Full Free-Market Capitalism Failed in these 13 Countries

Table of Contents

1. Introduction
2. Chile
3. Argentina
4. Uruguay
5. Bolivia
6. Brazil

1. The Asian Tigers
   A) Indonesia
   B) Thailand
   7. Japan
   8. China
   9. South Africa
   10. Russia
   11. Mexico
   12. South Korea
   13. Poland
   14. Iraq

Introduction

Chile, Argentina, Uruguay and Brazil were once the biggest laboratory for free-market capitalism. During their period of growth, these countries looked more like Europe and North America than the rest of Latin America.

By the 1950s, Argentina had the largest middle class on the continent. Before the junta, it had fewer people living in poverty than France or the U.S. — 9% — and an unemployment rate of only 4.2%. Next-door, Uruguay had a literacy rate of 95% and offered free health care for all it’s citizens.

Then the juntas took over.U.S. backed the military governments and the Chicago School economics department turned these countries into living laboratories.

1. Chile

The U.S. government paid to send Chilean students to study economics at the University of Chicago. The economist Schultz and his colleagues at the university were paid to travel to Santiago (the capital of Chile) to conduct research into the Chilean economy and to train students and professors in Chicago School fundamentals.

The students who went through the program, whether in Chicago or its franchise operation in Santiago, became known throughout the region as “los Chicago Boys.” It became known as a “Chicago School” revolution, since so many of Pinochet’s economists had studied under Milton Friedman at the University of Chicago. There was a virtual conveyor belt delivering Chicago Boys to the two institutions’ hulking headquarters on 19th Street in Washington.

The 1st experiment with neoliberalism occurred in Chile after Pinochet’s The coup, in 1973, against the democratically elected government of Salvador Allende — who was promoted by domestic business elites who were threatened by Allende’s drive towards socialism. The coup was also backed by US corporations, the CIA and US Secretary of State Henry Kissinger.

Friedman advised Pinochet to impose a rapid-fire transformation of the economy — known as “Shock Therapy.” For the first 1.5 years, Pinochet faithfully followed the Chicago rules. He:

1. They reversed the nationalizations and privatized public assets,
   *Privatized some state-owned companies (including several banks)
2. Allowed new forms of speculative finance
3. Flung open the borders to foreign imports, tearing down the barriers that had long protected Chilean manufacturers.
   *Freer trade and the right of foreign companies to repatriate profits.
   * Export-led growth was favored over import substitution.
   *and facilitated foreign direct investment and
4. Cut government spending by 10%
5. Increased the military significantly
6. Eventually, public schools were replaced with voucher-funded private ones. privatized social security,
7. The labor market was ‘freed’ from regulatory or institutional restraints (trade union power, for example)
8. Opened up natural resources (fisheries, timber, etc.) to private and unregulated exploitation (in many cases riding roughshod over the claims of indigenous inhabitants)

In 1974, inflation reached 375% — the highest in the world and almost 2x what it was under the ex-president Allende. De Castro, a Chilean economist, stacked the government with his fellow Chicago Boys, appointing one of them to head the central bank. In 1975, they cut public spending by 27% in one blow and they kept cutting until by 1980 it was half of what it had been under Allende. Health and education took the heaviest hits.

Pinochet took no pity on local companies and removed even more trade barriers. Between 1973 and 1983, 177,000 industrial jobs were lost. By the 1985, manufacturing as a percentage of the economy dropped to levels last seen during the Second World War. De Castro privatized almost 500 state-owned companies and banks, practically giving many of them away.

In the first year of Friedman-prescribed therapy, Chile’s economy contracted 15%, and unemployment — which was 3% under Allende — reached 20%. And contrary to Friedman’s predictions, this unemployment crisis lasted for years, not months.

Friedman’s prescriptions were so wrenching, a disaffected Chicago Boy wrote, that they could not “be imposed or carried out without the twin elements that underlie them all: military force and political terror.”

For the average family, roughly 74% of its income went to buying bread. The family had to cut out “luxury items” like milk and bus fare to get to work. By comparison, under Allende, bread, milk and bus fare took up 17% of a public employee’s salary.

Many children stopped getting milk at school, since one of the junta’s first moves was to eliminate the school milk program. As a result of this cut plus the desperation at home, more and more students were fainting in class, and many stopped going altogether.

The public school system was replaced by vouchers and charter schools, health care became pay-as-you-go, and kindergartens and cemeteries were privatized. The social security system was also privatized.

It all went sour in the Latin American debt crisis of 1982 where despite Chile’s strict adherence to Chicago doctrine, it’s economy crashed. Its debt exploded, it faced hyperinflation once again and unemployment hit 30% — 10x higher than it was under Allende.

The situation was so unstable that Pinochet was forced to do exactly what Allende had done: he nationalized many of these companies. And in the debacle, almost all the Chicago Boys lost their influential government posts, including Sergio de Castro. Several other Chicago graduates held prominent posts with the piranhas and came under investigation for fraud.

Pinochet held power from 1973 to 1990 — 17 years. The steady growth that began in 1985 was a full decade after the Chicago Boys implemented their shock therapy and well after Pinochet was forced to make radical corrections.

In an extremely short time, a small elite leapt from wealthy to super-rich — bankrolled by debt, heavily subsidized and then bailed out with public funds. By 1988, after 45% of the population fell below the poverty line, the economy stabilized and was growing rapidly. The richest 10% of Chileans, however, had seen their incomes increase by 83%.

Press reports about Pinochet’s massacres sparked a worldwide outcry, and activists in Europe and North America aggressively lobbied their governments not to trade with Chile — an unfavorable outcome for a regime whose reason for existence was to keep the country open for business.

Right now, Chile is the 2nd most unequal country as measured by the Gini Coefficient.

Milton Friedman conveniently ignored the fact that the central hypothesis for which he received the Nobel prize was being graphically proven false by the breadlines, typhoid outbreaks and shuttered factories in Chile.

Argentina

In 1979, a junta seized power from Isabel Peró, in Argentina. This junta faithfully followed Pinochet, thanks to the abundance of Argentine economists who had gone through the Chicago program. It attacked the policies and institutions that had lifted Argentina’s poor into the middle class and later privatize the country’s oil reserves and social security.

Martínez de Hoz’s first act as minister of the economy was to ban strikes and allow employers to fire workers at will. He lifted price controls, sending the cost of food soaring. He lifted restrictions on foreign ownership and in the first few years sold off hundreds of state companies. He deregulated the price of meat, and the cost was up more than 700%, leading to record profits.

Within a year, the country began to display signs of the underdevelopment. Poor neighborhoods had no water, and preventable diseases ran rampant. Wages lost 40% of it’s value, factories closed, poverty spiraled. In the decades to come, more than half the population were below the poverty line.

The debt spiral was born. During junta rule, Argentina’s external debt ballooned from $7.9 billion the year before the coup to $45 billion at the time of the handover — debts owed to the IMF, the World Bank, the U.S. Export-Import Bank and private banks based in the U.S. (It was the same across the region.) In 1989, the debt reached $65 billion.

Argentina suffered genocide. As Eduardo Galeano said in 1990, “People were in prison so that prices could be free.”

Uruguay

Uruguay was an egalitarian society then it’s generals invited Arnold Harberger and economics professor Larry Sjaastad from the University of Chicago and their team, which included former Chicago students from Argentina, Chile, and Brazil, to reform Uruguay’s tax system and commercial policy.

The immediate effects: real wages dropped by 28% and hordes of scavengers appeared in its capital for the first time. The junta expanded the debt from $500 million to $5 billion, a huge load in a country of only 3 million people.

Bolivia

Although Jeffrey Sachs knew next to nothing about Bolivia and its long history of colonial exploitation, the suppression of its indigenous inhabitants and the hard-won gains of its 1952 revolution, he was convinced that in addition to hyperinflation, Bolivia suffered from “socialist romanticism.”

Sachs advocated government austerity and price increases in the midst of the crisis. His advice to Banzer, the President of Bolivia, was straightforward: only sudden shock therapy would cure Bolivia’s hyperinflation crisis. He proposed raising the price of oil 3-10x, the elimination of food subsidies, the canceling of almost all price controls. It froze government wages at their already low levels for a year, called for deep cuts to government spending, flung open Bolivia’s borders to unrestricted imports and called for a downsizing of state companies.

Sachs was correct in predicting that price increases would end hyperinflation. But there were other horrors. In 1985, the year of shock therapy, the per capita average income was $845. Two years later it had fallen to $789, real wages were down 40% and peasants were earning (on average) just $140 a year. And between 1983 and 1988, the number of Bolivians eligible for social security dropped 61%.

One immediate result was that many of Bolivia’s desperately poor were pushed to become coca growers. By 1989, 1 in 10 workers were turning to work in the cocaine industries. Just two years after the shock, illegal drug exports were generating more income for Bolivia than all its legal exports combined, and an estimated 350,000 people were earning a living in some facet of the drug trade.

Brazil

The generals who came to power in Brazil promising financial order, actually took from $3 billion in 1964 to $103 billion in 1985. The Volcker Shock in 1980 exploded Brazil’s debt, doubling it from $50 billion to $100 billion in 6 years.

The Asian Tigers & Protectionism

The Asian Tigers were economic success stories developing with speed. However, their expansion weren’t based on free trade. Malaysia, South Korea and Thailand had highly protectionist policies that barred foreigners from owning land and from buying out national firms. They helped prove that mixed, managed economies grew faster and more equitably.

In the mid-90s, under pressure from the IMF and the newly created World Trade Organization, Asian governments agreed to split the difference: they would maintain the laws that protected national firms from foreign ownership and resist pressure to privatize their key state companies, but they would lift barriers to their financial sectors, allowing a surge of paper investing and currency trading.

The Asian Tigers were ready to be reborn Chicago-style: privatized basic services, flexible workforces, low social spending and of course total free trade.

According to the new agreements, Thailand would allow foreigners to own large stakes in its banks, Indonesia would cut food subsidies, and Korea would lift its law protecting workers against mass layoffs.
*One of the triggers for the collapse in East and Southeast Asia in 1997–98 was excessive urban development in Thailand.

In 1997, when the flood of hot money suddenly reversed current, it was a direct result of speculative investments. If free-markets worked perfectly, the hot money that fled the Tigers would rush back to buy up the Tigers’ now irresistible stocks, bonds and currencies.

But something else happened; the market panicked. The reasoning went like this: if the IMF thought that the Tigers were such hopeless cases that they needed to be remade from scratch, then Asia was obviously in much worse shape than anyone had previously feared.

The IMF’s own internal audit — the Independent Evaluation Office — concluded that the structural adjustment demands were “ill-advised” and “broader than seemed necessary” as well as “not critical to resolving the crisis.” It also warned that “crisis should not be used as an opportunity to seek a long agenda of reforms just because leverage is high, irrespective of how justifiable they may be on merits.”

A group of U.S.-educated Indonesian economists (the Berkeley Mafia) returned to Indonesia to build a copy of Western-style economics department at the University of Indonesia. On top of that, they passed laws allowing foreign companies to own 100% of the resources and within two years, Indonesia’s natural wealth — copper, nickel, hardwood, rubber and oil — was being divided up among the largest mining and energy companies in the world.

In order to get the IMF loan, the South Korea’s banking sector needed to shed 50% of its workforce (later lowered to 30%). In an overt subversion of democracy, the IMF effectively held South Korea at ransom when it refused to release money until it had commitments from all four main candidates that they would stick to the new rules if they won.

Merrill Lynch bought Japan’s Yamaichi Securities as well as Thailand’s largest securities firm, while AIG bought Bangkok Investment for a fraction of its worth. JP Morgan bought a stake in Kia Motors, while Travelers Group and Salomon Smith Barney bought one of Korea’s largest textile companies. Carlyle used its top-level connections to snap up Daewoo’s telecom division, Ssangyong Information and Communication (one of Korea’s largest high-tech firms), and it became a major shareholder in one of Korea’s largest banks. A few years later, Daewoo’s once-mighty car division, which the company had valued at $6 billion, was sold off to GM for just $400 million.

South Africa

South Africa was free but simultaneously captured by the international organizations (IMF, WTO). In June 1996, Mbeki unveiled a neoliberal shock therapy program for South Africa: more privatization, cutbacks to government spending, labor “flexibility,” freer trade and even looser controls on money flows. Mbeki’s grand gesture failed to attract long-term investment. It didn’t work.

Not only did the ANC renege on Mandela’s original pledge of “the nationalisation of the mines, banks and monopoly industry” but because of the debt, it was doing the opposite — selling off national assets to make good on the debts of its oppressors.

40% of the government’s annual debt payments go to the country’s massive pension fund. The vast majority of the beneficiaries are former apartheid employees. South Africa has wound up with a twisted case of reparations in reverse, with the white businesses that reaped enormous profits from black labor during the apartheid years paying not a cent in reparations, but the victims of apartheid continuing to send large paychecks to their former victimizers.

Mandela acknowledged the trap in 1997, “The very mobility of capital and the globalization of the capital and other markets, make it impossible for countries to decide national economic policy without regard to the likely response of these markets.”

To your success
Nikhil Mahadea