Latin American Economies and Free Markets

Macroeconomics is a tricky beast. It’s easy to take data out of context to fit your narrative, but it’s always important to look at the data and consider what it means, whether it supports you point or not.

This first section is in response to a post on the internet about Chile and Pinochet.

First of all, on the non-economic aspects of Pinochet’s regime, it’s clear that Chile was under a brutal dictatorship. Does this mean that market reforms can only occur under political repression? Not really. Most countries with free markets are more likely to be democratic. While it appears that if there is a causal relationship it would be in the direction of political liberalization to economic liberalization, it’s  also noteworthy that countries which liberalize before becoming democracies tend to have better outcomes than vice versa. The democratic record for socialist regimes is, on the other hand, rather atrocious.

Also in support of this point is that freer markets also accompany improved human rights, and that human rights abuses slow down the pace of economic liberalization.

But it’s also important to look at some of the economic criticisms of Pinochet:

This meant that, in per capita terms, Chile’s GDP only increased by 1.5% per year between 1974-80. This was considerably less than the 2.3% achieved in the 1960’s. The average growth in GDP was 1.5% per year between 1974 and 1982,

Pinochet took over in the early 70s, right about 1973, so this looks pretty crappy for his policies. All that evil dictatorship stuff is always going to be bad, but it’s especially bad if it also had no economic benefit.  So I took a look at Chile’s GDP numbers. Here is the world bank data for GDP per capita:

Chile GDP per capita. World Bank

Chile GDP per capita 1966-2003. World Bank

Here is that same data but just growth rates to make it more obvious what direction things were heading:

Chile GDP per capita growth rate. World Bank.

Chile GDP per capita growth rate 1966-2003. World Bank.

World bank data link is here. Note I did not use GDP per capita adjusted for PPP because we are not looking to compare cost of living and the World Bank did not start collecting PPP data until the 90s, at least for South America.

Those two big dips in Chile’s GDP growth in 1975 and 1982 the author blames on Pinochet’s policies. I’m not very familiar with the economic history of Chile, but it appears that things were going very wrong before the free market “takeover”. The 500% inflation rate the author mentions was accompanied by significant economic contraction (not surprising).  But once the big interest rate hikes came in and killed inflation (around 1974), there was actually significant growth at a rate at least as good as the 60s.  Reform was needed, and it helped. Maybe by manipulating the numbers we can say the average was lower, but had those reforms not come in the early 70s, the economy would likely have suffered much worse damage than it did under high interest rates.

And as for the 1980s downturn, it appears this was a global phenomenon. Here is Argentina, a neighboring country that had a significantly higher GDP per capita in the 1960s:

Argentina GDP per capita. World Bank.

Argentina GDP per capita 1966-2014. World Bank.

The 1980s saw Argentina have a GDP collapse even worse than Chile, with GDP per capita dropping to levels not seen since the early 60s. And of course, things weren’t going great in the US either. In fact, while Chile’s GDP per capita took off after the 80s, clocking it at about 5% for most of the 90s, Argentina had woeful growth for decades after 1970, as the government borrowed heavily to finance social welfare spending, froze wages, and fixed their exchange rate. Argentina didn’t pull its GDP per capita permanently above 1970 levels until 2002 when they finally allowed for trade liberalizations. Yikes.  It seems that those 1970s interest rate hikes were essential to helping Chile avoid this fate.

Also, looking at claims of inequality, it is certainly true that inequality increased over the course of Pinochet’s regime, due probably to both economic and political factors (today Chile has the highest GINI index of any OECD country).  But it’s also true that Chile has one of the highest standards of living of any country in South America, and if inequality was the price to pay for raising Chile out of poverty, it seems worth it. Was that inequality necessary? Probably not, as Pinochet’s regime stole wealth and redistributed it to government elites; the answer is less government, not socialism.

I don’t think anyone is going to defend Pinochet’s political suppression, but the Chilean economy is a fairly good story for someone trying to support freer markets, or at least Milton Friedman (Chile’s economic starting point). There will always be a lot of room for debate over macroeconomic policy, and whether one policy would have helped or not. But what makes no sense is trying to create an argument that’s easily refutable with data that’s available for free on the internet.

But hey, not so fast! If socialism isn’t the answer, then Cuba, the most prominent socialist economy in the western hemisphere, must be a crappy place to live.  Politically speaking, it is (they have to smuggle in the internet), but if you ignore all the human rights abuses like we did for Chile, economically speaking it’s not doing too bad. If you look at its ranking in the Economic Freedom Index (177), you’d expect their economy to be abysmal, and there is a dearth of economic data about Cuba since all information is controlled by the government.  However, we can reasonably believe Cuba’s real GDP per capita (PPP) to be somewhere around $16,000. Estimates varied wildly, but the best number I could get from a reputable source is $18,796 from the World Bank which would put it about 60th highest in the world.  I believe this is an overestimate because it seems to use numbers supplied directly by the Cuban government.  Nevertheless, this didn’t initially sound very impressive to me, and it was clear anyone would rather live in more developed, free market countries in North America, Europe, or Korea/Taiwan/Japan.  But someone on reddit argued that Cuba was actually doing well compared to similar countries in the area, which is a solid point.  I’m not sure how to best pick a representative sample of countries in the area. Obviously the closest country is the US, but that doesn’t seem fair. Other Carribbean nations seems the most appropriate comparison so here is the World Bank data arranged by GDP per capita, with Chile thrown in:

World Rank Country GDP per capita (PPP)
(11) Bermuda 52,347
(27) Aruba 36,017
(29) Puerto Rico 34,752
33 Trinidad and Tobago 30,446
48 The Bahamas 23,264
51 Chile 21,942
 52 Saint Kitts and Nevis 21,696
55 Antigua and Barbuda 21,028
60 Cuba 18,796
 72 Barbados 15,574
 85 Dominican Republic  12,186
 89 Grenada 11,645
 94 Saint Vincent and the Grenadines  10,491
 95 Saint Lucia  10,488
 96 Dominica  10,343
 103 Jamaica  8,893
 147 Sao Tome and Principe  2,971
 165 Haiti  1,703

So Cuba seems to be doing OK, probably above average for this cohort of countries. Certainly better than the other larger Caribbean nations of the Dominican Republic, Jamaica, and Haiti (although not Puerto Rico, but I guess that’s comparing them to the US again).  Cuba is also very high in Human Development Index numbers.  And despite Chile having a  much freer economy, Cuba is very close if we accept the World Bank’s number.  But it all depends on what you think Cuba’s economy should be.  With its natural resources, I would make the case that Cuba would have a much more productive economy were it more market oriented, though others will no doubt cite the long term American embargo as the source of Cuba’s difficulties. I’m not sure this helps supporters of a socialist government, since, if they believe a lack of a free market in international trade is impoverishing the nation, certainly a lack of a free market within the nation’s border is at least as big a stranglehold.  And, of course, this is why I would support any move to end the embargo with Cuba; freer markets would make everyone better off and more prosperous.  But the bottom line is that the data shows Cuba is not as bad as someone who opposes socialism might imagine, and to what extent Cuba could be better off requires more in depth data analysis.

Being able to look at data is important because it keeps us open to new ideas we did not think of or don’t agree with; I didn’t think Cuba would be doing as well as its HDI and GDP numbers indicate, and critics of markets should be willing to acknowledge Chile has turned out just fine despite implementing market policies they hate. I think the fact is that Chile has the richest economy in all of South America shows, despite all the hate, those market reforms did pretty well.  I could be wrong, as observational macroeconomic data analysis can’t prove anything for sure, and I don’t have a good background on Chilean (or Argentinian) economic history, and everyone discussing macroeconomic policies should acknowledge their limitations. But some data points are just too convincing.