Sunday, December 28, 2008

The Real Chile

Many Austrian economists at the Ludwig von Mises Institute, such as George Reisman, cited the Pinochet regime in Chile between 1973 and 1982 as an example of the free market. The Chile dictator during that time, Augusto Pinochet, underwent a gradual policy called "privatization." The Pinochet administration sought to implement the "privatization" plan by working with the Chicago Boys, who studied economics at the Chicago School. Many individuals, and even some libertarians, falsely proclaim the Chicago School as a "free market" school of thought. The Chicago School, however, did not have libertarian policies, it proposes active state intervention in the macroeconomic sphere.

Contrary to the popular myth, the Pinochet administration only had started to gradually implement the neoliberal "privatization" policies only after 1975 and reversed the reforms by 1981. The "privatization," policies did not significantly decrease economic intervention.

Under the Pinochet administration, Chile still had a 20% value-added tax, 10% welfare "pension," and 10% income tax. Chile had only gradually reduced tariffs from about 35% to 15%, subsidized "private" contractors as "privatization" of state industries, and "liberalized" price controls as "deregulation." The state only cut marginal tax rates, other types of confiscation rates stayed the same and even increased. Thus, direct taxation totaled over half of the income.

While Pinochet eliminated unions, he replaced it with government imposed wage floors, indexed to inflation. Pinochet's indexation plan created the massive unemployment there, which reached 22% in 1983.

Actually, much of Chile's "growth" came after 1982, after its implementation of more Keynesian policies. Quoted from this article:
By 1982, the pyramid finance game was up. The Vial and Cruzat "Grupos" defaulted. Industry shut down, private pensions were worthless, the currency swooned. Riots and strikes by a population too hungry and desperate to fear bullets forced Pinochet to reverse course. He booted his beloved Chicago experimentalists.
The Chilean government also reintroduced intellectual "property" privileges, and increased subsidies. The Chilean state has implemented the "East Asian" model for export "growth."

The East Asian states used mercantilist policies for "export" led growth. It maintained subsidies, import tariffs, restrictions, and quotas, financial interventions, investment planning, infant industry "protections," export business subsidies, privileged loans to favored export industries, and big industry regulations. A majority of the East Asian states actually implemented an import-substitution policy, which raised tariffs on imports to protect its domestic industries.

As quoted from the above link:
That these countries’ export success was achieved with major government subsidies and interventions – and that they strictly limited imports and tightly regulated finance and investment policy – was conveniently omitted from the story.
Their success based on non-neo-liberal principles continued until rapid financial liberalization triggered the 1997 Asian Financial Crisis, which then rolled back decades of economic development progress.
Under the U.S. 1960-70's "deregulation," the government only liberalized price controls and transportation restriction for trucking, railroads and airline tickets; while keeping all of the other regulations and subsidies intact.

Generally, when speaking of "deregulation," most of these plans focused on these three points:
Liberalizing price controls as "deregulation," while keeping the price-unrelated regulations the same or higher. Examples: Liberalizing price controls for transportation, minimum wage decrease instead of elimination, and outlawing of unions and instead set up a new wage control system.

Attempts to "privatize" but resort to subsidized state contractors. Examples: "Privatizing" welfare ("Social Security") and health insurance, but instead set up forced savings accounts to subsidize contractors. This also includes education vouchers and the "privatized" No Child Left Behind policy (called the Education Reform Act 1988 in the United Kingdom), which the Adam Smith Institute endorses.

Tax cuts
Cutting marginal tax brackets as cutting "pork barrel spending," as part of the trickle-down policy. Examples: Removing marginal tax brackets, capital gains taxes, estate taxes, and marginal corporate taxes. Margaret Thatcher and the Adam Smith Institute advocated "poll tax" reformism.

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