorship.

Paying the social costs

 After the economic collapse and structural adjustment programs of the debt crisis period, the Chilean economy began to grow again in the mid-1980s, and it is now again being hailed as a "miracle." This time, the growth is more solidly based on natural resource exports, primarily fruit, forests, fish and copper. But severe poverty and income inequality persist.

 In contrast to the dire predictions of the outgoing Pinochet regime, stability and growth were sustained during the Aylwin administration, which governed from 1990 to early 1994. Economic growth averaged 6.3 percent annually from 1990 to 1993, compared to 6.4 percent for the 1985 to 1989 period, the years of economic recovery from the debt crisis.

Official unemployment fell to a 20-year low at 4.5 percent in 1992, from 27 percent in 1982 and 5.7 percent in 1990. At the same time, the work week lengthened, with the average increasing from 48.5 hours per week in 1990 to 50.5 hours in 1992.

 The Aylwin administration acknowledged the "social debt" owed to those who have yet to benefit from the economic "miracle," and made poverty alleviation a priority. The number of people officially defined as living in poverty dropped from 5 million to 4 million, in a country of 13 million, partly as a result of increases in the minimum wage and pensions and increased government expenditures on social services, and partly due to economic growth which decreased unemployment.

Nevertheless, poverty rates remain much worse than before the neoliberals took over national economic policy. From 1970 to the early 1990s, the percentage of households living below the poverty and indigence lines skyrocketed. In 1970, before Pinochet took power, 17 percent of Chilean household incomes were below the poverty line; by 1990, the rate had doubled, with 35 percent of the households living in poverty; and in 1992 it was still 33.5 percent. After 10 straight years of economic growth, income distribution figures show little improvement.

Poverty in Chile is caused not so much by unemployment as precarious employment and low wages. As a result of labor's weak bargaining power, wage increases have continually lagged behind productivity gains. While the centrist and leftist political parties promoted "growth with equity" as an economic strategy during the 1960s and early 1970s, today "growth with stability" is the Concertación's mantra.

The Concertación considers its reform of the labor legislation inherited from the dictatorship one of its major accomplishments. The government lifted the 60-day limit on strikes, and unions are now allowed to join in confederations. But the government denied organized labor's principal demand, obligatory collective bargaining at the industry level, rather than at the firm level, and legal obstacles continue to impede efforts to rebuild the union movement. José Piñera, author of the 1979 Labor Plan, called the Plan a building that could not be burned down, and indeed the basic structure is still standing.

 That organized labor has made such limited gains since the transition reflects in part the weakness of labor as a movement. Unions have only recently begun to rebuild at the base, and with mixed results. Between 1989 and 1991, workers formed thousands of new unions, but many other unions are no longer active. In 1993, 13.1 percent of the Chilean labor force was unionized, up from 9.8 percent in 1988, but a decline from 1991's 14.5 percent membership level. Many of the new unions, fruit of the high hopes and enthusiasm of the transition period, have found that collective negotiations were not very successful. The bulk of firm-level unions, the only type of union with which employers must negotiate, have only 25 to 50 members, and correspondingly little power.

 The Concertación's strategy of elite negotiation and social demobilization has led to a stable transition period, yet one marked by few concessions from the Right or big business. While Chile under Aylwin saw some major strikes, especially by state and state-enterprise workers such as teachers, health workers and copper miners, on the whole, the Aylwin years were far more remarkable for their stability than for conflict.

 As his term came to an end in March 1994, President Aylwin became more openly critical of the neoliberal economic model over which he had presided. At a celebration of International Women's Day, Aylwin remarked, "There is no point in [free-market-based development] if the majority of human beings see it only on TV."