Augusto Pinochet's Uncomfortable Legacy

Dead at 91, the former Chilean dictator is remembered for his intolerance and strong-arm tactics, but also for turning around a mismanaged economy

I'll never forget the early-morning phone call I received on Feb. 25, 1982. I was working in Santiago, Chile, as the bureau chief for United Press International, and I had an interview scheduled that day with Tucapel Jiménez, a labor union leader who a few days earlier had called on Chilean workers to form a united front to protest the economic policies of military President Augusto Pinochet. My interview, I was told, wouldn't be taking place: Jiménez's body had been found a few hours earlier, shot five times in the head. His throat had also been slashed.

Those were the dark days of Pinochet's 17-year dictatorship, which ended after Chileans, in a 1989 referendum, finally demanded that he step down. Few tears were shed when he died on Dec. 10 in a Santiago military hospital.

During Pinochet's long rule, dissent was not tolerated and was often punishable by death. Only when Chile returned to civilian rule were the secret police agents who killed Jiménez arrested and convicted for the crime.

Military Coup

Pinochet, whose dark glasses and stern demeanor made him the caricature of the classic Latin American dictator, had publicly warned Jiménez that a proposed national strike would not be permitted. "This government tolerates many things, but we will never tolerate a return to the past," he said in a speech days before Jiménez's death. "I would dare to tell those who are carrying out actions against the government—be very careful, sirs."

When Chile's military seized power in a bloody 1973 coup that ousted Socialist President Salvador Allende, the Chilean economy was in tatters—thanks in part to Allende's mismanagement, but, as we now know, thanks also to covert CIA operations aimed at destabilizing the regime and keeping Communism from spreading through the hemisphere.

I had been a high school exchange student in Chile in the months leading up to the coup, and I experienced first-hand the food shortages—waiting in line for scarce bread at 5 a.m. and watching the black-market chicken vendor dart from door to door in my host family's neighborhood with his precious packages of protein for sale to the highest bidder.

The Chicago Boys

Pinochet introduced bold economic reforms to turn around the Chilean economy, turning for advice to free-market economists trained under Milton Friedman at the University of Chicago. The "Chicago Boys," as they were called, advocated shock therapy: Slash import tariffs and force Chilean industry to compete. Introduce private pension fund schemes to replace the government's under-funded system. Privatize state-run companies.

Thousands of local businesses went belly-up, and unemployment climbed to 25%. Soup kitchens sprang up around the country to feed the poor, and housewives soon began banging spoons on empty cooking pots to protest the hardship. Jiménez was no radical revolutionary—two years before his murder he was welcomed to the White House by President Jimmy Carter. He was just articulating what many Chileans felt—that the shock therapy, like Pinochet's heavy-handed rule, was too harsh.

Indeed, shortly after Jiménez died, Chile went through a banking crisis that plunged the country into another recession and forced the Chicago Boys to adjust their economic formulas once again. Chile's economy turned in negative economic growth from 1980 to 1985.

An "Economic Miracle"

Yet, within three years of Jiménez's death, the economic pain turned to gain. The economy started growing briskly, averaging 6.3% annual growth from 1985 to 1990 and turning in a stellar 9% leap in GDP in 1995. Per capita income has continued to rise on average 4.1% annually over the past 15 years, compared to just 1.1% for the rest of Latin America.

Admirers, including the International Monetary Fund, widely praised the Chilean "economic miracle.

" Although some industries vanished in the face of foreign competition, others had risen to take their place: Exported fresh fruit, wine, and farmed salmon became familiar sights in the world's supermarkets.

International economists praised Chile's privately run pension funds, which over the past 25 years have delivered average annual returns of around 11%. Neighboring countries began to emulate some of Chile's policies, from pensions to privatizations, but none of them seemed able to carry out the economic reforms with the same flair—or success—as Chile.

Prosperity without Democracy

It's too difficult, Chile's democratically elected neighbors said, to ram through harsh economic reforms without debate as Pinochet had. Academics from Buenos Aires to Boston agreed that Chile's success might not have been possible without Pinochet's rigid rule.

"I don't think there's a doubt in many people's mind that Pinochet turned this country around and that authoritarian rule might have been the only way to implement the dramatic economic policies he did," says Michael Grasty, a lawyer who heads Oracle's Chile operations.

"We were headed in the Cuban direction, and now we're an example, at least for Latin America." But the country paid a high price, he adds. "I'd rather have a more perfect democracy and not be able to go ahead with some of these pressing economic reforms we still have, rather than have someone ram them through."

The Washington Consensus

It's impossible to know whether Chile would be the economic success it is today if it hadn't been strapped into a straitjacket for all those years. It undoubtedly made a difference that Pinochet was free of electoral pressure and could effectively banish labor protests through unspeakable means. But Chile might well have continued along its rational path toward economic stability anyway.

The country suffered much hardship during the economic chaos of the Allende years, and many Chileans knew the economy had to be restructured. And the 1980s and early 1990s were the years of the so-called Washington Consensus, a series of free-market policy recommendations that multilateral lending institutions urged developing countries to adopt to straighten out their economies and attract foreign investment.

The fact that Chile ended up being the star pupil of the Washington Consensus may be partly due to the fact that the Chileans are, well, different from many of their Latin American neighbors. Perhaps it's the country's isolation—a long, skinny geographic strip that is separated from the rest of the region by the towering Andes mountains and the huge Atacama Desert—or the country's mix of industrious immigrants from Spain and Germany. The Chileans have a pragmatic streak that has served them well over the years.

A Cooperative Economy

Less inclined than their fellow Latin Americans to cling to a nostalgic past of price controls and subsidies, Chileans are quick to adopt promising new ideas. In the 1980s, when Argentine supermarket cashiers were still snarling at customers, Chile had welcomed Carrefour, the French hypermarket chain, where gracious hostesses strolled around offering samples of cheese and sausage to shoppers.

When Chilean scientists noted that the country's Pacific coastal fjords would be ideal for commercial fish farming, a government-backed technology incubator, Fundación Chile, developed the scientific expertise needed to launch the salmon farming industry and private sector investors quickly turned it into the world's second-largest producer. That kind of public-private collaboration, so common in successful economies such as Korea's, isn't seen much in Latin America, save Chile.

Thanks to years of steady economic growth, Chile managed to halve the country's poverty rate since 1990, to just 18% today—much better than the 50% rates seen in most of Latin America. The country still has problems, including a huge gap between the rich and the remaining poor (see, 10/3/05, "Chile: A Lopsided Miracle").

A Better Way

Even the much-vaunted private pensions program is in need of revamping to trim the excessive profits of fund managers. And Chilean students took to the streets in massive demonstrations earlier this year to demand greater spending to improve the country's inadequate educational system.

Still, with high world prices for Chile's substantial copper exports, the economy is set to grow more than 4.5% this year, so reforms might not seem as urgent as they once were. "We should be growing at 8% if we want to reach our full potential," says Oracle's Grasty. "The problem is that we're too comfortable—you have to be really uncomfortable in order to make the difficult changes a country needs."

Fortunately, Chile has left behind the years of extreme discomfort and suffering it went through while undergoing economic shock therapy in the early 1980s. Today, its challenges are being debated openly and resolved through consensus, by a democratically elected congress. And that is the way most Chileans seem to prefer it—even those who believe Pinochet contributed something valuable by turning the country's economy around.