Essay on Chilean Economic Shock Therapy

Essay on Chilean Economic Shock Therapy

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Chilean Economic Shock Therapy

Chile is seen to be the quintessential model of liberal restructuring in Latin America in the late twentieth century. After the overthrow of the socialist regime of Salvador Allende in 1973, Chile’s government has implemented an authoritative economic restructuring program that replaced state intervention with market incentives and opened Chile to the global economy. This four-phase process transformed the economy from highly protective industrialized to an open free market economy based on agricultural exports. The process by which the Chilean economy was stabilized was termed “shock therapy.” Like other dramatic economic policy changes, the “therapy” caused the underlying social problems of Chile to immediately surface. Real wages were cut in half, and public spending in preventive health care, primary education, and public housing were drastically cut. Unemployment, “soared to an average of 17.6 percent of the workforce, and hyperinflation averaged 350 percent.” (Sheahan 1997, 12) While in its inception C
growth, it also exacted a tremendous toll on Chilean workers, peasants, and sections of the middle-class, worsening poverty and inequality. It took the process four-phases to mediate the economy’s growth to equilibrium, unlike Russia which is still feeling the affects of their radical economic policies.

The “shock therapy” process entailed the rapid and efficient liberalization of capital markets and prices and the elimination of most restrictions on trade. Tariffs were cut to a uniformed percentage, and the exchange system was consolidated. The government implemented a “crash privatization” process under which “more than 300 firms with a value of $1 billion were returned to private ownership by the end of 1984.”
( Bosworth 1994, 5) The budget deficit was cut sharply from 25 percent of the GDP to 1 percent, and labor market relations were restructured by labor union suppression. The unions were severely weakened by legislation and then allowed to operate under new confining labor laws. These laws included limited means to negotiate over wages, collective bargaining and other issues regarding the working class.

The effects of the anti-labor union laws were far reaching indeed. Chile faced a severe economic crisis that saw the GDP fall by more than 14 percent. However, by 1986 the second phase of the “...

... middle of paper ...

...o building a “developmental state.” Other democratizing Latin American countries like Brazil, Peru, or Argentina have only been able to elect popular presidents who have broad executive, if not authoritarian powers. These countries as with Russia will only demonstrate a limited capacity to make the necessary reforms because of their lack of internal cohesiveness.


Bosworth, Barry, Rudiger Dornbusch, and Raul Laban. 1994. The Chilean Economy: Policy Lessons and Challenges. Washington, D.C.:Brookings Institution.

Collins, Joseph, and John Lear. 1995. Chile’s Free-Market Miracle: A Second Look. Oakland, Cal:.Food First.

Hojman, David. 1999. The Political Economy of Development and Democracy in the 1990’s. Pittsburgh, Pa.: University of Pittsburgh Press.

Scully, Timothy. 1996. Constructing Democratic Governance: South America in the 1990’s. Baltimore.: The John Hopkins University Press.

Sheahen, John. 1987. Patterns of Development in Latin America: Poverty, Repression, and Economic Strategy. Princeton, N.J. Princeton University Press.

Weyland, Kurt. 1997. “Growth with Equity in Chile’s New Democracy,”Latin American Research Review, vol. 32 no. 1.

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