Eye of the Hurricane: Milton Friedman and the Global South
While economists laud the recently deceased Milton Friedman for being “a champion of freedom whose work transformed economics and changed the world,” as a full-page advertisement in the New York Times put it, people in the South will remember the University of Chicago professor as the eye of a human hurricane that cut a swath of destruction through their economies. For them, Friedman will long be associated with two things: free-market reform in Chile and “structural adjustment” in the developing world.
Soon after the coup against the government of Salvador Allende on 11 September 1973, Chilean graduates of Friedman’s economics department, who were soon dubbed the “Chicago Boys,” took over the helm of the economy and launched a program of economic transformation with doctrinal vengeance. In light of his much-quoted assertion about political freedom going hand-in-hand with free markets, the irony that in Chile a free market paradise was being imposed with the bayonets of one of Latin America’s most bloodstained dictatorships could not have escaped the guru.
Yet Friedman visited Chile during the dictatorship, anointing the radical free-market, export-oriented thrust of the regime, praising Chilean dictator General Augusto Pinochet for his commitment to a “fully free market as a matter of principle,” and delivering talks with a title “The Fragility of Freedom” that could only be ironic in the Chilean context. Even as he accused his critics of being bent on “tarring and feathering” him with the regime’s human rights abuses, Friedman took pride in his doctrinal inspiration of what he described as the “Chilean Miracle.”
The Chilean experiment
After his disciples were done with it, Chile was indeed radically transformed…for the worse.
Free market policies subjected the country to two major depressions twice in one decade, first in 1974-75, when GDP fell by 12 per cent, then again in 1982-83, when it dropped by 15 per cent.
Contrary to ideological expectations about free markets and robust growth, average GDP growth in the period 1974-89 -- the radical Jacobin phase of the Friedman-Pinochet revolution -- was only 2.6 per cent, compared to over four per cent a year in the period 1951-71, when there was a much greater role of the state in the economy.
By the end of the radical free-market period, both poverty and inequality had increased significantly. The proportion of families living below the “line of destitution” had risen from 12 to 15 per cent between 1980 and 1990, and the percentage living below the poverty line, but above the line of destitution, had increased from 24 to 26 per cent. This meant that at the end of the Pinochet regime, some 40 per cent of Chile’s population, or 5.2 million of a population of 13 million, were poor.
In terms of income distribution, the share of the national income going to the poorest 50 per cent of the population declined from 20.4 per cent to 16.8 per cent, while the share going to the richest ten per cent rose dramatically from 36.5 per cent to 46.8 per cent.
In terms of the structure of the economy, the combination of erratic growth and radical trade liberalization resulted in “deindustrialization in the name of efficiency and avoiding inflation,” as one economist described it, with manufacturing’s share of of GDP declining from an average of 26 per cent in the late 1960’s to 20 per cent in the late eighties. Many metalworking and related manufacturing industries went under in an export-oriented economy that favored agricultural production and resource extraction.
The radical Friedman-Pinochet phase of the Chilean economic counterrevolution came to an end in the early 1990’s, after the Concertacion came to power. In violation of classic Friedmanism, this center-left coalition increased social spending to improve Chile’s income distribution, bringing down the proportion of people living in poverty from 40 per cent to 20 per cent of the population. This modification, which increased internal purchasing power, contributed to the post-Pinochet average yearly growth rate of six per cent a year.
However, with the social democratic regime unwilling to challenge the upper classes, the basic neoliberal contours of economic policy were kept, including the emphasis on agricultural and natural resource exports. This focus on primary product exports has created tremendous environmental stresses. Overfishing along Chile’s coasts has gone hand in hand with ecological destabilization from the spread of the fresh salmon and mussel farms inland. A booming wood export industry has promoted the growth of tree plantations at the expense of natural forests, resulting in Chile becoming the second most deforested area in Latin America after Brazil. Environmental management is widely acknowledged to be ineffective, being consistently subverted by the imperatives of export-oriented growth.
Exporting the "revolution"
Chile was the guinea pig of a free market paradigm that was foisted on other third world countries beginning in the early 1980s through the agency of the International Monetary Fund and the World Bank. Some 90 developing and post-socialist economies were eventually subjected to free-market, “structural adjustment.” From Ghana to Argentina, state participation in the economy was drastically curtailed, government enterprises passed to private hands in the name of efficiency, protectionist barriers on Northern imports were eliminated wholesale, restrictions on foreign investment were lifted, and, through export-first policies, the domestic economy was more tightly integrated into the capitalist world market.
Structural adjustment policies (SAPs), which set the stage for the accelerated globalization of developing country economies during the 1990’s, created the same poverty, inequality, and environmental crisis in most countries that free-market policies did in Chile, minus the moderate growth of the post-Friedman-Pinochet phase. As the World Bank chief economist for Africa admitted, “We did not think the human costs of these programs could be so great, and the economic gains so slow in coming.” So discredited were SAPs that the World Bank and IMF soon changed their names to “Poverty Reduction Strategy Papers” in the late 1990s.
Yet free-market and structural adjustment policies have been institutionalized so thoroughly that, despite their being now universally seen as dysfunctional, they continue to reign. The legacy of Milton Friedman will be with the developing world for a long time to come. Indeed, there is probably no more appropriate inscription for Friedman’s gravestone than what William Shakespeare wrote in Julius Caesar: “The evil that men do lives after them, the good is oft interred with their bones.”
Originally published by the Focus on the Global South. Copyright 2006