Wednesday, January 06, 2010

How Chile Got Amazingly Rich: Free Trade

INVESTOR'S BUSINESS DAILY -- Chile was formally invited to OECD's club of developed countries on Dec. 15 — a great affirmation for a once-poor nation that pulled itself up by trusting markets. One thing that stands out here is free trade.

Chile is the first country in South America to win the honor, and in a symbolic way its OECD membership card seals its exit from the ranks of the Third World to the First. For the rest of us, it's a stunning example of how embracing free markets and free trade brings prosperity.

It's not like Chile was born lucky. Only 30 years ago, it was an impoverished country with per capita GDP of $1,300. Its distant geography, irresponsible neighbors and tiny population were significant obstacles to investment and growth. And its economy, dominated by labor unions, wasn't just closed, but sealed tight. In the Cato Institute's 1975 Economic Freedom of the World Report it ranked a wretched 71 out of 72 countries evaluated.

Today it's a different country altogether. Embracing markets has made it one of the most open economies in the world, ranking third on Cato's index, just behind Hong Kong and Singapore. Per capita GDP has soared to $15,000. Besides its embrace of free trade, other reforms — including pension privatization, tax cuts, respect for property rights and cutting of red tape helped the country grow not only richer but more democratic, says Cato Institute trade expert Daniel Griswold. "Chile's economy is set apart from its neighbors, because they have pursued market policies consistently over a long period," he said. "Free trade has been a central part of Chile's success."

Chile has signed no fewer than 20 trade pacts with 56 countries, giving its 19 million citizens access to more than 3 billion customers worldwide. When no pact was in force, Chile unilaterally dropped tariffs. This paid off handsomely.

You've heard of flat taxes? Chile has a flat tariff — only 5% on any item not exempted by a free-trade treaty. But almost nobody has signed off on free-trade treaties like Chile. "What free trade has done is it's allowed Chile to specialize," Griswold says. "Copper, salmon and fresh fruit are some of its strengths that have drawn foreign investment. Free trade has allowed resources to shift to where they have the highest return. The result has been a more disciplined private sector that has made itself efficient enough to compete globally."

The success belies claims, made mostly by protectionist unions, that free trade is a job killer and source of misery. It's also a reminder of how the U.S. has lagged on trade agreements, signing just 11 with 17 countries since 1993 — one reason why its ranks just 17th on Cato's 2009 Index of Economic Freedom.

Despite the recession, American trade pacts with Colombia, Panama and Korea are languishing into a fourth year. By contrast, Chile got to where it is by embracing trade. Its example is a shining lesson of how prosperity can be achieved no matter what the challenges — a lesson the U.S. would do well to relearn as our recovery tries to get traction.

MP: The charts above document Chile's stunning economic success. Following four decades of economic stagnation and flat real GDP per capita from 1950 to 1990, output per capita has more than doubled since 1990. And Chile's economic growth has been accompanied by a roaring bull market rally that has lifted the MSCI Chile Stock Market Index by an amazing 400% since 2002, from less than 400 points in September of 2002 to currently above 2,000 points. That translates into an average return of 24% per year for the last seven years, despite an 800 point drop in 2008.

HT: The Plaidpundit, Matt B.


At 1/06/2010 7:27 PM, Anonymous Anonymous said...

Don't forget Chile's private retirement accounts.

This piece was written in 1999, but Chile's system is just as sound today:

In May 1981 Chile adopted a revolutionary reform by replacing its bankrupt pay-as-you-go retirement system with a fully funded system of individual retirement accounts managed by the private sector. The new system is based on three important pillars: freedom of choice, private-sector management and property rights in the retirement accounts. In its 18 years, the private retirement system has been an enormous success: more than 95 percent of Chilean workers have joined the system; the pension funds have accumulated over $34 billion in assets; and the average real rate of return has been 11.3 percent per year.


At 1/06/2010 8:38 PM, Blogger juandos said...

I'm guessing this couldn't have been done with Salvador Allende had still been running the assets of the country down...

At 1/06/2010 10:20 PM, Blogger Bill said...

Salvador Allende = sic semper tyrannis

At 1/06/2010 11:30 PM, Blogger sethstorm said...

So Chile made the Faustian deal with its sovereignty for a bit of coin. They're lucky it didn't turn out like Argentina.

I'm guessing this couldn't have been done with Salvador Allende had still been running the assets of the country down...

Salvador Allende = sic semper tyrannis

Interesting that the same logic used to defend Pinochet is used to defend trade with a modern(post-1980) China. The only real difference is that China retained its Communist Party.

At 1/06/2010 11:44 PM, Blogger sethstorm said...

Chile is the first country in South America to win the honor, and in a symbolic way its OECD membership card seals its exit from the ranks of the Third World to the First.

I'm not sure that they can exit being the Third World. For what I see of it, they're still going to be Third World, part and parcel. It doesn't help that they had some help from Pinochet.

Has it given up its Pinochet era loss of non-economic freedoms in the process? Or has it gone the route of Hong Kong and Singapore and overly optimized for transactional efficiency over non-economic freedoms?

At 1/07/2010 8:01 AM, Blogger Alex said...

The horrors of the Pinochet era should be mentioned in any honest historical analysis of Chile's current economy. All of this came at a huge price in terms of losses of other freedoms, disappearances, death, etc. I am not disagreeing at all on the merits of a free-trade, free-market economy (I'm one of the biggest proponents out there), and I am certainly no apoligist for the Marxist disaster of Salvador Allende.

However, it is rather dishonest to ignore the fact that in order to acheive these things, the democratically elected Allende was supplanted by a coup, which lead to the brutal dictatorship of Pinochet. This article makes it seem like Chile has been all smiles while implementing these reforms, and glosses over all of the suffering and undemocratic methods used to acheive the end result.

I guess one can look at the history and say that Allende may have been headed down the same undemocratic path as Pinochet, and the end result has made Chile better off, but either way...there was great tragedy in Chile, and history should not be ignored.

At 1/07/2010 9:06 AM, Blogger Paul said...

Uh, the article is about how Chile prospered, not how Allende almost turned the country into another communist hellhole. Hence no mention of Pinochet either.

The Leftists here are still seething they were denied another workers' paradise in Latin America.

At 1/07/2010 9:19 AM, Blogger sethstorm said...

Uh, the article is about how Chile prospered

The problem is that you would be ignoring a part of the way it got there and why it was willing to make such a deal.

At 1/07/2010 9:20 AM, Blogger Alex said...

As I mentioned, I'm not a leftist, but a free-market conservative. But one shouldn't have to defend that just by making an honest assesment of the lack of historical context within this article, which attempts to analyze the economic history of Chile leading up to today, specifically going back 30-35 years. 30-35 years ago, Chile was under a brutal dictatorship that forced many of the reforms through undemocratic means, and despite the fact that it is proserous today, that fact should be mentioned, rather than pretending that the whole process has been completely benign. It wouldn't be a big deal if the article started its analsys at the return of democracy in Chile, but it specifically goes back as far as 35 years.

Rather, instead of accusing those who point out the lack of historical context in this article of being bitter leftists, one might be better served to point out that Chile's true prosperity took off with the restortation of democracy in the early 1990's. It's a shame that this article did not do that.

At 1/07/2010 10:36 AM, Blogger Paul said...

"Rather, instead of accusing those who point out the lack of historical context in this article of being bitter leftists, one might be better served to point out that Chile's true prosperity took off with the restortation of democracy in the early 1990's. It's a shame that this article did not do that."

It isn't relevant. You don't need a Pinochet to ignite an economic miracle. The Left's "Chile economic miracle =Pinochet" is just tiresome and doesn't fool anybody.

At 1/07/2010 11:46 AM, Anonymous Anonymous said...

Judas's historical view is totally wrong. It was Allende who destroyed democracy in Chile, by violating the Constitution in order to impose "the dictatorship of the proletariat" (as he stated literally). Pinochet's Army saved Chile from 50 years of communist dictatorship (as Cuba). And the Chicago Boys seized the opportunity to transform Chile into a developed country, making it possible to eliminate poverty and restore free political elections. Chile's free market revolution is the most valuable example of the 20th century for the Third World.

At 1/07/2010 11:57 AM, Anonymous Anonymous said...

"I admire Chile and its people greatly, and became concerned when my friend Salvador Allende became its president and opened the country to hordes of armed radicals from all over the world. The result was the world´s highest inflation, universal violence and the threat of civil war. So I applauded the takeover by General Pinochet, on the orders of Parliament, and still more his success in reviving the economy and making it the soundest in Latin America. But by preventing the transformation of Chile into a Communist satellite, the general earned the furious hatred of the Soviet Union, whose propaganda machine successfully demonized him among the chattering classes all over the world. It was the last triumph of the KGB before it vanished into history´s dustbin. But Pinochet remains a hero to me because I know the facts"

PAUL JOHNSON, historian ("Heroes. From Alexander The Great and Julius Caesar to Churchill and De Gaulle", Harpers Collins Publishers, New York, 2007, page 279).

At 1/07/2010 12:29 PM, Blogger Alex said...

Paul, that isn't a "left" argument, it is well documented historical fact. Just because it puts an asterisk next to the current healthy economic state of Chile today doesn't mean it didn't happen, and shouldn't be at least acknowledged in any honest discussion.

And Anonymous 11:46, are you really going to pretend that the blatant human rights abuses and massive losses of freedom under Pinochet didn't happen? As I mentioned, Chile was likely headed down that road under Allende, and he set himself up by violating the constitution and bringing the economy to ruin; but that doesn't mean that what happened under Pinochet didn't happen, just because the end result was the laying of the foundations for the economy to take off once democracy was restored.

All I'm saying is, in honor of those who were killed, dissapeared, tortured or abused under Pinochet, it at least deserves a mention if you're going to run your context back to the Pinochet era.

At 1/07/2010 1:55 PM, Blogger Paul said...

"Just because it puts an asterisk next to the current healthy economic state of Chile today doesn't mean it didn't happen.."

There's no asterisk, none at all. There are only Leftists looking to discredit the revival of an economy, of a country, their hero Allende tried to ruin.

At 1/07/2010 2:51 PM, Anonymous Anonymous said...

Well said Paul. There is no asterik, none at all.

Judas, it is obvious that you are a distinguished member of the chattering classes brainwashed by KGB propaganda (as per Paul Johnson). Your facts are simply wrong, wrong, wrong (maybe you are Van Jones and also believe that 9/11 was produced by Presidente Bush). When people of the intelligence and integrity of Margaret Thatcher, Friedrich Hayek, Milton Friedman and Paul Johnson support the Chile epic under President Pinochet and the Chicago Boys, maybe you should begin to...check your premises!

At 1/07/2010 2:57 PM, Anonymous Anonymous said...

I think what the left really hates about Pinochet is that unlike leftist dictators he stepped down and he ushered in capitalism. OMG! And the damn country and it's peoples became prosperous! With civil liberties and the rule of law Chile has left the rest of South America in the dust.

Sethstorm, "The only real difference is that China retained its Communist Party."

What kind of stupid remark is that? Go back to high school and do a compare & contrast Chile vs China. Think Dictatorship and one party vs multiple parties vs free elections. Think rule of law vs law imposed by rulers. Think property rights upheld by law vs the strange parch work of laws in China. Freedom of religion in Chile vs none in China. I think all these thing are pretty damn real I suggest you travel to both countries and see for yourself.

At 1/08/2010 2:27 AM, Anonymous Anonymous said...

Really, sethstorm, you show no capacity for learning.

At 1/08/2010 7:37 PM, Anonymous Gringo said...

Those who are interested in the Allende and Pinochet eras in Chile should be familiar with the Declaration of the Breakdown of Chile’s Democracy, a resolution which three weeks before the coup passed the Chamber of Deputies by a 81 -47 vote, a 63%-37% margin. Allende correctly called the resolution an invitation to a coup.History is messy.

Note that the democratically elected post-Pinochet governments followed Pinochet economic policies, not those of Allende.

At 1/09/2010 10:39 AM, Blogger sethstorm said...

and do a compare & contrast Chile vs China

Let's see...

Pinochet era Chile: Despotism with capitalist tendencies

China: Despotism with 19th Century capitalist tendencies


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