Economics During the Military Years – US Policies, Chile, The Dictators, and "Free Markets"

In comments to his earlier post on the comparison between Chile and South Korea, Howard Covitz writes:

I had read the Wikipedia entries before writing my e-mail, and basically was hoping to get either confirmation or denial about the comparison to Chile…economic success at the cost of liberty (and I figured Cactus might have some cultural insight from a South American standpoint).

My best answer to this may not be very good, but I’ll give it a stab. I’m not sure my perspective is South American; I grew up in South America, though I was born in the US (American mother, Argentine father). One additional thing that may color my perspective – Chile was run as an experiment by the Chicago Boys and in grad school I would one day have the privilege of studying under the godfather of the Chicago boys, Arnold Harberger.

So here are my semi-random thoughts:

1. Chile has, in many ways, been the big success story over the past few decades in South America in terms of economic growth.

2. In many people’s minds, the US is very closely associated with Pinochet taking power in Chile. Just about anybody who doesn’t work for the Wall Street Journal seems aware of the fact that the CIA provided encouragement and intelligence to those plotting the overthrow of Chile’s democratically elected government in 1973.

3. But the US involvement was essentially the same in other, um, transitions from democratically elected governments to military rule. LBJ despised João (“Jango” – Brazilians do come up with some cool nicknames!) Goulart and I understand that the relationship between the American and Brazilian administrations in 1964 were no different than the relationships between the American and Venezuelan administrations today. But clearly, the US took a few steps then that they didn’t now – here are excerpts from a recently declassified telegram the American military attache to Brazil sent to his superiors in Washington (notice that I’m linking to the State Department’s website – this is not exactly The Nation that I’m quoting here) less than a week before the coup in Brazil:

He had just come from meeting of resistance movement to Goulart and said it had been decided to take action this week on a signal to be issued later. Response to Castello Branco document from Second Army Commander General Kruel fully satisfactory. Kruel stated that he agreed one hundred percent with document and considered himself released from any obligation to Goulart by reasons of latter’s recent actions. Kruel added that if relieved as Second Army Commander he would not turn over command. Cintra said that when Castello Branco is relieved as Chief of Staff early this week he will immediately issue denunciation to nation. Helicopter has been laid on to move Castello Branco, Gen Cordeiro de Farias and Marshal Dutra out of Rio and on to Sao Paulo when movement is imminent. Cintra indicated that he and BGEN Syseno Garmento will remain in Rio de Janeiro. BGEN Moniz de Aragao will operate in Rio Vila Militar. Movement in Vila Militar will begin from bottom up and plans have been made to neutralize key units believed to be favorable to Goulart and leftists. Cintra said that central command of movement would initially be in Sao Paulo. Arrangements have been made with navy and air force for joint action. BGEN Souto Malan proceeding this morning to Porto Alegre with full instructions for Maj Gen Adalberto Pereira dos Santos there in command of Sixth Inf Div and next senior officer to Third Army Commander. Cintra confident of Minas Gerais Garrison and said Governor Magalhaes Pinto of that state eager for move. Total movement may be triggered by meeting of democratic governors in Porto Alegre on Wednesday. Day not yet decided for initiation of movement. Cintra seemed confident of success.

Major Moraes Rego leaves in morning for Recife carrying instructions for Fourth Army Commander Justino Alves Bastos. Comment: While this may be only talk ARMA has never seen Cintra as assured and positive. ARMA expects to be aware beforehand of go signal and will report in consequence. If opposition intends to do something this is time. Cintra stated flatly move would occur during coming week barring overriding reason for postponement as further waiting would only help Goulart.

I will repeat… this is on the State Department’s website. That this happened is not some leftist propaganda.

You don’t have to know these names or recognize the geographic references to figure out that the generals planning to overthrow the civilian government were keeping the US fully informed. But the US support was more than tacit… see the line about “plans have been made to neutralize key units believed to be favorable to Goulart and leftists”? The coup plotters were particularly worried about the First Army, based in Rio – its General did not sign on for the coup. Now… it just so happens my father was an exchange student in Rio at the time. He told me American warships showed up and started patrolling up and down just off the coast… sending a clear message not only to General Âncora, the commander of the First Army, but to the local population and the Brazilian government as well. Everyone knew the coup was coming and that the Americans were in on it.

4. The US didn’t impose the Chicago Boys on Chile. Pinochet did. And elsewhere, each country’s military junta cooked up its own silly economic policy. The “infant industry” concept (which, incidentally, was copied from Asian countries like Japan, Taiwan and South Korea) was especially popular. For instance, you couldn’t import electronic equipment into Brazil or Argentina without paying very steep import duties.

5. As per item 4, it doesn’t make sense to say the US tolerated lack of liberty in exchange for economic success unless in Chile you also say the US tolerated lack of liberty in exchange for economic stupidity elsewhere in Latin America. Basically, the US didn’t care about the economic policies being tried provided that folks running the show called themselves anti-communist.

6. When the military takes over a country, they like to run it. That includes the economy. All of these countries – Chile included – nationalized key sectors of the economy (or if they had already been nationalized, kept them that way). Pinochet decided that his predecessor had nationalized too many industries, so he sold off some of them. But he wasn’t about to relinquish control of the key sectors. Chile produces more than a third of the world’s copper. As I recall, Pinochet kept that under government control.

7. Another note on copper… Chile’s population is actually pretty small… even today we’re talking about 16 or 17 million. One third of the world’s copper production divides up nicely in population that small. This is not a model that could be emulated by a country that doesn’t have quite the same ratio of natural resources to population any more than Norway or Saudi Arabia can be emulated.

8. If you’re interested in free markets in South America, perhaps General Stroessner in Paraguay ran a freer market than General Pinochet did in Chile, and Paraguay doesn’t have Chile’s copper, so if any market could be emulated, Stroessner’s Paraguay is a better example than Pinochet’s Chile. Sure, there was the same government meddling, and Stroessner is the same sort of villain. At one time, the second largest in Paraguay was “Puerto Stroessner” – now that its verminous namesake is gone, the city has reverted to its old name, Ciudad del Este. Puerto Stroessner is on the border with Brazil and Argentina. Remember the infant industry argument and how you couldn’t import electronic goods into Brazil or Argentina? Well… at the time you could buy electronic equipment on the Paraguayan side of the border… and for an extra fee (there were two prices listed for all electronic goods on sale in Puerto Stroessner) those goods would appear at your hotel doorstep on the Argentine or Brazilian side of the border the next morning. And trade went the other way too… I remember hearing a statistic that a third of the cars stolen in South America that are not recovered end up in Paraguay, and my understanding is that they’re still big in that industry.

My point… the closest thing to a free market I saw in South America at the time, and it wasn’t very close at all, looked an awful lot like Tijuana.