Blog: Chile´s Road to Freedom

September 17, 2009. No 5 in Economic Freedom.  Thanks to the free market revolution of 1975-89, Chile is now No 5, surpassing the USA for the second year, in the 2009 Economic Freedom of the WorldReport
 
December 18, 2008. No 6 in Economic Freedom. In the Fraser/Cato 2008 ranking, that includes 141 countries, Chile is No 6 in economic freedom. The top 10 are: Hong Kong, Singapore, New Zealand, Switzerland, UK, Chile, Canada, USA, Australia and Ireland. 

September 11, 2008. Five world leaders on Chile. It is extraordinary that, despite the leftist propaganda that has confused so many people, five top leaders in their fields, persons of the utmost integrity and talent, have dared to express their admiration for the legacy of the government presided by President Pinochet. They are Margaret Thatcher, former Prime Minister of the UK; Friedrich Hayek, Nobel laureate and public intellectual; Milton Friedman, Nobel Laureate and Chicago economist; Jorge Luis Borges, Argentinean poet; and Paul Johnson, British historian.

May 15, 2008. The success of the Chilean pension model. Economist Richard Rahn publishes an article titled A working model asserting that: "We now know that both in theory and practice privatized social security works far better than pay-as-you-go government systems. Opponents can only keep their citizens from adopting Pinera-type systems by keeping them ignorant of the benefits, and making false statements about the privatized social security system's successes. Fortunately, the world still has a very vigorous Jose Pinera, who for three decades has made it his life's work to empower workers and make them small capitalists, freed from the government foot upon their necks. Mr. Pinera has already made life more secure and prosperous for millions, and with luck it will soon be billions of people."

March 11, 2008. Paul Johnson on Chile. In his latest book, historian Paul Johnson writes: "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." ("Heroes. From Alexander The Great and Julius Caesar to Churchill and De Gaulle", Harpers Collins Publishers, New York, 2007, page 279.)

August 11,  2007. Close to defeat poverty. The Economist publishes an article about the consequences of the Chilean Revolution titled A country that pioneered reform comes close to abolishing poverty.

January 29, 2007. Honoring Milton Friedman. At an event in New York honoring Milton Friedman, who died a month ago, I am invited to speak about his international impact. Here are my remarks. The other speakers are William Niskanen, Cato Institute's Chairman, and Paul Gigot, Wall Street Journal Editorial Page Editor.

January 2, 2007. Again top 11. The "Index of Economic Freedom" compiled by the Heritage Foundation and The Wall Street Journal for 2006 places Chile again in the extraordinary position of No 11 among 157 countries ranked. Hong Kong is No 1, followed by developed countries like Singapore, Australia, USA, New Zealand, UK, Ireland, Luxembourg, Switzerland and Canada. And then comes Chile, the first country from the vast emerging world. After Chile comes Estonia, and then Denmark, Netherlands, etc. The last two are communist Cuba (156) and North Korea (157). Venezuela is No 144, below Bangladesh (143). On "Property Rights" protection, Chile shares the top ranking position with countries like the USA and the UK.

December 15, 2006. Three inflection points. "In Chile's history there are only three inflection points: the independence from Spain, the Pacific War, and the free market economic revolution carried out during the Pinochet government" (César Barros, Qué Pasa magazine).  

December 5, 2005. Gradual privatization of education. For the first time in Chilean history, in 2004 more children were in private schools (50.66%) than in municipal (or government) schools (49.34%, down from 70% ten years ago). According to the trends, it is projected that only 36% of the children will be in a government school by 2010. In another of our reforms of the early 80s, parents were allowed to choose a private school for their children, in which case the school receives a monthly payment by the government (an imperfect voucher system). An expert has concluded that "the most recent studies find significant differences in test scores between student educated at private voucher schools and those educated at municipal voucher schools" (Claudio Sapelli, "The Chilean Education Voucher System", in What America Can Learn from School Choice in Other Countries, Cato Institute, 2004). The Heartland Institute affirms in an article that "Chile and Sweden are two countries that have experienced vast increases in private (independent) schools as a result of voucher systems launched within the past two decades."

November 6, 2005. Two contrasting paradigms. On Nov. 6, 1917, Lenin takes power in Russia and admonishes: "Workers of the world, unite" (Of course, under the dictatorship of Lenin). On Nov. 4, 1980, Chile creates a pension system that allows every worker to become a small capitalist, and originates a much more appealing vision: "Workers of the world, become owners and thus free". 

November 4, 2005. 25 years. In Venticinque anni dopo. La rivoluzione liberale di Reagan e Pinera, the Istituto Bruno Leoni celebrates 25 years since the election of Ronald Reagan and the approval of Chile's pioneering Social Security Reform, both on November 4, 1980. Il 4 Novembre che cambiò il mondo, writes Professor Carlo Lottieri in an Op Ed in the Italian newspaper Il Indipendente. The Cato Institute also celebrates this day stating that "Ronald Reagan was the most eloquent spokesman for limited government of our time" and that "the success of the Chilean system has served as a model for pension reform around the world." A good day to read NYT's John Tierney dossier on the success of Chile's private pension system.

October 29, 2005. FTA with China. Chile closed a Free Trade Agreement with China, our second biggest trade partner after the USA. It will be signed on November 17. This is the first such agreement of China with a non-Asian country. Chile now has FTAs with countries representing 74.4% of the world GNP. As suggested in my Agenda 2010, presented two years ago, China was a priority and the next steps should be FTAs with Japan and India in 2006. 

October 24, 2005. Pension portfolio diversification. The AFPs, extraordinarily successful in getting a high rate of return for all its workers-clients (annual average of 10% real for 24 years), have also exercised, shepherded by the law, a remarkable degree of prudence in investing the pension funds. The portfolio composition of the private pension system is the following: 29.3% invested in the financial sector, 28.9% abroad, 24.8% in corporate bonds and stocks, and only 16.9% in government bonds (less than the government share of the economy). As I explained at length 25 years ago in my weekly TV commentaries, pension fund investing should be guided by the common sense rule of "not all eggs in the same basket". It has worked.

August 26, 2005. Constitution of 1980: amendments and further consolidation. Law 20.050 is published today with amends to the Constitution. The non-elected institutional senators and the decorative National Security Council are eliminated, among other adjustments related to the political process (also a welcomed 4-year presidential term, without reelection). The crucial chapter on "individual rights" is kept intact, as well as the basic institutions and orientation of the Constitution of 1980. The governing Concertación wrongly attempted to change the definition that "Chile is a democratic Republic" (Article 4) for "Chile is a social State", but failed to get the necessary votes. Nobody even mentioned the need to eliminate the anachronistic clause prohibiting CODELCO to have private shareholders. The bipartisan amendments were approved in Congress by 150 votes in favor, three against, and one abstention. 

August 11,  2005.  Real solvency. The transition financing from a pay-as-you-go to a personal accounts retirement system proceed even better than planned 25 years ago. Chile will have at least a 4% of GNP budget surplus in 2005, helped by very high copper prices and production levels. This surplus is 'after' spending another 3 percent of GNP on the retirees of the unfunded government pension system and a further 1.2 percent of GNP on paying "Recognition Bonds" to workers reaching retirement age in the private pension system (these are zero-coupon Treasury bonds used in the 1980 Pension Reform to compensate, for past contributions, those workers that freely decided to opt out from the government system). Since the hidden pension debt is fast disappearing in Chile and the government external debt is only 8% of GNP, the day will come when world capital markets will recognize that Chile's sovereign debt is much safer than that of developed countries with huge implicit pension liabilities like France, Germany, Italy and Spain.

July 1, 2005. Pro-Americans. "It isn't hard to come up with examples of famous pro-Americans, even on the generally anti-American continents of Europe and Latin America. There are political reformers such as Vaclav Havel, who has spoken of how the U.S. Declaration of Independence inspired his own country's founding fathers. There are economic reformers such as José Piñera, the man who created the Chilean pension system, who admire American economic liberty. There are thinkers, such as the Iraqi intellectual Kanan Makiya, who openly identify the United States with the spread of political freedom. All of these are people with very clear, liberal, democratic philosophies, people who either identify part of their ideology as somehow 'American', or who are grateful for American support at some point in their countries' history." (Pulitzer Prize's Anne Applebaum, In Search of Pro-Americanism, Foreign Policy, July/August, 2005).

June 1, 2005. Private mining contribution. Ten private mining companies, that decided to invest in Chile after the 1981 Constitutional Mining Law ensured full respect for property rights, will pay aproximately US$ 2 billion in income taxes in 2005 (around 25% of the total government foreign debt). The total tax contribution is still higher, since that figure does not include many other indirect taxes generated by the process of mining production (income taxes of suppliers and workers, VAT, etc). Chile's copper production may reach 5.5 million tons this year (up from 1 million in 1981) and so the country will turbo-benefit from the historically high prices. 

May 1, 2005. Long-term capital for the economy. After 24 years of operation, without ever losing a peso for the workers through fraud or improprieties, the Chilean private pension system has accumulated US$ 80 billion (equivalent to 75% of GNP). That figure is composed of US$ 67 billion in the pension funds and US$ 13 billion in the insurance companies that provide the life annuities originating from the capitalization system. It is estimated that the system's resources may peak at 100% of Chilean GNP. All Chilean workers in the system (7.1 million) have benefitted from a compounded average real (above inflation) rate of return of 10.1% over 24 years (The Social Security system of the United States provides current workers an equivalent annual rate of return of only 1%). 

February 1,  2005.  Facts are facts. The influential socialist author Robert Heilbroner dies, but not before reaching this conclusion: "Capitalism has been as unmistakable a success as socialism has been a failure. Here is the part that's hard to swallow. It has been the Friedmans, Hayeks, and von Miseses who have maintained that capitalism would flourish and that socialism would develop incurable ailments. All three have regarded capitalism as the 'natural' system of free men; all have maintained that left to its own devices capitalism would achieve material growth more successfully than any other system. I draw the following discomforting generalization: The farther to the right one looks, the more prescient has been the historical foresight; the farther to the left, the less so." (Dissent, Fall 1990)

January 1, 2005. Chile, top 11. The 2005 version of the Index of Economic Freedom, compiled by the Wall Street Journal and the Heritage Foundation, places Chile as No 11 in its ranking. Since the United States is No 12, this is an extraordinary achievement of the Chilean free-market revolution. The next highest ranking Latin American country is El Salvador (No 24), while Argentina is No 114. The bottom one is, naturally, communist North Korea (No 155). Hong Kong is No 1 and Estonia, the Baltic Tiger, is No 4. 

November 23, 2004. "A successful revolution." Fareed Zakaria writes in a column at The Washington Post: "The U.S. government can claim little credit for Chile's remarkable and successful free-market revolution. But the University of Chicago -- which trained most of the economists who spearheaded those reforms in Santiago -- can. Foreign students return home from the United States bringing with them an appreciation for U.S. values, ideas and, indeed, for America itself." 

July 21, 2004.  Assault on mining is rejected. The Chamber of Deputies and the Senate rejects the government project to change the Constitutional Mining Law that would have weakened property rights.

May 28, 2004. Pensions and roads. A Business Week article celebrates the role of a funded retirement system in creating robust capital markets: "Drivers in Chile don't have to wait until they're 65 to enjoy their pension benefits. Every day thousands do so when they speed from Santiago to Viña del Mar along the Rutas del Pacífico toll road, which opened on Apr. 13 with funding from the country's deep-pocketed pension funds. A billboard reminds passing motorists: 'Your savings are financing this highway, and this highway is financing your retirement'."

December 11, 2002. FTA Chile-USA. It is announced in Washington that a Free Trade Agreement has been signed between the two countries. Thus (almost) concludes the process of opening the economy began in 1975. In the press conference, the US negotiator, Ambassador Robert Zoellick, states: "One of the nice things in this agreement is that we have some additional access in Chile to pension fund management within a social security system that I wish we could imitate." Reversing its previous position of seeking a Mercosur agreement, President Lagos signs the FTA with the United States and the Chilean Congress approves it almost unanimously.

October 6, 1999. Thatcher on Chile. "What about the fact that Chile was turned from chaotic collectivism into the model economy of Latin America? What about the fact that more people were housed, that medical care was improved, that infant mortality plummeted, that life expectancy rose, that highly effective programmes against poverty were launched? Why don't they tell the world that it was Senator Pinochet who established a Constitution for the return to democracy?" (Margaret Thatcher, Speech at the Conservative Party Conference in Blackpool).

September 27, 1999. Promoting the human spirit. John Kasich, Chairman of the Budget Committee of the US House of Representatives, writes to José Piñera after his testimony: "I could not be more grateful for your recent appearance before the House Budget Committee. You fundamentally transformed our Social Security debate: You got us thinking not about numbing statistics, but about how best to promote the human spirit. Your obvious commitment to an idea - of making every man and woman a shareholder in their nation's economy - and your focus on people rather than numbers made your testimony compelling even for Members who favor an approach different from yours. I look forward to working with you in the months ahead. Our approach clearly will be tailored to our own circumstances, but the experience of Chile and other countries will offer valuable guidance. Your impressive command of the issues, as well as your personal experience, can teach us a great deal."

August 5, 1998. "The awesome power of ideas." James Flanigan writes in the Los Angeles Times: "In a sense, it all began in Chile. In the early 1970s, Chile was one of the first economies in the developing world to test such concepts as deregulation of industries, privatization of state companies, freeing of prices from government control, and opening of the home market to imports. In 1981, Chile privatized its social-security system. Many of those ideas ultimately spread throughout Latin America and to the rest of the world. They are behind the reformation of Eastern Europe and the states of the former Soviet Union today... which demonstrates, once again, the awesome power of ideas." 

September 18, 1997.  "Making a difference".  George W. Bush, future President of the Unites States, writes to José Piñera after dinner and a brainstorming at the Governor mansion in Texas: "Thanks for coming to Austin to share your wisdom. All of us enjoyed your comments. Congratulations on making a difference."

January 26, 1996. "The mother of all reforms". Mack McLarty, President Clinton's chief of staff, writes to José Piñera after a meeting in Santiago: "Without doubt, the reform of Chile’s pension system has been a critical contributing factor –some have called it the mother of all reforms—to Chile’s ongoing economic success. The social security reforms which you developed and fought for have put your country on a stable footing for the future. Although the Chilean and North American experiences are different in several key respects, I believe we can learn a great deal from your country’s bold initiative, which is widely envied throughout the hemisphere. Jose, you are a strong and thoughtful voice for economic reform; your legacy is secure." 

March 20, 1994. Thatcher in Chile. The day before her speech in Santiago, she asks to meet in private with the core team that implemented "thatcherism before Thatcher". We meet for dinner at the Santiago Hyatt hotel. In her conference the next day she says: "Since socialism was defeated in 1973, Chile has been transformed into a signal example of economic reforms and material progress. And with the return of democracy you are also giving an example of political maturity and national reconciliation".

June 26, 1991. Free trade path. Reversing his previous positions and the Aylwin candidacy program, Alejandro Foxley, Finance Minister, announces that the flat tariff policy will be maintained and announces its reduction from 15% to 11%. This is an important step in the consolidation of the Chilean Revolution, since it gives a clear signal that the Aylwin government will follow the strategy of open trade and no tariff discrimination. 

April 1, 1991. A martyr of the Revolution. Extreme leftists assassinate senator Jaime Guzman, the leader of the center right opposition. For years, many members of the center left opposition had conducted a campaign of demonizing Guzman because he was one of the main authors of the 1980 Constitution and a key ally of the team of free market economists. They were shocked when Guzman was elected to the Senate in the parliamentary elections of December 1989 and became arguably the best senator in Congress. His assassination decapitated the opposition and deprived the country of an extraordinary human being. He was one of my closest personal and intellectual friends, and we fought together many battles for liberty, democracy and human rights.

March 11, 1990. End of the transition to democracy. Strictly according strictly to the transitory articles of the 1980 Constitution, and once the institutions for democracy were in place, President Pinochet, in a formal ceremony in the new Congress building in Valparaiso, hands the traditional presidential sash to Patricio Aylwin, winner of the December 1989 presidential election (interestingly, Aylwin was the Christian Democrat former senator who wrote the conclusions of the Resolution of August 22, 1973, that demanded the removal of Allende). A great day for Chile, and especially for the Reconstruction Government economic and civilian team, that had fought persistently for this peaceful and constitutional transfer of power, that ensured the survival of the free market revolution, the consolidation of the structural reforms, the insertion of Chile into the global community, and the consolidation of a free society. Through the power of ideas, a new Chile has emerged.

November 9, 1989. The fall of the Berlin Wall. A great day for freedom. Chile was a pioneer in defeating communism in 1973, inflicting an unexpected defeat to the expansionist policies of the Soviet Union and Cuba. Years later, Anne Applebaum will describe communism as a story of horrors in her review of "The Black Book of Communism" and in her book "Gulag". The free market reforms in Chile also preceded those of Thatcher (elected in 1979) and Reagan (elected in 1980), and thus the subsequent international movement toward markets, open borders and private initiative.

October 10, 1989. An independent Central Bank. Law 18.840 establishes the structure and operation of an independent Central Bank, taking away monetary policy from the government for the first time in the history of Chile. Another key achievement of the economic team. In a gesture of civic friendship, the government reaches an agreement with opposition leaders on the composition of the five members Board and even allows an economist from their ranks to be the first Chairman.   

September 29, 1989. TV is open to private initiative. Law 18.838 allows the private sector to establish TV channels, until now only reserved to the State (directly through a government channel and indirectly through the channel of the state owned University of Chile) and the Catholic Church. This is a great step for freedom of expression.

July 30, 1989. The Constitution is validated. A referendum takes place to approve some adjustments to the Constitution. The text is negotiated between the government and all the political leaders. With an approval vote of more than 90%, the Constitution of 1980 is further validated. 

October 5, 1988. Presidential plebiscite. According to the 1980 Constitution, a yes/no plebiscite takes place to decide whether the government candidate (General Pinochet) should be President for another term. President Pinochet obtains 44% of the vote, and therefore, as contemplated in the transitory articles of the Constitution, an open presidential election is called for December 1989, together with the election of the members of a new Congress. 

May 20, 1988. Firing Line. I am the guest of William F. Buckley Jr.'s TV program "Firing Line" in a session titled Chile and a novel approach to Social Security which airs today in PBS (program number 1738). This is the comment distributed later by the Firing Line Newsletter: "The discussion is at least as much about Chile´s struggle toward democracy as it is about social security. The key to the hour is Mr. Piñera's persuasive charm. He describes his hopes for his country's political and economic future with eager confidence, and it is easy to see how he convinced a government that must have been dubious at best to try something new and daring. Mr. Green tries hard to burst Mr. Piñera's bubble. His efforts yield more interesting information on the Chilean economy, but ultimately fail to undercut Mr. Piñera's optimistic projections." The "devil's advocate" is a well known New York leftist activist,