Chile must let economy roar - Column

0 Comments | Insight on the News, Jan 10, 1994 | by Deroy Murdock

As dusk lulls Chile's capital on a Friday evening, a construction crane twirls aboveibbalaba Stre . long past the time when American hard hats would have fled for the weekend. But tonight there's just no stopping the work on yet another Santiago high rise.

Meanwhile, a gaggle of teenagers has gathered across the street. As rock music blares and supportive commuters toot their car horns, these volunteers gleefully wave flags and banners for legislative candidate Carlos Bombal. His slogan: "A New Style."

These days, Chile's new style is clearly on display. The Dec. 11 presidential and legislative elections underscored Chile's commitment to democracy and the widening distance from the military dictatorship of Gen. Augusto Pinochet. Indeed, the tranquillity, professionalism and variety of candidates and parties in the race was impressive, given that this was only Chile's second national election after 17 brutal years of rule by decree.

Much of Latin America also has come to admire Chile's swift and steady development, primarily through free market reforms. While Chileans had much to celebrate as they went to the polls, however, some fear that statist tendencies are creeping up there like a sunrise over the Andes Mountains.

Of course, things were far darker before Chile embarked on the road to prosperity. When Pinochet snatched power in a 1973 military coup, the economy was largely govermnent-controlled. Prices on about 3,200 products were fixed by bureaucrats rather than by businessmen.

As the man behind the deportations, detentions and "disappearances" of thousands of his critics, Pinochet ruled with an iron fist. Yet he also relied on the invisible hand of the free market to lead Chile's economy away from stagflation. His team of young, University of Chicago-trained Chileans, the so-called Chicago Boys, liberated the economy by slashing tariffs, ending price controls and privarizing many state-owned companies.

Coupled with a strong export orientation, these changes spawned solid growth for the past nine years. In 1992, Chile's gross domestic product advanced by 9.7 percent. Unemployment today is a mere 4 percent. The World Economic Forum in Switzerland recently ranked Chile the fifth most competitive newly industrialized power in the world, behind Singapore, Hong Kong, Taiwan and Malaysia. And while the current 12 percent annual inflation rate remains a nagging but stable problem, it's a long stride from the 505 percent rise in prices in 1974.

Chile's 1993 growth rate should be about 6 percent, and 1994 projections are in the range of 4 percent. While most people in the United States would pray for such healthy growth, some Chileans worry that the center-left governing coalition that continues under President-elect Eduardo Frei has softened on reform and leeched some of the steam out of the Chilean economic engine.

"I guess the government believes that since Chile has improved so much, now we can afford to let things dilapidate," complains Francisco Garces, an economic analyst at Santiago's Liberty and Development Institute. He and others say outgoing President Patricio Aylwin's administration has dragged its feet on further privatization (namely of Codelco, Chile's huge, state-owned copper company). The critics were further frustrated by the government's increases in corporate and value-added taxes in 1992.

These increases have only exacerbated the problem of high personal tax rates that apply to relatively low wages. The top rate of 50 percent, for instance, kicks in at about $48,000. Consequently, "most Chileans have turned themselves into companies and try to turn everything they do into a tax deduction," says David Gallagher, a British-Chilean investment banker.

Arturo Fontaine, director of the Center for Public Studies in Santiago, argues that the democratically elected government's "small steps backward" have allowed Chile to "disconnect the free market from its association with Pinochet." Fontaine believes that the nation's unleashed economy is now distinct enough from Pinochet's to stand on its own as a democratic institution. It's unlikely, he believes, that market reforms will be sacrificed in an effort to exorcise the ghosts of dictatorship.

Not far from Fbntaine's office, Mark Klugmann, a 34-year-old former Reagan speechwriter, bites into a just-delivered Domino's pizza. "There's opportunity here," says Klugmann, a political and media consultant. "There's so much going on." From his 14th-floor balcony, the Andes seem an arm's length away. This tranquil vista is disrupted the hammer-tapping and wrench-clanging from the dozen high-rise office and apartment construction sites visible through his windows.

Although Klugmann generally favors Chile's direction, he warns: "It's now even easier to invest in other countries in South America than it is here. Foreign businesses still can come, but now they face environmental and consumer-products regulations that were not here five years ago."

The U.S. should heed Chile's lessons: free trade, privatization and faith in the market indeed are reliable prescriptions for robust growth and rising wages. But the winners of Chile's elections should beware of repeating the mistakes of the Bush-clinton years: Increasing taxes and cooking up regulations is a surefire way to turn an economic miracle into an also-ran.