Note that Peru had a somewhat similar growth path after shock therapy and liberalization: moderate growth under Fujimori and faster growth after he left. As much as I despise Pinochet, I think your article may underestimate the long term impact of structural reforms, even if it's likely true that the democratic environment that followed his government was more favorable for growth. One important fact is that Peru's and Chile's new and much more free-market oriented constitutions remained even after they left, and this helped prevent macroeconomic policy mismanagement. Peru's constitution explicitly forbids the government borrowing from the central bank, for example.
I agree that Chile (and Peru) still rely too much on commodities and are not precisely industralized economies. However, they are macroeconomically much more sound that most latin american economies.
Weird country. They have everything to develop and industrialize - good, stable, mature, and equitable institution, relatively good education, sandwiched between two rather prosperous (although stagnating) large markets to milk in, rich on crucial natural resources (grains and most importantly beef). They could've become Singapore of Latin America easily with all of these advantages if they open up further.
Open up further? What does that mean? More neoliberalism? The fact that most people in Uruguay have more income than people in Chile seems like good evidence in favor of a more social-democratic model versus a neoliberal one. These two are probably the countries with the best institutions in the region, with Costa Rica there as well.
As for why Uruguay didn't become a developed country, it's hard to say, but one answer can be related to the fact that Uruguay PISA scores are not impressive, they are better than most of Latin America, but worse than Chile and Ukraine, and Ukraine is much poorer and has much worse institutions than Uruguay.
Perhaps some Uruguayans can explain what makes the country to be so unambitious in achieving such goal, which has supposedly always been within their reach?
Zambia was a copper based economy too. Still probably is but became an highly indebted poor country needing debt forgiveness. Pinochet was a monster whereas Zambian Presidents were, most of them, just corrupt. But it may be worth comparing them to see whst the commodity curse did to Zambia. However not so many available resources, comment or research exists for Zambia.
I think Chile has been doing far better than Zambia because its institution is so much more mature? It's an old country after all, especially compared to Zambia. Not to say all of these countries will be always or are successful (both in absolute and relative terms), it's just providing them more time and experience to ramp up its institution and mindset of its society towards better governance. Zambia on the other hand has come from much, much lower basis than Chile.
Moreover, Zambia is a landlocked country with either historically hostile and/or poor neighbors, where simply none of these willing to open trade (or invest) with them. I think it effectively caps its development and keep the government and society insular and corrupt.
Clearly a more successful country than most and an example of how to make a commodity a blessing not a curse. The rulers since independence til the last two were outstanding and if you just measure that by the foreign exchange reserves not corrupt.
Still they seem now to have difficulties. Partly due to covid where they sold off forex reserve to support the fall in budget income. But generally they are still struggling to diversify from diamonds despite many governments attempts to do so over many years. The small population, approx 2 million, doesn't help. But the World Bank identify the usual problem of parastatals receiving large subvents from the fiscus and interfering in freedom of business.
In general they have been called a gate keeper economy so can't really diversify.
Zambia apart from Kaunda at the beginning has had only one honest President, Levy Mwannassa, who died in office, after a short Presidency, that was already showing the beginnings of the establishment of sound institutions and financial policy. But since him and excluding the recently elected new President, the Presidents have been woeful. An example is that having obtained debt forgiveness, it defaulted on its new borrowings, and it is now more indebted than before the debt forgiveness.
Its problems are not due to geography or neighbours. It is all about corruption. The last President and his party are more or less considered to have looted the fiscus.
What is encouraging is that he was thrown out at the recent election. Like Malawi, where the incumbent was also recently voted out, it suggests the people still exercise control at the ballot box.
I have not mentioned tribalism but an African phrase is, it is our turn to eat. It means when one tribes representative gets to power then the tribe he belongs to expect access to the fiscus. Hopefully the new Zambian President who represents a new tribe in power will not mke that mistake.
Yeah it is always super convenient that countries become poor/undeveloped because they are corrupt. But countries simply doesn't become corrupt out of the blue. It's the lack of development that breeds extreme corruption as seen in Zambia - inability (or in this case, extreme barrier) to attract/raise capital leads to inability to exercise sound and broad-based educational policy (it's tied to GDP per capita like an underwear). Poor quality of public education leads to inability for the general population to mount public pressure effectively (or simply they become so nonchalant that they give up on doing this thing). It also leads to much smaller talent pool from which an effective and sensible leaders could be drawn in. Therefore, I think the isolation (and 'bad neighbor effect') clearly still plays a significant part in turning that particular country to become what it is now.
Zambia borders Botswana. Both landlocked and with some of the same neighbours. Zambia has been ruled by thieves. Botswana by honest men. The difference is obvious. Zambia has many honest people striving for decent rulers and civil servants. They have a different view of the problem to you.
Botswana, despite all of the economic stagnation it's in recent times, was/is incredibly lucky to have the late Seretse Khama as their first leader who was a pragmatist and put the ground works of the later institution of the country. It's like they hit a jackpot when they got their independence, which points out that such thing is always in realm of probability. Countries with better access to the market (friendly/prosperous neighbors, including access to sea), less incidence of historic extremely violent events by its colonizers (that can foster strong resentment towards outsiders), and existing institution (including education system) that was healthy and less divisive have larger windows of probability to obtain such leader (as well as fixing their economic defects to obtain capitals, see my previous post), and vice versa.
However, sometimes even less fortunate countries like Botswana in the past (landlocked, started with little institution and very poor education, but at least wasn't as violently oppressed as i.e. the Mozambicans, Congolese, Rhodesian/Zimbabwean, and perhaps Zambians themselves) had their windows of opportunities, albeit really narrow. But hey at least it's there, although perhaps if there's 100 countries in the exact same situations as theirs, there would've been only 1-2 that might avoid become Zambia-esque ones.
Zambia also hit that copper slump right as their opposition to colonialism had basically severed their access to the ocean. 1972 saw the Mozambican civil war spread right down into the border areas that could carry copper from Zambia to its northern ports, Angola was basically under full Portuguese control by that year, and the war in Rhodesia was just beginning in earnest, backed by rebel groups based in Zambia. Meanwhile, '73 was the start of Mobutu's Zairianization nationalizations, crippling an economy already plagued with transportation problems. Tanzania was the only acceptable country left through which to safely and ethically export copper, and the rail line to facilitate that wasn't ready until 1976. Having an active war bleed across its borders until 1980 from a major former trading partner certainly wouldn't have helped things either.
Corruption probably also plays a role, but it's difficult to put a number on what might have been. It's also important to note that enforcement against black market sales and smuggling was nearly impossible, and a lot of things like agricultural subsidies designed to provide cheap food to the mining towns ended up providing a lot of cheap food to Zaire's mining towns instead, and a lot of profit for smugglers. Similar policies in a country like Chile might have been less of a drain on state resources compared to the results they could provide.
Zambia has an average national IQ almost five-thirds a standard deviation lower than Chile. It's not a surprise they fell apart anymore than everywhere else in postcolonial Africa.
I was comparing it to Poland and per Wikipedia (which quotes the IMF), the nominal GDP per capita estimate for 2022 is Poland's $18,506 vs $15,941 for Chile. Yet PPP adjusted the difference is MUCH larger $41,685 compared to $28,526.
I'm assuming* this is a result of the infamous "resource curse" that leads wages to be higher than they would otherwise be due to the profitability of exporting. It seems like this would make it incredibly hard to foster the basic low end industrial work that most other countries have used to begin their industrialization process.
Are there good examples of countries that have been able to skip ahead to mid-level industrialization through education, subsidies, or other methods?
*Assuming is always dangerous and I'm very interested if there are other reasons people would propose...
Possibly the likes of Australia and Canada. Australia, at least, used to have much more manufacturing prior to the 80s and 90s liberalisations. We do know that inasfar as industrial policies and tariffs work, they tend to work up to a certain development level, then they become a drag on growth.
So you could plausibly construct a story where they were richer and more developed then they would have been otherwise up to a certain point, then they passed that point, after which the neoliberal stuff starts becoming useful. Certainly they are both rich and developed today.
>"As a developing country, you’re not supposed to fall behind developed countries; you’re supposed to catch up! Poorer countries are supposed to grow faster than rich ones. And Pinochet’s Chile fell behind the U.S. even as it was far poorer in absolute terms"
Except that poor countries grew slower than rich ones for most of the second half of the twentieth century, i.e. when most of the economic growth recorded in human history occurred. In fact, the divergence was so large that, even today, rich countries have had higher income growth (in relative terms) than poor ones.
In fact, Chile's growth remains impressive because every country that significantly outgrew it in Latin America was a total shithole, while Chile started the twentieth century as one of the richer countries in the region.
>"But it’s worth noting that both Argentina and Israel beat their hyperinflations in the 80s and early 90s without suffering big drops in living standards — indeed, hyperinflation itself was so terrible for the economy that ending it was enough to generate a recovery, even with the punishing austerity."
Yeah, and Argentina's nominal anchor exchange rate policy ended up causing the biggest depression in the country's history in 2000. Who are you trying to fool? It's rare and hard to succesfully pull of stabilizations without pain.
>""Shock therapy” didn’t go well in East Europe, so there’s reason to suspect that Pinochet’s similar program in 1974 caused a similar temporary crash in living standards."
Factually incorrect and based on an incorrect understanding of what "Shock therapy" actually means.
I don't know about Chile being richer than other countries that grew more. Uruguay grew more and was wealthier, Brazil grew by almost the same amount and was a little richer.
Ultimately Chile did dramatically outgrow even poorer countries but that was after Pinochet.
Started off very poor and built a very, very large dam that meets most of the country's electricity needs and supplies (for a price) a non-trivial share of Brazil's. Also managed to mostly avoid serious inflation and didn't have a bunch of financial crises, while everyone else had at least a couple.
Cheers! Thanks for the explanation. I assume from the detail/succinctness and Spanish name that you’re familiar with Paraguay/South America in general?
Also, it sounds like energy abundance does wonders for a country, which is a bit of a duh position, but also one that Noah and Matt Yglesias have both had to explicitly take because it gets ignored by the degrowth movement.
The GDP per capita figures also seem to show a nice little bump from some legal changes in 1975, incentivising export-oriented manufacturing and foreign investment. Without the promise of that dam, though, it's unlikely those incentives would have found nearly as many takers.
Pinochet has an allure in America because of the narrative behind his tenure. There are plenty of instances where we overthrew leftist leaders and then propped up corrupt right wing leaders that presided over pretty bad economies. There were some economic successes, but Iran could be written off as just another oil state and South Korea was nothing compared to neighboring Japan in the '70s. The American right wanted to prove that the "capitalist system" they were exporting was better than Cuban-style socialism, and, well...
Enter Chile, the custom made story you ordered. An internationally heralded socialist wins with 37% of the vote, parades around with the Castros, and Venezuelas the economy within three years. Enter a military man with a photogenic cape, cool shades, and a menacing looking hat who tortures and kills a bunch of people the right hates and starts implementing every Milton Friedman policy proposal he can get his hands on. Yes, the line looks jagged as hell, but compared with the rest of America's portfolio of corrupt and brutal dictators, that line certainly floats above the rest, especially w/r/t those policies that stayed in place through the '90s and '00s. And it directly contrasts with a bona fide democratic socialist directly before him. As Brasil and Argentina stagnate and Venezuela drops from contention, you're left with Chile and Uruguay as the two top countries on the whole continent in a lot of key metrics.
It's not a miracle by any means, but as an excuse for America to say "we staged a coup, killed a bunch of left wing civilians, stole a bunch of money, *and somehow it worked*," it's a more compelling argument than it perhaps should be.
We had nothing to do with the coup. Even our claim to "staging the conditions" that led to the coup is highly dubious.We didn't even invoke the Hickenlooper Amendment when Allende expropriated our copper holdings. The coup happened entirely because of Allende's raping his nation's economy. Which was entirely unsurprising, as Allende was a KGB contact honor bound to do his best to destroy the Western order:
Valourising Deng is problematic for honest libertarians with at least some knowledge of China beyond surface level. It's the dreaded I word - industrial policy. There's a reason why they don't want to say much about the East Asian success stories, which are genuine success stories, not confected stuff like Chile. They know it doesn't say much about libertarian policy prescriptions for developing countries.
In fact, Deng did very little industrial policy. Mostly just liberalization. Jiang Zemin did very little national industrial policy; he simply liberalized at the national level, and had provincial governments pursue their own industrial policy (basically what we do in the U.S., but with more explicit rewards for growth performance). Hu Jintao started to experiment with national-level industrial policy, but really China didn't get true national-level industrial policy until Xi came to power.
Key words being national level. Provincial level with rewards from national level sure essentially seems not that distinguishable from industrial policy in general, just that experimentation is diversified geographically rather than across different firms like in SK.
Also wasn't it true land reform was done under Mao and was in fact successful at first until they collectivised? Sure you can say Deng liberalised from that point on, but is it not also correct to say liberalising collectivised agriculture returned it to the point where it was successful?
The timeline is more complicated. This is my non-specialist, cartoonish recollection.
Land reform was initiated in the late '40s in the areas that the Communist government came to control, and then nationally during the period 1949-57. That period saw widespread establishment of "collectives," and there did appear to be good economic growth, although it was from a base depressed by a decade of near-constant war.
The pace did not satisfy the elements of the Party Mao led, and in 1958 (partly in response to non-economic political issues) Mao's faction attempted to move from gradual to explosive growth through a new model of agricultural organization called the "commune," and political willpower was officially deemed the vehicle for breaking the bottleneck of gradual economic growth in both agricultural and industrial sectors. This program (The Great Leap Forward) led to such disastrous results (industry collapsed and famine deaths were on the scale of 30-40m) that within three years Mao was effectively sidelined from power.
Party leadership shifted to the opposition faction, led by Liu Shaoqi, whose protege was Deng Xiaoping. This led to a partial recovery in the period 1962-66, at which point Mao launched the internal coup known as the Cultural Revolution. Deng was purged along with Liu, and the central government and some levels of local government were essentially dissolved until Mao's grip on power was secure enough for him to call on the military to restore political order. Economic continuity was managed through the influence of more moderate forces, such as those under the influence of the premier, Zhou Enlai (who semi-rehabilitated Deng), and remained relatively stable through the end of the Cultural Revolution and Mao's death in 1976 (after which Deng was briefly purged once again).
Mao's successor, Hua Guofeng, purged Mao's faction from Party and government leadership and opened the door to Deng's faction (Liu Xiaoqi was dead and Deng was now the leading figure). By the early 1980s, Hua was gone and Deng was initiating enitrely new experiments in liberalization.
So although the PRC followed a path the enabled significant economic growth in the periods 1949-58 and 1962-66, Deng's approach to liberalization built on a different context, far distant from the era of land reform, and it drew on different influences, exposed to currents from the US and, most particularly, I think, the transformation of the South Korean economy under Park Chung-hee.
I don't think I disagree with any of that, your knowledge of the period seems granular and consistent with what I know. My larger point is that China did not grow through adherence to Washington consensus or just to liberalisation.
Avoiding hyperinflation, multiple devaluations where zeroes are knocked off and default is the miracle (well, outside of Latam it wouldn’t be classified as a miracle, but handicapped against the local competition - yes. And of course most of the competition also relied on natural resources and kept their cronies well fed- up to an including today’s leaders across most of Latam).
Friedman wasn't comparing to local competition when he called it an economic miracle in his Newsweek column, so I don't know why you've moved the goalposts and put words in his mouth.
He talks about Spain, Greece, Russian, and China as other military dictatorships but on economic performance he's clearly making an absolute claim, not a relative one.
"Chile is an economic miracle. Inflation has been cut from 700% a year in mid-1974 to less than 10% a year. After a difficult transition, the economy boomed, growing an average of about 8% a year from 1976 to 1980. Real wages and employment rose rapidly and unemployment fell."
If you want to make a defence of Friedman it would be that he wrote that in 1982 and it was a claim that has, in retrospect, turned out to be premature and the structural problems Noah highlights hadn't yet come home to roost. I guess a bit like how in the 80s everyone thought it was obvious Japan was taking over the world but now in retrospect that seems laughable and we all know about their structural problems.
Personally I'd give Friedman a bit of a pass on his comment, especially since the main thrust of his article was that Chile needed political reforms ASAP (which didn't happen) in order to not lose their progress. He wrote,
"But I predict that the free-market policy will not last unless the military government is replaced by a civilian government dedicated to political liberty."
Not so much the later commentators who do have access to more information and analysis than he did.
Bret Stephens doesn't have the expertise he claims on economic matters? Next you'll tell me that global warming is a serious concern (Bret assures me it's just exaggerated liberal hokum).
(I try not to make snide posts but I literally can't recall the last time I read a Bret Stephens column that didn't combine serious errors of analysis with intellectual dishonesty)
Allende was a disaster, but Pinochet was a monster. Since Pinochet did a lot of horrible things to people, a variety of sadists think highly of him. They'd probably enjoy the section on the Pinochet years at the Naval Museum in Valparaiso just as much as they enjoy the economics of Milton Friedman. Their logic seems to be that if it hurts someone, it has to be good. It's the old alcohol on the wound has to help because it hurts reasoning.
I'm willing to give credit where it is due. Some pretty awful people who did horrible things deserve credit for the good things that they did. They also have to account for the bad stuff as well. There aren't a lot of saints in this world, and definitely not saints who have done good things for economic growth. I'd like to thank Noah for his analysis here. Numbers can only tell a part of the story, but the numbers are pretty clear here. Pinochet didn't do much for Chile's economy, and, no, waving one's hand to give him credit for the years before and years after just doesn't work.
When I was in Chile ten years ago, it was during an export boom. Copper prices were good and there were signs of economic growth and the mineral wealth being spread around to make infrastructure improvements. There were new roads, new water systems, new schools and so on. There was also a push for more education. I have no idea of how that played out.
When I first started getting into economics it was stories about Chile, New Zealand, Iceland and Ireland which got me really into believing in libertarianism. But that view really switched after I started digging and realizing that very often it was moderate social democrats who actually got the economy going. Extreme economic policies in either direction rarely seem to work well. Rapid changes in particular seem to go wrong all too often. Whether it is shock therapy or Stalin collectivizing farms. Predictable step by step gradual reforms seem to be the way to go. Business need predictability to invest and plan, not jojo economics.
I just did not find this convincing at all, for a multitude of reasons:
1) It seems like the real reason they fell behind in economic growth was because of the crisis of 1982, which can be pretty much put up to Cowen's reason (was "cronyist finance" really a huge part of it?), but that doesn't mean all of their policies were bad, right? Also seems like some reforms at the time weren't neoliberal, either.
2) Are synthetic control studies taken really serious in the literature? It just looks like a hotbed for OVB and overfitting, but I could be wrong!
3) The graph of GDP and potential GDP looks like a classic Friedman plucking model. This is exactly what we would expect out of any country. Blaming both of those recessions on solely him and acting like now fast recoveries are bad feels weird to me. Aren't 99% of recessions created by fiscal or monetary policy mistakes, anyways?
4) I also think that there's no evidence on either side (at least in the article) that talks about whether Chile really diversified or not. Showing the OEC graph feels like a weak argument to me, isn't it possible it would've been way worse w/o Chicago Boys reforms?
5) I think the fact that Chile is one of the richest countries in South and Central America is ehhh evidence for those reforms potentially having been good, as there's a lot of other factors. However, saying "but inequality has dropped by less" feels like a really weak argument on the other side of that.
You analysis has many errors. From the privatization numbers (240 between 1973 and 1978 “free of charge”) Please see Claudio Milman, Ph.D., is Assistant Professor, Department of Management, Haworth College of Business, Western Michigan University
Per capita numbers are wrong. Please normalize those by PPP, which a more accurate perspective, and you will get a different response.
There are other errors but I only have a few minutes tonight.
When people come at a post very quickly and aggressively like this, and make easy mistakes ("international dollars" is in the charts, man!), it's a red flag.
International dollars have no specific meaning. PPP is something that everybody understands.
I looked at GDP per capita at PPP and in the last fifty years it has increased 10X -- very similar to the US... While you may call it not impressive it is better than its neighbors and I would argue that it was Pinochet’s policies that allowed for such growth. Furthermore when you look at Debt to GDP and the private capitalization pension system I would argue that it has some features that are superior.
Furthermore you should also look at other development indicators like increase in education, improvements in health care, infrastructure, security, etc. GDP per se has too many flaws take a simple conclusion from it.
When was the last time you visited the country? I do not mean Santiago.
No doubt PInochet helped his friends but how is that different to what George W, Bill or The Donald did?
If you are going to argue that Pinochet did some kind of magic, you'll need to show your work. Smith showed his work. Chile has a good growth record, but not while Pinochet was running things. You might as well grant credit to O'Higgins' ghost.
One of the reasons why libertarians hold on to Chile dearly is because the other case studies aren't very convincing. Half of the developing world tried the Washington consensus several decades ago and are still apart of the developing world. The countries who have eclipsed developing world status have usually gotten there by using some sort of industrial policy - not very libertarian! There's also Hong Kong - doesn't look too hot nowadays. I don't believe that East Asian style development is the silver bullet that'll answer "how can countries develop?" but with 30-40 years of evidence from various neoliberal policy experiments in LatAm/Africa, it's clear that free markets alone won't make developing countries look like Western Europe, hell even the Southern Cone.
Noah, you refer to "Shock therapy". if i´m not wrong, who told for the first time about "Shock Therapy" was Balcerowicz, Lech Walesa´s minister. And Poland is the richest country among this group of countries. Why do you tell that "Shock therapy" didn´t go well?
Note that Peru had a somewhat similar growth path after shock therapy and liberalization: moderate growth under Fujimori and faster growth after he left. As much as I despise Pinochet, I think your article may underestimate the long term impact of structural reforms, even if it's likely true that the democratic environment that followed his government was more favorable for growth. One important fact is that Peru's and Chile's new and much more free-market oriented constitutions remained even after they left, and this helped prevent macroeconomic policy mismanagement. Peru's constitution explicitly forbids the government borrowing from the central bank, for example.
I agree that Chile (and Peru) still rely too much on commodities and are not precisely industralized economies. However, they are macroeconomically much more sound that most latin american economies.
How about Uruguay?
Weird country. They have everything to develop and industrialize - good, stable, mature, and equitable institution, relatively good education, sandwiched between two rather prosperous (although stagnating) large markets to milk in, rich on crucial natural resources (grains and most importantly beef). They could've become Singapore of Latin America easily with all of these advantages if they open up further.
Open up further? What does that mean? More neoliberalism? The fact that most people in Uruguay have more income than people in Chile seems like good evidence in favor of a more social-democratic model versus a neoliberal one. These two are probably the countries with the best institutions in the region, with Costa Rica there as well.
As for why Uruguay didn't become a developed country, it's hard to say, but one answer can be related to the fact that Uruguay PISA scores are not impressive, they are better than most of Latin America, but worse than Chile and Ukraine, and Ukraine is much poorer and has much worse institutions than Uruguay.
Uruguay also has an average national IQ almost two standard deviations lower than Singapore's.
They were once a big exporter of beef. Uruguay was rich back in the 1930s. It was known as the Switzerland of South America.
Perhaps some Uruguayans can explain what makes the country to be so unambitious in achieving such goal, which has supposedly always been within their reach?
Peru's economy is not an impressive example, nothing enough to justify a dictatorship.
The same conclusions of the article apply to Peru:
Mining a bunch of copper, is not a "miracle".
However, they are macroeconomically much more sound than most Latin American economies.? What economies? That is not an argument.
Zambia was a copper based economy too. Still probably is but became an highly indebted poor country needing debt forgiveness. Pinochet was a monster whereas Zambian Presidents were, most of them, just corrupt. But it may be worth comparing them to see whst the commodity curse did to Zambia. However not so many available resources, comment or research exists for Zambia.
I think Chile has been doing far better than Zambia because its institution is so much more mature? It's an old country after all, especially compared to Zambia. Not to say all of these countries will be always or are successful (both in absolute and relative terms), it's just providing them more time and experience to ramp up its institution and mindset of its society towards better governance. Zambia on the other hand has come from much, much lower basis than Chile.
Moreover, Zambia is a landlocked country with either historically hostile and/or poor neighbors, where simply none of these willing to open trade (or invest) with them. I think it effectively caps its development and keep the government and society insular and corrupt.
What do you make of Zambia’s neighbour, Botswana?
https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=ZM-BW
Clearly a more successful country than most and an example of how to make a commodity a blessing not a curse. The rulers since independence til the last two were outstanding and if you just measure that by the foreign exchange reserves not corrupt.
Still they seem now to have difficulties. Partly due to covid where they sold off forex reserve to support the fall in budget income. But generally they are still struggling to diversify from diamonds despite many governments attempts to do so over many years. The small population, approx 2 million, doesn't help. But the World Bank identify the usual problem of parastatals receiving large subvents from the fiscus and interfering in freedom of business.
In general they have been called a gate keeper economy so can't really diversify.
Zambia apart from Kaunda at the beginning has had only one honest President, Levy Mwannassa, who died in office, after a short Presidency, that was already showing the beginnings of the establishment of sound institutions and financial policy. But since him and excluding the recently elected new President, the Presidents have been woeful. An example is that having obtained debt forgiveness, it defaulted on its new borrowings, and it is now more indebted than before the debt forgiveness.
Its problems are not due to geography or neighbours. It is all about corruption. The last President and his party are more or less considered to have looted the fiscus.
What is encouraging is that he was thrown out at the recent election. Like Malawi, where the incumbent was also recently voted out, it suggests the people still exercise control at the ballot box.
https://diggers.news/local/2020/02/07/corruption-rising-because-voters-endorse-corrupt-leaders-tiz/
I have not mentioned tribalism but an African phrase is, it is our turn to eat. It means when one tribes representative gets to power then the tribe he belongs to expect access to the fiscus. Hopefully the new Zambian President who represents a new tribe in power will not mke that mistake.
Yeah it is always super convenient that countries become poor/undeveloped because they are corrupt. But countries simply doesn't become corrupt out of the blue. It's the lack of development that breeds extreme corruption as seen in Zambia - inability (or in this case, extreme barrier) to attract/raise capital leads to inability to exercise sound and broad-based educational policy (it's tied to GDP per capita like an underwear). Poor quality of public education leads to inability for the general population to mount public pressure effectively (or simply they become so nonchalant that they give up on doing this thing). It also leads to much smaller talent pool from which an effective and sensible leaders could be drawn in. Therefore, I think the isolation (and 'bad neighbor effect') clearly still plays a significant part in turning that particular country to become what it is now.
Zambia borders Botswana. Both landlocked and with some of the same neighbours. Zambia has been ruled by thieves. Botswana by honest men. The difference is obvious. Zambia has many honest people striving for decent rulers and civil servants. They have a different view of the problem to you.
Botswana, despite all of the economic stagnation it's in recent times, was/is incredibly lucky to have the late Seretse Khama as their first leader who was a pragmatist and put the ground works of the later institution of the country. It's like they hit a jackpot when they got their independence, which points out that such thing is always in realm of probability. Countries with better access to the market (friendly/prosperous neighbors, including access to sea), less incidence of historic extremely violent events by its colonizers (that can foster strong resentment towards outsiders), and existing institution (including education system) that was healthy and less divisive have larger windows of probability to obtain such leader (as well as fixing their economic defects to obtain capitals, see my previous post), and vice versa.
However, sometimes even less fortunate countries like Botswana in the past (landlocked, started with little institution and very poor education, but at least wasn't as violently oppressed as i.e. the Mozambicans, Congolese, Rhodesian/Zimbabwean, and perhaps Zambians themselves) had their windows of opportunities, albeit really narrow. But hey at least it's there, although perhaps if there's 100 countries in the exact same situations as theirs, there would've been only 1-2 that might avoid become Zambia-esque ones.
Masire and Mogae were excellent too. The latter won the prize from Sudan which is not easily given out.
The Swiss banks did well out of the many other countries.
Zambia also hit that copper slump right as their opposition to colonialism had basically severed their access to the ocean. 1972 saw the Mozambican civil war spread right down into the border areas that could carry copper from Zambia to its northern ports, Angola was basically under full Portuguese control by that year, and the war in Rhodesia was just beginning in earnest, backed by rebel groups based in Zambia. Meanwhile, '73 was the start of Mobutu's Zairianization nationalizations, crippling an economy already plagued with transportation problems. Tanzania was the only acceptable country left through which to safely and ethically export copper, and the rail line to facilitate that wasn't ready until 1976. Having an active war bleed across its borders until 1980 from a major former trading partner certainly wouldn't have helped things either.
So you don't think it is corruption?
Corruption probably also plays a role, but it's difficult to put a number on what might have been. It's also important to note that enforcement against black market sales and smuggling was nearly impossible, and a lot of things like agricultural subsidies designed to provide cheap food to the mining towns ended up providing a lot of cheap food to Zaire's mining towns instead, and a lot of profit for smugglers. Similar policies in a country like Chile might have been less of a drain on state resources compared to the results they could provide.
Zambia has an average national IQ almost five-thirds a standard deviation lower than Chile. It's not a surprise they fell apart anymore than everywhere else in postcolonial Africa.
I was comparing it to Poland and per Wikipedia (which quotes the IMF), the nominal GDP per capita estimate for 2022 is Poland's $18,506 vs $15,941 for Chile. Yet PPP adjusted the difference is MUCH larger $41,685 compared to $28,526.
I'm assuming* this is a result of the infamous "resource curse" that leads wages to be higher than they would otherwise be due to the profitability of exporting. It seems like this would make it incredibly hard to foster the basic low end industrial work that most other countries have used to begin their industrialization process.
Are there good examples of countries that have been able to skip ahead to mid-level industrialization through education, subsidies, or other methods?
*Assuming is always dangerous and I'm very interested if there are other reasons people would propose...
It's very hard to stop being a resource exporter, once you are one!
Possibly the likes of Australia and Canada. Australia, at least, used to have much more manufacturing prior to the 80s and 90s liberalisations. We do know that inasfar as industrial policies and tariffs work, they tend to work up to a certain development level, then they become a drag on growth.
So you could plausibly construct a story where they were richer and more developed then they would have been otherwise up to a certain point, then they passed that point, after which the neoliberal stuff starts becoming useful. Certainly they are both rich and developed today.
>"As a developing country, you’re not supposed to fall behind developed countries; you’re supposed to catch up! Poorer countries are supposed to grow faster than rich ones. And Pinochet’s Chile fell behind the U.S. even as it was far poorer in absolute terms"
Except that poor countries grew slower than rich ones for most of the second half of the twentieth century, i.e. when most of the economic growth recorded in human history occurred. In fact, the divergence was so large that, even today, rich countries have had higher income growth (in relative terms) than poor ones.
In fact, Chile's growth remains impressive because every country that significantly outgrew it in Latin America was a total shithole, while Chile started the twentieth century as one of the richer countries in the region.
>"But it’s worth noting that both Argentina and Israel beat their hyperinflations in the 80s and early 90s without suffering big drops in living standards — indeed, hyperinflation itself was so terrible for the economy that ending it was enough to generate a recovery, even with the punishing austerity."
Yeah, and Argentina's nominal anchor exchange rate policy ended up causing the biggest depression in the country's history in 2000. Who are you trying to fool? It's rare and hard to succesfully pull of stabilizations without pain.
>""Shock therapy” didn’t go well in East Europe, so there’s reason to suspect that Pinochet’s similar program in 1974 caused a similar temporary crash in living standards."
Factually incorrect and based on an incorrect understanding of what "Shock therapy" actually means.
Maybe Branko Milanovic can help you get it: https://braveneweurope.com/branko-milanovic-distinguishing-post-communist-privatizations-from-the-big-bang
I don't know about Chile being richer than other countries that grew more. Uruguay grew more and was wealthier, Brazil grew by almost the same amount and was a little richer.
Ultimately Chile did dramatically outgrow even poorer countries but that was after Pinochet.
Sooo... what the fuck did Paraguay do RIGHT?!?
Started off very poor and built a very, very large dam that meets most of the country's electricity needs and supplies (for a price) a non-trivial share of Brazil's. Also managed to mostly avoid serious inflation and didn't have a bunch of financial crises, while everyone else had at least a couple.
Cheers! Thanks for the explanation. I assume from the detail/succinctness and Spanish name that you’re familiar with Paraguay/South America in general?
Also, it sounds like energy abundance does wonders for a country, which is a bit of a duh position, but also one that Noah and Matt Yglesias have both had to explicitly take because it gets ignored by the degrowth movement.
Yeah, I’m a native Spanish speaker and the region interests me. Happy to be helpful, cheers.
The GDP per capita figures also seem to show a nice little bump from some legal changes in 1975, incentivising export-oriented manufacturing and foreign investment. Without the promise of that dam, though, it's unlikely those incentives would have found nearly as many takers.
Pinochet has an allure in America because of the narrative behind his tenure. There are plenty of instances where we overthrew leftist leaders and then propped up corrupt right wing leaders that presided over pretty bad economies. There were some economic successes, but Iran could be written off as just another oil state and South Korea was nothing compared to neighboring Japan in the '70s. The American right wanted to prove that the "capitalist system" they were exporting was better than Cuban-style socialism, and, well...
Enter Chile, the custom made story you ordered. An internationally heralded socialist wins with 37% of the vote, parades around with the Castros, and Venezuelas the economy within three years. Enter a military man with a photogenic cape, cool shades, and a menacing looking hat who tortures and kills a bunch of people the right hates and starts implementing every Milton Friedman policy proposal he can get his hands on. Yes, the line looks jagged as hell, but compared with the rest of America's portfolio of corrupt and brutal dictators, that line certainly floats above the rest, especially w/r/t those policies that stayed in place through the '90s and '00s. And it directly contrasts with a bona fide democratic socialist directly before him. As Brasil and Argentina stagnate and Venezuela drops from contention, you're left with Chile and Uruguay as the two top countries on the whole continent in a lot of key metrics.
It's not a miracle by any means, but as an excuse for America to say "we staged a coup, killed a bunch of left wing civilians, stole a bunch of money, *and somehow it worked*," it's a more compelling argument than it perhaps should be.
We had nothing to do with the coup. Even our claim to "staging the conditions" that led to the coup is highly dubious.We didn't even invoke the Hickenlooper Amendment when Allende expropriated our copper holdings. The coup happened entirely because of Allende's raping his nation's economy. Which was entirely unsurprising, as Allende was a KGB contact honor bound to do his best to destroy the Western order:
https://www.kyleorton.com/p/myth-1973-american-coup-in-chile
Valourising Deng is problematic for honest libertarians with at least some knowledge of China beyond surface level. It's the dreaded I word - industrial policy. There's a reason why they don't want to say much about the East Asian success stories, which are genuine success stories, not confected stuff like Chile. They know it doesn't say much about libertarian policy prescriptions for developing countries.
In fact, Deng did very little industrial policy. Mostly just liberalization. Jiang Zemin did very little national industrial policy; he simply liberalized at the national level, and had provincial governments pursue their own industrial policy (basically what we do in the U.S., but with more explicit rewards for growth performance). Hu Jintao started to experiment with national-level industrial policy, but really China didn't get true national-level industrial policy until Xi came to power.
https://dusselpeters.com/CECHIMEX/Naughton2021_Industrial_Policy_in_China_CECHIMEX.pdf
Key words being national level. Provincial level with rewards from national level sure essentially seems not that distinguishable from industrial policy in general, just that experimentation is diversified geographically rather than across different firms like in SK.
Also wasn't it true land reform was done under Mao and was in fact successful at first until they collectivised? Sure you can say Deng liberalised from that point on, but is it not also correct to say liberalising collectivised agriculture returned it to the point where it was successful?
The timeline is more complicated. This is my non-specialist, cartoonish recollection.
Land reform was initiated in the late '40s in the areas that the Communist government came to control, and then nationally during the period 1949-57. That period saw widespread establishment of "collectives," and there did appear to be good economic growth, although it was from a base depressed by a decade of near-constant war.
The pace did not satisfy the elements of the Party Mao led, and in 1958 (partly in response to non-economic political issues) Mao's faction attempted to move from gradual to explosive growth through a new model of agricultural organization called the "commune," and political willpower was officially deemed the vehicle for breaking the bottleneck of gradual economic growth in both agricultural and industrial sectors. This program (The Great Leap Forward) led to such disastrous results (industry collapsed and famine deaths were on the scale of 30-40m) that within three years Mao was effectively sidelined from power.
Party leadership shifted to the opposition faction, led by Liu Shaoqi, whose protege was Deng Xiaoping. This led to a partial recovery in the period 1962-66, at which point Mao launched the internal coup known as the Cultural Revolution. Deng was purged along with Liu, and the central government and some levels of local government were essentially dissolved until Mao's grip on power was secure enough for him to call on the military to restore political order. Economic continuity was managed through the influence of more moderate forces, such as those under the influence of the premier, Zhou Enlai (who semi-rehabilitated Deng), and remained relatively stable through the end of the Cultural Revolution and Mao's death in 1976 (after which Deng was briefly purged once again).
Mao's successor, Hua Guofeng, purged Mao's faction from Party and government leadership and opened the door to Deng's faction (Liu Xiaoqi was dead and Deng was now the leading figure). By the early 1980s, Hua was gone and Deng was initiating enitrely new experiments in liberalization.
So although the PRC followed a path the enabled significant economic growth in the periods 1949-58 and 1962-66, Deng's approach to liberalization built on a different context, far distant from the era of land reform, and it drew on different influences, exposed to currents from the US and, most particularly, I think, the transformation of the South Korean economy under Park Chung-hee.
I don't think I disagree with any of that, your knowledge of the period seems granular and consistent with what I know. My larger point is that China did not grow through adherence to Washington consensus or just to liberalisation.
Avoiding hyperinflation, multiple devaluations where zeroes are knocked off and default is the miracle (well, outside of Latam it wouldn’t be classified as a miracle, but handicapped against the local competition - yes. And of course most of the competition also relied on natural resources and kept their cronies well fed- up to an including today’s leaders across most of Latam).
Friedman wasn't comparing to local competition when he called it an economic miracle in his Newsweek column, so I don't know why you've moved the goalposts and put words in his mouth.
He talks about Spain, Greece, Russian, and China as other military dictatorships but on economic performance he's clearly making an absolute claim, not a relative one.
"Chile is an economic miracle. Inflation has been cut from 700% a year in mid-1974 to less than 10% a year. After a difficult transition, the economy boomed, growing an average of about 8% a year from 1976 to 1980. Real wages and employment rose rapidly and unemployment fell."
If you want to make a defence of Friedman it would be that he wrote that in 1982 and it was a claim that has, in retrospect, turned out to be premature and the structural problems Noah highlights hadn't yet come home to roost. I guess a bit like how in the 80s everyone thought it was obvious Japan was taking over the world but now in retrospect that seems laughable and we all know about their structural problems.
Personally I'd give Friedman a bit of a pass on his comment, especially since the main thrust of his article was that Chile needed political reforms ASAP (which didn't happen) in order to not lose their progress. He wrote,
"But I predict that the free-market policy will not last unless the military government is replaced by a civilian government dedicated to political liberty."
Not so much the later commentators who do have access to more information and analysis than he did.
Exactly.
Bret Stephens doesn't have the expertise he claims on economic matters? Next you'll tell me that global warming is a serious concern (Bret assures me it's just exaggerated liberal hokum).
(I try not to make snide posts but I literally can't recall the last time I read a Bret Stephens column that didn't combine serious errors of analysis with intellectual dishonesty)
Allende was a disaster, but Pinochet was a monster. Since Pinochet did a lot of horrible things to people, a variety of sadists think highly of him. They'd probably enjoy the section on the Pinochet years at the Naval Museum in Valparaiso just as much as they enjoy the economics of Milton Friedman. Their logic seems to be that if it hurts someone, it has to be good. It's the old alcohol on the wound has to help because it hurts reasoning.
I'm willing to give credit where it is due. Some pretty awful people who did horrible things deserve credit for the good things that they did. They also have to account for the bad stuff as well. There aren't a lot of saints in this world, and definitely not saints who have done good things for economic growth. I'd like to thank Noah for his analysis here. Numbers can only tell a part of the story, but the numbers are pretty clear here. Pinochet didn't do much for Chile's economy, and, no, waving one's hand to give him credit for the years before and years after just doesn't work.
When I was in Chile ten years ago, it was during an export boom. Copper prices were good and there were signs of economic growth and the mineral wealth being spread around to make infrastructure improvements. There were new roads, new water systems, new schools and so on. There was also a push for more education. I have no idea of how that played out.
When I first started getting into economics it was stories about Chile, New Zealand, Iceland and Ireland which got me really into believing in libertarianism. But that view really switched after I started digging and realizing that very often it was moderate social democrats who actually got the economy going. Extreme economic policies in either direction rarely seem to work well. Rapid changes in particular seem to go wrong all too often. Whether it is shock therapy or Stalin collectivizing farms. Predictable step by step gradual reforms seem to be the way to go. Business need predictability to invest and plan, not jojo economics.
I just did not find this convincing at all, for a multitude of reasons:
1) It seems like the real reason they fell behind in economic growth was because of the crisis of 1982, which can be pretty much put up to Cowen's reason (was "cronyist finance" really a huge part of it?), but that doesn't mean all of their policies were bad, right? Also seems like some reforms at the time weren't neoliberal, either.
2) Are synthetic control studies taken really serious in the literature? It just looks like a hotbed for OVB and overfitting, but I could be wrong!
3) The graph of GDP and potential GDP looks like a classic Friedman plucking model. This is exactly what we would expect out of any country. Blaming both of those recessions on solely him and acting like now fast recoveries are bad feels weird to me. Aren't 99% of recessions created by fiscal or monetary policy mistakes, anyways?
4) I also think that there's no evidence on either side (at least in the article) that talks about whether Chile really diversified or not. Showing the OEC graph feels like a weak argument to me, isn't it possible it would've been way worse w/o Chicago Boys reforms?
5) I think the fact that Chile is one of the richest countries in South and Central America is ehhh evidence for those reforms potentially having been good, as there's a lot of other factors. However, saying "but inequality has dropped by less" feels like a really weak argument on the other side of that.
Definitely not a supporter of Pinochet, and not right-wing in any sense of the word. Just feels like weak sauce to me.
"In fact, over the years of Pinochet’s rule, Chilean living standards actually fell behind American living standards"
By this you mean the rate of change fell behind? This is what the accompanying chart seems to be pointing out
You analysis has many errors. From the privatization numbers (240 between 1973 and 1978 “free of charge”) Please see Claudio Milman, Ph.D., is Assistant Professor, Department of Management, Haworth College of Business, Western Michigan University
Per capita numbers are wrong. Please normalize those by PPP, which a more accurate perspective, and you will get a different response.
There are other errors but I only have a few minutes tonight.
The per capita numbers are already PPP.
When people come at a post very quickly and aggressively like this, and make easy mistakes ("international dollars" is in the charts, man!), it's a red flag.
International dollars have no specific meaning. PPP is something that everybody understands.
I looked at GDP per capita at PPP and in the last fifty years it has increased 10X -- very similar to the US... While you may call it not impressive it is better than its neighbors and I would argue that it was Pinochet’s policies that allowed for such growth. Furthermore when you look at Debt to GDP and the private capitalization pension system I would argue that it has some features that are superior.
Furthermore you should also look at other development indicators like increase in education, improvements in health care, infrastructure, security, etc. GDP per se has too many flaws take a simple conclusion from it.
When was the last time you visited the country? I do not mean Santiago.
No doubt PInochet helped his friends but how is that different to what George W, Bill or The Donald did?
If you are going to argue that Pinochet did some kind of magic, you'll need to show your work. Smith showed his work. Chile has a good growth record, but not while Pinochet was running things. You might as well grant credit to O'Higgins' ghost.
You clearly do not follow Chile... Show my work... Please give me a break.
The economic fabric of Chile as it stands today flourished from the Pinochet’s work. No need to expand on it for those that know Chile.
Have a good day
That seems to be the level of the argument. You made an assertion. Now present an argument.
One of the reasons why libertarians hold on to Chile dearly is because the other case studies aren't very convincing. Half of the developing world tried the Washington consensus several decades ago and are still apart of the developing world. The countries who have eclipsed developing world status have usually gotten there by using some sort of industrial policy - not very libertarian! There's also Hong Kong - doesn't look too hot nowadays. I don't believe that East Asian style development is the silver bullet that'll answer "how can countries develop?" but with 30-40 years of evidence from various neoliberal policy experiments in LatAm/Africa, it's clear that free markets alone won't make developing countries look like Western Europe, hell even the Southern Cone.
Noah, you refer to "Shock therapy". if i´m not wrong, who told for the first time about "Shock Therapy" was Balcerowicz, Lech Walesa´s minister. And Poland is the richest country among this group of countries. Why do you tell that "Shock therapy" didn´t go well?