Pinochet, the Friedman Boys & Thatcher By Andy Beckett

When General Pinochet came to power in Chile after a military coup in 1973, he unleashed a wave of radical free-market policies that thrilled rightwing observers in Britain. The resulting ‘economic miracle’ in Chile benefited only some and was achieved at a cost of detention, torture and assassination. Nonetheless, it provided an inspiration for the monetarist revolution of the Thatcher years – and echoes of Chile-style economics survive here to this day

Source: The Guardian – May 4, 2002

Blueprint for Britain

In August 1990, before I knew anything much about Chile, I was staying with my parents for part of the university holidays and trying, as usual, to extend breakfast deep into the morning by reading every page of their copy of the Times, when I came across what seemed a slightly shocking article. For months, ever since the breaching of the Berlin Wall, British newspapers had been full of uncharacteristic political optimism. Oppressive governments everywhere were falling; capitalism, it was widely reckoned, was making liberal democracy inevitable. But here, on one of the Times’s grandly self-assured comment pages, someone begged to differ. “It is a comforting thought that the most benign form of governance provides the appropriate system for material advance,” the article began. “Comforting. But quite wrong.”

Several dusty paragraphs of economic and political philosophy followed.  Then came the writer’s evidence: “Pinochet’s Chile … was not a democracy. There was much bloodshed and numerous political prisoners were taken. But [while] Pinochet limited political freedom … he massively expanded the freedoms of the individual, giving him access to foreign goods … low tariffs … a free labour market, and prices [that] were unregulated and unsubsidised. These freedoms,” the article concluded, “were the basis for vigorous economic recovery, the wonder of the rest of Latin America.”

The cold frankness of this argument stayed with me. And so did the name of its author: Alan Walters. He had recently been the chief economic adviser to Margaret Thatcher.

When Pinochet was arrested in London eight years later on charges of genocide, terrorism and torture, Walters was still a working economist with an international reputation. He had a knighthood. He was based in the British capital. Yet despite his familiarity with Chile, which included decades of visits, personal meetings and even collaborations with Pinochet and his subordinates, Walters’ opinions on the general’s treatment were conspicuous by their absence during the protracted controversy over whether the Chilean should be extradited to Spain for trial, where the charges against him had originated. While Anglo-Chilean businessmen, right-wing newspaper columnists, Conservative politicians with or without Chilean connections, and most notably Thatcher herself all noisily joined the campaign to free Pinochet, Walters, by reputation politically indiscreet and keen to see his views in print, did not. “I thought I ought not to intervene,” he said when I met him. “I talked to Margaret and she said, ‘Best to stay on the sidelines.’ ”

Walters was a potential liability because he had acted as a link, officially and otherwise, between the Thatcher and Pinochet administrations. And through this link many ideas about how to change Britain had quietly flowed from South America.

Only fleetingly was this acknowledged, in public at least, by the Britons who lobbied against Pinochet’s captivity between 1998 and 2000.  Not in Thatcher’s speeches and letters to newspapers, which were hoarse with outrage but also careful to mention Pinochet’s assistance to Britain only in connection the Falklands. Not in the elaborate events staged by Chilean Supporters Abroad, as the general’s allies in Britain neutrally called themselves, where battalions of guest speakers kept strictly to patriotic and cold war generalities. Nor in most of the literature Pinochet’s advocates distributed in ambitious print runs to British “opinion formers”. The admission that Chile had been the model for modern Britain came buried in the middle of a paragraph on page 58 of a pamphlet justifying the coup in which he seized power: “This is not the place to describe the details of Chile’s new prosperity under Pinochet. Suffice to say that it was Thatcherite before Thatcher, though with a tougher stance towards the trade unions and a more consistent commitment to monetarism and markets.” Once Pinochet had flown back to Chile, and British feelings about him had had several months to cool, it seemed wise to talk to Walters about this.

He was working still, at the age of 74, as vice-chairman of a company called AIG International. His office was in Wapping, the part of London most transformed by Thatcherism. Walters finally arrived from his home in Mayfair an hour late. He did not offer a handshake. He gave a half-excuse – the traffic had been bad and his diary had been confused.  Despite a suntan and a smart pale suit, he looked much older than I remembered him from newspaper photographs during the Thatcher era.

“Would you like coffee?” he said. “Caffeine-free or caffeine-loaded?” As he shuffled off to fetch it, I took in the biographies of Thatcher and Ronald Reagan on his bookshelves, next to a volume of Machiavelli and something entitled Why Wages Don’t Fall During A Recession. A fax from the Bank of Malaysia lay on his desk. A miniature flag of St George stood on top of his computer monitor. Then Walters returned, lowered himself into his chair, and began to reminisce about his days in Chile.

“I didn’t visit during the Allende period,” he said. Salvador Allende had been the elected Marxist president of Chile, the only such head of state in the world, whom Pinochet bloodily overthrew in 1973. “I had a passing interest in Allende, but the first time I visited, I think, was in 1975.” Walters was working for the World Bank, although not exclusively. The bank had been increasingly reluctant to lend money to Allende but was now increasingly keen to lend money to Pinochet. “We got involved in a housing project. It was a very good project: private housing with a state subsidy.” Walters pursed his small lips with approval: “Very good. Very efficient. Because they had competitive tendering.” On that first trip, he also met Chilean civil servants and Pinochet’s finance minister. “I liked the Chileans – engaging people.  The civil servants were very good, very honest. I can’t say I positively liked Pinochet at that time. Later I came to like him.”

In 1975, Walters already had a reputation as a rightwing economist of some fierceness. He had been born, as he described it in the biographical summary he sometimes included in his pamphlets, “of working-class parents in a Leicester slum”. His father was an “ultra-leftwing Socialist” of unshakeable convictions. “So,” said Walters with a cheeky look, “I went the other way.” During the 1950s and 1960s, he became a disciple, and then a peer, of the American economist Milton Friedman, who rejected the socially conscious economics that had dominated the thinking of democratic governments since the Great Depression of the 1930s. Friedman and Walters called themselves monetarists: they believed that inflation, not recession, was the great enemy, and that governments should restrict the amount of money circulating in the economy at all costs, rather than print more of it to help those struggling when times were hard. During the early 1970s, Walters became involved in a concerted and successful campaign to convince the Conservative party of this new philosophy. And beneath the dry surface of his careful economist’s prose, daring political thoughts began to crystallise.

The idea that “a government could do no good”, in the words of a Walters pamphlet, if it interfered with the rough business of the free market, had unpleasant implications for the trade unions, the poor, and the other leftwing or vulnerable interest groups to whom British politicians had been paying increasing attention since the second world war. At the same time the monetarists viewed the status quo of the mid-1970s – in particular, the messy inclusiveness of British politics – in the same way that Chilean rightwingers had regarded Allende’s rule: as a time of unprecedented danger. Walters still does. “You can have democracy and no freedom, as we’ve had in Britain at various times, including the 1970s,” he said, suddenly stern. “In those days it was said widely that the Anglo-Saxon economic model was finished.”

But the sheer instability of the period was also an opportunity. Radical, even extreme notions, such as monetarism (or military coups) had more appeal in a crisis. The problem was finding a suitable country to test them in. Then came the coup in Chile. Here was a small economy and society, already quite modern, urbanised, and used to receiving economic prescriptions from abroad. Its new ruler was rightwing but without much of an existing ideology. He faced no elections where bold policies might get him ejected. And he had the authority derived from a complete apparatus of state security. Finally, his predecessor had been overthrown against a backdrop of strikes, shortages and corrosive inflation. Almost any subsequent “reforms” could be made to look like progress. When Walters first flew to Santiago in 1975, what he was really doing was going to measure it.

He would not be disappointed. In Chile, even before Pinochet seized power, a new school of rightwing economists had begun to emerge. Like Walters, they had started as followers of Friedman in the 1950s. After the failure of some visiting American advisers in 1955 to persuade Chile to run its economy according to a rough early version of monetarism, the US government had set up a system of scholarships for Chilean students to attend the University of Chicago, where Friedman was teaching and developing his ideas. When these students returned to Chile, many of them began teaching at the University of Chicago’s equivalent in Santiago, the conservative Catholic University. Over time, as the Chilean version of the counter-revolution began to receive attention, its young male participants were given a name: the Chicago Boys.

With the election of Allende in 1970, their thinking took on a greater urgency. Just as the new president saw himself as part of a long leftwing tradition in Chile, so the Chicago Boys, for all their modern theory and training, were also the latest hopes of the other Chile, equally old: the Chile of the rightwing and wealthy, with their terror of social reform and inflation, and their enthusiasm for opening up the country to international capitalism. As Allende struggled against this opposition in public, the Chicago Boys met privately with the military and the other groups who were turning in favour of a coup, and drew up a plan for a new Chile, to be implemented when the gun-smoke had cleared.

At first, after Allende had been overthrown, it was not obvious that the Chicago Boys’ blueprint would be chosen. Introducing competition into every area of Chilean life, as they proposed, was almost as alarming a prospect to some conservatives as it was to the left. During the first unsettled weeks of military rule, with factions of all kinds jockeying for power, rival schemes were proposed that were closer to old-fashioned fascism, of the kind still practised by Franco in Spain, with a repressive state giving orders to business rather than collaborating with it. But then, in Santiago, the political weather abruptly changed in the Chicago Boys’ favour.

In April 1974, Pinochet made a speech to copper miners in the north of the country. The experience Chile was about to undergo, he promised, would involve “scrubbing our minds clean”. The idea of the country starting afresh appealed to him for several reasons. First, like many in the Chilean military, he had a strong sense that men in uniform were the natural saviours of the nation. Second, he knew very little about how to run the country. His previous experience of administering civilians had been confined to running prison camps. And Chile in 1974 was a mess, in part an ongoing consequence of the sabotage of the economy by Allende’s opponents. Finally, Pinochet came to realise that the upheavals the Chicago Boys promised would consolidate his own position. Only a single strong leader, most likely, could force the population to endure what Friedman, without a trace of irony – or sensitivity to the general’s law and order policies – called “shock treatment”.

Between 1974 and 1976, a few dozen young graduates were permitted to gut the Chilean economy. From their comfortable new government offices, the Chicago Boys ordered state spending to be cut by more than a quarter.  Overnight, industries previously subsidised or shielded from competition were exposed to the full strength of market forces. Tariffs on imports and price controls on local products were removed simultaneously, making foreign goods vastly cheaper and Chilean ones vastly more expensive.  Wages were allowed to collapse to half their 1970 level, while VAT was increased, and interest rates, too, to a suffocating 178% in mid-1975.  The social consequences of all this were dramatic. Unemployment leapt to almost a fifth of the national workforce. (If you included those on a temporary work scheme set up by the government, it was closer to a third.) The welfare state established by Allende and his predecessors fell apart: so many companies were going bankrupt that the government stopped receiving enough social security insurance payments from employers to enable them to pay unemployment benefit. Only soup kitchens run by the church kept people from starving. By mid-1976, there were more than 200 of them in Santiago alone.

The chaos and entropy of it all may possibly have been greater than the Chicago Boys intended. As in Britain, where “shock treatment” would be tried next, under Thatcher in the late 1970s and early 1980s, the ideas of Friedman and Walters and their intellectual allies proved very blunt instruments in practice. But much of the damage done to the structures of everyday life in Chile was quite deliberate. It was a prelude to the making of a new society.

At its crudest, the Chicago programme was class vengeance. It reversed the creep towards a more egalitarian country that had been occurring under the social reforms of Allende and his predecessor, Eduardo Frei.  The Chilean rich were restored to their traditional position of dominance. More ambitiously, the increased likelihood of poverty, unemployment and insecurity for the majority of the population under Pinochet was intended to change their politics: people without work were less likely to join trade unions; people suddenly abandoned by the state were more likely, it was thought, to become entrepreneurial in outlook; people struggling to make ends meet were more likely to put themselves first. This logic, in slightly diluted form, would be thoroughly absorbed by Margaret Thatcher.

Starting in 1978, the Chicago Boys imposed what they called the “seven modernisations”. Each sought to reform an aspect of society irreversibly, by setting up new institutions and instilling new habits in Chileans. When Walters went to Santiago for the World Bank again, “in 1978 or 1979”, he met Pinochet. “He wasn’t an economist,” Walters remembered thinking, “but like Margaret Thatcher, he liked good housekeeping arguments.” The general told him, “Chile will be safe from communism when every Chilean has their own car and house.”

Privatisation, a new and untried notion, was at the centre of this strategy. First, the firms that had been nationalised by Allende were returned to commercial ownership. Then older state enterprises were sold off: the airline Lan Chile, the national telephone company, the electricity-generating network. In many cases, the prices paid for these businesses were questionably low. The beneficiaries of these hurried auctions were often the same old money-making families that had dominated Chilean commercial life since the 19th century. Tacit official admission of this came in the mid-1980s, with an attempt to rebrand the privatisation programme as “popular capitalism”: less wealthy Chileans were encouraged to buy shares, and employees of state enterprises that were about to be sold were sometimes offered small stakes in them at a discount. By the late 1980s, the Financial Times estimated that Chile had a greater proportion of shareholders than any other Latin American country. As with the other economic benefits that would be claimed for Pinochet’s rule, however, the actual distribution of this new wealth was less impressive than the general’s advocates liked to insist. Only one working person in nine owned shares, admitted one of the heads of the privatisation programme, Major José Martinez, in 1986.

More relevant to most of the population were the changes to the institutions that had previously offered them a degree of social protection. Trade unions were weakened: their powers to bargain for their members were reduced and strikes in support of other workers were outlawed. The national health service had its budget reduced, while private health care was encouraged: Chileans who used it were offered half-price treatment vouchers by the government. The state pension system, one of the oldest in the world, was replaced by private funds into which people paid compulsory contributions. State schools and universities lost funding, and had their syllabuses purged of courses considered to have been “infiltrated” by subversive ideas, such as sociology and political science. Business conglomerates bought up chains of campuses, and were given tax breaks to run them. The benefits system was reformed, in the approving words of a special report on Chile in the Economist in 1980, “to reward the thrifty, while providing a safety net about an inch from the floor for the less virtuous”.

The British business magazine was hardly alone in its enthusiasm. During the late 1970s, the Chilean economy had begun to recover and then prosper – at least according to the measures preferred by foreign bankers and investors, which did not count the soup kitchens. Inflation fell. Productivity rose. Overall growth reached levels far higher than those being achieved in the stuttering economies of America and Europe.  To the parts of the British press that were influenced by Walters and Friedman, here was evidence that monetarism worked and, by implication, that it should be applied in Britain. The Spectator praised “the Chilean economic miracle”. The Daily Telegraph described the Chicago Boys as “honest, idealistic and admired”. The Financial Times said Pinochet was “presiding over Latin America’s best-managed economy”. In a repetition of the Allende era, foreign observers sympathetic to what was happening in Chile flew out to Santiago. And in the same clean Andean light, they saw what they wanted to.

Walters visited Chile with increasing frequency during the 1980s. “It was very exciting. I was an honorary Chicago Boy.” He gave a small, proud laugh. “Which I quite enjoyed. It was the great experiment in liberal economics. The reform of the social security…” There was a lift now in his voice. “That was a pure Chicago leap! A great thing!”

Walters remembered the names of the important Chilean economists and ministers of the time as if he had just met them for lunch. “The Chicago Boys,” he said, “were undoubtedly very able.” Did he worry at all about the torture? Walters spoke slowly and carefully: “I knew that with revolutions of that kind you are going to get casualties. Obviously, nasty things went on.” He did not seem keen to pursue the connection between Pinochet’s repression and his reforms any further. Instead, he continued more cheerfully, “I took my wife with me in 1979. She was expecting a police state. The only police she saw were a riot squad, of about 20 people, playing football.”

Nevertheless, Walters thought he had to be discreet about his Santiago trips. During the 1970s, his job at the World Bank gave him a cover (“I got away with murder!”). During the 1980s, when he was working for Thatcher, his visits were “private”. In Britain even then, a decade after the coup, Walters felt, “Everyone hated Chile – except Margaret.  I’d probably talked to her about it for the first time some time in the 1970s. She knew I’d been there, and she asked me about it … She admired Pinochet for putting Allende out of office.” From then on, “I let her know if I was going. She said, ‘Keep quiet about it. Don’t advertise it.’ ”

When I wrote to Thatcher about Pinochet, a letter came back on thick cream headed paper: “Lady Thatcher was very interested to read about your project as the relationship between the two countries is both intricate and fascinating. However … she has had to restrict herself to [contributing to] those books being written by either close personal friends or former colleagues.”

I read her memoirs instead. In the text, she praised Walters, “upon whose judgement I came more and more to rely”. She continued: “He knew that he could always have access to me more or less when he wished.” And strikingly, in her account of her formative political years during the 1970s, the perspectives of Walters about the state of Britain and the world seemed almost exactly the same as her own. More strikingly still, her analysis of what was to be done carried distinct echoes of the thoughts of their favourite dictator.

Britain in the mid-70s, she wrote, required “a fundamental change of attitudes … to wrench [it] out of decline”. Her picture of British life under Heath and Wilson was close to apocalyptic: “Mass infringement of the law, as in the miners’ strike of 1972 … the subversion of moral values … fraternal relations between trade-union leaders and the Soviet bloc … militants clearly out to bring down the Government …  fundamental liberties under threat … inflation threatening to destroy our society … the FT Ordinary Share Index down to the lowest level for 20 years . . .” In 1974, the Conservative party lost power, and such anxieties reached their peak in British rightwing circles.

“I renewed my reading of the seminal works of liberal economics and conservative thought,” Thatcher wrote. “I also regularly attended lunches at the Institute of Economic Affairs where Alan Walters and others were busy marking out a new non-socialist economic and social path for Britain.”

Since the late 1960s, she had been one of a small group of ambitious Conservatives, including Enoch Powell and Keith Joseph, who wanted the party to adopt more free-market policies. Their hopes had been briefly raised by the Conservative election victory of 1970: here was a chance, it seemed, to put their new ideas about “denationalisation” (as Thatcher then tentatively called privatisation) and a more competitive society into practice. But the only state-owned enterprises the Heath government actually sold off were the travel agent Thomas Cook and, bizarrely, the pubs of Carlisle, which had been left under state control since the first world war. Within a year, faced with strikes and economic difficulties, Heath had abandoned any further gestures towards rightwing radicalism. Yet Thatcher and allies were not discouraged – quite the opposite, as Heath’s more pragmatic approach failed, and the British “crisis” deepened.

During 1974 and 1975, Thatcher manoeuvred her way to the party leadership. Joseph, whom she had originally wanted to assume it, ruined his prospects with a speech apparently in favour of eugenics – a measure of the reckless thinking going on among the monetarists, and on the British right in general – so she mounted a coup against Heath, of the bloodless, party-political variety. All the while, her programme for governing Britain moved closer and closer to Chilean-style “shock treatment”. A future Conservative government should “risk some increase in unemployment”. If inflation was to be reduced, “monetary growth had to be curbed”. Then Walters began making his trips to Santiago, and Thatcher began to hear encouraging news from South America. “Chile was on our side,” as she put it in her memoirs. “A dramatic demonstration of how liberal economics makes the difference.”