Thursday, August 30, 2007

How Wobbly Is the Chilean Miracle?

The BBC has a report on violent street protests in Santiago, Chile. They raise concern over whether Chile has finally made the acquaintance of Mancur Olson.

Olson, in his classic book The Rise and Decline of Nations, noted that prosperous nations and empires decline when pressure-group warfare over the redistribution of the national wealth becomes fatally toxic to continued economic dynamism, i.e. to the creation of the wealth to be redistributed. Evidence of this is legion in Western Europe, and the U.S., with its tax code crammed with special-interest provisions running to thousands of pages in length, is hardly immune.

Chile is an anomaly -- a country that works in a continent full of countries that don't. All of this is due to the legacy of the economic policies enacted under the brutal dictator Augusto Pinochet, who stumbled accidentally into a set of radical free-market policies that completely transformed his nation. After his 1973 coup, the initial impulse of the military government was to do what comes naturally to dictators (and probably with most government officials), to use its power to try to run a command economy. But he ultimately settled on a set of advisers known as "the Chicago Boys," so named because of their Ph.D.'s in economics from the militantly free-market University of Chicago. They enacted reform that would look radical now and was more than radical in the 1970s, when outright socialism was still a viable economic idea. After initial stumbles amid the general global economic dysfunction of the 1970s, these policies launched a great boom that totally remade that nation, moving it solidly into the ranks of middle-income countries and causing it to draw illegal immigrants from the collapsed economies around it.

When he left office, General Pinochet left behind a constitution and a climate of fear that made reimposing a command economy difficult. But the social acid of pressure-group warfare is ultimately hard to resist, and Chile may be reaching that point now. Its current president is a socialist, as was her predecessor. The previous president only tinkered around the edges of Chilean economic policy, and Michelle Bachelet promised much the same during her campaign. But the redistributionists are ever restless, and now appear to sense an opening. There may be more agitation for greater restrictions on the labor market, for higher levels of social spending funded by higher rates of taxation, and for manipulation of the other levers of national decline.

In the BBC story, its own reporter is quoted as saying that “a family of four, without thinking of pension plans and health insurance etc, needs about $1000 to $1,500 a month to live comfortably.” But this is a nice problem to have in that neck of the global woods. In many other countries in South America, the poor worry not about pensions and health insurance but about slums, cholera, basic health care, gangland crime, etc. They worry, in other words, about poverty of the traditional Latin American sort, not the sort of rich-country poverty that preoccupies the much more comfortable residents of Chile. The next time Chileans contemplate taking to the streets in protest over such lofty concerns, they might give some thought to the sort of economic policies that allowed them the freedom to worry about these problems to begin with. Chile has in the last couple of years, like Venezuela and elsewhere, drawn a good hand because of rising global commodity prices (Chile is a major commodity exporter), but over the next several months, is a country that definitely bears watching.

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