Free Markets in Chile; H. Sennholz

Hans F: Sennholz FREEl MARKETS IN CHILE made way to the private property order. And yet, all these remarkable achievements, admired by the friends of individual enterprise everywhere, are seriously fl$.wed. They were at tained by ordeIt of a military junta and are safeguarded by armed power and might, thatiis, by an authoritar ian state, which is denying basic hu man rights to thousands of its citi zens and repressing important political rights i to all. To most ob servers, Chile atands condemned as an outcast in tl~e family of nations, a pariah country run by generals and colonels who lord over their sub jects. In the world press and the in ternational news media, Chile is a primary targetiof severe censorship and bitter condemnation. The friends (J)f the market order are bewildered and perplexed by the Chilean situation. If they hail the on..

292 THE FREEMAN May restoration of the enterprise system and the restitution of many property rights, they face the biting criticism of being "antidemocratic" and sup portive of a regime imposed by brute force. They are chastised for their ideological bias that allegedly sur renders basic human rights in order to achieve a particular economic or der. But if they choose to disapprove of the Chilean system they find themselves in the uncomfortable company of communists and social ists everywhere, and in agreement with radical critics and commenta tors. Allende Deposed Communists and socialists the world over spurn and despise the military regime because it over threw the Marxist-dominated gov ernment of President Allende. On September 11,1973, the armed forces arrested some 6000 known Marxist activists in the country, including several hundred foreigners. All re sistance by partisans of the Unidad Popular coalition of communist and socialist parties was crushed. Al lende died in the national palace, re fusing to surrender.

Salvador Allende had been the first freely elected Marxist president in the Western hemisphere. As candi date of the Unidad Popular he had won over two opponents with 36.3% of the vote in the September 1970 elections. In the March 1973 congressional elections, the UP had won 44% of the vote. But Allende never won majority control over the legis lature, which kept the Marxist ex ecutive branch at odds with a con gress dominated by the opposition parties. Nevertheless, he proceeded to socialize Chile. He expropriated the U.S.-owned copper companies and ordered wage increases of up to 40%. He imposed stringent price controls and ordered production to be dou bled. He inflated the currency at ac celerating rates. In 1973 inflation reached almost 1000% and the wholesale price index increased 1,147%.1 When the government ex hausted its financial reserves it de faulted on international obligations and sought aid and support from the Soviet Union and other communist countries.

As students of economics would expect, economic chaos soon de scended on Chile. Strikes and dem onstrations were crippling the coun try, and food shortages brought mass exodus from the cities. Farmers stopped producing for fear of either legal nationalization of their prod ucts or illegal seizure by roaming hungry workers. Businesses were failing by the thousands, unemploy ment was soaring, and living condiIJuan Carlos Mendez G., Chilean Socioeco nomic Overview, Santiago, 1980, p. 15; also Chilean Economic Policy, edited by Juan Car los Mendez G., Santiago, 1979.

1982 FREE MARKETS IN CHILE 293 tions were deteriorating every where. In short, the division of labor, which is an essential condition of human existence, was disintegrat ing rapidly, giving way to economic chaos and civil strife. Economic Reconstruction After the 1973 coup the junta headed by General Augusto Pinochet Ugarte hastened to make peace with Chilean businessmen and foreign investors. The nationaliza tion of American copper companies was declared irreversible, but the compensation claims of Cerro Cor poration, Anaconda Company and Kennecott Copper Corporation were settled amicably. A new foreign in vestment law was designed to lure foreign investors by guaranteeing remittance of profits and safeguard ing their property. The government also began to return private ,compa nies, seized by the previous regime, to their owners. In September 1975 Chile conducted a currency reform introducing a new monetary unit, the peso, equal to 1000 old escudos.

Gradually the government budget was balanced and the rate of infla tion reduced. In 1974, prices rose 375.9%, in the following year 340.7%, then 174.3%, 63.5%, 30.3%, 38.9%, 27.5%,and an estimated 10% in 1981. The central bank's stock of money, which stood at some 200 billion es cudos at the time of the coup, rose to 836.7 billion in December 1974, to 3,279 billion e$cudos (or 3.279 bil lion new pesos) in 1975, 9.6 billion pesos in 1976,118.3 billion pesos in 1977,30 ..5 billiQn pesos in 1978, 47.4 billion pesos ill 1979, and 50.3 bil lion in 1980.2 At its best,lsuch statistical evi dence is rather dubious and incon clusive. When i offered by govern ment it is espec~ally suspect of crude political manip-plation and interpre tation. Nevertheless, it may be con cluded withoutl much contradiction that the Pinochet junta indulged in rampant inflation throughout most of the 1970s. It (reported its first bal anced budget in 1979.

When labor!unions all over the Western world i threatened to block shipments to and from Chile the junta hastenedi to make peace with the labor union movement. It en acted the 1979 tlabor code which re stored the right! to form labor unions. But the code also established the right to work !Without labor union affiliation, and made union dues voluntary. It aUowed collective bar gaining although neg<?tiations were restricted to individual plant and company leveE Labor agreements were made leg~lly binding and had to be made fo~ at least two years. Strikes were p~rmitted after a se cret ballot, but Qnlyfor 60 days after which workers would be assumed to 2Encyclopaedia Br4tannica, Books of the Year, 1974-1981.

294 THE FREEMAN May have quit their jobs. The new code immediately led to a number of ugly strikes by unions protesting against the "union-busting" provisions in the code. WelfareStateala Junta The friends of the individual en terprise order who may rejoice about the return of some property to the legal owners and the restoration of some goods markets must not over look other junta policies that were designed to restore and strengthen the welfare state. Soon after the September 1973 coup the regime set out to make the tax system "more efficient and equitable." It pro ceeded to extract a larger share of tax revenue from the "wealthier sec tors." It repealed a great number of so-called "development" laws that were said to discriminate in favor of capital. It eliminated the tax ex emption on undistributed corporate profits, thereby including them in the taxable income base. While it was raising the minimum levels of tax exempt incomes it collected ever higher shares from larger incomes.

While it lowered its real estate taxes on many property units it raised them significantly on more valuable properties. While it lowered most tariff rates to 10%, it raised them on capital goods by eliminating their previous exemption from customs duties. It imposed a general system of monthly tax indexation which made it possible to extract more rev enue from business more quickly. It added a Value Added Tax which made collections from business more efficient and easy to manage. It em barked upon an intensive campaign to crush tax evasion by business men. Altogether, it worked fever ishly "to enhance the equity of the tax system" by redistributing the tax burden from the poor to the more affluent, from workers to business men and capitalists. The Burden Increases It is significant that the fiscal bur den of the junta state has risen markedly since the 1973 coup. In 1977 the gross national product of Chile was estimated at 313 billion pesos. Government revenue amounted to 120 billion pesos, or 38.5% of GNP, which probably came to some 45% of net national income.

That is, the military regime of Gen eral Pinochet is consuming some 45% of all goods and services legally produced in Chile. In 1972, the last full year of the Allende Administra tion' the government reported ex penditures of some 40.689 billion es cudos of a gross national product of 228.64 billion, or 17.8% gross and 21-22% net. Even official junta statistics re veal that economic activity after the junta tax reform in 1974 contracted severely. In 1975 GNP declined by 12.9% and output per capita by 1982 FREE MARKETS IN CHILE 295 3Juan Carlos Mendez G., ibid., pp. 40, 41. 4Ibid., p. 71. Bitter Fruits It was no surprise to the impartial observer that in 1981 the Chilean economy ran into new trouble, the worst in its eight years of "restora tion." Thousands of enterprises went 14.4%.The latter remained below the 1972 per capita product until 1980. 3 Transfer expenditures have changed little since the Allende Ad ministration. However, the source of revenue probably changed signifi cantly. While Allende supplemented his tax revenue with generous help ings from the printing presses (40.9% of 1972 spending), the generals were laboring successfully to rely in creasingly on taxation. Allende was seizing income and wealth from the middle classes, the primary victims of inflation, while in 1978 Pinochet was extracting ever more revenue from businessmen and capitalists.

bankrupt, min~s and factories were closed and far~s sold at public auc tions. Many banks and financial in stitutions are i~solvent; the govern ment had to sa\j'eeight in November. Unemploymen~ is soaring and is ex pected to exce~d 20% in 1982. Ac cording to Canlinal Raul Silva Hen riquez, head i of Chile's Roman Catholic Churcn: "I could be wrong, but never in my long life have I seen such a disastrous economic condi tion." Government economists blame the disaster on the ,world recession with its slump in c~mmodity prices, in cluding Chilean export prices for copper, timber, fresh fruits, and so on. But critics ppint out that the mon etarist policies ,bfthe economic team called "the Chicago boys" (because many studied at the University of Chicago under ,Nobel Laureate Mil ton Friedman) contributed to the di saster. The monetarists insist in af fixing their national currencies to the U.S. dollar whi~h, in their belief, af fords internatiQnal monetary stabil ity and order. They fixed the peso dollar exchange rate. at 39 to 1 in 1979 and then I clung to it although Chilean prices ~ubsequently rose 60% while U.S. prices rose less than half that rate.

In time the peso became greatly overvalued, w»ich did double dam age. It made Chilean products more expensive abrofid, while it made im ports cheaper. The overvalued peso Pinochet (1978) 172.75 179.20 67.58 341.56 456.12 51.34 1,268.55 SocialSpending4 (Millions of U.S. 1976 Dollars) Allende (1972) 242.36 41.14 156.20 372.75 502.98 17.91 1,333.34 Health Social Asst. Housing Welfare Education Regional Dev. Total 296 THE FREEMAN May brought devastation to Chilean ex porters. Hundreds of small mines and smelters were forced to close, throw ing thousands of miners out of work. But at the same time Chilean con sumers went on an import binge, buying foreign cars, home appli ances and television sets. The binge was financed primarily by foreign credits extended to Chil ean banks and consumer-finance companies. Chile's foreign debt, which for years had been the con cern of foreign lenders, being the second highest per capita in the world after that of Israel, increased by $4 billion in 1981, to $15 billion. Under President Allende Chile had gone bankrupt with a debt of just $3 bil lion.

Many Chilean banks are in grave difficulty today. The deepening recession is frightening foreign bankers, causing them to go slow with new credits. They are begin ning to have second thoughts about Chilean lending practices and on the future of the junta order itself. Struggling to survive the liquidity pressures the Chilean banks have raised their interest rates on 30-day loans to 4.6% a month, which is has tening the demise of many indus trial and commercial enterprises. For a while there was a feeling of hope and optimism, which came with the restoration of some features of the market order and its easy access to the world credit markets. Moreover, the peso pegging to the dollar ala monetarist recipe permitted the Chilean people to live far beyond their means. But, as always, over consumption can only be temporary; it must come to an end as soon as the limits of credit are reached. It is obvious that Chile has reached its limit and therefore faces the stren uous task of consolidation and re payment. Chilean levels of living must fall not only by the rate of pre vious overconsumption, but also by the amounts of necessary repay ment. The deterioration in living conditions now clearly visible throughout Chile is putting new strains on the credibility and popu larity of the junta regime.

Transgressions Against Human Rights To most observers of the Chilean dilemma such economic delibera tions have much lesser import than the consideration and observation of basic human rights. American lib erals who may even be tempted to applaud the restoration of the Chil ean welfare state and the redistri bution of income through progres sive taxation, are objecting strenuously to the junta denial of human rights and political rights. To them, property rights must always give way to the political rights of democratic majorities. If a popular majority acting through a demo cratic election process desires to seize 1982 FREE MARKETS IN CHILE 297 income and wealth from entrepre neurs and capitalists, or wishes to control prices and wages by political force, no property right must stand in their way. The political rights to seize and confiscate private property must be supreme. The junta's return of some business property seized by the Allende Administration ob viously violates their democratic maxim.

Property rights actually are basic human rights. They are derived froni the God-given right to life that must be sustained by man's labor and ef fort. To deny the right to the fruits of one's labor and effort is to deny his right to life. To create a political right to seize or confiscate private property not only negates this basic right to sustain life through labor and effort but also creates an insol uble conflict. When political rights are pitted against property rights, social conflicts arise that cannot be solved by majority vote. On the contrary, a society bent on seizing and confiscating the prop erty of its minorities must brace for a bitter economic, social and politi cal struggle not only with its minor ities but also among the benefici aries themselves. Ugly political battles. are likely to erupt about ac cess to the public trough at which the beneficiaries hope to partake of the transfer. The magnitude of the transfer tends to determine the se verity of the battle. When economic transfer by pol~tical might finally assumes ultimajte desperate signifi cance to the vi<etims as well as the beneficiaries, the political battle tends to erupt into bloody confron tations. When $ociety disintegrates into fighting mobs, the time has come for Caesar as t~ bringer of peace.

Political DictatOrship Thinkers and writers who would deny property rights or create polit ical rights over private property, are the ultimate heralds and harbingers of dictatorship. :Most nations of the world are led bYidictators of one color or another because they worship po litical might thiat negates property rights. To the~, political freedom means the right to seize and plun der, to inflict harm on each other by majority vote. Jt does not matter whether they ate guided by hatred, envy, greed, resentment, or merely by popular transfer ideologies; they all are heading toward the final bat tle in the streets where the biggest guns determine! the outcome. Human tragedy reaches its cli max in civil stIjife. All the political transgressions committed in years of peace are mere trifles compared with the evils stalking the streets in re volts and revolutions. Their out come does not ~aterially change the transfer system but merely read justs the order at the public trough.

For as long as political rights negate property rights and the transfer ide298 THE FREEMAN May ology leads men to prey on each other, the conflict will rage on in one form or another. The military coup of September 1973 was the first experienced by Chile in 49 years, which in South America was a long record of mili tary neutrality in political affairs. Chile was going from crisis to crisis, with chaos in the streets, daily dem onstrations, strikes, and bloody riots. There was hunger, deprivation and desperation in the homes and illegal seizures and confiscations of prop erty. For many people these events were raising the question of sur vival in Chile. Under such condi tions a few individuals may turn their backs on society so bent on self destruction, and emigrate to safer shores. But most people do not have this opportunity for lack of mobility, flexibility, knowledge, or the neces sary means. Moreover, even if they would want to leave their country, they are not welcome abroad. In des peration they may call on the armed forces to restore order and social co operation. When the military finally strikes, the people usually welcome and hail it as the restorer and guardian of peace.

For the generals the coup may be a patriotic duty which they reluc tantly assume in order to save the country. The multitudes may ap"" plaud their courage and devotion to duty, and admire their example of leadership, which in time may actually corrupt them and finally de stroy them. After all, they are not intellectual leaders who through pa tient teaching and preaching can change the hearts and minds of the people so that they discard their eco nomic and social conflict notions and embrace the philosophy of individ ual freedom and social harmony. The generals themselves usually cling to the very ideas that are tearing soci ety apart. They, too, favor economic redistribution by political force. But they want it in an orderly fashion without the fighting in the streets. The Chilean junta immediately re constructed, with minor variations, the Allende transfer-conflict system. Changing of the Guard A junta regime usually comes to a violent end when it loses the support of public opinion. When economic conditions deteriorate again for any reason, or when public sentiment strenuously disapproves of the ben efit order at the public trough, a vi olent reaction is likely. It may come from another general or colonel who senses the junta loss of popularity and, when successful, promises to be carefully guided by the popular will.

Some juntas may even resist the temptation and corruption of power and relinquish it as soon as they sense a loss of public support. They may return the instruments of polit ical power to the democratic trans fer state and then wait patiently for 1982 FREE MARKETS IN CHILE 299 the coming chaos when they will be needed again. By their timely with drawal they manage to safeguard the public esteem for the armed forces as the ultimate guardian of law and order. The seizure of power by the mili tary always entails the risk of vio lence and bloodshed. The risk is minimal when the administration in power has lost all respect and sup port by the disillusioned public. But it is serious as long as some ele ments of public opinion continue to give the administration their loyal support. Many communists and so cialists held to their Presidente to the bitter end. Thousands of them were incarcerated for several years, hundreds lost their lives, many were later expelled from the country. Po litical parties were dissolved, the news media placed under censor ship, the public subjected to rigid curfew.

In every case of civil rebellion the victor is quick to point at the sum total of social benefits created by his rebellion. When communists or so cialists prevail they may speak of a liberation of the proletariat from capitalist exploitation. When de fenders of the private property order prevail they may point at the resto ration of private property and free markets. Both invariably propose to weigh their open violations of hu man rights against the e~onomic and social rights which their violent actions are presumed to have gained. Both regularly l conclude that their actions were justified by the sum to tal of benefits tQ society. There surely fs such a scale in the realm of politic.l rights that negate individual rigqts, especially prop erty rights. But, by its very nature, it is an arena of perpetual social conflict that ultimately brings forth the strong man~ A society that rou tinely weighs political rights against property rights and finds them wanting ultimately will weigh the loss of human lives in revolution and rebellion again~t the sum total of collective benefits.

There is no s~ch scale in morality which is religi~n with its face to ward man. No: sum total of social utility and bel1efit whatever can outweigh the death of one human being or any suffering inflicted on him. No man oriassembly of men can secure well-being or happiness by violence against a single individual. Violence breeds violence and is an offense against God even when com mitted in the name of majorities. A Shadowy Future The ideological forces of social and economic conflict that led to the 1973 disintegration' of Chilean society continue to be alive and active at home and abro~d. Under their spell the junta hastened to restore the conflict system: that forcibly redis tributes income and wealth from the 300 THE FREEMAN May more productive members of society to its favorite beneficiaries. In fact, the junta's fiscal policies were de signed to impose ever larger bur dens on the business community, which for most of the seven years of junta regime has lingered in stag nation or recession. Wages· and sal aries throughout most of the decade have been lower than before. Some ·20% of the working people now are walking the streets in idleness and despair. Foreign credits have been squandered and must now be repaid.

And there is not a single voice of dissent that is explaining the road toward a brighter future. Surely, the political dissidents who escaped or were expelled are vocal enemies of the junta. Many Chris tian Democrats now are making common cause with the parties of Allende's former Marxist coalition. The Communist Party and the So cialist Party in exile are calling upon the people of Chile to continue their armed struggle against the junta. They have nowhere to go, they are told, but the Unidad Popular. All along, the "Chicago Boys" in the inner councils of government are keeping in touch with the world by writing glowing reports and pro jections about growing GNP's and rising incomes from work and pen sions. But the results of their efforts are surely disappointing. It seems that they are rejecting or ignoring the fruitful lessons learned in Chicago, but are applying diligently the errors of monetarist thought.

General Pinochet and his men are probably evaluating the situation correctly: there has been little or no progress in economic and social thought since 1973. The only dis senting voice they. hear is abroad, that of the Unidad Popular. They still loathe it and will not bear it. Therefore, they have been clinging to the reins of power as long as pos sible. And in lieu of promoting meaningful changes in social ideol ogy and political morality, which alone would change the course ofthe future, they have busied them selves-as well as Inany jurists and lawyers-with reshaping the form of government by rewriting the consti tution. In 1980, on the seventh an niversary of the military coup that overthrew the Allende government, they submitted a new constitution to a national plebiscite. Of the votes cast, 67.5% approved of the consti tution, which strengthened the presidential powers, created an eight year nonrenewable term for the president, and restored the bicam eral Congress composed of a Senate and a Chamber of Deputies. General Pinochet was elected the first presi dent.

But no matter what we may think of the Pinochet junta we must not forget that the generals aiways have been, and continue to be, viscerally opposed to the Unidad Popular anti1982 FREE MARKETS IN CHILE 301 U.S., pro-Soviet attitude. They are looking upon Chile as a Christian nation and a loyal member of West ern society, a willing friend and ally of the U.S. They are resenting American criticism of their barracks rule and denial of human rights. Af ter all, their intentions were so no ble, restoring law and order and re turning their country to the Western camp. Continuing Threats Dark clouds are hanging over the future of Chile. Ideologies of eco nomic and social conflict are tearing at the roots of society, straining so cial cooperation and the division of labor. The doctrines of conflict are permeating every aspect of social life. Similar conflicts springing from identical causes are visible also in neighboring countries, which is ag gravating the uncertainties of life in Chile.

Old wounds are festering and may break open at any time. Territorial disputes with both Bolivia and Peru frequently raise border tensions and threaten to erupt into open hostility. Bolivia wants access to the Pacific Ocean which it lost to Chile in the War of the Pacific in 1883. Peru de mands the return of its provinces lost in the same war. Chile's powerful neighbor, Argentina, is claiming territorial rights to the islands of Picton, Lennox and Nueva, south of the Beagle Ch~nnel. They all are awaiting their opportunity for mov ing on Chile, which often sends the Chilean governIjrlent scrambling for more planes an~ tanks from the U.S. and other coun~ies. Chilean weak ness through social disintegration may someday offer this opportunity. Ideas and beliefs are the invisible powers that govern man's actions. Ideas of economic, social, and na tional conflict h~ve made their way in silence and i swept around the globe. The Chile~n situation does not differ materially from that of other countries.

There is an alternative other than Unidad Popular and its armed struggle agains~ the junta. There is the road to individual freedom, which step by step retr~eves the freedom of each and every ~ndividual to pursue his own good, in :Pis own way, as long as he does not: deprive others of theirs. On that road, no political party or pressur~ group seeks to en rich its membens at the expense of others. There ib no transfer pro gram, in fact, 1\0 government that seizes income and wealth from some people in order to benefit itself and others. There iSfIlo public trough at which political Iiight and might de termine not only who shall feast at the trough but ~lso who shall labor to keep it ever well-filled and boun tiful. There is harmony and peace on the road to freedpm. i Steven N. Spetz The Day Welfare Hit the Classroom I HAVE OFTEN HEARD it expressed that the classroom should be a small window upon life and prepare stu dents for the world they will soon enter as adults. I accept this idea, and introduced a magnificent scheme of marking that would alert stu dents to economic factors they should appreciate. When I gave back a ma jor assignment, the students noted some peculiar entries on their pa pers.