Eye of the Hurricane: Milton Friedman and the Global South

Mar 06

While
economists laud the recently deceased Milton Friedman for being “a
champion of freedom whose work transformed economics and changed the
world,” as a full-page advertisement in the New York Times put it,
people in the South will remember the University of Chicago professor
as the eye of a human hurricane that cut a swath of destruction through
their economies. For them, Friedman will long be associated with two
things: free-market reform in Chile and “structural adjustment” in the
developing world.

Soon after the coup against the government of
Salvador Allende on 11 September 1973, Chilean graduates of Friedman’s
economics department, who were soon dubbed the “Chicago Boys,” took
over the helm of the economy and launched a program of economic
transformation with doctrinal vengeance. In light of his much-quoted
assertion about political freedom going hand-in-hand with free markets,
the irony that in Chile a free market paradise was being imposed with
the bayonets of one of Latin America’s most bloodstained dictatorships
could not have escaped the guru.

Yet Friedman visited Chile during the dictatorship,
anointing the radical free-market, export-oriented thrust of the
regime, praising Chilean dictator General Augusto Pinochet for his
commitment to a “fully free market as a matter of principle,” and
delivering talks with a title “The Fragility of Freedom” that could
only be ironic in the Chilean context. Even as he accused his critics
of being bent on “tarring and feathering” him with the regime’s human
rights abuses, Friedman took pride in his doctrinal inspiration of what
he described as the “Chilean Miracle.”

The Chilean experiment

After his disciples were done with it, Chile was indeed radically transformed…for the worse.

Free market policies subjected the country to two
major depressions twice in one decade, first in 1974-75, when GDP fell
by 12 per cent, then again in 1982-83, when it dropped by 15 per cent.

Contrary to ideological expectations about free
markets and robust growth, average GDP growth in the period 1974-89 —
the radical Jacobin phase of the Friedman-Pinochet revolution — was
only 2.6 per cent, compared to over four per cent a year in the period
1951-71, when there was a much greater role of the state in the economy.

By the end of the radical free-market period, both
poverty and inequality had increased significantly. The proportion of
families living below the “line of destitution” had risen from 12 to 15
per cent between 1980 and 1990, and the percentage living below the
poverty line, but above the line of destitution, had increased from 24
to 26 per cent. This meant that at the end of the Pinochet regime, some
40 per cent of Chile’s population, or 5.2 million of a population of 13
million, were poor.

In terms of income distribution, the share of the
national income going to the poorest 50 per cent of the population
declined from 20.4 per cent to 16.8 per cent, while the share going to
the richest ten per cent rose dramatically from 36.5 per cent to 46.8
per cent.

In terms of the structure of the economy, the
combination of erratic growth and radical trade liberalization resulted
in “deindustrialization in the name of efficiency and avoiding
inflation,” as one economist described it, with manufacturing’s share
of of GDP declining from an average of 26 per cent in the late 1960’s
to 20 per cent in the late eighties. Many metalworking and related
manufacturing industries went under in an export-oriented economy that
favored agricultural production and resource extraction.

Mitigating Friedmanism

The radical Friedman-Pinochet phase of the Chilean
economic counterrevolution came to an end in the early 1990’s, after
the Concertacion came to power. In violation of classic Friedmanism,
this center-left coalition increased social spending to improve Chile’s
income distribution, bringing down the proportion of people living in
poverty from 40 per cent to 20 per cent of the population. This
modification, which increased internal purchasing power, contributed to
the post-Pinochet average yearly growth rate of six per cent a year.

However, with the social democratic regime unwilling
to challenge the upper classes, the basic neoliberal contours of
economic policy were kept, including the emphasis on agricultural and
natural resource exports. This focus on primary product exports has
created tremendous environmental stresses. Overfishing along Chile’s
coasts has gone hand in hand with ecological destabilization from the
spread of the fresh salmon and mussel farms inland. A booming wood
export industry has promoted the growth of tree plantations at the
expense of natural forests, resulting in Chile becoming the second most
deforested area in Latin America after Brazil. Environmental management
is widely acknowledged to be ineffective, being consistently subverted
by the imperatives of export-oriented growth.

Exporting the "revolution"

Chile was the guinea pig of a free market paradigm
that was foisted on other third world countries beginning in the early
1980s through the agency of the International Monetary Fund and the
World Bank. Some 90 developing and post-socialist economies were
eventually subjected to free-market, “structural adjustment.” From
Ghana to Argentina, state participation in the economy was drastically
curtailed, government enterprises passed to private hands in the name
of efficiency, protectionist barriers on Northern imports were
eliminated wholesale, restrictions on foreign investment were lifted,
and, through export-first policies, the domestic economy was more
tightly integrated into the capitalist world market.

Structural adjustment policies (SAPs), which set the
stage for the accelerated globalization of developing country economies
during the 1990’s, created the same poverty, inequality, and
environmental crisis in most countries that free-market policies did in
Chile, minus the moderate growth of the post-Friedman-Pinochet phase.
As the World Bank chief economist for Africa admitted, “We did not
think the human costs of these programs could be so great, and the
economic gains so slow in coming.” So discredited were SAPs that the
World Bank and IMF soon changed their names to “Poverty Reduction
Strategy Papers” in the late 1990s.

Yet free-market and structural adjustment policies
have been institutionalized so thoroughly that, despite their being now
universally seen as dysfunctional, they continue to reign. The legacy
of Milton Friedman will be with the developing world for a long time to
come. Indeed, there is probably no more appropriate inscription for
Friedman’s gravestone than what William Shakespeare wrote in Julius
Caesar: “The evil that men do lives after them, the good is oft
interred with their bones.”

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