Chile as a possible example for Greece?

I know that this post is a dangerous one because I am embarking on the thin ice of praising something which published opinion, for very good reasons, has classified as politically incorrect --- the happenings in Chile during the late 1970s/early 1980s. I take the right to embark on this course because I have lived in Chile during those years.

I have talked about the Chilean situation before in this blog. I recently posted another - somewhat daring - article about it. A commentator asked what it was exactly that was good about the policies of the Chicago Boys in Chile. He suggested that, essentially, all it was was an indirect intervention of the US to protect their investments in Chile. Below is my response to him. 


I did NOT say that the US involvement in Chilean affairs during the 1970s had as its goal to save poor Chileans, nor would I think so. That kind of a dreamer I am not. Of course, the US involvement in Chile had geopolitical objectives --- Allende/Castro were on their way towards turning Chile into a second Cuba (that was their publicly stated objective) and the US, for understandable reasons, had no interest at all to have more than one Cuba in the Western Hemisphere. Protecting US investments in Chile was not a principal objective because the US had no major investments there at the time.

I know I am moving onto thin ice when I say the following, but bear with me.

Pinochet’s bad luck was that of all the zillions of coups in Latin America in the last couple of centuries, his coup was the one which kicked out the world’s first democratically elected Marxist President. With that handicap, the Chilean coup will forever go down into ivory towers as the most brutal coup in the world.

Any coup is one coup too many and any person killed in a coup is one person too many. Having said that, I was amazed how Argentina – where I lived after Chile – could practically at the same time have a bunch of butchers slaughter off tens of thousands of people while the whole world focused on Chile (and ignored the brutalities of a junta in Argentina). And those butchers left an economic mess behind and not a well-functioning economy!

Mind you, Chile – if I recall correctly – has the most constitutional history of all Latin countries. I believe they had had only one coup before and that had been many decades before. Against that historical background, the idea of a coup was a nightmare, even to the military itself.

What is generally not publicized is that, according to the Constitution, there had actually been the obligation to remove Allende from office. Allende had been in fights with the Supreme Court for some time. On 26 May 1973, the Supreme Court of Chile unanimously denounced the Allende government's disruption of the legality of the nation in its failure to uphold judicial decisions, because of its continual refusal to permit police execution of judicial decisions contrary to the government's own measures. According to the Constitution, the President had to be removed from office. The only thing is: after removal, a new election should have been called and the military, as militaries tend to do, forgot about that part. That was the crime of the coup (and the civil rights violations), not Allende’s removal from office!

Now to give you even more of a feeling. Pinochet had been appointed by Allende himself to his post about a year before the coup. The story was that Allende chose Pinochet because he was considered as a weakling. At home, he was under the rule of his tough wife (correct!) and in the military the Head of the Air Force was the power guy. I had met both and I could subscribe to that view.

Chileans had run out of food (except for those close to the Communist Party). It is well documented how housewives would populate the streets of downtown Santiago banging on empty pots and pans. “Do something!” they shouted (meaning the military). The story goes that Pinochet did not have the guts to do anything because, as I said above, a coup was so much against Chilean tradition. It was said that the Head of the Air Force finally gave Pinochet an ultimatum to either do it or to be gone. Within weeks after the coup, Chileans had food again.

Am I supporting the coup? Of course not, but life is full of choices and I can imagine what the choice would have been (in fact, I had talked about this with many Allende followers and they essentially saw it the same way. The owner of the house we rented, a former ambassador of Allende and someone who was pursued by the junta for some time, told me a lot about that). Chile was indeed on its way to become a second Cuba. The political process had lost its self-corrective power. So, if there hadn’t been a coup, Chile today would probably have many similarities with Cuba today (and Allende would probably be glorified for that like Castro still is). Everyone is invited to judge what his/her preference might have been. There was no “third way”.

In the economic area, THE masterstroke of Pinochet & Co. was that they recognized that they didn’t know anything about economic affairs, and that they shouldn’t mess with it. The Chicago-Boys were Chileans who – since the 1950s – had formed a following, principally at the Universidad Catolica, of the Austrian National School of Economy (Hayek, Schumpeter, Mises, etc.). Later, several of them went to study at the University of Chicago where they became favorite students of Milton Friedman (and blind followers of Milton Friedman). The Chicago Boys were brilliantly intelligent people, like many brilliantly intelligent Greeks today. Unfortunately, they based everything on theory and lacked practical experience.

Pinochet delegated ALL economic affairs to the Chicago Boys and promised them, so it was said, air cover for 5 years. They needed that because the radical reforms they introduced would not have been possible in a democracy (I fear).

In short, there is no question that neither the military nor the US were driven by boy scouts motives. The military, of course, wanted Chile to become the kind of country they wanted it to be and the US didn’t want to have another Cuba. But that is not the issue which I raised. The issue I raised was that the Chicago Boys had at their core the objective to improve the lot of ALL Chileans.

What did they do?

They opened up the economy so that Chile could make use of its competitive advantages. First, they defined what they saw as Chile’s competitive advantages and then they made plans to make use of them. Chile, formerly an exporter of only copper and an importer of just about everything else, became an important exporter (which generated foreign currency). Foreign investors brought capital to the country because they considered Chile to be a great place for doing business. They freed the economy of excessive rules and regulations but made sure that there was an overall regulatory structure in place. Milton Friedman would have called that: “They established the rules of the game within which the private sector could operate competitively and fairly”. They privatized a lot, not primarily for financial gain but for acquiring private sector (and particularly foreign) know-how.

Their major blunder was fixing the exchange rate which lead to a massive inflow of cheap foreign funding which was misspent by the private sector on consumption and which caused a crash around 1982. The way they handled that crash was a text book case (that was already handled by the successors of the Chicago Boys). Probably the best bank rescue program I have ever seen! Shareholders and institutional investors lost; depositors and tax payers were protected.

In short, the Chicago Boys gave Chileans the opportunity to develop their own creative powers and talents with very little restraint from government. The new business start-up’s were at a phenomenal rate. Here is how Milton Friedman later described it: "The Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." I subscribe to that 100%!

One of the most eloquent spokesmen of the Chicago Boys was the then still very young José Pinera (a brother of today’s President). In debates about whether or not Chile should exploit its natural resources, at the time when he was Secretary of Mining, he often stated a phrase which, to this day, makes my heart feel warm: “We will use our natural resources. Not to waste or to spend them. Instead, we will use them so that we can invest in the only resource which has eternal value --- our human capital!” That’s what they did. Later, as Secretary of Labor and Social Security, he privatized the Chilean pension system based on personal retirement accounts.

There is absolutely no doubt in my mind that if Greece had a similar economic team in place, with the necessary powers, the same results would happen in Greece. Chileans are characterized by an extreme love, if not passion for their country; so are Greeks. Chile then had a whole generation of extremely well-educated people who were eager to accomplish something; so does Greece. At the same time, Chile had a large part of the population which was “underdeveloped”, so to speak. Not all that educated; not all that familiar with modern times; in short: ideal targets for populists and demagogues. Greece does, too (in my opinion). The trick was that the Chicago Boys could ignore the populists and demagogues and focus on the job at hand instead.

No doubt about it: the original Chicago Boys failed in 1982 and they were replaced by more down-to-earth economic leaders. But they had instilled into the Chileans a sense of self-determination; a conviction that – regardless how small a country was, how remote and how seemingly short of competitive advantages – the conviction that even such a country could succeed internationally if it only put its mind to it.

Compared to Chile then, Greece today is in much better shape. Chile did not have an extremely rich oligarchy. Greece’s oligarchy, instead, belongs to the richest in the world. Much of Chile’s entrepreneurial talent had left for Spain during the Allende years and they led great lives there. One of them (Jorge Cauas) once told me: “We were having the greatest life in Spain but we were all scared of one thing: that Pinochet would call us and appeal to our loyalty and our responsibility to the ‘patria’. We knew that if he called, we couldn’t say no. But we also knew that we would be leaving a great life and return to a life of uncertainty and to a public servant’s salary with little purchasing power, as well as the risk of immediate termination of contract if we failed”.

Jorge Cauas and many others of his kind received the call and accepted the responsibility (Cauas became Pinochet’s first Finance Minister). Not to their disadvantage in the end, I might add.

So ask yourself the following question: what would it take for a Greek leader to appeal to the country’s economic oligarchy, to their loyalty and their responsibility to the Greek ‘patria’? To make their talents and resources (if only a few billion of the many, many billions they have expatriated from Greece…) available for the turn-around of their home country? If you have an answer to this, you have half the problem’s solution.