Jamie Weinstein

Days after the massive Chilean earthquake, deputy Wall Street Journal editorial page editor Bret Stephens created a stir. In a column, Stephens had the audacity to credit the great free market economist Milton Friedman for the way Chile fared during its recent massive earthquake.

Results.

“Milton Friedman has been dead for more than three years,” Stephens wrote. “But his spirit was surely hovering protectively over Chile in the early morning hours of Saturday. Thanks largely to him, the country has endured a tragedy that elsewhere would have been an apocalypse. ”

In short, Stephens argued that late Chilean dictator Augusto Pinochet’s decision to adopt many of Friedman’s free market economic policies in the mid-1970s allowed Chile to become the economic powerhouse in South America it is today. As a result, Chile became rich enough to build strong enough buildings to handle an earthquake over 500 times more powerful than Haiti’s with a death toll that may turn out to be nearly one thousandth as large.

Predictably, the liberal blogosphere went crazy. America’s most obnoxious (see here) economist, Paul Krugman, wrote on his New York Times blog “the economics of Chile under Pinochet are a lot more ambiguous than legend has it.” He then went on to try to demystify the idea that Chile’s economic miracle was due to Friedman’s free market ideas.

Now, I readily admit I am no economist. Given how poorly economists have fared in predicting the recent economic downturn, I say this not as a cautionary note, but as a credential.  The fact is the numbers do seem to suggest that Stephens was correct in his estimation of Friedman’s impact.

Indeed, a few months ago I got into a debate with a friend from grad school over this very issue at a party (I know, what a party!). My friend not only argued that Chile’s economic success had little or nothing to do with Friedman’s free market ideas, but that its success was not really that astounding to begin with. I argued just the opposite.

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Soon after the party, I sought to prove my point by crunching the numbers from a USAID website with development statistics for Latin America and the Caribbean. Not surprisingly, my number crunching seems to suggest that something special happened in Chile.

Pinochet took power in Chile in 1973 and began adopting free market economic policies advised by Milton Friedman and the “Chicago Boys” in 1975. Chile would ultimately return to democratic rule in 1990.

Given these parameters, I looked at the GDP per capita of eight Latin American countries from 1960 to 2008. If you look at how Chile’s economy was doing relative to its Latin American peers before Pinochet’s coup in 1973, you discover that things weren’t going so great. From 1960 to 1973, Chile had the second worst GDP growth per capita among the countries I examined, barely edging out Venezuela (see below).

Percentage Growth per capita GDP from 1960-1973 (constant 2000 U.S. dollars)

• Brazil 81%
• Colombia 44%
• Ecuador 34%
• Paraguay 34%
• Argentina 33%
• Peru 30%
• Chile 17%
• Venezuela 15%

But when you look at the numbers from 1976 to1990—from just after Pinochet implemented free market reforms to when he relinquished power—something obviously changed (see below).

Percentage Growth per capita GDP from 1976-1990 (constant 2000 U.S. dollars)

• Chile 59%
• Paraguay 35%
• Colombia 33%
• Brazil 9%
• Ecuador 2%
• Argentina (18%)
• Venezuela (24%)
• Peru (27%)

This, as you can see, is pretty astounding. Two countries decreased in per capita GDP by over 20 percentage points (Venezuela and Peru) and one by nearly 20 percentage points (Argentina). One country increased by less than 10 percent (Brazil).  Another increased by a little over 15 percent (Ecuador). Two countries had solid showings of over 30 percent increases (Colombia and Paraguay).  But Chile blows everyone away with a nearly 60 percent increase in per capita GDP over that period.

Even after Pinochet left the political stage, successive Chilean governments have largely stuck to many of Friedman’s free market principles. On the 2010 Index of Economic Freedom put out annually by the Heritage Foundation and the Wall Street Journal, Chile ranked 10^th. Given this, it is fair to look at Chile’s economic results from 1976 through 2008 (the latest numbers I could find) as reflective of Freidman’s free market influence. Take a look:

Percentage Growth per capita GDP from 1976-1998 (constant 2000 U.S. dollars)

• Chile 223%
• Colombia 81%
• Paraguay 46%
• Argentina 45%
• Brazil 44%
• Ecuador 37%
• Peru 28%
• Venezuela (6%)

Yes, you can say wow.

For the 32-year period after many of Friedman’s free market principles were implemented in Chile, the per capita GDP of Chile grew 2.5 times greater than its closest challenger in Latin America. For this, the country owes the late, great Milton Friedman many thanks.

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