At a time when Latin America struggles with socioeconomic and political turmoil, Chile stands as a solid contrast. The country tops Latin America regarding economic freedom, security, development and globalization and is the only country in Latin America that the World Bank has ranked as a high-income country. 

However, a few decades prior, the Chilean economy was in a deep financial crisis. Between 1982 and 1983, Chile’s GDP fell by 16%, unemployment soared to 30%, and around half of the population fell below the poverty line, while extreme poverty affected 30% of the population. How did Chile go from a bleeding economy to the top of the ranks in Latin America and earn a spot as a developed country? 

Chile’s Road to Growth 

Starting in 1985, the Chilean government, with assistance from the Chicago Boys, a group of Chilean economists who were prominent around the 1980s, shifted focus toward economic growth and financial solvency. Exports grew rapidly and unemployment decreased. The United Nations Economic Commission for Latin America and the Caribbean showed that Chile experienced the highest levels of economic growth of all countries during the 1980s. 

While these efforts established the groundwork for Chile’s economic transformation, they did not address the widespread poverty, which resulted in a collapse in public health services, lower wages and lower social pensions for the elderly. Following these results, a new approach placed the fight against poverty as the nation’s top priority under Chile’s Growth with Equity Development Strategy. The administration sought to balance pro-growth policies along with strong social policies. 

4 Objectives in Chile’s Path to Development

Chile’s path to development focused on four primary objectives:

• The Chilean government opened the economy to world trade and focused on developing a strong export sector. Free trade agreements and eliminating tariffs and other barriers to trade have complemented this strategy.
• The government launched a conservative fiscal policy to shrink public debt. It sponsored state-run policies to decrease national spending and lower inflation, which was at crippling rates. Chile’s inflationary crisis was so severe that, in 1973, it reached 600%.
• The government reformed labor and tax policies to expand social protection. It increased wages, expanded income support for low-income families and increased minimum pensions. Additionally, it invested strongly in aid directed toward education, skills, health services and the construction of new schools and hospitals. 
• Chile reconstructed its private sector by transferring control of numerous state-run industries to the private sector and expanding job creation. Significant reforms that rebuilt Chile’s domestic capital market, banking system and pension fund system followed this. The central piece to these strategies was reducing the tax burden on companies, which would enable them to increase investment levels, invest savings in the financial market and repay their debts to the banks.

The Reform’s Immediate Impact

Following the new policies, the Chilean economy grew at 6% per year, and poverty reduced from 40% to 20% of the population between 1990 and 2000, which was a historic high. Furthermore, in a continent that ranks last in wealth inequality, the policies cut in half the extreme income disparity between the top 20% and the bottom 20% of the country. These policies continued to spur growth and reduce poverty during the 2000s. In 2022, the poverty rate was 4.8%, drastically lower than the average in Latin America. 

A Model for Latin America

Chile is often referred to as the target model for other countries in Latin America due to its success in its economic restructuring and reaching a high level of development. However, economies across the globe are not uniform, and there is not a single solution applicable to all of Latin America. Yet, there are some lessons that other countries in Latin America can use that Chile’s path to development has illustrated.

The Importance of Social Networks and Institutions

Two very important conditions allowed the reform to be not only successful but also sustainable. The first was the establishment of an efficient network of social protection for low-income workers and families. Chile’s experience and early failures show that development centered on economic growth cannot abandon attention to social protection, health and education. The second was the creation of effective laws and institutions that provided stability to the economic policies and ensured they were maintained over time. A major problem in Latin America that hinders its growth is the constant change of policy that resets any progress. Growth needs to be stable and consistent for it to be sustainable.

Additionally, while many countries in Latin America have tried to obtain economic growth through isolationist policies, such as basing their economies on import substitutions, Chile’s path to development shows that being a global player has its benefits. By opening its economy up to world trade, Chile was able to earn itself a seat at the global table. 

Looking Ahead

Through insightful economic reform, Chile went from a country on its knees to Latin America’s most stable economy. Chile was able to cut poverty successfully, split inequality and boost job creation tremendously. However, while there have been significant improvements, there is still progress to be made. Chile still battles significant wealth inequality and will need to address this issue with continued social investment that works to expand social mobility. Nevertheless, Chile has left behind many lessons and guidance for the rest of Latin America to follow as they attempt to walk their development paths. 

– Cameron Alcocer
Photo: Flickr