Economy in Crisis (1981-1984)

The onset of global economic recession in 1981 became the first external challenge to Chile's engine of economic growth and development, and would profoundly impact the character of its political economy. The recession fundamentally challenged Sergio de Castro's theories on monetarism and the role of states and markets in national development. de Castro's economic theories were linked to highly idealistic and theoretical perceptions of the behavior of markets, which more often than not neglected to coincide with market realities. The Chicago Boys have been accused of "applying [a] simplistic... version of neoliberalism to a complex Chilean reality," a reality that included an economic program protected by a repressive dictatorship that was nonetheless not immune to public pressure or the temporalities of global economic relations.1

In 1982, the gross national product of Chile fell a dramatic 14 percent over the course of the year. GDP fell over 19 percent and the number of bankruptcies tripled. Workers, the one element of Chilean society that benefitted least from or, at worse case, were victimized by the "Chilean miracle," bore the brunt of the recession as unemployment rose to 30 percent. These rates of unemployment and recession were the worst since the time of the Great Depression.

The economic crisis touched off months of protests and demonstrations. The Pinochet regime, which had become institutionalized by a 1980 plebiscite, faced a serious threat to its monopoly of violence. Neoliberal elements in the regime were threatened by the crisis as well, but de Castro held firm, attempting to borrow Chile out of recession and refusing to inflate the currency, which might have possibly helped ease the pain of the economic crisis on the Chilean people. Whereas state-centered development was decried as the cause of the Latin Debt Crisis of 1982, neoliberalism was demonized in Chile as a progenitor of the recession. In the end, de Castro and his neoliberal, free-market policies were sacrificed to save the regime. Pinochet selected a new economic minister and aides who would enact a more pragmatic, market-oriented development model that would not exclude strategic use of state monetary and fiscal policies.

During the economic crisis, over 70% of the banks and financial institutions in Chile were nationalized to prevent bankruptcy and panic. Subsidies also grew in scope and amount to help protect the domestic economy from suffering the contagion of global markets. Whereas economic gains had been privatized during the primary years of the Pinochet regime, the losses were now being socialised at the expense of the taxpayers and Chilean workers. After the crisis, more industries, institutions, and infrastructure was in the hands of the Chilean state than ever during the Allende government; the irony should be abundantly clear, and serve as an example that is ever-more prescient in the context of the recent bail-outs in the US earlier this year.

1Peter Winn, Victims of the Chilean Miracle (Duke University Press: Durham, 2004) p. 41.