What if Pinochet Was Elected Into Presidency?


To start with, the story of Chile’s recovery and transition from dictatorship to democracy would have been very different. Pinochet’s election to the presidency in 1980 could have been viewed as a liberalization and democratization that could have transformed Chile. Instead, a more-authoritarian and authoritarian-minded Pinochet gained the presidency in 1980 and maintained it until 1990.

Moreover, the economic record of the Pinochet years was far better than what many people think. Unemployment, the principal measure of the economic health of a society, fell from about 20 percent in 1973 to 8.5 percent in 1982, just as Pinochet was coming to power. The economy was more diversified than most people realize. Although, like other Latin American countries, it was deeply affected by the international crisis of the 1970s, and by the subsequent trade and economic crisis of 1982, Chile’s gross domestic product per capita grew at an average annual rate of 4.5 percent between 1980 and 1990.

It is also often said that the Pinochet government tried to do too much too fast. The truth is that the government took significant steps to reverse the legacy of Allende and to create an economy and society that would be a viable successor to that of Allende.

The primary goal was to create a competitive private sector, with small, stable, and responsible companies and a strong, independent, and efficient central government that protected private property and was accountable to the public. Pinochet took steps to promote privatization in the early 1980s, partly by encouraging the sale of government-owned enterprises, mostly the power and water sectors, to private companies.

Pinochet also significantly increased the productivity of the country’s workforce. Although government regulations were tightened after the crisis of 1982, private-sector employment grew faster than in other Latin American countries. Between 1983 and 1987, the share of the workforce in the formal sector (the proportion of the workforce employed by the government or in the private sector) fell from 47 percent to 42 percent. Between 1983 and 1991, the annual growth rate of real GDP per capita in Chile was higher than in any other Latin American country.

There was also significant growth in Chilean consumption. The proportion of total household income that was spent on food, beverages, and tobacco declined sharply between 1980 and 1990. From the beginning of the 1980s to the middle of the 1990s, the growth rate of total household consumption was higher in Chile than in any other Latin American country.

After the crisis of 1982, a system of macroeconomic stability was created, with tight monetary and fiscal policy, a modest government budget deficit, and a financial system in which the state had a large share of the banking system. In fact, in the early 1980s, before the economic crisis, the state’s share of the banking system was twice the level in any other Latin American country.

A temporary fiscal deficit (the difference between government expenditures and tax revenues) was reduced to zero in 1990. Although the government ran a large deficit in 1991, the fiscal balance improved to the level of 1990. Public debt as a percentage of GDP fell from 50 percent in 1980 to 27 percent in 1990.

Chile’s financial system was characterized by a large government share of the banking system, a high level of credit, and a large volume of external borrowing. These factors made it possible for the state to finance the substantial fiscal deficit that developed after the crisis of 1982.

After the 1980s crisis, Chile’s inflation rate fluctuated around the upper bound of the permitted range, and inflation was largely determined by the price level of the underlying economy. Between 1983 and 1991, inflation averaged 7 percent per year. After 1991, when the exchange rate regime changed, inflation averaged 4 percent per year.

In 1992, the Ministry of Finance was reorganized, and in the same year the government adopted a new economic strategy to overcome the recession and keep inflation below 5 percent. It also introduced an inflation target of 4 percent per year. By adopting an inflation target, Chile was the first country to commit to a specific inflation rate. Since 1992, inflation has averaged 3.5 percent per year.

Reform of the banking system and its financial instruments began in the early 1990s. In 1990, the government announced a reform of the exchange rate system, introducing a “flexible exchange rate” regime that allowed the government to buy or sell the exchange rate.

The price level target was retained. The government’s goal was to achieve the new exchange rate and price level targets through flexible monetary and fiscal policy, as well as price-setting and price-elasticity adjustments of the exchange rate and prices. In practice, the exchange rate policy was more flexible than expected.