History is not an obstacle to economic freedom - look at Chile

Wednesday April 27, 2011

Eamonn Butler, on a visit to South America, questions whether a country’s history can inhibit the progression to economic freedom. The example of Chile suggests not.

The Mont Pelerin Society, the group of pro-freedom intellectuals founded by F A Hayek in 1947, has now grown into a major force for classical liberal values around the world.

Last week it met in Buenos Aires to explore the prospects for personal freedom in South America. At first blush, those prospects do not look good. South American governments are mostly populist or socialist, highly protectionist, and with growing public sectors. Some people – including some of the liberal scholars at the meeting – argue that the history and institutions of South America make this political nightmare inevitable. The United States had the benefit of being colonised by a liberal, capitalist country.

But the widest stretch of water in the world is the English Channel. South America was settled by countries with top-down, authoritarian, proscriptive civil law systems quite unlike the bottom-up, permissive liberalism and common law system of Britain. And three hundred years of colonial centralism has left the continent with institutional baggage that weighs heavily on its political processes. Perhaps the best it could hope for is enlightened despotism.

Oblivion

But I don’t think that history and institutions consign any country to such oblivion. Argentina, for example, was a very wealthy country at the beginning of the 20th century, with a standard of living close to the United States’, and actually slightly greater than the average in the Anglo-Saxon countries as a whole. It is only now, after decades of military governments, inflation and other catastrophies, that it is barely a quarter as well off as those countries.

Chile shows just how quickly a country can turn around. In 1973, under Allende, Chile’s utilities were 100 per cent state owned, while mining and finance were 85 per cent state owned. The government were running a 52 per cent deficit, inflation peaked to 508 per cent (on the official figures, though the reality was probably nearer to 1000 per cent) and productivity was falling fast. Some 43 per cent of the poorest children were not at school. Though elected democratically, Allende largely ignored the democratic decisions of the congress. Chile’s military coup hardly came as a surprise.

What was surprising is that the military government of Augusto Pinochet made its priority the creation of conditions for a free society. The protectionist tariffs (some as high as 10,000 per cent) were cut, price controls were scrapped, industries were privatised, the government’s books were balanced, public services were decentralised, pensions were reformed, the central bank became independent.

Stimulated

Such reforms stimulated a huge rise in foreign and domestic trade; the country became much less dependent on copper exports, and booming wine and food industries grew up. Poverty fell, and now only 1.6 per cent of the poorest children are not in school. And democracy was restored. When the new constitution was agreed and elections were called, Pinochet was voted out and, unlike almost any other dictator the world has known, actually stood down.

In the next few elections, Chileans chose centre-left coalitions (only now has the pendulum swung back to the centre-right). But remarkably, the liberal free-market reforms introduced under Pinochet have largely been maintained. It does not take some kind of dictatorship, or even Mrs Thatcher, to rescue a country from the brink and restore a free society. Most people know fine well that you can’t live by running up debts, printing more and more money, subsidising loss-makers, trying to hide behind trade barriers, handing out large numbers of non-productive government jobs, and imposing huge taxes on your most productive and entrepreneurial people.

All it needs is a system of government that enables that public common sense to be reflected in government. The trouble is that too few countries have such a system.

Dr Eamonn Butler is director of the Adam Smith Institute