Exploring The Chile Project – Econlib

Any book that intends to provide a complete account of a chapter covering almost 70 years in the history of ideas is an ambitious achievement by itself, especially when it is centered around a fuzzy concept like neoliberalism. If such a book also attempts to cover decades of economic history, discussing the evolution of policymaking and the intellectual and political debates that shaped it, one would probably worry that the author is trying to accomplish too much. Now, add that the author will try to do so while navigating murky waters, surrounded by the history of a violent dictatorship and the overall context of Latin American politics of the Cold War era. It seems like a recipe for failure.

Yet, to the great benefit of his readers, Sebástian Edwards accomplishes all this brilliantly. The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism is nothing short of a monumental achievement.

Project overview

A native Chilean himself, Edwards got his bachelor from the Universidad Católica de Chile (Pontifical Catholic University of Chile, hereinafter PUC), worked as a young economist in Allende’s government department of economic planning, and witnessed a famous British scientist who was visiting Chile to call out the madness of the task: “my friend, you really want to determine true, social, equilibrium prices for over three thousand goods, with a fifteen-sector input-output matrix?” (p. 62). An opponent of Pinochet’s regime, he fled Chile in 1977, and received his graduate training in economics at the University of Chicago, where he became “colleague, coauthor, and close friend of [Arnold] Al Harberger, who is the intellectual father of the Chicago Boys.” (p. 23).

While, as the subtitle suggests, The Chile Project is mainly a book about the story of the Chicago Boys and the rise and fall of neoliberalism in Chile, it is also a tale of Chile’s modern economic history, told in three parts.

The first part (Chapters 1–3) sets the stage for the rise of neoliberalism; from the deal between the University of Chicago and PUC, to Salvador Allende’s “one thousand days of socialism.” Edwards provides a careful definition for neoliberalism:

“I define neoliberalism as a set of beliefs and policy recommendations that emphasize the use of market mechanisms to solve most of society’s problems and needs, including the provision and allocation of social services such as education, old-age pensions, health, support for the arts, and public transportation. […] neoliberalism is the marketization of almost everything” (p. 14, emphasis original).

Part two (Chapters 4–9) begins with Pinochet’s rise to power and analyzes the economic policies over the length of the dictatorship (1973–1990). This includes debates over the initial shock treatment and Milton Friedman’s controversial visits to Chile (Ch. 4–5), the struggles for command over policy within the regime (Ch. 6), and the details about their eventual implementation (Ch. 7). Chapter 8 deals with the deep currency crisis of 1982, and the second part ends with an analysis of the second round of “pragmatic” reforms that follow the crisis in Chapter 9. The latter also explores the growing influence of Arnold Harberger, who was likely the man influencing the “pragmatic” part. Part two shines because theory and history come together to deliver a fascinating story that reads almost like a novel.

The final part of the book (Chapters 10–16) covers the fall of Pinochet’s regime and the series of economic reforms that continued under democracy. This part tells a story of the model that led to Chile’s economic miracle, but also of its downfall. It started with a series of protests and riots in 2019 that eventually led to an ambitious attempt to draft an entirely new constitution that ultimately failed. While the end seems certain, Edwards also delves into its potential causes, drawing from a perceived widespread sentiment of unhappiness: “large numbers of Chileans lived in fear of retrogressing both socially and economically and rejoining the ranks of the poor,” (p. 209) which became known as the malestar (“malaise”) hypothesis.

Edwards’ first-hand testimony, combined with his use of archival material, provides a rich historical account. Many of these events are surrounded by controversy, and some have been elevated to the status of outright myths. Edwards recognizes upfront the limitations of what the archive tells us and is clear when he is filling the gaps with his conjectures. The result is an extremely well-balanced narrative that – perhaps except for a more technical chapter dealing with the currency crisis – is accessible for a more general audience. Thus, the main contribution of the book is to provide new (and, in some cases, arguably definitive) historical accounts of key events of Chile’s recent economic history.

Clarifying misconceptions

The agreement between the University of Chicago and the Universidad Católica de Chile (PUC) is the subject of an important misconception. It is often portrayed as a nebulous U.S. plan to train economists specifically to run Pinochet’s economic policy. Yet the plan was drafted in 1954–55, a decade and a half before even Allende rose to power, not to mention Pinochet.

Edwards draws from archival records and reveals that the U. Chicago-PUC deal was, in many ways, accidental. The deal was intermediated by the International Cooperation Administration (ICA), and it first aimed at the Universidad de Chile, the country’s main public university, not PUC. However, “the [U. de Chile] faculty was reluctant to enter into a partnership with an American school, and particularly with the University of Chicago, with its reputation of being a white knight for monetarism, free trade, deregulation, and free markets” (p. 29). When the ICA reached out to PUC for a similar deal, both U. Chicago and PUC had concerns about the compatibility of the university’s religious affiliation. Eventually, PUC’s dean manifested their “desire is to sign an agreement between our university and an institution in the United States, such as the University of Chicago, or the Massachusetts Institute of Technology.” (quoted in pp. 30–31). Thus, it was not clear from either the U.S. or Chilean side that the University of Chicago would be ultimately paired with PUC.

The government of Salvador Allende is also the subject of many misconceptions. Edwards recognizes that part of the confusion stems from the fact that Allende was from the Socialist (and not from the Communist) Party, which led authors to mistakenly portray him as a relatively moderate candidate even though, in Chile, the Socialists were much more to the left and had close ties with Cuba and North Korea.

The book offers a detailed overview of Allende’s economic policies. For instance, Edwards reveals that the government’s grasp over the economy went significantly beyond the well-known nationalization of U.S.-owned copper mines. It also nationalized the banking sector and enforced its right to take control, for an undetermined period, of hundreds of factories producing goods “in short supply.” This short supply was often staged by unions stopping the factory floor and creating artificial shortages. He notes that every import required a license, with some tariffs reaching 250 percent. He also describes how perverse and arbitrary mechanisms were used to set price controls, which led to confiscation of goods, often imposed huge fines, and, sometimes, sent “speculators” to prison.

Turning to controversy

Part II of the book sheds light on more controversial topics: the Chicago Boys’ involvement in the Pinochet regime. Some early accounts attributed the economic plan to the CIA and placed Arnold Harberger and Milton Friedman as perhaps major contributors. Edwards again relied on archival materials and interviewed several of the Chicago Boys themselves to offer, it seems, a balanced account.

The plan was known as El Ladrillo (The Brick), due to its sheer size. The controversy is whether the plan was knowingly drafted by the economists for Pinochet. What is known is that the plan was written before the coup, in 1972, as a blueprint for Chile’s development in the next presidential elections; eleven of the Chicago Boys contributed individual chapters.

On the one hand, it appears that only one of them, Emilio Sanfuentes, then associated with the Chilean think tank Centro de Estudios Sociales y Económicos, had contact with a retired high-ranking navy official who worked for a private conglomerate and was interested in such a plan. Edwards also recalls that much of the content of the plan were quite similar to an earlier economic plan written by some of the same Chicago Boys for presidential Jorge Alessandri, a center-right candidate who faced Salvador Allende in 1970, and were also seen as extension to reports that two of the economists (Alvaro Bardón and Sergio Undurraga) were writing for the opposition, including the moderate Christian Democrats and former president Eduardo Frei Montalva.

Edwards highlights that the latter plan, El Ladrillo, included more economists, some of them centrists. The main editor of the plan, Sergio de Castro, argued that to gain the support of Christian Democrats, it even included suggestions of “Yugoslavia-style firms, where workers owned the companies and participated actively in their management” (Arancibia Clavel and Balart Páez 2007, p. 144). He also emphasizes the idea that only Emilio Sanfuentes had connections with military officials.

On the other hand, there is evidence that all authors met in a hotel to discuss it with the retired naval officer liaison. Edwards recognizes that it is ultimately a “mystery that will never be fully resolved” (p. 80), but doesn’t shy away from conjecturing that it is likely that the rest of the economists knew, at least to some extent, that the plan was intended for the military.

In what follows, Edwards provides a comprehensive analysis of the policies contained in the plan. For every policy area (e.g., healthcare), he compares what the plan proposed and what was eventually implemented by the military, creating an extremely useful guide to researchers. Another statement to Edwards’s thoroughness is that he connects some policy choices to theoretical debates that were taking place at the time, both in Chile and elsewhere.

Friedman’s role

Chapter 5 offers a carefully researched examination of Milton Friedman’s involvement with the Chicago Boys and his two visits to Chile during the military regime. Friedman first visited Chile between March 20 and 27, 1975, and met with Pinochet on the 21st. In their one-hour meeting, Friedman argued—in seemingly broad strokes—that the country needed a “shock therapy” to fight rampant inflation that had reached 350% a year.

In the following days, Friedman met with Chile’s business elite, gave a lecture to a group of military officials, and gave several interviews to newspapers. Friedman again argued for shock therapy. Edwards collects some of the questions asked by the business audience and Friedman’s reply to them, concluding that businessmen wanted the same gradualism they were used to.The military was mostly against privatizations and cutting unnecessary personnel needed for the fiscal adjustment. Indeed, the director of intelligence was spying on the Chicago Boys to convince Pinochet that “the Chicago Boys were not true patriots and that their only interest was to privatize state-owned enterprises at low prices in order to have private investors (including their friends and associates) own and run key strategic industries.” (p. 100).

While critics treat Friedman as the mastermind behind Chile’s 1975 Recovery Plan, the Chicago Boys themselves downplayed Friedman’s influence. Several biographies don’t mention Friedman’s visit to Chile at all. Earlier research also suggested that he did not influence the plan (see Caldwell and Montes, 2015, p. 271). More broadly, Friedman defended himself by arguing that meeting a politician is not the same as advising him, and by noting that he also met with Chinese leader Zhao Ziyang in 1988. Moreover, what he said about Chile was a mere reflection of broad lessons from his academic research, not specific advice.

However, Edwards makes a convincing case that Friedman is responsible for the recovery plan, referring to the importance of a “before Friedman and an after Friedman.” (p. 97, emphasis original). The Chicago Boys would likely have proposed the same plan regardless, but Friedman’s visit weighed the scales in favor of their plan over the more gradualist approach that was being put forth by businessmen and military officials.

What to make of the Chicago Boys?

Recurring in Edwards’ narrative in the third and final part of the book is that, despite the breadth of the reforms implemented during the regime, much else was also done after the return to democracy to deepen and extend the reforms. This continuation was often undertaken by center-left politicians. This insight invites reflection on the role Chicago Boys. On the one hand, their ideas undoubtedly charted the path to greater economic freedom, much needed in Chile after Allende’s populist policies.

On the other hand, Chile’s experience highlights the limitations to economic growth and prosperity under a dictatorship. Recent empirical research has analyzed this issue in Pinochet’s Chile from two different sides. Escalante (2022) shows that the Chilean GDP per capita underperformed for at least the first 15 years following the coup. Arenas, Toni, and Paniagua (2024) also question the timing of the “Chilean miracle”, arguing that it only really developed following the return to democracy. Indeed, other Latin American development “miracles” (in Uruguay and Costa Rica) occurred without a similar story of a liberalizing autocrat.

Nonetheless, it is undeniable that the Chicago Boys completely shifted the Overton window in Chile. Even if by historical accident, they transformed perceptions of policies that were unimaginable in Latin America into a status quo that endured as the country returned to democracy. Hopefully, Chile will also endure its new challenges.

Note:

I refer the readers to another review of the book by Pablo Paniagua, which deals more extensively with Edwards’ hypothesis about the downfall of liberalism in Chile: the “malaise” hypothesis.

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