Exploring The Chile Project – Econlib

Any ambitious attempt to encapsulate nearly 70 years of intellectual history, particularly when orbiting the elusive concept of neoliberalism, is a daunting task. Add the complexities of economic history, the evolution of policymaking, and the political turbulence characterizing Latin America during the Cold War, and it’s a recipe that seems destined for disaster. Yet, in a delightful twist, Sebástian Edwards defies the odds with his masterful work, The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism, which emerges as a monumental achievement.

Project Overview

As a native Chilean, Edwards brings a personal touch to his narrative. After earning his bachelor’s degree from the Universidad Católica de Chile (PUC), he served as a young economist in Salvador Allende’s economic planning department, only to witness the chaos of trying to calculate social equilibrium prices for over three thousand goods with a mere fifteen-sector input-output matrix—a quixotic endeavor, as a visiting British scientist noted (p. 62). A staunch opponent of Pinochet’s regime, Edwards fled Chile in 1977 and continued his academic journey at the University of Chicago, where he forged close ties with Arnold Al Harberger, often regarded as the intellectual godfather of the Chicago Boys (p. 23).

While the subtitle of The Chile Project suggests a primary focus on the Chicago Boys and the trajectory of neoliberalism in Chile, it also weaves a comprehensive tale of the country’s modern economic narrative, artfully divided into three parts.

The initial section (Chapters 1–3) lays the groundwork for the emergence of neoliberalism, tracing the collaboration between the University of Chicago and PUC, leading up to Allende’s brief “thousand days of socialism.” Edwards offers a thoughtful definition of neoliberalism:

• “I define neoliberalism as a set of beliefs and policy recommendations that emphasize the use of market mechanisms to solve most of society’s problems and needs, including the provision and allocation of social services such as education, old-age pensions, health, support for the arts, and public transportation. […] neoliberalism is the marketization of almost everything” (p. 14, emphasis original).

Part two (Chapters 4–9) begins with the ascent of Pinochet and scrutinizes the economic policies implemented during his dictatorship (1973–1990). This section delves into the contentious debates surrounding the initial shock treatment and Milton Friedman’s notable visits to Chile (Ch. 4–5), the internal power struggles over policy direction within the regime (Ch. 6), and the specifics of their eventual execution (Ch. 7). Chapter 8 focuses on the severe currency crisis of 1982, while the section concludes with an exploration of the subsequent “pragmatic” reforms that followed the crisis in Chapter 9, highlighting the growing influence of Harberger. The second part excels in merging theory with historical narrative, resulting in a captivating story that reads almost like a novel.

The final segment of the book (Chapters 10–16) chronicles the demise of Pinochet’s regime and the ongoing economic reforms during the democratic transition. Here, Edwards narrates the model that catalyzed Chile’s economic miracle, juxtaposed with its eventual unraveling. Protests and unrest in 2019 culminated in an ambitious yet ultimately failed attempt to draft a new constitution. Despite the seemingly inevitable conclusion, Edwards examines the underlying causes, tapping into a widespread sentiment of discontent: “large numbers of Chileans lived in fear of retrogressing both socially and economically and rejoining the ranks of the poor,” (p. 209), which coalesced into what is now known as the malestar (“malaise”) hypothesis.

Edwards’ firsthand experiences, bolstered by archival research, yield a rich and nuanced historical account. Many events are shrouded in controversy and myth, and Edwards candidly acknowledges the limitations inherent in the archives while clearly signaling when he fills gaps with conjectures. The result is a well-balanced narrative that, aside from a more technical chapter on the currency crisis, remains accessible to a general audience. The book’s primary contribution lies in offering new—and in some cases, definitive—historical interpretations of pivotal moments in Chile’s recent economic saga.

Clarifying Misconceptions

The agreement between the University of Chicago and PUC has often been misrepresented as a covert U.S. strategy to cultivate economists specifically to implement Pinochet’s economic policies. In reality, this plan was conceived between 1954 and 1955, well before Allende’s rise to power, let alone Pinochet’s.

Edwards utilizes archival evidence to illustrate that the U. Chicago-PUC partnership was largely serendipitous. Initially mediated by the International Cooperation Administration (ICA), the plan was originally intended for the Universidad de Chile, the nation’s primary public university, which hesitated to collaborate with an American institution, particularly with one as associated with monetarism as the University of Chicago (p. 29). When the ICA approached PUC for a similar agreement, concerns over the university’s religious affiliation lingered. Ultimately, PUC’s dean articulated a desire to formalize a partnership with either the University of Chicago or Massachusetts Institute of Technology (pp. 30-31), highlighting the lack of clarity from both the U.S. and Chilean perspectives regarding the eventual pairing.

Edwards also addresses numerous misconceptions regarding Allende’s government. He notes that confusion often arises from the fact that Allende was a member of the Socialist Party, which, in the context of Chile, was much further left and had strong ties to Cuba and North Korea than many external observers recognize.

The book meticulously outlines Allende’s economic initiatives, revealing that government control extended far beyond the well-known nationalization of U.S.-owned copper mines. It encompassed the banking sector and allowed for the appropriation of hundreds of factories producing goods deemed “in short supply,” often orchestrated by unions creating artificial shortages. Every import required a license, with tariffs soaring to 250 percent. Edwards describes the arbitrary and often draconian mechanisms employed to enforce price controls, leading to confiscation and imprisonment of “speculators.”

Turning to Controversy

Part II of Edwards’ work delves into more contentious subjects: the Chicago Boys’ entanglement with the Pinochet regime. Initial narratives often attributed the economic blueprint to the CIA, with figures like Harberger and Friedman cast as pivotal players. However, Edwards relies on archival data and interviews with Chicago Boys to present a more balanced account.

The plan, known as El Ladrillo (The Brick), was controversial due to its size and the question of whether it was knowingly crafted for Pinochet. It is confirmed that the plan was initiated prior to the coup in 1972, intended as a developmental roadmap for the forthcoming presidential elections, with contributions from eleven Chicago Boys.

Interestingly, only one member, Emilio Sanfuentes, had direct interactions with military officials interested in the plan. Edwards notes that the proposals echoed earlier economic plans drafted for center-right candidate Jorge Alessandri, who faced Allende in 1970. Additionally, the plan for El Ladrillo included input from various economists, including centrists, to appeal to the Christian Democrats. The main editor, Sergio de Castro, even suggested incorporating “Yugoslavia-style firms,” where workers could own and manage companies (Arancibia Clavel and Balart Páez 2007, p. 144). Edwards emphasizes that only Sanfuentes maintained connections with military personnel.

On the flip side, evidence suggests that all contributing economists convened with the retired naval officer to discuss the plan. Edwards candidly concludes that this mystery may never be fully unraveled (p. 80), but he speculates that the majority of economists were at least somewhat aware that the plan was intended for military implementation.

The subsequent sections of the book offer a thorough analysis of the policies contained within the plan, comparing proposed measures for different sectors (e.g., healthcare) against what the military ultimately executed, thus creating an invaluable resource for researchers. Edwards further connects these policy decisions to theoretical discussions occurring both in Chile and globally at the time.

Friedman’s Role

Chapter 5 presents a meticulously researched account of Milton Friedman’s interactions with the Chicago Boys and his two visits to Chile during the military regime. Friedman’s first visit occurred between March 20 and 27, 1975, during which he met with Pinochet on the 21^st. In their succinct one-hour discussion, Friedman suggested that the country required “shock therapy” to combat the staggering inflation rate of 350%.

In subsequent days, Friedman engaged with Chile’s business elite, delivered lectures to military officials, and participated in numerous media interviews, reiterating his advocacy for shock therapy. Edwards compiles several questions posed by the business audience, noting that they sought the gradualism they had grown accustomed to. Conversely, the military was largely opposed to privatization and reductions in workforce necessary for fiscal realignment. Notably, the director of intelligence was surveilling the Chicago Boys, trying to convince Pinochet that they were not loyal patriots but rather self-interested in privatizing state assets for the benefit of their personal networks (p. 100).

Critics often depict Friedman as the mastermind behind Chile’s 1975 Recovery Plan, yet the Chicago Boys themselves downplayed his influence. Several biographies omit his visit entirely, and previous research suggests he did not play a direct role in formulating the plan (see Caldwell and Montes, 2015, p. 271). Friedman has defended himself by arguing that meeting a politician does not equate to advising him and insists that his comments about Chile reflected broader academic insights rather than tailored guidance.

However, Edwards compellingly argues that Friedman’s impact on the recovery plan was significant, suggesting a clear “before Friedman and after Friedman” (p. 97, emphasis original). While the Chicago Boys might have proposed a similar plan independently, Friedman’s presence likely tipped the scales in favor of their approach over the more cautious strategies advocated by business leaders and military officials.

What to Make of the Chicago Boys?

Edwards’ narrative in the final section emphasizes that while extensive reforms were enacted during the regime, a significant amount of work to deepen and extend those reforms continued after the transition to democracy, often driven by center-left politicians. This realization prompts reflection on the Chicago Boys’ legacy. On one hand, their ideas undoubtedly paved the way for increased economic freedom, a necessary shift for Chile following Allende’s populist policies.

Conversely, Chile’s experience underscores the inherent limitations of achieving sustained economic growth and prosperity under authoritarian rule. Recent empirical research has scrutinized the economic performance of Pinochet’s Chile from two angles. Escalante (2022) argues that Chile’s GDP per capita lagged for the first 15 years post-coup, while Arenas, Toni, and Paniagua (2024) contend that the “Chilean miracle” only truly emerged after the restoration of democracy. This stands in contrast to other Latin American success stories, such as Uruguay and Costa Rica, which thrived without a narrative of economic liberalization under a dictator.

Nevertheless, the Chicago Boys undeniably shifted the Overton window in Chile. Even if by historical happenstance, they altered perceptions of previously unimaginable policies into a status quo that persisted through the return to democracy. One can only hope that Chile will navigate its new challenges with the same resilience.

Note:

I refer the readers to another review of the book by Pablo Paniagua, which delves deeper into Edwards’ hypothesis regarding the decline of liberalism in Chile: the “malaise” hypothesis.

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