Chile´s Road to Freedom
March 11, 2018. Victory for Chilean Model. After 4 years trying to dismantle the pillars of the Chilean Model, President Bachelet leftist government ends today as a great failure and without being able to touch either the system of personal retirement accounts or the Constitution.
January 1, 2018. Economía y Sociedad No 94 is published. In the cover “Mining 3.0. The engine of a new Chile”.
October 1, 2017. Economía y Sociedad No 93 is published. In the cover “The victory of the Chilean Revolution”.
July 1, 2017. Economía y Sociedad No 92 is published. In the cover “The jeffersonian rebellion of 1973”.
May 1, 2017. Economía y Sociedad No 91 is published. In the cover “The other American Dream”.
February 1, 2017. Economía y Sociedad No 90 is published. In the cover “Chile 3.0. The Challenge”.
November 1, 2016. The return of “Economía y Sociedad”. José Piñera renews the publication of his magazine of opinion with the stated purpose of defending the three main pillars of the Chilean Model: the economic regime, the system of private retirement accounts and the 1980 Constitution. With No 89 it is opened the fifth epoch of the magazine. The cover reproduces the already famous graph: “The Take Off of Chile” (link to graph) with the title: “Chile: What is at stake”.
May 1, 2014. 33 years. The Personal Retirement Accounts system has remained intact for 33 years of operation, under seven very different governments and various world crisis, without ever a peso being lost to theft or fraud, and with an extraordinary annual rate of return, above inflation, of 8.7% for workers.
Nov. 28, 2011. Gingrich for Chilean Model. “Republican front-runner Newt Gingrich, former Speaker of the House, made a strong case at last week's GOP debate for Chilean-style personal retirement accounts and listed the details in his 21st Century Contract With America” (Newt touts "Chilean model" for Social Security).
Nov. 5, 2011. The US entitlements debate. C-Span organized a conversation between Newt Gingrich and Herman Cain on the crucial problem of entitlements. Both Republican candidates proposed the Chilean Model of personal retirement accounts as the solution for the USA. Former Speaker Gingrich mentioned Jose Piñera, the architect of the Chilean Model, and called "breathtaking" the fact that the Chilean pension funds have accumulated the equivalent of 75% of GNP, resources that are behind the extraordinary growth of Chile in the last three decades.
Feb. 14, 2011. Private Chile. It is reported that 80% of Chileans students chose a private higher education institution in 2011. So, the 1975-1981 structural reforms have led to the prevalence of private education, private pensions and private copper production. Three enormous and positive transformations for the long term prospects of Chile.
Jan. 31, 2011. In Santiago, the capital of Chile, 72% of parents chose a private school for their children. Governments schools continue their long term decline as a result of parents free choices.
January 1, 2010. From being the most protectionist economy in the early 70s, Chile may well be now the most free trade country in the world.
December 4, 2009. “ Chile is a stunning example of how embracing free markets and free trade brings prosperity”, affirms an IBD editorial titled “How Chile got rich”.
September 17, 2009. No 5 in Economic Freedom. Thanks to the free market revolution of 1975-89, Chile is now No 5, surpassing the USA for the second year, in the 2009 Economic Freedom of the WorldReport
December 18, 2008. No 6 in Economic Freedom. In the Fraser/Cato 2008 ranking, that includes 141 countries, Chile is No 6 in economic freedom. The top 10 are: Hong Kong, Singapore, New Zealand, Switzerland, UK, Chile, Canada, USA, Australia and Ireland.
September 11, 2008. Five world leaders on Chile. It is extraordinary that, despite the leftist propaganda that has confused so many people, five top leaders in their fields, persons of the utmost integrity and talent, have dared to express their admiration for the legacy of the government presided by President Pinochet. They are Margaret Thatcher, former Prime Minister of the UK; Friedrich Hayek, Nobel laureate and public intellectual; Milton Friedman, Nobel Laureate and Chicago economist; Jorge Luis Borges, Argentinean poet; and Paul Johnson, British historian.
May 15, 2008. The success of the Chilean pension model. Economist Richard Rahn publishes an article titled A working model asserting that: "We now know that both in theory and practice privatized social security works far better than pay-as-you-go government systems. Opponents can only keep their citizens from adopting Pinera-type systems by keeping them ignorant of the benefits, and making false statements about the privatized social security system's successes. Fortunately, the world still has a very vigorous Jose Pinera, who for three decades has made it his life's work to empower workers and make them small capitalists, freed from the government foot upon their necks. Mr. Pinera has already made life more secure and prosperous for millions, and with luck it will soon be billions of people."
March 11, 2008. Paul Johnson on Chile. In his latest book, historian Paul Johnson writes: "I admire Chile and its people greatly, and became concerned when my friend Salvador Allende became its president and opened the country to hordes of armed radicals from all over the world. The result was the world´s highest inflation, universal violence and the threat of civil war. So I applauded the takeover by General Pinochet, on the orders of Parliament, and still more his success in reviving the economy and making it the soundest in Latin America. But by preventing the transformation of Chile into a Communist satellite, the general earned the furious hatred of the Soviet Union, whose propaganda machine successfully demonized him among the chattering classes all over the world. It was the last triumph of the KGB before it vanished into history´s dustbin. But Pinochet remains a hero to me because I know the facts." ("Heroes. From Alexander The Great and Julius Caesar to Churchill and De Gaulle", Harpers Collins Publishers, New York, 2007, page 279.)
August 11, 2007. Close to defeat poverty. The Economist publishes an article about the consequences of the Chilean Revolution titled "A country that pioneered reform comes close to abolishing poverty".
January 29, 2007. Honoring Milton Friedman. At an event in New York honoring Milton Friedman, who died a month ago, I am invited to speak about his international impact. Here are my remarks. The other speakers are William Niskanen, Cato Institute's Chairman, and Paul Gigot, Wall Street Journal Editorial Page Editor.
January 2, 2007. Again top 11. The "Index of Economic Freedom" compiled by the Heritage Foundation and The Wall Street Journal for 2006 places Chile again in the extraordinary position of No 11 among 157 countries ranked. Hong Kong is No 1, followed by developed countries like Singapore, Australia, USA, New Zealand, UK, Ireland, Luxembourg, Switzerland and Canada. And then comes Chile, the first country from the vast emerging world. After Chile comes Estonia, and then Denmark, Netherlands, etc. The last two are communist Cuba (156) and North Korea (157). Venezuela is No 144, below Bangladesh (143). On "Property Rights" protection, Chile shares the top ranking position with countries like the USA and the UK.
December 15, 2006. Human rights. Historian James Whelan publishes a clarifying article: "The truth about the victims of political violence in Chile"
December 15, 2006. Three inflection points. "In Chile's history there are only three inflection points: the independence from Spain, the Pacific War, and the free market economic revolution carried out during the Pinochet government" (César Barros, Qué Pasa magazine).
December 5, 2005. Gradual privatization of education. For the first time in Chilean history, in 2004 more children were in private schools (50.66%) than in municipal (or government) schools (49.34%, down from 70% ten years ago). According to the trends, it is projected that only 36% of the children will be in a government school by 2010. In another of our reforms of the early 80s, parents were allowed to choose a private school for their children, in which case the school receives a monthly payment by the government (an imperfect voucher system). An expert has concluded that "the most recent studies find significant differences in test scores between student educated at private voucher schools and those educated at municipal voucher schools" (Claudio Sapelli, "The Chilean Education Voucher System", in What America Can Learn from School Choice in Other Countries, Cato Institute, 2004). The Heartland Institute affirms in an article that " Chile and Sweden are two countries that have experienced vast increases in private (independent) schools as a result of voucher systems launched within the past two decades."
November 6, 2005. Two contrasting paradigms. On Nov. 6, 1917, Lenin takes power in Russia and admonishes: "Workers of the world, unite" (Of course, under the dictatorship of Lenin). On Nov. 4, 1980, Chile creates a pension system that allows every worker to become a small capitalist, and originates a much more appealing vision: "Workers of the world, become owners and thus free".
November 4, 2005. 25 years. In Venticinque anni dopo. La rivoluzione liberale di Reagan e Pinera, the Istituto Bruno Leoni celebrates 25 years since the election of Ronald Reagan and the approval of Chile's pioneering Social Security Reform, both on November 4, 1980. Il 4 Novembre che cambiò il mondo, writes Professor Carlo Lottieri in an Op Ed in the Italian newspaper Il Indipendente. The Cato Institute also celebrates this day stating that "Ronald Reagan was the most eloquent spokesman for limited government of our time" and that "the success of the Chilean system has served as a model for pension reform around the world." A good day to read NYT's John Tierney dossier on the success of Chile's private pension system.
October 29, 2005. FTA with China. Chile closed a Free Trade Agreement with China, our second biggest trade partner after the USA. This is the first such agreement of China with a non-Asian country. Chile now has FTAs with countries representing 74.4% of the world GNP. As suggested in my Agenda 2010, presented two years ago, China was a priority and the next steps should be FTAs with Japan and India.
October 24, 2005. Pension portfolio diversification. The AFPs, extraordinarily successful in getting a high rate of return for all its workers-clients (annual average of 10% real for 24 years), have also exercised, shepherded by the law, a remarkable degree of prudence in investing the pension funds. The portfolio composition of the private pension system is the following: 29.3% invested in the financial sector, 28.9% abroad, 24.8% in corporate bonds and stocks, and only 16.9% in government bonds (less than the government share of the economy). As I explained at length 25 years ago in my weekly TV commentaries, pension fund investing should be guided by the common sense rule of "not all eggs in the same basket". It has worked.
August 26, 2005. Constitution of 1980: amendments and further consolidation. Law 20.050 is published today with amends to the Constitution. The non-elected institutional senators and the decorative National Security Council are eliminated, among other adjustments related to the political process (also a welcomed 4-year presidential term, without reelection). The crucial chapter on "individual rights" is kept intact, as well as the basic institutions and orientation of the Constitution of 1980. The governing Concertación wrongly attempted to change the definition that " Chile is a democratic Republic" (Article 4) for " Chile is a social State", but failed to get the necessary votes. Nobody even mentioned the need to eliminate the anachronistic clause prohibiting CODELCO to have private shareholders. The bipartisan amendments were approved in Congress by 150 votes in favor, three against, and one abstention.
August 11, 2005. Real solvency. The transition financing from a pay-as-you-go to a personal accounts retirement system proceed even better than planned 25 years ago. Chile will have at least a 4% of GNP budget surplus in 2005, helped by very high copper prices and production levels. This surplus is 'after' spending another 3 percent of GNP on the retirees of the unfunded government pension system and a further 1.2 percent of GNP on paying "Recognition Bonds" to workers reaching retirement age in the private pension system (these are zero-coupon Treasury bonds used in the 1980 Pension Reform to compensate, for past contributions, those workers that freely decided to opt out from the government system). Since the hidden pension debt is fast disappearing in Chile and the government external debt is only 8% of GNP, the day will come when world capital markets will recognize that Chile's sovereign debt is much safer than that of developed countries with huge implicit pension liabilities like France, Germany, Italy and Spain.
July 1, 2005. Pro-Americans. "It isn't hard to come up with examples of famous pro-Americans, even on the generally anti-American continents of Europe and Latin America. There are political reformers such as Vaclav Havel, who has spoken of how the U.S. Declaration of Independence inspired his own country's founding fathers. There are economic reformers such as José Piñera, the man who created the Chilean pension system, who admire American economic liberty. There are thinkers, such as the Iraqi intellectual Kanan Makiya, who openly identify the United States with the spread of political freedom. All of these are people with very clear, liberal, democratic philosophies, people who either identify part of their ideology as somehow 'American', or who are grateful for American support at some point in their countries' history." (Pulitzer Prize's Anne Applebaum, In Search of Pro-Americanism, Foreign Policy, July/August, 2005).
June 1, 2005. Private mining contribution. Ten private mining companies, that decided to invest in Chile after the 1981 Constitutional Mining Law ensured full respect for property rights, will pay aproximately US$ 2 billion in income taxes in 2005 (around 25% of the total government foreign debt). The total tax contribution is still higher, since that figure does not include many other indirect taxes generated by the process of mining production (income taxes of suppliers and workers, VAT, etc). Chile's copper production may reach 5.5 million tons this year (up from 1 million in 1981) and so the country will turbo-benefit from the historically high prices.
May 21, 2005. The truth prevails. In his State of the Union, President Ricardo Lagos, a former socialist, praises the new Chile that has emerged thanks to the freedom revolution began in 1975. Here his exact words describing "Chile, un caso de desarrollo exitoso" (Chile, a case of succesfull development).
May 1, 2005. Long-term capital for the economy. After 24 years of operation, without ever losing a peso for the workers through fraud or improprieties, the Chilean private pension system has accumulated US$ 80 billion (equivalent to 75% of GNP). That figure is composed of US$ 67 billion in the pension funds and US$ 13 billion in the insurance companies that provide the life annuities originating from the capitalization system. It is estimated that the system's resources may peak at 100% of Chilean GNP. All Chilean workers in the system (7.1 million) have benefitted from a compounded average real (above inflation) rate of return of 10.1% over 24 years (The Social Security system of the United States provides current workers an equivalent annual rate of return of only 1%).
February 1, 2005. Facts are facts. The influential socialist author Robert Heilbroner dies, but not before reaching this conclusion: "Capitalism has been as unmistakable a success as socialism has been a failure. Here is the part that's hard to swallow. It has been the Friedmans, Hayeks, and von Miseses who have maintained that capitalism would flourish and that socialism would develop incurable ailments. All three have regarded capitalism as the 'natural' system of free men; all have maintained that left to its own devices capitalism would achieve material growth more successfully than any other system. I draw the following discomforting generalization: The farther to the right one looks, the more prescient has been the historical foresight; the farther to the left, the less so." (Dissent, Fall 1990)
January 1, 2005. Chile, top 11. The 2005 version of the Index of Economic Freedom, compiled by the Wall Street Journal and the Heritage Foundation, places Chile as No 11 in its ranking. Since the United States is No 12, this is an extraordinary achievement of the Chilean free-market revolution. The next highest ranking Latin American country is El Salvador (No 24), while Argentina is No 114. The bottom one is, naturally, communist North Korea (No 155). Hong Kong is No 1 and Estonia, the Baltic Tiger, is No 4.
November 23, 2004. "A successful revolution." Fareed Zakaria writes in a column at The Washington Post: "The U.S. government can claim little credit for Chile's remarkable and successful free-market revolution. But the University of Chicago -- which trained most of the economists who spearheaded those reforms in Santiago -- can. Foreign students return home from the United States bringing with them an appreciation for U.S. values, ideas and, indeed, for America itself."
July 21, 2004. Assault on mining is rejected. The Chamber of Deputies and the Senate rejects the government project to change the Constitutional Mining Law that would have weakened property rights.
May 28, 2004. Pensions and roads. A Business Week article celebrates the role of a funded retirement system in creating robust capital markets: "Drivers in Chile don't have to wait until they're 65 to enjoy their pension benefits. Every day thousands do so when they speed from Santiago to Viña del Mar along the Rutas del Pacífico toll road, which opened on Apr. 13 with funding from the country's deep-pocketed pension funds. A billboard reminds passing motorists: 'Your savings are financing this highway, and this highway is financing your retirement'."
December 11, 2002. FTA Chile-USA. It is announced in Washington that a Free Trade Agreement has been signed between the two countries. In the press conference, the US negotiator, Ambassador Robert Zoellick, states: "One of the nice things in this agreement is that we have some additional access in Chile to pension fund management within a social security system that I wish we could imitate." Reversing its previous position of seeking a Mercosur agreement, President Lagos signs the FTA with the United States and the Chilean Congress approves it almost unanimously.
October 6, 1999. Thatcher on Chile. "What about the fact that Chile was turned from chaotic collectivism into the model economy of Latin America? What about the fact that more people were housed, that medical care was improved, that infant mortality plummeted, that life expectancy rose, that highly effective programmes against poverty were launched? Why don't they tell the world that it was Senator Pinochet who established a Constitution for the return to democracy?" (Margaret Thatcher, Speech at the Conservative Party Conference in Blackpool).
September 27, 1999. Promoting the human spirit. John Kasich, Chairman of the Budget Committee of the US House of Representatives, writes to José Piñera after his testimony: "I could not be more grateful for your recent appearance before the House Budget Committee. You fundamentally transformed our Social Security debate: You got us thinking not about numbing statistics, but about how best to promote the human spirit. Your obvious commitment to an idea - of making every man and woman a shareholder in their nation's economy - and your focus on people rather than numbers made your testimony compelling even for Members who favor an approach different from yours. I look forward to working with you in the months ahead. Our approach clearly will be tailored to our own circumstances, but the experience of Chile and other countries will offer valuable guidance. Your impressive command of the issues, as well as your personal experience, can teach us a great deal."
August 5, 1998. "The awesome power of ideas." James Flanigan writes in the Los Angeles Times: "In a sense, it all began in Chile. In the early 1970s, Chile was one of the first economies in the developing world to test such concepts as deregulation of industries, privatization of state companies, freeing of prices from government control, and opening of the home market to imports. In 1981, Chile privatized its social-security system. Many of those ideas ultimately spread throughout Latin America and to the rest of the world. They are behind the reformation of Eastern Europe and the states of the former Soviet Union today... which demonstrates, once again, the awesome power of ideas."
March 26, 1998. "Present at the creation". George Shultz, as its Chairman, invites me to explain the Chilean Model to the International Council of JP Morgan. Later, he sends me this revealing letter: "You know how much I hope we can get these ideas at work in the United States. I believe we must move in your direction...You have been present at the creation, and the creation is simple, starling, and important." My answer here.
September 18, 1997. "Making a difference". George W. Bush, future President of the Unites States, writes to José Piñera after dinner and a brainstorming at the Governor mansion in Texas: "José, Thanks for coming to Austin to share your wisdom. All of us enjoyed your comments. Congratulations on making a difference."
September 19, 1996. Frank Field, Chairman of the House of Commons Social Security Committee, send a gracious letter after a visit to Santiago to study the Chilean pension system.
February 27, 1996. President Ford's invitation. Former President Gerald Ford send a letter inviting me to address the American Enterprise Institute World Forum in Beaver Creek, Colorado. I explained the Chilean Pension Model to 500 CEOs, academics and politicians. The proceedings were headed by four Western leaders who served in the same period: Gerald Ford in the USA, Valery Giscard D’Estaing in France, Helmut Schmidt in Germany and James Callaghan in the United Kingdom.
January 26, 1996. "The mother of all reforms". Mack McLarty, President Clinton's chief of staff, writes to José Piñera after a meeting in Santiago: "Without doubt, the reform of Chile’s pension system has been a critical contributing factor –some have called it the mother of all reforms—to Chile’s ongoing economic success. The social security reforms which you developed and fought for have put your country on a stable footing for the future. Although the Chilean and North American experiences are different in several key respects, I believe we can learn a great deal from your country’s bold initiative, which is widely envied throughout the hemisphere. Jose, you are a strong and thoughtful voice for economic reform; your legacy is secure."
January 26, 1996. Mack McLarty, Chief of Staff of President Clinton, send a letter after a visit to Santiago to study the Chilean pension system.
March 20, 1994. Thatcher in Chile. The day before her speech in Santiago, she asks to meet in private with the core team that implemented "thatcherism before Thatcher". We meet for dinner at the Santiago Hyatt hotel. In her conference the next day she says: "Since socialism was defeated in 1973, Chile has been transformed into a signal example of economic reforms and material progress. And with the return of democracy you are also giving an example of political maturity and national reconciliation".
June 26, 1991. Free trade path. Reversing his previous positions and the Aylwin candidacy program, Alejandro Foxley, Finance Minister, announces that the flat tariff policy will be maintained and announces its reduction from 15% to 11%. This is an important step in the consolidation of the Chilean Revolution, since it gives a clear signal that the Aylwin government will follow the strategy of open trade and no tariff discrimination.
April 1, 1991. A martyr of the Revolution. Extreme leftists assassinate senator Jaime Guzman, the leader of the center right opposition. For years, many members of the center left opposition had conducted a campaign of demonizing Guzman because he was one of the main authors of the 1980 Constitution and a key ally of the team of free market economists. They were shocked when Guzman was elected to the Senate in the parliamentary elections of December 1989 and became arguably the best senator in Congress. His assassination decapitated the opposition and deprived the country of an extraordinary human being. He was one of my closest personal and intellectual friends, and we fought together many battles for liberty, democracy and human rights.
March 11, 1990. End of the transition to democracy. Strictly according to the transitory articles of the 1980 Constitution, and once the institutions for democracy were in place, President Pinochet, in a formal ceremony in the new Congress building in Valparaiso, hands the traditional presidential sash to Patricio Aylwin, winner of the December 1989 presidential election (interestingly, Aylwin was the Christian Democrat former senator who wrote the conclusions of the Resolution of August 22, 1973, that demanded the removal of Allende). A great day for Chile, and especially for the Reconstruction Government economic and civilian team, that had fought persistently for this peaceful and constitutional transfer of power, that ensured the survival of the free market revolution, the consolidation of the structural reforms, the insertion of Chile into the global community, and the consolidation of a free society. Through the power of ideas, a new Chile has emerged.
November 9, 1989. The fall of the Berlin Wall. A great day for freedom. Chile was a pioneer in defeating communism in 1973, inflicting an unexpected defeat to the expansionist policies of the Soviet Union and Cuba. Years later, Anne Applebaum will describe communism as a story of horrors in her review of "The Black Book of Communism" and in her book "Gulag". The free market reforms in Chile also preceded those of Thatcher (elected in 1979) and Reagan (elected in 1980), and thus the subsequent international movement toward markets, open borders and private initiative.
October 10, 1989. An independent Central Bank. Law 18.840 establishes the structure and operation of an independent Central Bank, taking away monetary policy from the government for the first time in the history of Chile. Another key achievement of the economic team. In a gesture of civic friendship, the government reaches an agreement with opposition leaders on the composition of the five members Board and even allows an economist from their ranks to be the first Chairman.
September 29, 1989. TV is open to private initiative. Law 18.838 allows the private sector to establish TV channels, until now only reserved to the State (directly through a government channel and indirectly through the channel of the state owned University of Chile) and the Catholic Church. This is a great step for freedom of expression.
July 30, 1989. The Constitution is validated. A referendum takes place to approve some adjustments to the Constitution. The text is negotiated between the government and all the political leaders. With an approval vote of more than 90%, the Constitution of 1980 is further validated.
October 5, 1988. Presidential plebiscite. According to the 1980 Constitution, a yes/no plebiscite takes place to decide whether the government candidate (General Pinochet) should be President for another term. President Pinochet obtains 44% of the vote, and therefore, as contemplated in the transitory articles of the Constitution, an open presidential election is called for December 1989, together with the election of the members of a new Congress.
May 20, 1988. Firing Line. I am the guest of William F. Buckley Jr.'s TV program "Firing Line" in a session titled Chile and a novel approach to Social Security which airs today in PBS (program number 1738). This is the comment distributed later by the Firing Line Newsletter: "The discussion is at least as much about Chile´s struggle toward democracy as it is about social security. The key to the hour is Mr. Piñera's persuasive charm. He describes his hopes for his country's political and economic future with eager confidence, and it is easy to see how he convinced a government that must have been dubious at best to try something new and daring. Mr. Green tries hard to burst Mr. Piñera's bubble. His efforts yield more interesting information on the Chilean economy, but ultimately fail to undercut Mr. Piñera's optimistic projections." The "devil's advocate" is a well known New York leftist activist, Mark Green (future candidate for Major of New York), who unable to attack the results of the private Chilean pension system, decides to doubt the success of our fight to restore democracy in Chile. We had a lively confrontation and I even invite him to Chile to be a witness of the coming transition process.
February 12, 1985. Privatization program. My former advisor at the Labor Ministry, Hernán Buchi, becomes Finance Minister. His mission is to overcome the economic downturn and to consolidate the economic model. He launches a radical program of privatization in the energy and telecommunications area.
August 31, 1983. The opposition. It must be said that the free market reforms were subject, from the very beginning, to the most unfair attacks by the leading leftist politicians that were, directly or indirectly, responsible in the 60s and early 70s for the destruction of Chile's democracy and its quasi civil war. After the 1982 Latin American and Chilean economic crisis, the attacks reached unprecedented levels. Today former Christian Democrat presidential candidate (1970) Radomiro Tomic made the following statement: "If the Mining Law remains, we will loss a hundred times the value of the Patagonia in the next half century". Later he will say: "The Mining Law is the greatest crime committed against Chile since O'Higgins to these days" (30.11.83). This sort of opposition made it much more difficult for the pro-democracy camp inside the Reconstruction government to accelerate the process of power devolution. One is reminded of the statement done by an adviser during the Thatcher's government in the 80s: "Our role is to stay here until it emerges in the UK a sane opposition".
June 30, 1982. The crisis that almost destroyed it all. The fixed exchange rate system, that pegged the peso at CH$39 per dollar since June 1979, is abandoned after President Pinochet dismissed Sergio de Castro, the Finance Minister who insisted in keeping the peg against all evidence showing the enormous loss of competitiveness of the Chilean economy. This Titanic mistake led to a huge crisis and almost destroyed the economic model and the transition to democracy. In his Memoirs, Nobel Laureate Milton Friedman states: "In the euphoria of the rapid decline in inflation and rise in economic growth, the authorities decided in 1979 to peg the exchange rate of the Chilean peso to the U.S. dollar. The rate of inflation in the U.S. at the time was in the low double digits –high for the United States but lower than inflation in Chile. By pegging, the Chilean authorities hoped to bring the Chilean rate of inflation to the U.S. rate. They got more than they bargained for, thanks to the economic policy introduced by President Reagan in 1981, which brought inflation down sharply in the U.S. and led to a sharp appreciation in the U.S. dollar. The peg imposed strong deflationary pressure on Chile, resulting in severe recession. Gross domestic product fell by 13 percent in 1982 and by 3.5 percent in 1983. The architect of the peg, Finance Minister Sergio de Castro, was relieved of his post in April 1982, and the peg was abandoned...Once the peg was dropped and the exchange rate allowed to adjust, rapid real growth resumed. The sharp recession left its mark and undoubtedly was one reason why a plebiscite in October 1988 on the Pinochet government yielded a different result than that in 1980." ("Two Lucky People", Chapter 24, pp. 405-406)
January 25, 1982. Two miracles. " Chile is an economic miracle...but Chile is an even more amazing political miracle. A military regime has supported reforms that reduce sharply the role of the state and replace control from the top with control from the bottom." (Milton Friedman in a Newsweek column; the Nobel laureate repeated this assessment 12 years later, once Chile had engineered a peaceful and constitutional transition to a democracy, in a letter published in the January/February 1994 issue of Foreign Affairs).
December 1, 1981. The Constitutional Mining Law. Ten years after Allende´s constitutional reform abolishing property rights in this crucial sector of the Chilean economy, the Constitutional Mining Law is approved today reversing that process and initiating an explosive period of huge wealth creation. The Constitutional Tribunal of independent, life appointed, judges approves it seven to zero. On December 2, I resigned voluntarily and definitively from my Cabinet post to fight more freely for liberty and democracy, mainly as publisher and chief editor of the monthly opinion magazine "Economía y Sociedad".
October 11, 1981. Invited by Thatcher government. For a week, I visit the United Kingdom as an official guest of the government presided by Prime Minister Margaret Thatcher. Weeks before my visit, leftist political leaders from the UK (among them, Michael Foot, leader of the Labor party) and Chile (Mrs. Allende) assemble in the historic Trafalgar Square to protest the invitation. But "vini, vidi, vinci" anyway. Meetings with governments experts, keynote speech at the annual meeting of the London Metal Exchange, lunch with Evelyn Rothschild and entrepreneurs in the City, coffee with editor Andrew Knight at The Economist, tea with historian Hugh Thomas at the House of Lords, dinner with businessman James Goldsmith, well attended conferences at both the Institute of Economic Affairs (with Lord Harris presiding) and the Adam Smith Institute. There was enormous interest in Chile's free market experience, and especially in the pension, labor and mining reforms.
October 9, 1981. At Sadat's funeral. I preside the Chilean delegation to the funeral of the assassinated President of Egypt. In an El Cairo under state of siege, I join the funeral procession with heads of state and authorities of all the major countries. Among them, Prince Charles, King Baudoin, Menahem Begin, Valery Giscard d’Estaing, and many others. The US delegation is headed by Secretary of State Alexander Haig, and includes three former presidents–Nixon, Ford and Carter- and Henry Kissinger.
September 25, 1981. Work freedom in ports. Law 18.032, promoted by Labor Minister Miguel Kast, ends the trade union monopoly in Chilean ports. Soon after, productivity in ports experience a significant increase as work begin to be organized freely and efficiently, eliminating a potential bottleneck to Chilean exports.
August 4, 1981. La Escondida mine. Today I am informed by the executives of Utah International that they have discovered what could become the largest copper mine in the world, located near the northern city of Antofagasta. The initial investment required to develop would amount to at least US$ 2 billion. Without a law protecting mining property rights, this wealth would remain for ever under the ground.
April 27, 1981. Private health. DFL No 3 creates the system of ISAPRES. These are private health companies that provide an insurance plan that can be bought with the mandatory health contribution of 4% of wages by those workers who choose to do so. This option was made possible by the Pension Reform of 1980.
April 18,1981. John McClaughry, White House economic advisor, send a letter after receiving the information asked by George Shultz on the Chilean Pension system
April 1, 1981. Confrontation with Pinochet. In a Cabinet meeting, generally just informative ones given Chile's presidential and not parliamentary system, a military aide enters the room and, in an unusual act of indiscretion, tells aloud to President Pinochet that the leftist trade union leader Manuel Bustos is going to be exiled that same night for calling for violent street demonstrations. I fear that this action may derail the whole transition process. So, I decide to confront the President and argue respectfully but strongly against this decision. I make the case that exile is not only a cruel punishment to anyone, but also completely contradictory with this period of constitutional government, despite the emergency powers granted to the President by transitory article 24. General Pinochet reacts angrily. To him, not only I am Minister of Mining and thus interfering outside my field in an issue he considers a national security one, but he resents the fact that I am compelled by circumstances to confront him in front of the full Cabinet with several generals and admirals among them. To his credit, he finally rescinds the order and announces that Bustos will not be exiled "this time".
March 11, 1981. A constitutional government. Today we celebrate the return of Chile to constitutional rule. In fact, a new Constitution, replacing the suspended one of 1925, was approved by referendum on September 11, 1980. It established, beginning March 11, 1981, a transition period, headed by President Pinochet, under the norms of the 1980 Constitution, which could not be reformed without a referendum. This period task was to gradually create the institutions for an effective democracy: an independent Central Bank, private television, an electoral system, a Constitutional Tribunal, etc. Without these institutions, the return to a democratic system would be fragile and unstable. As Alexander Solyenitsin would say many years after, referring to the problematic Russian transition to democracy: "The road to democracy takes time and patience and that applies to both intellectuals and politicians. An automobile cannot come down from a high mountain by driving off a cliff. It needs to take the long series of switchbacks. People wanted a democratic Russia overnight, without a period of transition, of learning and of growing accustomed to it."
January 25, 1981. I receive a letter from George Shultz, head of president-elect Ronald Reagan transition team and president of the Bechtel Group, that opens with this enthusiastic statement: "onward social security, the labor code, let alone the mining industry". Shultz visited me in the second week of January at the Ministry of Mines in Santiago. We had a long conversation on the free market reforms in Chile and the prospects of a Reagan presidency. He was so impressed by our Social Security Reform, approved only 2 months ago, that he asked me if I could write a one-page memo to Reagan on "your new and creative system" (which of course I did).
January 3, 1981. Freedom to establish universities. Until now, only the State and the Catholic Church were allowed to have universities in Chile (and TV stations). From now on, there is complete freedom to establish new universities, subject to an accreditation mechanism, as well as professional institutes and centers of technical training. A few months later (15.9.81), the National Fund for Science and Technology (Fondecyt) is created, substituting the criteria of distribution of state subsidies to R&D. Instead of a lump sum to the traditional universities, a method was created to allocate subsidies on the merits of specific research projects, decided by a jury of experts.
December 1, 1980. Hayek and the Revolution. The first free market think tank is founded by a group related to the classical liberal economists. The "Centro de Estudios Públicos" (CEP) has the former Finance Minister, Jorge Cauas, as President, and Nobel prize laureate, Friedrich Hayek, as Honorary President. Cauas travels to Friburg University to meet Hayek, explain him the Chilean Revolution, and offer the Honorary Presidency, which he accepts and holds until his death. Hayek travels in 1981 to Chile to the inauguration of CEP and leads with an essay the No 1 issue of "Revista de Estudios Públicos". We had a long conversation about the labor and pension reforms. In 1981, he writes to Thatcher advocating the Chilean reform for the UK (the exchange is in the Hoover archives).
November 4, 1980. A revolutionary Pension Reform. After two years of extremely hard work with my team to design the new system, define hundreds of important technical details, devise a viable transition strategy, write the bills, and educate the public, today it is approved the Social Security Reform. It creates a new pension paradigm based on freedom and personal responsibility, and fully replaces the collectivist, state managed, pay-as-you-go system. This Reform signals the climax of the Chilean Revolution and Chile becomes a world pioneer in this area. (In this same day, Ronald Reagan is first elected President of the United States).
September 11, 1980. A new Constitution is approved. In a referendum, the new Constitution is approved by 67% of the vote against 30%. On March 11, 1981 it will replace the Constitution of 1925.
August 14, 1980. Poland confronts communism. At 6 a.m. three workers at Gdansk's Lenin Shipyard declare a strike. Within hours, thousands of others join their sit-in. By 11 a.m., Lech Walesa, a former electrician at the yard, scales its perimeter wall and takes charge of an impromptu strike committee. The Solidarity movement in Poland is born, marking the beginning of the end of the Soviet empire.
August 8, 1980. The D-Day for democracy. In a Cabinet meeting, we all sign the project of a new Constitution for Chile, to be submitted to a referendum on September 11. There are important advances in the permanent text (especially in the field of individual rights), as well as some provisions that are wrong and should be eliminated in the future (like an ineffectual National Security Council or the institution of designated senators). The extraordinary achievement is that it enshrines a path towards the devolution of political power from an emergency authoritarian to a fully democratic government. In my TV commentaries, I called it "The Constitution of Liberty" after the title of an important book of Friedrich Hayek.
July 24, 1980. "General trial-run for the restoration of democracy". Former Minister of Labor under Eduardo Frei, William Thayer, calls the free election of thousands of trade union leaders "a general trial-run for the restoration of democracy." He adds in an interview in the magazine Que Pasa: "The Plan Laboral has been an enormous act of courage of Minister José Piñera, his team and the government. It creates a full trade union democracy in a country that is still in a situation of emergency in the most important areas. It is remarkable that it has been in the labor sector where democracy has been first completely re-established."
October 1979. Pendulum arbitration is tested. The new Trade Union Code contemplates the possibility of market-disciplined strikes when workers and employers do not reach agreement in the collective bargaining process (so-called "chaos strikes" at any moment and for any reason are prohibited). Only in a handful of companies-generally state monopolies in "strategic" areas like water, telephone, oil, electricity- the failure of agreement does not lead to strike, but to compulsory arbitration by independent arbitrators (not by the government). An original provision of the Plan is the introduction of "pendulum arbitration" (the arbitrator has to choose between the last positions of one side or the other, but not the middle way). In this way management and labor are encouraged to make responsible contract offers, lest the other side's full proposal be mandated by the arbitrator. This mechanism is successfully tested and proven in the case of the state oil company, ENAP.
June 30, 1979. A new Trade Union Code. The so called "Plan Laboral" reinaugurated union activity in Chile, after six years of suspension, under a new pro-employment and pro-democracy paradigm. The new Code reconciled collective bargaining with an open market economy, made union affiliation totally voluntary, and fostered internal democracy. A constitutional change is also needed to include the powerful copper mining workers, whose monopolistic trade union structure ("El estatuto de trabajadores del cobre") is enshrined in the Constitution.
December 26, 1978. A worthy cause. I accept the invitation to enter the Cabinet. Before doing so, I explicitly tell President Pinochet that my cause is not only prosperity, but also freedom, rule of law, and democracy (the full story about this meeting is in my book "La revolución laboral en Chile", 1990). I feel a moral duty to contribute to my country in an extremely difficult moment (the challenge to rebuild an economy and a democracy, an imminent war with Argentina and a trade boycott threat from the AFL-CIO). Though I was offered initially the Ministry of Economy, I become Minister of Labor and Social Security in order to focus on two great structural reforms that I have been promoting in public debate: Pensions and Labor reforms that can have significant economic, social and political consequences.
May 25, 1978. A road map for democracy. A "perfect storm" was threatening Chile: an antagonistic Carter presidency; a trade boycott threat by the AFL-CIO; an aggressive Argentine military Junta that rejected a British Crown arbitration ruling about the Beagle islands; the abominable assassination of Allende's Minister Orlando Letelier in the streets of Washington; a proposal by the powerful group of "duros" (hardliners) inside the Reconstruction government to install a "war economy" and stop any movement toward democracy; a Junta member, Air Force general Gustavo Leigh, and Army generals of the Comité Asesor, vacillating about the economic strategy. With Jaime Guzman, leader of the "gremialistas" group, we plan a private dinner at his apartment with three key government ministers. We invite Minister of Interior Sergio Fernandez, Minister of Finance Sergio de Castro, Minister of Foreign Affairs Hernan Cubillos, and leading free market entrepreneur Manuel Cruzat. We review the extremely dangerous internal and foreign situation. We agree to renew efforts, in all dimensions, to go for a new Constitution setting the timetable for the re-establishment of democracy and at the same time accelerate the economic and social free market reforms. I remember Marechal Foch's dictum: "My rear is blocked, my flanks are giving away, so I attack!"
March 3, 1978. Chile in the front line of a colossal struggle. Professor Jeffrey Hart of Darmouth College writes in his "Letter from Santiago" in National Review: "During the First World War, many American writers experienced a powerful desire to see the Western Front in France. These Americans needed to feel the reality of the trenches. They knew that something important was happening there. It was with some analogous conviction that I decided to go to Chile. Warfare now takes more complex forms. But there can be no question that Chile is an important sector of the front line in a colossal global military-political-ideological struggle that makes World War I look like an Indian raid."
May 27, 1977. The Conference. In the annual conference of the Alumni Foundation at the School of Economics of the Catholic University, I presented a paper that stated that Chile could be a developed and free country if it undertakes a coherent and radical set of liberty-oriented structural reforms. I postulated that Chile can double its historic rate of growth of only 3% (around 1% per capita), emphasizing that if a 7% average growth rate is achieved, GNP could double in 10 years and quadruple in 20, making possible a substantial reduction in poverty and a stable free society. Immediately after, I am asked to repeat the same presentation to President Pinochet, whom I have never met, the Legislative Junta of the Commanders in Chief, the full Cabinet, and all the deputy Ministers. It seems to me that President Pinochet and the Junta are intrigued by my proposal of going beyond a Chicago economics transformation, needed as it was, toward a more comprehensive freedom revolution (free markets, rule of law, human rights, and democracy) based on the vision of the Founding Fathers of America and the ideas of those thinkers of liberty like John Locke, Adam Smith and Friedrich Hayek.
(Note. I was at Harvard during the 1970-73 Alllende government. At the end of 1974, already a Ph.D. in Economics and Teaching Fellow at Harvard, I faced a very difficult choice: to either remain in Boston enjoying the academic life I loved so much, or to go back to help found a new country from the ashes of the old one. As The Economist stated in an editorial, Allende and his followers had destroyed democracy in Chile, and on September 11, 1973, obeying the Chamber of Deputies Resolution of August 22, 1973, the Armed Forces had removed marxist President Salvador Allende. I decided to go back to help my country that was in ruins. In March 1975, I began promoting the ideas of economic, social, and political liberty in public debate, and informally helping my friend and former professor Jorge Cauas, then Finance Minister.)