Sebastian Edwards is the Henry Ford II Professor of International Economics at the University of California, Los Angeles. He was the former Chief Economist for Latin America at the World Bank where from 1993 until 1996. His most recent book is The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism.
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I think that the most important reform is openness. Once the country is open, really open to the rest of the world, the rest follows.
Sebastian Edwards
Key Highlights
- Introduction – 0:46
- Pinochet and the Origin of the Chicago Boys – 3:17
- Neoliberalism Under Democracy – 22:35
- Personal Background of Sebastian Edwards – 30:18
- Future of Chile – 38:35
Podcast Transcript
It’s hard to believe but my first episode on Chile was about two years ago. I spoke with Aldo Madariaga about his book Neoliberal Resilience. The episode focused on how the neoliberal experience in Chile had produced not just economic inequality, but a social inequality or even an inequality in terms of life expectations. It was a powerful episode that I recommend listeners to revisit.
However, not everyone agrees with Aldo’s account. In fact, many have long credited Chile’s economic policies for its ability to lift many out of poverty and dramatically increase economic standards. Today’s guest Sebastian Edwards is one who credits those policies for its economic success. His new book The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism offers what I would describe as a balanced account of its economic history.
Sebastian is the Henry Ford II Professor of International Economics at the University of California, Los Angeles. He has held many titles including Chief Economist for Latin America at the World Bank where he served from 1993 until 1996.
This conversation discusses some of the historical background that’s important to understand Chile better. It’s also more of a centrist account than the past episodes with Aldo Madariaga and Jennifer Piscopo. Sebastian does describe himself as center-left, but you’ll find he is more sympathetic to Chile’s past economic policies than past guests on the show. Hopefully, you’ll find this episode offers a new perspective to help explain some of the ongoing debates in Chile.
If you like this episode, please support the podcast as a monthly donor on Patreon or a paid subscriber on Apple Podcasts. You’ll get to hear new episodes early and access the catalog of bonus episodes. Like always you can email me at jkempf@democracyparadox.com. But for now… This is my conversation with Sebastian Edwards…
jmk
Sebastian Edwards, welcome to the Democracy Paradox.
Sebastian Edwards
It’s a pleasure to be here, Justin. Thanks for having me.
jmk
Well, Sebastián, I was really impressed with your book. It’s called The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism. I found it to be a really important read for right now because there are so many conversations about Chile and your book provided one of the best backgrounds I thought that you could get. Not just in terms of its history, but really the history that’s relevant for this moment as we have Boric in the presidency, and we have lots of conversations about Chile’s neoliberal legacy, and questions about the Constitution. So, I am really excited to be able to talk to you.
I want to start out with a quote from the book. In the book you write, “The Miracle had an original sin. It was put in place by a dictatorship, a regime that violated human rights and systematically persecuted, imprisoned, tortured, and assassinated its opponents.” I’m starting here because there are parts of this conversation that I expect will say positive things about the Chicago Boys. I expect that we’ll have some criticism of them, but I’d like to put it in the context early on about how brutal the Pinochet regime was. I’d like to just give you a moment to explain to listeners who aren’t familiar with Chile’s history about the brutality of the Pinochet regime.
Sebastian Edwards
That’s a very important question, Justin, and it was a brutal dictatorship. There’s no question about that. The dictatorship came to power on 9/11, 1973 when the armed forces led by Pinochet deposed Socialist President Salvador Allende. But what I want to say is that when the coup took place, the expectation among most people was that the military were going to stay in for maybe a year, at most two, maybe even three, that would’ve come to the end of the term that Allende had. They stayed for 17 years and it was brutal. They did assassinate people. Their agents killed a former ambassador to the US, Orlando Letelier, in Washington, DC. His car blew up as he was driving into Sheridan Circle.
So, it was brutal, and human rights were violated. That’s the political background. And it is an original sin and it makes it very difficult then to talk about the accomplishments of the Chicago Boys as the group that was in charge of economic policy during that time.
jmk
So let’s talk about Allende then. He is elected in the early seventies. He is very far to the left. What I did not realize until I read your book was how he was elected almost in a fluke, where he obtained a very small percentage because the vote was split between so many people running for the presidency. So even though he won the presidency, it seems like he didn’t have that much popular support. Is that why many people didn’t oppose the coup, or at least as many people as you would’ve imagined?
Sebastian Edwards
No, I think that that is some of it, but it’s more complicated than that. As you properly say, Dr Allende was elected with a little over one third of the votes. So, the then-constitution said that if there were multiple people running for the presidency and no one got a clear majority- 50% plus one of the votes- then the Congress in a joint session would elect the president among the two top vote-getters. The tradition was that Congress always elected the number one person, whoever got one vote more than the rest. That was the tradition and on this occasion they did that. It would’ve been a big problem politically if they hadn’t done that.
Now, the Allende government comes in with one third of the vote, but they very quickly get support from a pretty large proportion of the population who had voted for the centrist candidate- the third one who got 28% of the vote. For local municipal elections six months later they got 50% of the vote. So, his coalition got an increase in support and about half of the people favor the notion of Chile becoming a socialist country. Let me add that socialism in 1970, at least when applied to the Chilean case, is not social democracy as we know it today. The aspiration of his coalition was to transform Chile into Cuba. Now, we didn’t know at the time all the violations of human rights in Cuba, the censorship, the persecution of intellectuals and gay people and all of that. We didn’t know that.
But Allende was not a Social Democrat. He was a Marxist and he wanted his coalition to transform Chile into what now we call the real socialist countries, similar to Czechoslovakia at the time or Hungary or Poland or Cuba. He was a member of the Socialist Party, but in the interesting architecture of the Chilean left, the Socialist Party was significantly to the left of the Communist Party. Many people think Allende was a socialist, so they have in mind a Social Democrat, like an old uncle that wanted social justice and more equality. He did want that, but he wanted much more than that. He wanted Chile to become Cuba.
jmk
So, his economic plan was not a success. I think that’s a very mild way to put it.
Sebastian Edwards
That’s a great understatement. It was an utter failure. It was awful. Horrible.
jmk
So, tell us a little bit about that, because some people, especially if they’re listening and they’re on the left, would just assume that if you have a leftist in charge, the economy would do well. I don’t want to make this a case of, ‘Oh, he’s on the left, so that’s why the policies didn’t work.’ His policies were very specific and just didn’t succeed on their own merits. Can you talk a little bit about what those were and why they failed?
Sebastian Edwards
Yes. So, we start from the background that he wanted to transform Chile into a real socialist country. That meant the means of production, quote unquote using the Marxist terminology of the time, were to be moved or nationalized and that the state would become the owner of the means of production. What that meant was that the largest companies were to be nationalized. Copper mines that belonged to American mining companies were also nationalized. The whole banking system was nationalized. So, you have to think that we have a mixed economy with a very robust sector of state-owned enterprises, but now it’ll become dominated by the state. Every bank was nationalized except for one. Insurance companies were nationalized and logistics companies were nationalized. Six hundred million hectares of land were expropriated for agrarian reform and a very large number of manufacturing firms were nationalized.
It was moving from a mixed economy to a state dominated economy. Then there was also a short-term economic program, which was geared at giving aggregate demand a jolt in the short run and to greatly improve output, production, and income, especially of the lower classes. This program was predicated and put in place on two or three assumptions. The most important one was that Chile was dominated by monopolies. If you remember your college economics 101, what monopolies do is they cut the output, reduce supply, and increase prices.
So, they thought there was a lot of unutilized capacity because these monopolies were limiting output in order to have high prices. We’re going to increase demand by printing money at the central bank. That will create significant demand and then we’re going to control prices. We’re going to have price controls. Then the unutilized capacity in the manufacturing sector will be able to respond. This program was an utter failure. They totally and absolutely overestimated how much unutilized capacity there was. In their analysis, there was no role for what economists call elasticities, which is the ability for supply to respond. They printed too much money. It’s basically modern monetary theory, MMT, on steroids with price controls.
So, that generated a situation of inflation that just before the coup was 1600%, which is almost impossible for anyone who has not lived through that to even fathom what happened. If you add to that very draconian price controls, then you had hyperinflation with shortages, black market corruption, and all of that. Housewives and teenagers and kids and people stood in line in front of empty shops for hours and hours a day and in the end some could get maybe a pound of rice. Some could not get anything. I think that it was a combination of inflation with price controls, shortages, black markets, corruption, that eroded the support for Allende. In particular the middle class became very, very disenchanted. Then they started to support the notion that there would be a coup and when the coup came, many people were behind it.
jmk
So, the picture that you’re painting of Chile sounds a lot like modern day Venezuela.
Sebastian Edwards
It’s very similar in that regard. The main difference, I think, is that if you add Chavez and Maduro, it’s much more than the thousand days of President Allende.
jmk
Of course. So, the Chicago Boys eventually step in and they start making economic changes. Before we get to that, can you tell us a little bit about the origin of the Chicago Boys and why they were even called the Chicago Boys?
Sebastian Edwards
Sure. So in the famous inaugural speech by President Truman, he pointed out that foreign aid, in particular to poorer countries, should become part of the US foreign policy. There is then a program of technical assistance throughout the world and with particular emphasis in Latin America. It’s difficult to go back and to imagine that world. That world was when colonialism was dominant in many parts of the world. In Latin America, they were all independent countries. We’re talking about the late 40s. India has just become independent, but no country in Africa is independent except for South Africa.
So, one of the premier agricultural economists in the world, Theodor Schulz, who would win the Nobel Prize in ‘78 or ‘79, was an agricultural technical advisor in Latin America. He went from country to country with what is now USAID teaching farmers how to use fertilizer and that kind of thing. Theodor realized that there would be no progress in these countries, in spite of what he was doing in terms of technical assistance, if there were no economists who understood the big picture. So, he convinced the US government to start a big picture program and they chose Chile to do that. In 1955 an agreement was signed between the US State Department, the University of Chicago, and The Catholic University of Chile.
The program called for some Chilean students, mostly from The Catholic University, but also from The National University to go to Chicago to do graduate studies. What’s interesting is that the agreement called for The Catholic University to hire back as young professors at least four of the graduates. They in turn would train other economists in Chile. The Chicago Boys was a generic name given both to the graduates of Chicago, free market supporters and so on. They were trained by Milton Friedman, Al Harberger and others. These students, who had just gotten a degree in economics, had these pro-market ideas in a world which was dominated by economists that thought that controls, regulations, state ownership of firms and so on was very important and also very protectionist.
So, the Chicago boys for many years were a minority. No one paid any attention to them. They were not taken seriously at all. In fact, the right-wing conservative candidate didn’t want to talk to them because they wanted to lower import tarriffs and free interest rates, free prices and, of course, the corporate sector that was benefiting from all of those regulations didn’t want any of those changes. So, there was this group of Chicago trained economists that were sort of idle and the military asked them, ‘Well, why don’t you do something and help us?’ It’s a little bit more complicated than that, but that’s basically the storyline.
jmk
I love how the first few chapters of your book portray the Chicago boys as almost unsung heroes. They’re trying to bring scientific ideas into economics, like professional ideas into the study of economics, against people that are studying economics in just a way that is hard for us to completely fathom these days. For instance, I believe that you had expressed how people who would get their PhD would end up having to touch different types of cloth to determine what types of cloth they were. That was their graduation from economics as opposed to actually studying economic theories and economic ideas the way that we think about it today.
Sebastian Edwards
Yeah, so the School of Economics and Management at The Catholic University was very low quality in terms of academics. It was almost like a trade school where the aspiration of many of the graduates was to become customs agents. Now, in a country where there is a lot of protectionism a customs agent makes a lot of money, because it has to sort of walk around and enforce all these import quotas, tariffs, licenses, and so on. There were lots of very high import tariffs for textiles.
So, one of the skills that they had to develop was to be able to tell apart different yarns because they had different import tariffs. If it was linen, you had to pay a 200% import duty, but if it was a cotton, you had to pay only 100%. It made a big difference. So, one of the final exams was to be able, blindfolded, to recognize the different types of textiles. Then the Chicago Boys come and they start teaching statistics and real economics and supply and demand using mathematics. They’re very young. They’re 25, 26.
The director of Catholic University, who is a Monsignor, calls them in and asks what are you doing? They say the students haven’t learned anything. He said we have the elite of Chile coming to the Catholic University – that’s where the elite went. You cannot flunk everyone because their parents are supposed to leave their property for the church and now they’re not going to do that. They said, no, this is what we’re going to do.
Here’s an interesting story. At the time, if anyone wanted to be at The Catholic University, there was an exam on religious beliefs. They wouldn’t take Jewish students. The Chicago Boys said, no. If they are qualified, you should let them in. Again, they got into a big fight with the Monsignor and finally they prevailed and Jewish students were allowed. They became some of their best students. The first Jewish student that enrolled into that program eventually went to Chicago and ended up joining the faculty at Harvard. But there were all these issues that came along the way which were interesting in telling the story.
jmk
What I found fascinating is that when I think of the Chicago Boys, I’m thinking of people that are adopting free market policies and are ideologues. They believe in free markets, even if the data doesn’t move in that direction. But the story that you tell is that the Chicago Boys are doing their best to try to bring real social scientific rigor into the discipline and are oftentimes fighting against the academic establishment in Chile to be able to do it. They’re trying to look at statistics. They’re trying to figure out what are the actual best economic policies. So, when Pinochet brings them into the administration, you have people that are taking economics as a discipline, as a form of public policy, very seriously and for the first time really trying to adopt policies that are based somewhat on research, based on actual social scientific data.
Sebastian Edwards
That is true, but there is an element of ideology as well. They are not completely free from ideology. They are totally convinced that the market and low import tariffs, low protectionism, low inflation, financial stability, free interest rates will eventually result in a big take-off of the economy. Now, the path to that take-off is long, much longer than what they think, and there are lots of problems. They make some important mistakes. I don’t know if the right word is ideology. They’re so convinced that they persevere and the fact that it is a dictatorship allows them to persevere. In a normal democracy, after a few years with very high unemployment and not too much to show for it, they would’ve been dismissed by the political system.
They are kept and they persevere. Eventually Chile takes off and moves from being the number 10 country in Latin America in terms of income to be the number one by a wide margin and that’s a true miracle. In terms of poverty, incidence of poverty is 50%. Half of the people live below the poverty line. It ends up with 8% living below the poverty line. So, it is a remarkable achievement, but it takes much longer. They have faith that the system will work and they keep at it. Again, I think that it’s important to realize that they can do that because it is a dictatorship that lasts for 17 years.
jmk
What’s fascinating about it is that over those first 17 years of the dictatorship, they have modest gains. But the really amazing story of Chilean growth actually doesn’t come under Pinochet at all. We associate all of these neoliberal reforms under Pinochet and for good reason. But the real fruits of the labor happen not under the dictatorship, but under the democracy. Why is it that growth accelerates after democratization?
Sebastian Edwards
Yeah, that’s a remarkable story and I sort of tried to position the book from that perspective, which is the war of ideas. We have the pro-market ideas that the Chicago boys bring and we have the very heavy regulation idea on the other side. When we had the return to democracy in 1990, the new president, Mr. Aylwin, does not believe in markets. He actually says markets are cruel and he prides himself for never having been to a shopping mall. He says, ‘I’ve never been to one and I will never go to one. I think that the way to do this is to go to your neighborhood shops.’ Some members of the cabinet, when Mr. Aylwin becomes president have been persecuted and tortured in jail by Pinochet. But they realize that there’s something good going on here.
As you say, the overall record during the dictatorship is not very good, but we have to divide it into two parts. In the last three, four years, there’s already a take-off. They say, ‘No, we are not going to go back to the old protectionist heavy hand regulation system. We are going to persevere with markets.’ They do make a few changes supporting social policies. They make it easier for unions to function and they raise some taxes. But otherwise, they actually not only maintain what the Chicago Boys have done, they deepen it and go further into trade liberalization. When the Chicago Boys leave, import duties are on average 11%. The democratic government bring it down to 3%. Chile basically is a totally free trade country for all practical purposes.
They privatize a number of other firms. They introduce markets in other spheres that the Chicago boys are not there to do. They use markets for creating a first-rate infrastructure in the country. So, what I claim in the book is that neoliberalism, as the characters of any good novel, evolves through time. It’s not a cardboard character. We started with run of the mill traditional orthodox neoliberalism. Then at the end of the dictatorship, I claim it evolved into pragmatic neoliberalism, meaning that they are not obsessed with eliminating inflation. They say as long as we grow, it’s okay to have 20% inflation. Let’s take time and bring that down gradually.
Then during the return to democracy, neoliberals evolved into something that I called inclusive neoliberalism. There was more concern for social programs, but again, markets were preserved, competition was enhanced, and they finally bring inflation down to 3%. So, the great thing is that the Chicago Boys convinced their opponents that the right thing to do is to go pro-market. That’s the beauty of it. It’s a war of ideas and the Chicago Boys or the pro-market forces win… until they neglect it and we get to that at the end of the book.
jmk
So, one of the most remarkable things that I think Chile teaches us is that free market reforms were not enough to spur growth, especially under the Pinochet regime. It seems that you actually have to think through the right type of reforms to be able to create the growth because I get the impression that Chile learned a lot of lessons over the 17 years of the Pinochet regime, and even beyond that, after democratization about the right way to produce the kind of reforms that produce meaningful growth rather than just reforms that you can label as free market or conservative or neoliberal or whatever you want to call it. It seems like it’s got to be the right reforms to produce the type of growth that Chile had.
Sebastian Edwards
This comes back to something, Justin, that you brought up earlier. By now, we have a large group of US-trained, maybe a majority at Chicago, but other great school people from MIT, from Harvard, Berkeley, UCLA, and other places. They are professional economists and are no longer totally wedded and married to the Chicago views. They take ideas from all over economics and they start reading other authors like Douglas North from the University of Washington, St. Louis who emphasized the role of institutions. So, there is a lot of important institutional building. The judiciary is made more independent. There are very important reforms to the different codes. There is very significant protection of property rights that is brought into the constitution.
Chile has one of the first, if not the first independent central bank among the emerging markets, and there’s a Chinese wall between the politics and the central bank. They cannot go back into what happened during the Allende regime applying MMT. So, there is very significant institution building. On the social policies front, they favor highly targeted social programs for the poor. That works very well and I claim in the book that towards the end, it becomes a straightjacket and contributes to the uprising of 2019 and what’s going on now with the constitutional reform. But for a long time, these targeted programs worked very well and they were behind the fact that poverty was reduced from 56% to 8%, which is a remarkable achievement. What many people don’t realize is that Chile not only became the number one country in terms of income per capita, but also in terms of almost every single social indicator. So United Nations Human Development Indicators that have life expectancy, education achievements, the health coverage, and everything from the social perspective, Chile, again, moved from the middle of the pack to be the number one country by a wide margin. One thing I tell people is that it’s hard to understand.
I was born in Chile and grew up there until my early twenties. At that time, it was unthinkable that Chile would do better than Argentina on anything. Anything. We looked east over the Andes to Argentina. They had better soccer, better singers, better artists, better architecture. Buenos Aires was a much more interesting city than Santiago. Everything. Chile surpassed Argentina almost on every account except for soccer- which they still have Leo Messi and the great players, and they won the World Cup. But on almost everything, Chile surpassed Argentina. When the Chicago Boys took over life expectancy was four years less than Argentina. Today Chile has a longer life expectancy. That means that health, nutrition, all of that has greatly improved in Chile and it’s quite remarkable. The truth is that it is a miracle with an original sin that is very serious.
jmk
So, Sebastian, you just gave a lot of credit to the Chicago Boys for creating what many have called the Chilean Miracle. I’d like you to take a step back and just talk about yourself in terms of your own views. You still associate yourself with the left, even though you actually have studied under Al Harberger, who is very much associated with the Chicago school.
Sebastian Edwards
Yes, I was trained at Chicago, but I’m not a Chicago Boy in many respects. I never worked for the dictatorship and politically I’ve been center left. I did work as a very young man when I was 19 and 20 for the Allende government. So, I come from a different background. I went to Chicago because I got into political trouble with the military and was advised to leave and the only place I could go right from one day to the next was to Chicago, because I had worked with Al Harberger when he went to Chile to do some work. I was his assistant there. So, I have a very different background, but am convinced that most of the Chicago Boy ideas were correct and have been very useful. Not all of them, and they may be misused by some people, but competition, free markets, low protectionism or no protections, joining the global world – It’s the basis of the Chilean miracle.
jmk
Yeah, I bring that up because I just want to emphasize the fact that you’re not somebody who’s some extreme, far right economist that is cheerleading for everything that the Chicago Boys have done.
Sebastian Edwards
Far from it, Justin. As I said, I got into trouble with the military and I was told in no uncertain terms that my name had moved up very significantly in the list of people that they were after. That’s how I got to Chicago with the idea of staying there for one year and then moving to Cambridge, UK. I became enamored with the Chicago economics, the rigor, the seriousness, and the commitment of the faculty towards this approach where you identify a problem, you develop a theory, you gather the data, you confront the theory with the data. If there is no confirmation of the theory, you rework the theory until you have confirmation from the data that you are moving in the right direction. I just became convinced of that and working with Al Harberger, traveling around the world with him, advising governments was a remarkable experience.
jmk
But you obviously identify yourself with the center left. You just said so a moment ago. I don’t want to get into the differences that you have with the Chicago Boys policies. What I’d like to know is if you think that policies earlier in Chile’s history, like during the Pinochet regime and Chile’s early democracy, were right for the moment, but that the needs of the country maybe have changed at this point in time.
Sebastian Edwards
I think that that’s the right way of describing what has been going on. I just talked a minute ago, Justin, about the targeted social programs. So, the idea was we have a very tight budget constraint for the government. High taxes are going to hurt growth, so we better keep taxes low, in particular, to encourage investment and innovation. Given that we have a tight budget, we better target our social problems- and that helped take out of poverty a large number of people, as I said. Now when you have no poor people left and you’re still targeting to that particular group, then you’re not providing the right kind of public policy.
Those who get out of poverty, many of those families become marginally non-poor. They know what poverty was because they’ve been taken out of poverty. They know what middle class, even lower middle class, is. They are really scared of going back into poverty and there was no significant innovation of moving the target to that group. Increasingly, as countries become wealthier, there is a demand for more universal types of social programs and that did not happen. So, I think that basically the programs became stale and the people who had put them together, the Chicago Boys, did not work in the government anymore. Why? Because during the return to democracy, the other side was in power.
But also, they declared victory in the war of ideas and decided to then move into more lucrative lines of work. They joined corporate boards and became advisors and worked for multinationals. No one stayed minding the ideas ship as it were. The left, in the meantime, which had been beaten in the war of ideas, retreated. They licked their wounds, regrouped, and started going to school. They started reading more progressive authors and they came to a very simple conclusion, which is based on the famous Italian Marxist thinker, Antonio Gramsci, whoever calls the narrative and ideas controls power eventually.
They worked on this narrative that the Chilean system was very unfair and it only helped the super-rich. There was a kernel of truth in many of the things they said, but they brought them into an extreme. That is what’s behind the uprising of October 2019. Now the more classical liberal forces are coming back to engage again in the war of ideas, and we’ll see how it goes.
jmk
I get the impression from the conversations I hear from Chileans and from the news that I read, that it’s really a debate between growth and fighting inequality. The right wants to be able to continue to pursue higher growth and the political left wants to fight inequality. Is there a trade-off between those two? Can you both have growth and fight inequality?
Sebastian Edwards
Well, you can certainly have both. There are a number of countries that have shown that that can happen, including Ireland. We have to remember that Spain was a dictatorship for a very long time under Francisco Franco and we have a lot of countries where that has happened and the answer, which was tried in Chile and didn’t quite work- so it’s not that no one thought about it- is schooling and building human capital. People who add to their human capital, that go to school, that work hard, are going to get better jobs, better salaries, and they’re going to move up in the social scale.
At the same time, if the schooling is the right type of schooling, that would add to productivity in the country, and that will help growth. It can happen and a trade-off is there. But if you work hard enough and are creative, you can go around it. The problem or the feature of the far left there is that it’s more than growth versus equality. You have to bring in the environmental angle. Chile is a country that is very, very rich in natural resources and its main exports are natural resource based. The far left thinks that mining companies are raping the earth and that having salmon farms are interfering with the free transit of fish and that it pollutes the oceans, so they don’t want what they call an extractivism type of economic system. They are very protectionist.
So, they would like Chile to produce highly sophisticated, highly value-added goods, which just will not happen. The comparative advantages are not there. If you add the environmental angle, then you get a situation where they are for zero growth or even for de-growing.
jmk
So, I’m getting a clear picture from you that you think that we need to move to a different stage within Chile, past what the Chicago Boys did. We need to evolve beyond that. But at the same time, you don’t necessarily adopt the ideas of what you describe as the extreme left or the very far left. What should the goals be for Chile’s next chapter in terms of the development of its economy?
Sebastian Edwards
I think that it really needs to emphasize the right type of human capital formation. Let me give you an example. If you go into the internet and look for the best locations for solar energy, you’ll find out that the Chilean north is number one. Why? Because it’s very dry and it’s very hot. At first, you might think that the best part would be the equator, but the problem with the equator is that there are lots of clouds and as you go either south or north, the clouds are either not there or thinner, so the sun can actually go in.
Now they’ve been building these very large solar farms with panels. The first three years of that, there was not a single installer worker who was installing these panels, who was Chilean. There was no one in Chile who knew how to do that. The people who installed them, these are technicians, came from Romania and from Portugal who worked for two weeks and then went back home for 10 days and then back. So, Chile has the number one potential for solar and no one who can do that. If you look at the best location in the world for wind energy production, it’s the Strait of Magellan, Patagonia, because the two oceans get together and there’s a lot of wind. Again, no one can install those, so you have to import the workers.
Understanding that Chile has certain characteristics that set it apart from other countries, one of those characteristics, Justin, is that it is very, very far away from where the markets are. Today, sophisticated manufacturing is done through supply chains. Goods are produced a little bit in one country then they move to the second country, then to the third country. Then they may come back to the first country. But if you are very, very, very, very, very far, just the cost of transportation, eats upthe whole margin. Chile is the number two, number three country in terms of lithium deposits, and it is now being exported as raw material.
The far left says, ‘Well why don’t we make electrical vehicles?’ Well, no electrical vehicle is produced in a single country. They move from one country to the other and you just cannot do it because if you send a part to Chile, just the sheer distance, eats up the margin. So, we have to use our natural resource endowments. We have to use them in an intelligent way and we have to do the right type of human capital.
CODELCO, the state-owned copper company, is the largest copper producer in the world. Now it refines some copper, but it doesn’t pay for Chile to really make final copper goods because of the distance, the transportation cost. Now, why doesn’t CODELCO export technological know-how? If you run the largest open pit mine in the world and run one of the largest underground mines in the world, you have engineers that have significant knowledge. You can export technological advice by just pressing a key in your laptop. There’s no transportation costs involved. So again, there is a role here for the state from nudging. We’ll be giving a nudge in which direction people should go.
jmk
A lot of political conversations have been focused on the creation of a new constitution, and people on the left feel that the current Constitution holds them back. I’d like to ask you if you think that the current Constitution holds back the type of policies that you think Chile needs to be able to adapt and continue to grow.
Sebastian Edwards
I think that the current constitution is a good constitution. I am not a constitutional lawyer. I’m not a lawyer, in fact. But I’ve done some work on the intersection between constitutional law and economic policy. If you go chapter by chapter or function by function of the constitution and you look at what the experts say, it’s not a bad constitution. Chile is usually ranked around where the US is in terms of independence of the judiciary. You go through the list of what constitutions are and it’s not a bad constitution, but it has an original sin. It was put together by Pinochet during the dictatorship. So, for quite some time I advocated to have a new constitution that is very similar to the old constitution, but with a referendum where everyone votes in favor of it, so we can erase the original sin.
That was not done. The right said, ‘Why should we do that? That’s a waste of resources. It’s running an election. It’s 15 million dollars and we could use that for something else.’ Then the uprising of 2019 came up and Chile was a few inches away from adopting the worst possible constitution in the world. So, there are consequences of not doing the right thing- you can do the wrong thing by either action or by omission. If you don’t take care of certain things at the right time, that may also backfire and generate serious problems. I think that the Constitution is not a bad one, but the original sin is it’s illegitimate or considered to be illegitimate. If we can solve that problem, that would be good.
jmk
As we look to wrap up, I want to give us a moment to think about what the Chicago Boys have accomplished and the limitations of what they were doing, and really a kind of a movement away from neoliberalism. I mean, your book’s subtitle is The Downfall of Neoliberalism. So, in the book you write, “Pinochet lost the electoral battle, but the Chicago Boys won the war of ideas.” But then later on in the same book you write, “What they did not understand was that victory in the war of ideas is not eternal.” And that’s really where we are right now.
We have a shift in terms of the war of ideas, the sense of where people are and where the country’s going. I’d like to get a sense from you what legacies of the Chicago Boys you think are going to survive and what you expect to change.
Sebastian Edwards
Well, at a regional level, Chile will not join Venezuela or Cuba or Nicaragua. The aspiration even of the far left is something like Germany. So, squarely inside capitalist economics with a greater concern for inequality, for social conditions. and for segregation and that kind of thing. The goal even of the far left is not the old goal of President Allende. I think that the country will probably move towards social democracy. I think the main legacies of the Chicago boys is that the country will remain open to the rest of the world and where exports play a very important role in economic development. I think that low inflation is another thing that is a very important legacy. The importance of productivity as a general idea, although I’m not sure if they’re going to put together the necessary reforms to do that.
Justin, I think that the most important reform is openness. Once the country is open, really open to the rest of the world, the rest follows. You cannot have a really open country with a lot of regulation. You cannot have a really open country with lots of state-owned enterprises which are not very efficient. You cannot have a really open country with high inflation. So, openness forces you to do a lot of things that otherwise you don’t have to do. As far as the country remains really open to the rest of the world and Chilean companies have to go out to get market shares, I think that there is a chance of going back to these magical years.
jmk
Sebastian, thank you so much for joining me today. The book, once again is The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism. It’s a really enjoyable read. It’s part history, it’s part politics and I think it even teaches a little bit about economics all at the same time. So, thank you so much for writing it. Thank you so much for joining me today.
Sebastian Edwards
Thank you, Justin. It was very enjoyable to be with you and to have this conversation.
Key Links
The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism by Sebastian Edwards
Learn More About Sebastian Edwards
Watch the film Chicago Boys by Carola Fuentes and Rafael Valdeavellano
Democracy Paradox Podcast
Jennifer Piscopo on the Constitutional Chaos in Chile
Aldo Madariaga on Neoliberalism, Democratic Deficits, and Chile
More Episodes from the Podcast
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