Part 6
Another case of "technocrats" saving the day for countries that suffered from long stretches of extractive political institutions, which Acemoglu and Robinson completely ignored, was Chile. Chile suffered under the military dictatorship of Augusto Pinochet from 1973 to 1990. After the 1973 Chilean coup d'état on Sept. 11, 1973, the military dictator turned to a group of Chilean economists who trained under the famous Nobel laureate in economics, Milton Friedman of the University of Chicago. Friedman is famous for his emphasis on free market forces to attain economic progress. These economists, who were appointed to important positions in the Pinochet cabinet, were among those who were referred to as the "Chicago boys." I actually met some of them on some of my trips to Latin America during the 1970s and 1980s.
The Chicago boys were given a lot of latitude by Pinochet to implement their free-market policies. The initial phase was literally a shock treatment. In 1982, the Chilean GDP fell by about 15 percent, with government spending still growing slightly. This was, however, just the initial impact. The market-oriented reforms were profoundly successful, increasing the GDP per capita more than six times in the following 40 years, making Chile one of the wealthiest countries in Latin America. It must be pointed out, though, that high economic growth did not solve the problem of great inequality of income and wealth. This just proves that Milton Friedman is wrong in his belief in the trickle-down effect of market forces. Appropriate state intervention is still necessary to make sure that the benefits of growth also lift up the living standards of the poor.
As the lead economic advisors of the Pinochet dictatorship, the Chicago boys were the forerunners of that government's economic policies. They sponsored state-run policies to decrease national spending, end inflation, and promote economic growth. They advocated for a policy of strict austerity and cut government expenditures drastically. Free trade agreements and the breakdown of barriers to trade were promoted to help Chile compete in the global market. They also privatized public companies and used the free market rather than government rule to promote their economic policies. In some ways, what they did in Chile during the dictatorship of Pinochet was replicated in the Philippines during the Presidency of Fidel Ramos, who did much to deregulate, privatize, and liberalize the Philippine economy, with very positive results.
The policies recommended by the Chicago boys were meant as the natural reaction to Marxism and part of Chile’s role as a hotspot during the Cold War. The anti-Marxist junta supported radical free market policies promoted by the Chicago boys as part of their destruction of Marxism. After the end of military rule and the return to democracy (similar to what happened in Spain), the Chicago boys lost power, and many of them joined the private sector. Their policies, however, remained in place—not only in Chile but in other countries in Latin America. Chile has had recently its own share of Latin American-style political turbulence. Thanks, however, to the economic institutions and market-oriented policies introduced by the Chicago boys, it continues to have one of the more progressive and stable economies in Latin America.
Acemoglu and Robinson also failed to consider the special case of Indonesia, which attained economic progress under the dictatorship of President Suharto, who presided over what were clearly extractive institutions characterized by much corruption. Instead of the Chicago boys as economic technocrats, there were members of the "Berkeley Mafia," a term used to designate a group of economists who got their graduate school training at the University of California at Berkeley. These highly trained economists, some of them with doctoral degrees in economics, were appointed to key economic and administrative positions in the early stages of Suharto’s “New Order” administration. Like the Chicago boys in Chile, their work focused on promoting free-market capitalism in Indonesia and reversing many of the reforms that had been introduced by the previous Sukarno government.
On October 3, 1966, on the advice of these economists and a few others, Suharto announced a program aimed at the stabilization and rehabilitation of the failing economy of Indonesia. The Berkeley Mafia focused on low inflation, fiscal discipline, and market deregulation. The program wisely aimed (in contrast with the Philippine experience during the Marcos Sr. regime) at widespread rehabilitation of infrastructure and development of the agricultural sector. At the same time, an international support group to support economic recovery was established under the auspices of a newly-formed Inter-Governmental Group on Indonesia.
A new economic program was launched under the leadership of the Berkeley Mafia. The results were impressive: inflation fell from 650 percent in 1966 to only 13 percent in 1969. After Suharto became President in 1968, the members of the Berkeley Mafia were appointed to ministerial and senior advisory posts in the Cabinet. Despite continuing extractive political institutions, characterized by widespread corruption based on crony capitalism, the Berkeley Mafia were able to bring Indonesia’s economy to an unprecedented growth period. The GDP growth rate was high, averaging around 6.5 percent annually from the late 1960s to 1997, the year when the whole of East Asia was hit by a severe financial crisis. Indonesia’s economy was among those that suffered most from the East Asian financial crisis, with its GDP declining a whopping -13 percent in 1998 (as contrasted with the -0.5 percent of the Philippines). During this collapse, people blamed the Berkeley Mafia for their free-market approaches to economic development. It was never easy sailing for them to introduce their reforms because, like in the Philippines, economic nationalism dies hard. In fact, even today, we are witnessing one of the freest markets of the world, the US economy, succumbing to protectionism under the rallying cry of President-elect Trump’s Make America Great Again (MAGA).
These references to the Chicago boys and the Berkeley Mafia may lead us to conclude that even if it is not possible to rid the Philippines in the next ten to twenty years of extractive political institutions, we can still attain a significant degree of economic growth and a more equitable distribution of income (if not of wealth) if a coalition of civil society, business, and academe are able to introduce the necessary market-oriented reforms, together with the appropriate state intervention. That is exactly what we have done during at least the last twenty years: establishing some key economic institutions that are more inclusive than extractive; allowing market forces to operate as freely as possible even in those sectors that, for technical reasons, are characterized by monopoly or oligopoly; despite continuing corruption in our government revenue-generating agencies, maintaining a minimum of fiscal discipline; gradually opening up to Foreign Direct Investments that can assist us in continuing to invest in infrastructures at least at an annual rate of six percent of GDP. We have much more to do. On top of that To-Do list is the attainment of at least a three percent to four percent growth of output in our agriculture sector to attain food security through farm consolidation, especially in the coconut industry; product diversification, away from too much emphasis on rice self-sufficiency, towards a wide range of high-value crops like coffee, cacao, bamboos, palm oil, mangoes, avocado, durian, and other high-value fruits that can replicate our success stories in bananas and pineapples; the digitalization of many of the parts of the agribusiness supply chain, like using drones in farming; and the increased processing of raw materials instead of exporting them raw.
To be continued…