Chile's much-belabored "economic miracle," fashioned from high growth rates, macroeconomic stability and explosive export expansion, is widely considered by neoliberal advocates to be the masterpiece of the economic model that the International Monetary Fund (IMF) has lauded and sought to replicate around the world. In Latin America, where significant state intervention has been the economic leitmotif for decades, Chile has distinguished itself in recent years as a champion of the Washington Consensus which is widely reviled elsewhere in the hemisphere. More specifically, Chile’s participation in the three IMF programs it signed onto over a two-decade span seems to follow the classic success story for IMF loans. Santiago’s commitment to implement the structural adjustment provisions attached to such credit lines was as resolute as its original compliance with the IMF’s agenda. Chile graduated from IMF assistance by the end of the 1980s and, most importantly, continued on a path of strong economic growth without once again having to resort to Fund financing, even as regional giants Brazil and Argentina were succumbing to the punishing blows of successive devastating recessions in 1998 and 2001.

Exacerbating a Crisis
However, interpreting Chile's IMF participation as a paradigm of success can be open to fundamental challenges over at least two points. First, a careful examination of the IMF-designed adjustment programs implemented in Chile following the 1982-3 debt crisis indicates that the policies pursued can be faulted for not being optimally effective in facilitating the economy's emergence from the severe recession that battered it, and in fact may have been openly harmful. The 1982 crisis represented for Chile a bitter harvest that flowed from the radical restructuring of the country’s economy undertaken by the harsh military government that seized power in 1973. By ridding itself of Salvador Allende, the country’s constitutionally-elected president, and simultaneously squashing the country’s democratic institutions, the Pinochet regime opened the door for the ascension of the hardline neoliberal “Chicago Boys.” Under their stewardship, state enterprises were privatized to the regime’s cronies at rock-bottom, often fixed prices, economic regulations were lifted and the economy’s trade and capital accounts fully liberalized. The result was skyrocketing levels of foreign debt and an increasingly overvalued currency as the Chilean elite indulged in an orgy of debt-fueled importation of consumer goods and turbulent speculation between 1977 and 1982. The process was facilitated by the oversupply of petrodollars and a resulting abundance of cheap foreign credit at the time.

In 1982-3, however, the combination of an international credit crunch, a sharp decrease in the price of copper (Chile’s longtime staple export), and the total collapse of the unstable and poorly regulated domestic banking system threw the country’s economy into its deepest recession of the twentieth century. As a result, the Pinochet regime, like many other governments across Latin America that were concurrently experiencing their own debt crises, turned to IMF loans and its prescriptions in exchange for swallowing a new round of Fund-mandated neoliberal medicine. This included a further shrinkage in government spending and tight monetary policies, which all but guaranteed a sharpened recession. Particularly damaging in this respect was the IMF's misplaced emphasis on tight fiscal austerity, a policy based on a fundamental miscomprehension of the basically sound fiscal position of the Chilean economy. In fact, the apparent public sector deficits did not reflect a pattern of government profligacy at all, but rather the transition costs resulting from the 1981 privatization of the country’s social security system, which left the public sector with the onerous burden of having to service existing pensions, while the bulk of new worker contributions were being funneled into the coffers of private finance companies. In this context, the IMF's intervention only worsened a recession already marked by enormous contractions in gross domestic product and rising unemployment rates topping twenty percent.

At the same time, the Fund insisted as a precondition for its loans that Santiago extend a public guarantee of repayment to foreign bank creditors holding domestic private debt, as part of the debt renegotiation the Chilean economy desperately needed in order to ease the immediate pressure on its foreign exchange reserves. Thus in a multibillion dollar spending orgy, the government rushed to bail out private banks, corporations and leading grupos económicos that before the crash had enjoyed (and often abused) privileged access to credit, especially dollar-denominated loans. Needless to say, the poor remained the principal victims of the recession, suffering through sustained high unemployment rates and a persistent stagnation in real wages that continued even after strong economic growth resumed in 1986.

In addition, the most important factors in the reestablishment of economic stability after the crisis and in the robust economic growth rates that Chile enjoyed throughout the 1990s, were an array of more instances of interventionist state policies, most notably export promotion initiatives and the imposition of controls on short-term capital flows that ran counter to the Fund's general policy orientation, or, as in the case of capital controls, its specific recommendations. Thus, despite the prattling of IMF program officers about Chile's economic success--an assessment apparently unaffected by persistently high levels of poverty and a sharply skewed distribution of income--a strong argument can be made that "Chile’s miracle" in fact occurred in spite of, not on account of, its participation in IMF programs.

Neoliberal Authoritarism
At the same time, it is important to acknowledge that the Pinochet regime’s strong commitment to IMF-sponsored neoliberal reforms and the specific conditions attached to them, was by no means an unmitigated good. This commitment often has been approvingly cited by the Fund as an example for other developing countries to follow, but it can also be seen as a reflection of the inherently undemocratic nature of the military regime and the self-serving alliance it methodically cultivated with the upper crust of a markedly stratified society. In fact, the government's enthusiastic commitment to neoliberal policies is perhaps best interpreted as the ongoing dominance of a policy-making elite linked to internationally-oriented economic conglomerates that stood to benefit considerably from the intensification of the IMF’s neoliberal model. This, coupled with the functioning of a closed political system and the generous use of repressive tactics, served to eliminate any serious prospect of domestic dissent to Fund-supported policies. Chile's sterling economic performance thus came not only at the grievous cost of the economic welfare of the working and middle classes, but also at the expense of citizens’ most basic political freedoms and human rights.

Thus, like many often-cited IMF success stories, the "miracle" of Chilean economic development and the Fund’s role in that process is more complicated than appears at first glance. Although the relative merits of the programs implemented by the IMF in Chile can be debated, they were certainly not optimally successful in facilitating the economic recovery from the 1982 crisis, and in fact may have served to delay and prolong it. Equally important, Chile's miracle rests in considerable part on policies that were neither recommended nor endorsed by the IMF and for which the latter accordingly deserves little, if any credit. Perhaps most importantly, the Pinochet government's full "ownership" of Chile's IMF programs and their accompanying conditions is better interpreted as the inherent advantage of a diktat-issuing regime free from any political or democratic pressures and closely linked to the small economic elite that ultimately was the beneficiary of the overwhelming thrust of the IMF's policy recommendations.

This redaction of the conventional narrative of Chile’s stellar performance presents the IMF with a new series of challenges, potentially robbing it of one of the examples it has long presented as unassailable evidence for the validity of its economic policies as well as its model of a deceptively harmonious Fund-borrower relationship. Both of these theses can still be defended and undoubtedly will be, but the history of the so-called tiger of the southern cone should no longer be claimed as an undisputed victory for the economic development model promulgated by the Chicago Boys and by the IMF.

This analysis was prepared by Jessica Leight, COHA Research Fellow.