Hayek in Chile

Hayek in Chile

Hayek in Chile
Mario Sznajder
In August 1991,immediately after the attemped coup,I went to Moscow,to participate in a conference on democracy and authoritarianism in the Third World,in which I was about to present a paper on the transition to democracy in Chile.I was surprised by the interest shown by our Soviet colleagues in Pinochet abd the case of Chile.They posed many questions and were specially interesyed in the way Pinochet’s government had successfully transformed Chile into a free market economy,according to the guidelines of Friedrich von Hayek,one of the staunchest intellectual enemies of the Soviet system.In the transition to democratic rule,led by Pinochet,they swa an additional benefit.But their main interest was focused on the Chilean model of development as one of sustained economic stability,growth and governability,possessing all the elements that were lacking in the disintegrating Soviet Union.Through the democratisation process controlled by Pnichet and his followers,Chile was—on its way to becoming Lord Dahrendorf’s fourth city,acquiring a balance between prosperity,civility and liberty.In Chile,civil associations had become the leading forces of both a free market model and open public sphere,and their interaction not only served for the elaboration of tensions and contradictory interests but also generated the energies needed for economic growth and social development.The governments of redemocratised Chile,while preserving the free market model and its advantages,in terms of economic efficiency,had clearly identified social and economic exclusion as a moral problem to be addressed,but the question here was whether limited democracy allowed the state the possibility to enforce the policies needed to curb the increasing socio-economic gap.The Chilean had become smaller but stronger in its governance abilities.Society,politically demobilised through repression during the years of military rule,made a democratic choice in 1988,rejecting Pinochet’s plebiscitarian bid to be elected for a further eight-year period.But after democracy was installed,the levels of political participation and interest descended rapidly.The neo-liberals model seems to have been internalised and the feelings of social cohesion that characterized Chile in early decades have become marginal.
In my answers I tried to point out the fact that the redemocratised Chile has been constructed as a limited democracy,in which the defence of Hayek’s neo-liberal economic model,as implanted in Chile,and of the interests of the stronger parts of society-including the military-were enshrined in a rigid constistution of almost impossible reform,in current terms.Moreover,in Dahrendorf’s terms,military rule in Chile resembled a polity preoccupied mainly with obtaining economic prosperity,disregarding civility and liberty,redemocratised Chile had a long way to travel in order to restore pre-dictatorial levels of social cohesion and achieve a totally open political model.According to ny explanation,the main problem was that the adoption and implementation of Hayek’s model under military rule had stressed the dualistic character of Chilean society.The stronger sectors of society,favored by the workings of the model,had all the characteristics of the civil societies found in developed Western liberal democracies.Under military rule,their associated strength was focused into the economic market,producing high levels of growth for the whole country but mainly sectorial profits that further enhanced their own status and influence in the piblic sphere.With redemocratisation,the strength of the associations characteristic of the upper income quintilies of Chile’s society was directed also into the political arena.The other side of Chile’s dualistic society enjoyed general economic growth in a different way.Still beleaguered by the problems of misery and poverty,with no real political options,especially after the tragic end of Allende’s experiment in democratic socialism,and having lost social cohesion as a traditional term of reference,it bounced between protest and adherence to the margins of the neo-liberal model.Again,limited democracy did not offer Chile’s lower strata a political chance of changing the rules of the game in order to curb exclusion through governmental intervention and welfare policies.Furthermore,I stressed the cost,in terms of military and political repression,human rights violations,unemployment and deepening of poverty,that large sectors of Chilean society had unwillingly suffered through the authoritarian implementation of the neo-liberal model inspired by Hayek’s thought.
This work deals with the impact of the application of a neo-liveral economic model based on Hayek’s thought,in Chile under military rule.It claims that in order to prevent of the dismantling of the economic model,as part of the process of democratisation,Pinochet and his supporters constructed a limited democracy.Hayek was aware of these processes.His strong liberal stands bring us to ask some questions.How could an economist and philosopher of the calibre of Friedrich A.Hayek willingly become a source of intellectual inspiration to the main group of supporters and technocrats who,under General Pinochet,carried out the process of modernisation in Chile in the 1970s and 1980s?How was it possible to reconcile Hayek’s image as ‘a doctrinnaire defender of liberty,whose general outlook is little different from that of Nozick,or a partisan of laissez-faire such as Milton Friedman’,with his support for the policies of Chile’s military authoritarian government?And how could Hayek’s philosophy be transormed into policies designed to overcome problems of poverty,underdevelopment,the discrimination of minority groups and extreme political polarisation?


The Process
The answer to these questions is to be found in political developments in Chile,as well as in intellectual debates on economic policies,theories of development and on the political systems deemed most appropriate for their implementation.Here,philosophical views interact with political ideologies and with attendant questions of legitimacy.Intellectual sources of public policy are also of importance,not only because their acceptance provides the kind of legitimacy that allows for the formation of alliances to support and implement political control and policies(which in Pinochet case were necessary to carry out the project o demobilising the the masses that had supported Allende),but also because they provide international links and contacts with foreign powers with similar ideological sources,a scenario vital to Chile due to the dependent natutre of its economy.

The political crisis that affected Chile under the Allende government generated much debate and discussion within the ranks of the Christian Democratic and Liberal-Conservative opposition.However,while the former were divided between those that favored a political compromise that would help to preserve formal democracy and moderate the reforms proposed and enacted by the Popular Unity government,the latter were staunch in their opposition and demanded a forceful solution that was carried out by the armed forces in the military coup of 11 September 1973.

The political-intellectual debate was older than the crisis generated under Allende and included the development of elaborate anti-Keynesian discourse in the circles of the right.From the 1950s,and especially during the 1960s,the Catholic University of Chile in Santiago was home to the two main intellectual groups that would support Pinochet’s government in the 1970s and 1980s.The first was of Catholic Integralist origion and had developed a particular brand of social corporatism-gremialismo;it was led by Jaime Guzman,student leader,future lawyer and professor of ccnstitutional laws,staunch polemicist,opposition spokesperson to Allende and the main political adviser of Pinochet.The other ,of neoliberal character,was led by Sergio De Castro,an economist trained at the Catholic University and later in the department of economics of Chicago University.De Castro was the first disciple of Arnold Harberger,Professor of Economics at Chicago.,and had come to teach at the Catholic University in the framework of the academic cooperation agreement signed between the universities in 1956.

De Castro became a professor of economics at the Catholic University of Chile and the first of a pleyade of nearly one hundred Chilean economists trained in Chicago that would introduce the economic philospphy developed by Hayek and Milton Friedman into Chilean intellectual,political and entrepreneurial circles,and later also the social and political ideas associated with the economic thought and practice o neoliberalism.

In the framework of their anti-Keynesian views,a group of Chilean ‘Chicago Boys’ supported and provided economic advice to the 1970 candidacy of Jorge Alessandri against Allende.During the Allende’s rule,and especially in the months prior to military intervention,they drew up an economic plan to redress the effect of Allende’s reforms.The summary of this plan was submitted to the armed through a contact in the navy in the months prior to September 1973,under the name of ladrillo(The Brick).

After the military takeover,De Castro and some of his colleagues were designated advisers to the generals,and would later act as ministers in the economic sphere.El Ladrillo was a very detailed analysis of the Chilean economy and included proposals for specific policies in all areas of economic activity,drawn up according to the basic neoliberal priciples of free markets,freedom of economic initiative,the preservation of private property rights,the elimination of state intervention in the economy through regulation and subsidies,massive privitasation,the reduction of state bureaucracy and the adoption of market criteria of efficiency.

De Castro and his followers,participating merely as advisers to a military government,found themselves trapped between a deepening economic crisis which required austerity and macroeconomic adjustment,and the governmental need for political legitimacy,which made neoliberal formulae unpopular.This dilemma continued until 1975,when the worsening economic crisis catapulted the neoliberal advisers into the ministries that controlled economic planning and policies.   

Until 1975,the military government had looked for legitimacy,support and political inspiration mainly from the gremialistas-of Catholic social-corporatist inspiration-who led the right-wing coalition behind the Semptember 1973 coup.Their leader,Jaime Guzman,had drawn up the first politicla documents of the military Junta,but he,his supporters and the military lacked a viable economic strategy to combat the deep crisis the country suffered.

It wa De Castro and his followers who provided a solution when,in 1975,the Chilean GDP fell by nearly 15 percent and unemployment and inflation were out of control.Their solution was the strict application of El ladrillo,without restrictions deriving from problems of political legitimacy and government popularity.Pinochet himself decided to follow the radical neoliberal measures proposed by the Chilean Chicago Boys whilst at the same time bringing in the gremialistas and other conservative supporters of his government to draw up a future political framework of limited democracy for Chile,which would become the 1980 Constitution and its controlled referendarial acceptance.

This division of labour was not without its shortcomings.Military authoritarianism was stepped up to deal with those adversely affected by the economic reform,i.e. the industrial and lower income sectors of society after the removal of protective custom duties,as well as to deal with those affected by the political reform,i.e. proscribed political parties,especially those of Marxist orientation,that were meant to be constitutionally excluded from existence even after Chile’s return to democracy.A further characteristic of the political process at the time was the Caesarean-like centralisation of power in the figure of Pinochet,who overcame internal opposition within the ranks of the armed forces,which tended to favor a more rapid and softer model of democratisation and economic policies.

Chile had become a kind of socio-economic laboratory in which a neoliberal experiment was being carried out with scant political hindrance.In the second half of 1970s,the military government gave priority to the economic experiment,relying on its success to legitimise the future political framework of limited democracy,which in turn would provide the required guarantee for the survival and defence of the neoliberal model.

After the enactment of the 1980 Constitution,a double ideological-political process took place within the ranks of the neoliberal and the gremialistas.The latter began to adapt their social-coporatist views,where an autonomous civil society composed of intermediate bodies acting according to the rules of subsidiary takes over all the state functions it feels better equipped to run,to a version that relied more on a radical kind of individualism,akin to neoliberalism.In this development,the principle of subsidiary was applied in favour of individual initiative,leaving to the intermediate bodies only those functions that individuals could not carry out more efficiently,and to the state a minimal social and economic role.Any obstacle to individual freedom,whether anchored in the state or in the intermediate bodies of civil society,would,therefore,be removed.

The spirit of social coporatism was relegated by the gremialistas to the realm of the past,when the existence of an omnipotent state placed a society imbued with Catholic values in a defensive position in which the intermediate bodies of civil society had to defend the individual against the arbitrary nature of majority rule.The neoliberals on their part ‘globalized ’ their project , bringing it out of the economic realm into the social one by presenting a seven-point modernisation plan that would change Chile into a country not only able to develop,but also to compete in highly sophisticated international markets.

The seven-point modernisation plan involved transforming the labour market,pension funds,the areas of justice,health,education and agriculture into highly efficient units,and the regionalisation of the country.This would allow Chile to become a Latin American Jaguar,i.e. the equivalent of an East Asian Tiger,meaning a sustainable model o development whilst simultaneously living through a process of democratisation.

After the debt crisis of 1982 and the serious economic crisis which affected the country at that time,Chile’s neoliberal experiment was moderated,whilst still adhering to its basic principles.After 1985 a second economic boom that continues to the present day began,producing high rates of growth,economic stability and generating positive economic expectations for the future of the country.The political model was left unchanged and led to a process of democratisation controlled by the military.This process produced a limited version of democracy-according to which the country is ruled today-which includes authoritarian enclaves,i.e. a binominal regional electoral system clearly favouring the right coalition of parties that supported Pinochet,nominated senators that obstruct any possibility of constitutional reform,a National Security Council dominated by the military,budgetary and rank-appointment autonomy for the armed forces,an insoluble legacy of human rights violations,etc.,that guarantee the survival of the socio-economic model inspired by Hayek’s ideas.


The theories
The main supporters of Hayek’s ideas always stressed that their model went far beyond the issue of the ideal economic system and that it touched upon a basic epistemological question.For them,the main issue that Hayek had clarified was the relatonship between the economic process and the creation and transmission of practical knowledge.They claimed that Hayek presented market economics as a ‘method of discovery’ which required decentralisation,competition and initiative in order to create progress.The free market entrpreneunial model becomes,in this view,a paradigm for the acquisition of knowledge which in itself is a central factor of development.
This kind of analysis found particular resonance with Chileam liberal interests and views at the time because it led to the conclusion that concentrating economic decision-making in the hands of the few(the kind of central economic planning and state intervention that Allende’s reform tried to enforce in Chile) was not only detrimental for the functioning of the economy,but also precluded the possibility of wider knowledge and progress.For Hayek’s supporters in Chile,the rejection of central planning-as equivalent to totalitarianism,-and the elimination of individual freedoms and the penetration of civil society by the state bureaucracy,was a very attractive idea,which again served internal political purposes.The supporters also applauded Hayek’s anti-constructivist approach,sterssing that the latter generated coercion,whilst accepting the defence of individual liberties and the acquisition of knowledge as part of the natural order.
Hayek preferred spotaneity,based on the natural order,to rational constructivism,on the premise that in the most exreme case rational constructivism could lead to the imposition of one will over a whole society.Another side of the argument was that individual rationality was unable absorb and deal with the whole of accumulated human knowledge.Constructivism,according to Hayek,produced artificial models,untested by experience and liable to impose serious limitations on individual freedom,which was for him the basis of civilised life.
Individual freedom is the axis of Hayek’s argument.For him,freedom is achieved through the absence of coercion,as in classic liberalism,and closely related to the existence of a sphere of privacy in which the individual is free to act according to his wishes.Political freedom is defined by Hayek as the right of individuals to participate in public affairs,meaning to elect a government,or be elected,to legislate and to control the administrative perfomance of the authorities.But for Hayek,a free people was not necessaril a people of free individuals because the mechanisms that insure political freedom do not,automatically,insure the existence of a private sphere of action in which the individual enjoys a maximum of possible action.
Hayek estimated that political freedom could serve a majority to decide and curb individual liberties.Thus for him,the basic tenets of freedom were related to the individual.From the other side,political freedom was a sine qua non for individual freedom.This reasoning led Hayek to propose the term demarchy ‘as a system of government in which demos(the people) has no brute power( kratos)but is confined to ruling( archein) by established standing laws promulgated and kown to the people,and not by extemporary decrees’.In this model,the right balance between the piblic and the private spheres depends on the existence of an authority strong enough to preclude coercion over the individual ,acting accoding to an agreed set of pre-established rules enforced by the state,that sanctify individual freedom and its main economic outcome-the existence and preservation of private property.This is related to the main economic freedom,that of unrestricted contracting between individuals,which means the existence of an unhampered free market.
The practice
All this created a series of dilemmas for the supporters of Hayek in Chile.Under military rule,the enforcement of basic economic freedoms and the installation of free market mechanisms was being carried out repressively and against the strong opposition of many sectors of the population.Chile lived in a state of siege for many years,a situation in which the scarcest commodity for most of the population,to put it in Hayek’s terms,was personal freedom.
To make matters worse,the enforced application of the above –mentioned economic formulae had by 1982 produced an unprecedented economic depression,and massive state intervention was necessary to salvage the banking system and economy.Serious recession generated hugh unemployment,which inturn produced a wave of political protest against Pinochet and his government.This triggered a new wave of political-military repression.The socio-economic roots of the problem were directly linked to the structure of the country and its political development vis-a-vis the economic and political model that the military were trying to install in Chile.
The first basic contradiction came from that economic freedom was being imposed by means of the liquidation of all other freedoms.The opening of the markets did not produce a comprehensive strenghening of the private sphere of every individual,but only or those that through their support of military rulr and priviledged socio-economic position were able to enjoy it.And even amongst these sectors there was a problem of guarantees for their basic freedoms.Change in the political situation could place individuals in unfavorable positions and further limit their freedoms.
The second contradiction concerned the wide socio-economic gap,which grew even wider with the application of neoliberal policies.In a country where a large part of the population lived below the poverty line,additional sectors became poorer as a direct result of the economic recession and unemployment it generated.In the periods of economic growth,1978-82 and 1985-98,poverty was somewhat alleviated,largely due to decreasing unemployment and,under democracy,by forced social policies.Still,the gap between the rich and the poor continued to grow.Access to the markets in conditions of poverty or growing socio-economic gaps neither strengthened individual freedom for most of the population,nor created better mechanisms for the acquisition and dissemination of knowledge.A large part of the formerly strong middle class in Chile,considered by experts to be one of the mainstays of democracy in the country,suffered a process of pauperisation with consequences for the development of its member’s skills and their capacity to contribute to the future development of the country.
A third point was the impact of the open markets on the country’s ecology.The opening if formerly protected sectors to international and internal competition-fisheries,forestry,public transportation deregulation-had a strong impact on the ecological balance of the country.Unregulated over-exploitation led to the indiscriminate cutting down of forests,depletion of shell and fish banks and a notourious worsening of the smog situation in Santiago.
A fourth point related to the Indian minorities whose communal land-holding system was destroyed by deregulation of land tenure.This again produced protests and violence,leading to further repression.
The counter arguments of Hayek’s supporters in Chile were that a sustainable model of development and true democracy was being installed in the country.The existence of a strongly authoritarian government was justified by the fact that,through economic reform and the opening of the markets,the Pinochet government was establishing the basis for liberty in Chile.former democracy,controlled by political parties and corporatist groups,was depicted as a ‘pseudo-democracy’.
This analysis provided the common ground for a meeting between the gremialistas and Chilean Chicago Boys .They agreed with the military that the reforms introduced would not allow Chile to return to its status quo.A new kind of democracy would be established according to the terms of 1980 Constitution.In this democracy the free market model and property rights would be beyond the scope of legislation.In order to ensure that no reorm of these principles would take place in the near future,authoritarian enclaves were established and the armed forces,enjoying unprecented degrees of autonomy,were formally placed as guarantors of ‘national secutity and institutional order’,leaving to their better judgement the precise definition of these terms,and of the right to intervene.
In Chile,some of the policies initiated in the authoritarian period were volutarily or quasi-voluntarily carried over by the democratically elected authorities,such as the neoliberal model initiated during Pinochet’s period and slightly modified during Aylwin’s government,and the modernisation measures that accopanied the process of privatisation and streamlining(the paring down and reorganisation)of the state.Nevertheless,it is clear that those in Chile who introduced the neoliberal economic model did not neglect the political aspect,as is shown by the adoption of the 1980 Constitution which imposed,in Whitehead’s words, ‘ a stunted  version of liberal democracy that works’.
Three democratic national elections and an eighth year of democratic practice,even if within the limits imposed by the authoritarian enclaves inherited from the period of military government,have passed without major threat.The perfomance of the Jaguar,even if slightly less successful than that of the Tigers,has demonstrated that the Chilean development model works with no less success under a democratic government than it did under authoritarian rule.1992,with an 11percent growth in GDP,was the best year for Chile’s economy in three decades.
The economic model has become consolidated and the question that is now central to the issue is whether limited democracy is a sine qua non for its survival.The question is important because while the Chilean economy,modernised during the period of military rule,continues to flourish,society,politics and culture have not experienced parallel processes.The social and political aspects of Pinochet’s modernisation-rigid social structures in which change is effected through market mechanism regulations and through authoritarian enclaves in politics-are incompatible with modern democracy and a modern economy.Improvements in education,health ,food,housing and the environment are the results of development,but also the impetus for further development.A better distribution of income,by strengthening Chile’s internal markets,may make the economy less vulnerable to the fluctuations of raw material prices on the international market,especially copper,which still constitutes almost a third of Chile’s total exports,as well as to recession in its main markets:Japan,USA,Brazil,Germany and the UK.
The reduced state still has important role to play in the above-mentioned areas because the market is unable to take care of them adequately.Poverty is associated with social marginalisation,a widespread phenomenon throughout Latin America that increases social tension,not through revolutionary menace,but through a constant threat to individual security.The internal security forces have been strengthened to cope with the phenomenon,but Chile’s complex legacy of human right violations makes forceful solutions to the problems of social marginalisation and rising crime problematic.A modification of the state’s role in these areas would constitute a fundamental step towards the political modernisation of the country.
Coping with the ecological impact of the application of neoliberal policies is an ongoing and urgent need in Chile.It is difficult to imagine how the situation can be improved without regulation,social awareness and state intervention.The same is true for labour relations.The state basically has the dual task of ensuring the efficient perfomance of markets,but at the same time of curbing the social Darwinist dimension characteristic of neoliberal experiments of the Chilean type.
Chile’s bid to become a full member of NAFTA and of MERCOUSOR-the latteralmost accomplished –adds further pressure on the need to redefine relations between state and society.Economic integration and increased competitiveness require a better educated,healthier,well-housed and ecologically aware population,able to articulate,as an autonomous civil society,its needs and capabilities.Chile’s democracy is ruled by a relatively strong and coherent state.Levels of corruption are probably the lowest in the region.Although some of the characteristcs of advanced democracies are becoming again part of Chile’s political and social life,the problems of duality,as shown before,impair the process of democratisation.The lack of resolution of most of the legacy of human rights violations extends the problem of the duality to the rule of law.Impunity for those that carried out most of the human rights violations during military rule is not only a metter of redressing grievances of the past but of the essence of democratic rule in the present and in the future.The obstaclesto reforming and liberalising Chile’s political model reside not only in the authoritarian institutional enclaves but also on the political apathy  accompanying neoliberal socio-economic practices.In order to reach Dahrendorf’s ideal model Chile still has to ensure that prosperityis not the realm of the few,civility is expanded to the whole society and liberty is achieved through further opening of the political model.