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Cowen on Chilean Development

March 3, 2010

Ever since this op-ed appeared in the Wall Street Journal, there has been a mild uproar in the left-wing blogosphere regarding the impact that Milton Friedman’s ideas had on Chile. Case in point.

As always, it will do you well to rise above the fray, and read Tyler Cowen, for an honest, salient analysis of the issue.

Pinochet the man behaved so badly, both during his term and after, as to be morally indefensible. From second hand accounts I have heard, it is also not clear how much the man himself was personally responsible for the good economic policies. Still many good policies happened. We need a closer look at the Chilean economic legacy, which is a complicated story and by no means wholly negative.

On to Krugman, who does not seem to think Chilean economic legacy is complicated:

Actually, as you can see from the chart above, what happened was this: Chile had a huge economic crisis in the early 70s, which was, yes, partly due to Allende and the accompanying turmoil. Then the country experienced a recovery driven in large part by massive capital inflows, which mostly consisted of making up the lost ground. Then there was a huge crisis again in the early 1980s — part of the broader Latin debt crisis, but Chile was hit much worse than other major players. It wasn’t until the late 1980s, by which time the hard-line free-market policies had been considerably softened, that Chile finally moved definitively ahead of where it had been in the early 70s.

Of course, Krugman does this all the time. He is smart enough to know how to word and phrase things so that he doesn’t go too far — so his points aren’t exactly wrong (except when his points are exactly wrong). Reading this without context, you would think that it was the policies advocated by Milton Friedman that caused Chile’s problems during the debt crisis. Reading some articles, you may even come to the conclusion that Friedman, himself, caused the earthquake from the grave! In fact, it was Chile’s failure to follow Friedman’s advice, for floating exchange rates, which caused RGDP to fall. Chile’s currency was pegged to a rapidly-strengthening dollar (causing our own deflation!), which of course caused NGDP to plummet in Chile, which caused RGDP to plummet.

The problem with Krugman’s post is he knows this, he just chooses to feign ignorance to make his point.

Also, about the building codes (which has been a very popular rebuttal); what good would building codes have done Haiti? They could have had European-level building codes, and it would have been meaningless, because they don’t have the wealth needed to satisfy that level of prudence.

Pinochet was horrible for Chile, and they are better today for having democracy. However, the counterfactual is that Chile could be 30 years in under state socialism…

Addendum: Mark Thoma tweeted this article. Klein is an idiot — end of story. How does that reflect on Mark Thoma?

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