The Chilean Miracle

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Herman Cain is fucking crackpot. Well thats at least how he had been marketing himself for some time. From his online TV channel, CainTV, which seemed like if the Adult Swim creators suddenly became deep in Austrian economics to his appearances on the Colbert Report, it seems that Cain had been cashing in on his fame when it lasted. Even when he was running for president he had his share fair of cooky moments. His 9-9-9 tax plan caught the attention of the media as Cain’s solution to our mess of a tax code was literally nothing more than a magic bullet. And who can forget Cain quoting Poke’mon during one of the debates. Yet there was one more crackpot thing that Cain tried to suggest that the less political savvy didn’t realize. During one of the debates Herman Cain proposed his plan for social security. The Chilean model. Herman Cain cited that this is a model that quite simply works. But as you can assume that much like everything else from Herman Cain its just a load of crap.

Chile’s pension system differs from the United States and other first world nations in which that pensions aren’t financed through a system where workers, employers and the government all contribute to the pension, but instead where workers are forced to pay 10 percent of their salaries to private investment accounts. There are some positives to this model. The most notable is that social security costs significantly less than it does in other nations. About one third less than the United States and half of Australia. In a nation obsessed with debt it seems like an obvious path to take. There is just one problem, when Cain said this nearly half of the Chilean population wasn’t covered by Chile’s system… Its pretty easy to have half the amount spent on social security compared to the beacon light of the traditional model when you only cover half the amount of people. Nor does this go into the detail that in the United States the social security system it uses the people pay nearly fifty percent less into it than Chile’s system. And it doesn’t go into the fact that the minimum amount of social security given in Chile’s system, which isn’t always given, is hysterical. Now I’m not trying to say that the American form of social security is perfect, far from it. And I am ignoring the fact that Chile has recently revised its social security, like it has many times before, to try and cover more people. I just find it odd that such a system is held up as the pinnacle of social security. Even prior to the reforms many on the right, including the then president George W. Bush, stated that the Chilean model is what the nation should strive for social security to be.

The right wing in general seems to be interested a lot in Chile. From the private voucher school system to its healthcare structure, it always seems that the right is obsessed with these Chilean models. However when you look at Chile it seems quite obvious. The country is arguable the most successful nation south of the border. It has the highest GDP per capita and is the only OCED nation in all of South America. People tend to credit this due to Chile adopting these right wing policies with their education and healthcare. Yet just like the pension system these are often very dysfunctional. Their education system for example is plagued with large amounts of the population not attending school and huge inequality between public and private education. During the not so long ago student protests, The Economist, the premiere free market newspaper, stated in one of their columns overviewing the education system in Chile that while the nation has one of the best school systems in South America, an area surrounded by third world countries, its by no means good.

However the biggest misunderstanding seems to come from the fact that much of the nations current success is due to its former military dictatorship. Under Augusto Pinochet’s rule the majority of Chileans suffered. It was characterized by a diminishing working class, the strengthening of the elite, and abuses in the economic system. Real wages fell by more than a third under the third year of the regimes rule. It wasn’t until 1981 until real wages were near equal to what they were in 1970. Unfortunately the recession in 1982 made wages fall to 86.7% of 1970s. Even in 1995 real wages were still 18% lower than they were in 1970! So where did all the wealth go? Where do you think? In 1960 the richest 10% of the population has their national income skyrocket. In just ten years it went from 36.5% in 1980 to 46.8% in 1989.

In the previous paragraph I’m sure the term “recession” provoked your curiosity. Well saying it was a “recession” isn’t correct as it was much closer to a depression. It was the worst economic crisis in Chile since the 1930s, in which Chile suffered amongst the worst of the world. The crisis was brought on by two reasons. One in which was the tying of the Chilean peso to the American dollar, the other was due to the big banks taking excessive risks so much so that the government had to intervene. It resulted in the state having significantly more control over the economy. The two big banks, Banco Espanol Chile and Banco de Talca, were both nationalized (yes nationalized) as the government worked to get things back on track. They were later reprivatized but I think the event speaks for itself how well the “free market’ worked when the premiere right wing state had to nationalize its banks to keep them in order. Even in the current recession only Iceland had to do such a thing. So the results of letting the market run free and practically eliminating labors’ say resulted in the poor getting poorer, the rich getting richer, and a mass market crash. Sound familiar?

If you want to get an idea of how much Chile prospered under Pinochet’s regime just look at the chart below. Pinochet took power in 1973 and relinquished it in 1990.

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The chart pretty much says it all. While I’m sure that Pinochet’s reforms helped Chile in some ways, the vast majority of work owed to Chile’s success is credited to those that came after Pinochet. Those who focused on dramatically increasing social welfare spending, putting in regulations, and other things that helped Chile get back on track. Stating that Pinochet got Chile in order just isn’t a correct evaluation.

While it may seem that I spend a lot of time in this article beating up on Chile I don’t mean to come off that way. Chile seems like an amazing country and has accomplished quite a lot over the course of its history. While nations like Brazil and Uruguay are just finding their roads to take to modernization Chile has been on that road for quite some time. Being number one in the region on as many indicators as Chile is isn’t something to look away from. However the nation has achieved this despite of what Pinochet brought the country not because of it. And this article hasn’t even gone into the detail of the human rights abuse under Pinochet. Yet despite these obvious facts much of the right still seems to have a guilty pleasure for the guy.

Let me close this article on two facts. The first fact is that people often feel to compare Pinochet to Fidel Castro. Let me say this again, in defense of Pinochet’s human rights abuses and taking over the democratic government, in which Chile was still one of the leading countries in South America, people often compare Pinochet to Fidel Castro… Now while the person Pinochet overthrew was indeed a Socialist, Salvador Allende certainly was not undemocratic. He actually prided himself in finding a route to socialism through democratic means. It was arguably his trademark. Compare this to Castro who…well this needs no explanation. The second point goes to the person who coined the term “Chilean Miracle” in the first place, Milton Friedman. He started using this term during a speech in 1980, and while he criticized the regime he praised the economic reforms. A little over a year later Chile’s markets crashed.

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