How did a group of Chicago-trained economists manage to turn Chile into the cradle of neoliberalism? As the country aims to move away from their approach to economic policy, Chilean author and journalist Daniel Matamala discusses the controversial legacy of the Chicago Boys. 

Editor’s note: The current debate in economics seems to lack a historical perspective. To try to address this deficiency, we decided to launch a Sunday column on ProMarket focusing on the historical dimension of economic ideas. You can read all of the pieces in the series here.

When you say “Chicago” almost anywhere in the world, it could bring to mind any number of associations: Michael Jordan, the Cubs, Al Capone, Willis Tower. If you are in Chile, though, you will likely get a different knee-jerk reaction: Chicago? Sure, the Chicago Boys! The influence of a generation of economists trained at the University of Chicago under Milton Friedman and Arnold Harberger is so pervasive that not even Michael Jordan and the entire Bulls roster could eclipse them.

Under Augusto Pinochet’s dictatorial regime in the 1970s and 80s, the Chicago Boys conducted the farthest-reaching economic revolution in the history of Chile. Their pro-business policies have had an overwhelming impact that can be seen today in nearly every area of social life: education, health care, the pension system, and more. 

The Chicago Boys’ legacy is a controversial issue in Chile. On the one hand, Chile’s economic growth has been exceptional: its GDP leaped from $14 billion in 1977 to $247 billion in 2017. On the other hand, the country’s economic inequality is astonishing: 28.1 percent of the total income is concentrated among 1 percent of the population, making Chile one of the world’s most unequal nations. 

While the Chicago Boys’ policies did open some economic areas to real competition, they also concentrated capital among a small group of well-connected magnates. Since their implementation, powerful corporate groups born under Pinochet’s regime have used these pro-market ideas to avoid competition.

When, in October of 2019, more than a million Chileans poured into the streets to protest inequality and the privileges of the elite, the critique of the Chicago Boys resonated loudly. “Chao, Chicago” (“Bye, Chicago”), said a typical graffiti message. “Chile was the cradle of neoliberalism, and Chile will be its grave,” was one of the protesters’ chants. 

Two years later, Chile has elected a Constitutional Convention tasked with designing a new foundational document to replace the one enacted by Pinochet, one whose critics—including the Convention’s overwhelming majority—deem “neoliberal.” Convention President, Elisa Loncon, said that the new Constitution should establish “an economic model that brings justice, instead of a neoliberal model”. 

The left-wing presidential primaries in July this year were won by Gabriel Boric, a 35-year-old ex-student leader. In his victory speech, Boric repeated the slogan of the 2019 protests: “If Chile was neoliberalism’s cradle, it will also be its grave.” 

But who were the Chicago Boys? And how did they manage to turn Chile into the cradle of a social experiment that today many want to bury? 

Protests in Santiago, Chile, October 2019. Photo by Carlos Figueroa, via Wikimedia Chile [CC BY-SA 4.0]

Project Chile

Until 1973, economic theory and practice in Chile—as in much of Latin America—was dominated by ideas promoted by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC): a strong state, protectionism, and “inward” development, prioritizing industrialization as the way to emerge from underdevelopment. These were not just left-wing ideas; political parties on the right and some in the business sector also supported them. 

Amid the ongoing Cold War, the advancement of these ideas was considered a threat by US politicians. In his 1961 book The Voice Of Latin America, then Democratic Senator from Connecticut William Benton wrote that, “a grave problem in Chile has been posed by the Marxist, left-wing-oriented economists who have come from the university economics departments and who have infiltrated into the Chilean government and economy.” According to US Ambassador to Chile (1953-1956) Willard L. Beaulac, the University of Chile’s College of Economics—which was the nation’s most important economics school during those years—was “a communist nest.”

According to Chilean historian Manuel Gárate, author of La Revolución Capitalista de Chile (“The Capitalist Revolution of Chile,” 2012), the US government tried to “combat and counteract what was perceived as a ‘socialist way of thinking’ in Chile’s economics education”. Albion Patterson, a close ally of Senator Benton’s and a representative of the US government’s International Cooperation Administration (ICA), a government agency that provided non-military assistance, sponsored an agreement between the University of Chicago and the Pontificate Catholic University of Chile (PUC), the bastion of Chile’s conservative elite. The agreement, signed in 1955, enabled the exchange of professors and post-graduate fellows. As part of this “Chile Project,” 26 Chilean students were educated at the University of Chicago between 1956 and 1964, with University of Chicago economist Arnold Harberger as their academic and personal guide. 

Upon their return, this group took over the PUC School of Economics. The Chileans came back with “a sense of mission, the mission of the economist who, as the new philosopher, transmits science and modernism to society,” writes Juan Gabriel Valdés, Chile’s former Minister of Foreign Affairs (1999-2000) and the author of the deepest investigation into the Chicago Boys, Pinochet’s Economists: The Chicago School of Economics in Chile (1995). Almost all the “Chicago Boys” supported right-wing policies and parties, and worked in right-wing governments, but they saw themselves as scientists, far removed from ideology. Dominique Hachette, ex-director of the PUC’s School of Economics, recalled in “La Escuela de Chicago,” by Francisco Rosende that “I received good, scientific, positivist training, not an ideology designed by the ‘Great Satan.’” Rolf Lüders, Pinochet’s former Treasury and Economics minister from 1982 to 1983, said that The University of Chicago conceives of the economy “not as an instrument to justify one ideology or another,” but rather to observe reality in a way that was “positivist and empirical. 

This program was supported by business and political groups who saw it as an antidote to the expansion of socialism. The Chicago Boys were assembled in the Center for Socio-Economic Studies (Cesac), a think tank financed by Agustín Edwards, the owner of one of the largest economic groups of the time, director of the influential right-wing newspaper El Mercurio, and a CIA collaborator

When the Marxist candidate Salvador Allende won Chile’s 1970 presidential elections, the Chicago Boys felt their work to be even more urgent. While business and military groups conspired to overthrow Allende, the Chicago Boys prepared a government plan called “The Brick,” which later served as the economic base for the dictatorship. 

In 1973, a military coup overthrew Allende, who committed suicide in the presidential palace. A military “junta,” led by General Augusto Pinochet, controlled the country since then and until the restoration of civil rule in 1990. According to Lüders, “A social-economic program like the one put forward in ‘The Brick’ was a necessary pre-condition for the military coup.” 

After Allende’s overthrow and suicide, Pinochet’s dictatorship put the Chicago Boys in charge of its economic team, granting them broad powers to put the Brick’s ideas into practice. It was not a purely ideological decision: Pinochet leaned heavily on the business conglomerates BHC and Cruzat-Larraín, which were linked to the Chicago Boys and would benefit from an abrupt liberalization of the economy like the one that was about to occur. These groups were based in the financial and export sectors, unlike the traditional groups centered on industry and “inward” development. 

The leader of the Chicago Boys, Sergio de Castro, was named Economic Minister in 1975, and his associates filled the main positions of power within the dictatorship’s economic team. “They all had personal and/or business ties with the BHC or Cruzat groups”, said Political Science professor Eduardo Silva. “These influential businessmen often discussed reforms with policymakers,” says the dictatorship’s ex-Budget Director, Juan Villarzú, with the result being “a privileged relationship—and, as the period’s history proved, one that was highly inconvenient for the national interest—between those businesses and economic policy,” according to Chile’s former Secretary of the Presidency (1994-1996), Genaro Arriagada. In his book Desigualdad (Inequality, 2019), former Treasury Minister Nicolás Eyzaguirre figures that the groups close to the regime received wealth transfers from the State worth 40 percent of GDP.

“Chile was a laboratory for neoliberalism in its most pure (or extreme) version. Drastic reforms that would be unthinkable in a democracy were executed as military orders, without criticism or opposition and at an enormous social and human cost, thanks to a dictatorship that used blunt force to block any debate.”

“Shock Treatment is the Only Way”

The first challenge the Chicago Boys faced was to control the hyperinflation unleashed under Allende’s government. To that end, they implemented a shock policy, following the advice Milton Friedman gave directly to Pinochet when the two met during Friedman’s visit to Chile in 1975: “I think that when a person has a serious illness, even more serious measures are needed in order to heal it,” Friedman said then. “Shock treatment is the only way.”

The dictatorship implemented drastic cuts in public spending and social investment, which led industrial production to fall 28 percent in 1975, while GDP was down 12.9 percent. Then, Pinochet’s regime opened the economy quickly, which involved liberalizing prices; lowering customs fees from a maximum of 94 percent to a blanket 10 percent duty; eliminating certain taxes; and reducing labor unions to a minimum. 

Around 95 percent of public companies were privatized, sold at clearance prices to a handful of buyers with ties to the dictatorship. This fostered crony capitalism and the growth of very concentrated economic groups. Key state-owned companies were bought by Pinochet’s cronies. One example is SQM, the main producer of lithium, that was captured by Pinochet’s son-in-law, Julio Ponce. Today, SQM is one of the top five lithium companies in the world, and Ponce is the second richest billionaire in Chile.   

The Chicago Boys and their intellectual mentors placed the word “freedom” at the top of their priority list. The paradox of promoting this supposed economic “freedom” in the midst of a dictatorship is the darkest part of their legacy. Chile was a laboratory for neoliberalism in its most pure (or extreme) version. Drastic reforms that would be unthinkable in a democracy were executed as military orders, without criticism or opposition and at an enormous social and human cost, thanks to a dictatorship that used blunt force to block any debate. 

Friedrich Hayek visited Chile in 1977 and 1981, and he had a favorable opinion of Pinochet: “Sometimes it is necessary for a country to have, for a time, some form of dictatorial power. As you will understand, it is possible for a dictator to govern in a liberal way. And it is also possible for a democracy to govern with a total lack of liberalism,” Hayek said in 1981. 

The effective freedom of a person is only guaranteed by an authoritarian government,” Sergio de Castro said in 1976. At the end of the dictatorship, De Castro would repeat this idea even more brutally: “con una metralleta en la raja, todo Chile trabaja.” (That is, “with a machine gun up their asses, all Chileans work.”) 

Machine guns in hand, the dictatorship privatized social services like retirement, education, and health care. It implemented a pension system based on individual capitalization in private, for-profit companies (AFPs). It cut off funds to schools and public universities, promoting the expansion of subsidized, for-profit schools with co-pays, which is where the majority of Chilean children study today. And it created Isapres, private companies tasked with providing health services. 

A Fake Miracle”

Such was the Chicago Boys’ faith in their ideology that when the Latin American debt crisis exploded in 1981, “they made it clear, explicitly, that a ‘do-nothing’ policy was the best option” since the economy should be able to adjust on its own, said Chilean economy professor Patricio Meller. The consequences were disastrous: Chile’s GDP fell by 15 percent, unemployment rose above 30 percent, the Central Bank lost half of its international reserves, and the country sank into the worst recession since the Great Depression. 

The social crisis led to massive protests that put the dictatorship at risk. Pinochet asked for De Castro’s resignation, “marking the end of the Chicago Boys’ ‘naive’ phase in power”, said Valdés. The course of the dictatorship’s final phase was set by more pragmatic neoliberals, such as Treasury Minister Hernán Büchi (1985-1989).

Milton Friedman coined the phrase “The Miracle of Chile,” but Pinochet-era results did not look so miraculous: Nobel-prize winning economist Amartya Sen said that “the so-called ‘monetarist experiment,’ which lasted until 1982 in its pure form, has been the object of much controversy, but few have claimed it to be a success.” In his 1991 book Hunger and Public Action, Sen emphasizes “the failure of the monetarist experiment to lead to a sustained and broad-based increase in economic prosperity.”

Chile’s GDP grew 2.9 percent annually during the dictatorship, putting Pinochet in eighth place out of the nation’s past ten governments, between 1958 and 2018. Annual inflation was 79.9 percent, the second-highest of the past ten governments. Unemployment averaged 18.0 percent, the highest figure in any Chilean government of the past 60 years. 

Public spending on education decreased from 3.8 percent of GDP in 1974 to 2.5 percent in 1990, and health spending fell to 2 percent of GDP. In 1990, the country Pinochet handed over was poor and unequal. Poverty measured by the current standard was 68 percent. The GINI inequality index was 0.57, one of the highest in the world, similar to the Central African Republic or Guatemala. 

Chao Chicago?

Still, some of the Chicago Boys’ reforms did plant the seeds for Chile’s development: economic liberalization, promotion of private investment, and autonomy for the Central Bank. After 1990, the democratic post-Pinochet governments kept these foundations and complemented them with free trade agreements, and small tax increases to finance social spending. Between 1990 and 1998, GDP grew 7.1 percent annually, inflation fell to 11.7 percent, and unemployment dropped to 7.0 percent, while poverty decreased steadily to reach 8.6 percent in 2017. The “miracle” came during democracy. 

However, this “miracle” maintained high inequality rates. Today, Chile’s GDP per capita is $25,000, but 50 percent of Chilean workers earn less than $6,320 per year. According to the World Inequality Database, the richest 1 percent in Chile accounts for 28.1 percent of total income, which places it as the third most unequal country in the world among those with comparable data, only exceeded by the Central African Republic and Mozambique, and tied with Mexico. A handful of families dominate the economy, and one, two, or three companies belonging to those family groups dominate markets like pharmacies, banking, chicken, and phone services. In several of these groups, cases of collusion, tax evasion, illegal payments to politicians, and consumer fraud have been detected, which have ended up without any jail time for the guilty parties. 

Moreover, the country’s economic model is frayed. Chile’s economy remains basic and rife with rent-seeking, centered as it is on mining and fishing: 50 percent of its exports are copper. “We can expect that a nation that has done the same thing for decades, but with ever-increasing capital, will face decreasing yields. The only way to avoid this is through a high level of investment in science, technology, and innovation, which allows for leaps in productivity. This is not Chile’s case,” summarizes the economist Óscar Landerretche. Chile has one of the lowest R&D investment rate in the OECD (states 0.35 percent). Productivity and growth have been on a downward trajectory for the past 15 years. 

Stagnation, inequality, abuse, and the opposition to reforms like the one to the private pension system, AFP (half of the retired people in Chile received less than $3.106), all led to the great civil uprising of 2019, and eventually to the process of drawing up a new constitution, one that will bury Pinochet’s.