The Chicago Boys’ plan failed in Chile. Brazil wants to give it another shot

. Nov 29, 2018
Paulo guedes chicago economics Paulo Guedes will be Brazil's economic tsar

On January 1st, Jair Bolsonaro will take office as Brazil’s 38th president. He will do so on a platform chock full of brash and heavy-handed social policies, yet one underpinned by ultraliberal economics and the vesting of extensive power into the hands of economist Paulo Guedes, a University of Chicago graduate.

In 1973, General Augusto Pinochet seized power in Chile after a military coup. While imposing his brutal regime on the Chilean people, General Pinochet also handed the reins of the country’s economy to a group of economists, fresh off the plane from the very same University of Chicago.

While there are plenty of caveats, the comparisons between the two are too close to resist.

The Chicago school of economics

The foundations for Chile’s economic experiment date back to 1950s U.S. and the establishment of a school of American economic liberalism within the University of Chicago. Led by Milton Friedman and George Stigler (both of whom would later go on to win the Nobel Prize in Economics), the Chicago School became known around the world as the hub of liberal economic thought.

Opposed to the state intervention of the New Deal and Marshall Plan, the group’s economic theory was based on the maxim that when left to its own devices (read, without any intervention from the state), the market would take care of itself.

</span></p> <div id="attachment_12213" style="width: 1034px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-12213" class="size-large wp-image-12213" src="" alt="chicago boys chile" width="1024" height="731" srcset=" 1024w, 300w, 768w, 610w, 1180w" sizes="(max-width: 1024px) 100vw, 1024px" /><p id="caption-attachment-12213" class="wp-caption-text">Chicago Boys circa 1957, left to right: Luis Arturo Fuenzalida, Alberto Valdés, Larry Sjaastad, Pedro Jeftanovic, and Sergio de Castro.</p></div> <p><span style="font-weight: 400;">Meanwhile, afraid of the spread of communism throughout Latin America, the U.S. State Department organized the &#8220;Chile Project,” funded by the </span><a href=""><span style="font-weight: 400;">Ford Foundation</span></a><span style="font-weight: 400;">, which sponsored economics students from Santiago institutions Universidad Católica and Universidad de Chile to go abroad and study in Chicago.</span></p> <p><span style="font-weight: 400;">“The idea was to help Universidad Católica improve the level of economics that it was teaching,&#8221; claimed economist Arnold Harberger in Carola Fuentes&#8217; 2015 documentary </span><a href=""><i><span style="font-weight: 400;">Chicago Boys</span></i></a><span style="font-weight: 400;">. &#8220;The broader idea was to improve the level of economics in Chile.&#8221; </span></p> <p><span style="font-weight: 400;">On their return, these Chilean students became known as the Chicago Boys, stepping off the plane in Santiago with brains full of liberal economic theory and carrying &#8220;</span><i><span style="font-weight: 400;">El Ladrillo</span></i><span style="font-weight: 400;">,&#8221; (The Brick) their economic manifesto for their home country, so named because of its unreasonable size.</span></p> <h2>Shock treatment</h2> <p><span style="font-weight: 400;">In 1970, socialist Salvador Allende was elected president of Chile. Already nervous about a red tide south of its borders, U.S. President Richard Nixon told his advisors to &#8220;make the economy scream,” in order to prevent Allende taking office or remaining there for very long. On September 11, 1973, a U.S.-backed coup, led by Chilean army general Augusto Pinochet, seized control of the country. Allende was killed during the putsch, with the official records showing he committed suicide.</span></p> <p><span style="font-weight: 400;">With the socialist government out of power, the Chicago Boys approached the Army and handed them The Brick. They were then put in charge of the country’s economy.</span></p> <p><span style="font-weight: 400;">Without opposition or democracy, and given full autonomy to work, Chile was a blank canvas for the Chicago Boys to do whatever they pleased. Price controls and import barriers were removed, the oil industry and other state-owned businesses were sold off, and spending was cut left, right, and center.</span></p> <p><span style="font-weight: 400;">The immediate impact of the liberal experiment in Chile was a profound recession. In 1975 alone, the country’s GDP fell 12.82 percent and unemployment shot up 6.5 percent. Milton Friedman himself flew to Chile, famously proclaiming the country required “shock treatment&#8221; in order to transition to a free-market economy.</span></p> <hr /> <p><img class="alignnone size-large wp-image-12211" src="" alt="The Chicago Boys' plan failed in Chile. Brazil wants to give it another shot." width="1024" height="768" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><img class="alignnone size-large wp-image-12212" src="" alt="The Chicago Boys' plan failed in Chile. Brazil wants to give it another shot." width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">The economy began improving in what was called the “Miracle of Chile,&#8221; seen as something of a dress rehearsal for Margaret Thatcher and Ronald Reagan&#8217;s governments in the UK and U.S. In 1981, after six years of growth, Chilean GDP reached USD 62.9 billion.</span></p> <p><span style="font-weight: 400;">All the while, Chile lived under the brutal dictatorship of General Pinochet, a regime which killed thousands of opponents and tortured ten times more. The Chicago School thinkers downplayed the violence, conceding that it was the price to pay in order to implant sweeping liberal economic policies.</span></p> <p><span style="font-weight: 400;">While reportedly reticent towards the Chicago Boys themselves, General Pinochet put up with them for many years, until their policies caused a second recession, the so-called Crisis of 82. Only seven years after its last economic disaster, the country’s GDP fell over 11 percent in 1982 and unemployment rocketed 9.2 percent, to the point that just under one-fifth of the population was left without work. General Pinochet fired the Chicago Boys and turned away from liberal economics, deciding to nationalize some of Chile’s largest banks. </span></p> <h2>Bolsonaro’s economic oracle</h2> <p><span style="font-weight: 400;">Forty-five years on from the </span><i><span style="font-weight: 400;">coup d&#8217;état</span></i><span style="font-weight: 400;"> in Chile, Brazil is set to hand the reins of its economy to Paulo Guedes—the country’s very own University of Chicago graduate. Though not strictly speaking a &#8220;Chicago Boy,&#8221; Mr. Guedes followed the same path as Sergio de Castro, Emilio Sanfuentes, Pablo Baraona and the other Chilean economists who called the shots in General Pinochet’s economy between 1973 and 1982.</span></p> <p><span style="font-weight: 400;">Paulo Guedes moved to the U.S. in 1974, pursuing a Ph.D. at the University of Chicago. Upon returning to South America, he was invited by General Pinochet’s finance minister Jorge Selume (another Chicago graduate) to teach at the Universidad de Chile—at the time controlled by the military.</span></p> <div id="attachment_12214" style="width: 1010px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-12214" class="size-full wp-image-12214" src="" alt="Paulo guedes chicago economics" width="1000" height="706" srcset=" 1000w, 300w, 768w, 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><p id="caption-attachment-12214" class="wp-caption-text">Guedes: &#8220;Pinochet-style fix&#8221;</p></div> <p><span style="font-weight: 400;">Today, Mr. Guedes is standoffish about his time working under General Pinochet’s dictatorship, claiming in an interview with </span><i><span style="font-weight: 400;">Revista Piauí</span></i><span style="font-weight: 400;"> that he “knew nothing about the political regime,” and that “it was irrelevant from an intellectual standpoint.&#8221; He returned to Brazil after catching agents from Chile’s secret police searching his apartment.</span></p> <p><span style="font-weight: 400;">However, Mr. Guedes obviously feels an affinity towards the Chicago Boys. Earlier this year, he told the </span><a href=""><i><span style="font-weight: 400;">Financial Times</span></i></a><span style="font-weight: 400;"> he plans to implant a “Pinochet-style” solution in Brazil, claiming “the Chicago Boys saved Chile,” despite leaving the country significantly worse off than when they took control.</span></p> <p><span style="font-weight: 400;">With echoes of General Pinochet, Jair Bolsonaro is set to hand over </span><a href=""><span style="font-weight: 400;">complete authority on Brazil’s economy to Paulo Guedes</span></a><span style="font-weight: 400;"> — putting him in charge of a “super-ministry” of the economy, merging the Ministries of Finance, Planning, Budget and Management, and Development, Industry, and Foreign Commerce.</span></p> <p><span style="font-weight: 400;">Mr. Guedes has also recruited a gang of fellow Chicago alumni to assist him: Rubem Novaes will preside over Banco do Brasil; Roberto Castello Branco will </span><a href=""><span style="font-weight: 400;">lead Petrobras</span></a><span style="font-weight: 400;">, and Joaquim Levy—who was briefly the Finance Minister of ousted Workers&#8217; Party president Dilma Rousseff—will take charge of Brazil&#8217;s development bank.</span></p> <h2>Brazil is not Chile</h2> <p><span style="font-weight: 400;">Paulo Guedes’ economic agenda follows the basic tenets of American liberal economics and shows many similarities with the measures implemented in Chile. A fierce proponent of privatizations, he intends to sell off state assets, restrict spending, and transform the country’s pension system to copy the model used in Chile.</span></p> <p><span style="font-weight: 400;">The Chilean pension model is the polar opposite to the one currently in place in Brazil, explains Filipe Campante, professor of economics at Johns Hopkins University. &#8220;It’s like a forced savings account,&#8221; he told </span><b>The Brazilian Report</b><span style="font-weight: 400;">. &#8220;The contributions go to individual accounts which are then invested, the returns are then used to sustain post-retirement benefits.&#8221;</span></p> <p><span style="font-weight: 400;">The Chilean pensions model has been the subject of huge popular dissatisfaction in recent years, with these individual savings accounts not producing returns sizeable enough for retired persons to live on. The average pensioner in Chile is today receiving less than minimum wage.</span></p> <p><span style="font-weight: 400;">According to Mr. Campante, if Brazil was to make such a dramatic switch in its pensions system, the transition period will hit the country hard. “When you move to a private pension model, current workers no longer contribute to the pensions of current retirees, but they also don’t have their individual pensions accounts because they worked under the old system,” he explains. Funding the pensions of current workers would invariably result in an increase of the public debt. “The devil is in the details, and these details are particularly troubling in the case of Brazil,” he adds.</span></p> <p><span style="font-weight: 400;">From the outside, today’s Brazil seems like a match made in Friedmanite heaven. A strong-handed government is about to take office, backed by the Armed Forces and with a cabinet littered with military men. Meanwhile, ultra-liberal economists are about to be given free rein over the economy.</span></p> <p><span style="font-weight: 400;">However, Brazil is not the </span><i><span style="font-weight: 400;">tabula rasa</span></i><span style="font-weight: 400;"> the Chicago Boys came across in Chile, it is more like a </span><i><span style="font-weight: 400;">tabula inscripta</span></i><span style="font-weight: 400;">, a country where negotiations and concessions are the norm, with 27 states, over 5,500 municipalities, and </span><a href=""><span style="font-weight: 400;">35 political parties</span></a><span style="font-weight: 400;"> to keep happy.</span></p> <p><span style="font-weight: 400;">&#8220;[Implanting Guedes’ economic agenda] will be very unpopular and would demand a level of political articulation which the future government doesn’t seem to possess,” says João Carlos Magalhães, a Ph.D researcher at the London School of Economics.</span></p> <p><span style="font-weight: 400;">“It’s all very volatile,&#8221; he told </span><b>The Brazilian Report</b><span style="font-weight: 400;">. &#8220;If Brazil doesn’t come out of this crisis, or if it goes back into a recession, it will be interesting to see how the financial elites will react.&#8221;</span></p> <p><span style="font-weight: 400;">Mr. Magalhães wonders if Brazil might then take a leaf out of Chile’s book, deciding that their plan of Pinochet-style liberal shock therapy will not pass in a democracy, subsequently heading down the path towards authoritarianism.

Euan Marshall

Euan Marshall. Originally from Scotland, Euan Marshall is a journalist who ditched his kilt and bagpipes for a caipirinha and a football in 2011, when he traded Glasgow for São Paulo. Specializing in Brazilian soccer, politics and the connection between the two, he authored a comprehensive history of Brazilian soccer entitled “A to Zico: An Alphabet of Brazilian Football.”

Don`t copy text!