This study examines Chile's neoliberal transformation, considering both its aggregate results and disaggregated effects, specifically the outcomes of neoliberal policies on the domestic population as measured by levels of poverty and income inequality. As one of the Latin American countries that has experienced the deepest international integration, examining Chile's economic transformation can provide insight on the impact of neoliberal policies on developing countries in the region. Such insight can perhaps facilitate the reduction of poverty and income inequality that many developing states in Latin America face. The intent of this paper is not to challenge the neoliberal model, but rather to examine whether that policy was appropriate in a developing state that instituted an extreme orthodox version of the neoliberal paradigm. It finds that deviation from extreme neoliberalism, through government investment in social programs, that is, the assumption of an active state role in the economy, was necessary to improve socioeconomic conditions in Chile and achieve some level of poverty reduction. The issue of income inequality appears to be more complex and requires further analysis to determine how to improve socioeconomic conditions in Chile and achieve some level of poverty eradication. The issue of income inequality appears to be more complex and requires further analysis to determine how to mitigate its severity.
Even before the free-market philosophy became the dominant global economic ideology, by the early 1980s Chile had embarked on the path toward neoliberal economic reform and successfully integrated into the global market heralded by the growth of exports and foreign investments. As the first Latin American state to do so, Chile is renowned as "the poster child for the neoliberal model." (1) Expressing a commonly-accepted view, William R. Keech, a political economist at Duke University, claims the neoliberal policies implemented during the Pinochet dictatorship, influenced by the 'Chicago Boys,' led the Chilean economy to "a new level of prosperity." (2) Thus, it is postulated that the transformed Chilean economy represents an exceptionally successful model for other Latin American states to replicate. This study examines the validity of that claim by exploring Chile's neoliberal transformation, considering both its aggregate results and disaggregated effects, specifically the outcomes of policies on the domestic population as measured by levels of poverty and income inequality.
What is Neoliberalism?
Over the last two decades, the term neoliberalism has been used in various contexts. (3) It is, therefore, important to define what is meant by neoliberalism in this study. Neoliberalism here refers to a political-economic philosophy that advocates a laissez-faire approach to development by reducing state intervention and relying on unfettered market forces, following capitalist paths of free trade and market expansion. Under neoliberalism, state intervention in the economy is greatly abridged. Functions, such as investment promotion and industrialization, are turned over to private hands in order to generate integrated and well-informed markets. (4) The main policy strategies in neoliberalism include: elimination of price controls; liberalization of import trade; deregulation of financial markets and capital flows; and reduction of the public sector, particularly cuts in social program funding; privatization of public enterprises; and, reform of the labor sectors and tax system. (5) Promoted by U.S. President Ronald Reagan (1981-1989) and British Prime Minister Margaret Thatcher (1979-1990), in what became known as the 'Washington Consensus,' this economic philosophy became the predominant ideology among developed countries in the 1980s. (6)
The neoliberal economic model was extended to developing and less-developed countries through Washington-based developmental institutions, namely, the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO), in the form of structural adjustment programs. …