Free-Market Travail

The Chilean coup that overthrew Salvador Allende in late 1973 replaced one set of economic ideologues with another. The Marxists who strove for total regulation of the economy have been succeeded by a group of policymakers known as the "Chicago Boys." Reason: they ardently embrace the free-market teachings of University of Chicago Economist Milton Friedman, who visited Chile for six days last year to counsel them.

Reflecting Friedman's antipathy to government intervention in the economy, Chile has sold many state companies to private investors at bargain prices. The swollen bureaucracy has been slashed drastically to reduce government spending. Some price controls have been lifted. Tariff restrictions are gradually being eased, in the hope that foreign competition will force local industry to become more efficient.

The intent was to throw the economy into an ice-cold bath of free competition--and the result has been to turn business blue. Inflation raged at 340% last year. Industrial production has fallen so sharply that Chile's total output of goods and services last year was 20% below 1974. Unemployment, low during the Allende days of ample government payrolls, is now at least 19%.

Friedman himself does not defend the results. Says he: "It's absurd to talk about Chile as if it is an important test of my ideas. I don't even know if they have been carrying out my policies." His colleague Arnold Harberger complains that the Chileans have in fact been violating a prime tenet of Friedmanism: that a nation's money supply should expand at a steady but moderate pace. The Chilean money supply jumped 27.5% in this year's first quarter alone. The Chicago Boys retort that they have cut down as rapidly as they can the rate at which they are printing new pesos. Indeed, they point out that since prices have been shooting up even more rapidly, the "real" money supply--discounted for inflation--has actually been reduced.

The controversy brings up the deeper question of whether Friedman's theories are really applicable to a poor, inflation-ridden country. Says one Chilean university economist: "In an underdeveloped country like Chile it is less possible to have a free-market economy than it is in a developed one. It is a question of size and scale." It is also a question of history: since the 1930s the government has tightly controlled key parts of the Chilean economy. Prices and wages have traditionally been set by the government; the major industries have long been monopolies. Competition, the present Chilean government is discovering, cannot be created overnight.

The Chicago Boys give various reasons for the economy's poor performance. Finance Minister Jorge Cauas blames factors beyond the government's control: the distortions left over from the

Allende period and the drop in the price of copper, Chile's chief moneymaker, from an average of 930 per Ib. in 1974 to a disastrous 560 in 1975 (it has since recovered to 700).

Pablo Baraona, president of the Banco Central, adds a complaint that is ironically reminiscent of the Allende period: "Any other country with the economic record and the problems of Chile would have received much more assistance from world organizations." Because of Chile's repression of human rights, international lenders barely agreed to refinance Chile's debt in 1975. This year Chile claims already to have scraped together enough cash in loans from various sources, including the major American banks, to meet the $800 million of interest and principal payments it must make on its old debt. Beams Baraona: "We have reestablished our credit worthiness."

Santiago Businessman Orlando Saenz retorts: "The price of all this credit worthiness has been overwhelming. The cut in the standard of living is the most disastrous ever experienced. In a democracy, this level of unemployment and hunger would be unacceptable, but here they can get away with it."

Despite the fearful repression, people still cautiously complain. In Con-chali, a northern district of Santiago, the families are decidedly lower middle class --taxi drivers, mechanics, seamstresses. Over the years they had hauled themselves out of poverty. Now unemployment and recession have pushed them back again. Malnutrition is spreading.

"My husband drives a cab from curfew to curfew," says one housewife, "but still he does not make enough to feed us all. In the Allende days, everybody had plenty of money, but there were few things to buy. Now there's plenty to buy, but nobody has any money."

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