There was no "economic" transition cost, because there is no harm to the gross domestic product from this reform (on the contrary, there is a huge benefit). A completely different issue is how to confront the "cash flow" transition cost to the government of recognizing, and ultimately eliminating, the unfinanced Social Security liability. The implicit debt of the Chilean system in 1980 was about 80 percent of the G.D.P.
We used five "sources" to generate that cash flow: a) one-time long-term government bonds at market rates of interest so the cost was shared with future generations; b) a temporary residual payroll tax; c) privatization of state-owned companies, which increased efficiency, prevented corruption and spread ownership; d) a budget surplus deliberately created before the reform (for many years afterward, we were able to use the need to "finance the transition" as a powerful argument to contain increases in government spending); e) increased tax revenues that resulted from the higher economic growth fueled by the personal retirement account system.
Since the system started on May 1, 1981, the average real return on the personal accounts has been 10 percent a year. The pension funds have now accumulated resources equivalent to 70 percent of gross domestic product, a pool of savings that has helped finance economic growth and spurred the development of liquid long-term domestic capital market. By increasing savings and improving the functioning of both the capital and labor markets, the reform contributed to the doubling of the growth rate of the economy from 1985 to 1997 (from the historic 3 percent to 7.2 percent a year) until the slowdown caused by the government's erroneous response to the Asian crisis.
Here's what he left out:
In 1973, the year the General seized the government, Chile's unemployment rate was 4.3%. In 1983, after ten years of free-market modernisation, unemployment reached 22%. Real wages declined by 40% under military rule.
In 1970, 20% of Chile's population lived in poverty. By 1990, the year "President" Pinochet left office, the number of destitute had doubled to 40%. Quite a miracle.
Pinochet did not destroy Chile's economy all alone. It took nine years of hard work by the most brilliant minds in world academia, a gaggle of Milton Friedman's trainees, the Chicago Boys. Under the spell of their theories, the General abolished the minimum wage, outlawed trade union bargaining rights, privatised the pension system, abolished all taxes on wealth and on business profits, slashed public employment, privatised 212 state industries and 66 banks and ran a fiscal surplus.
Freed of the dead hand of bureaucracy, taxes and union rules, the country took a giant leap forward ... into bankruptcy and depression. After nine years of economics Chicago style, Chile's industry keeled over and died. In 1982 and 1983, GDP dropped 19%. The free-market experiment was kaput, the test tubes shattered. Blood and glass littered the laboratory floor. Yet, with remarkable chutzpa, the mad scientists of Chicago declared success. In the US, President Ronald Reagan's State Department issued a report concluding, "Chile is a casebook study in sound economic management." Milton Friedman himself coined the phrase, "The Miracle of Chile." Friedman's sidekick, economist Art Laffer, preened that Pinochet's Chile was, "a showcase of what supply-side economics can do."...
By 1982, the pyramid finance game was up. The Vial and Cruzat "Grupos" defaulted. Industry shut down, private pensions were worthless, the currency swooned. Riots and strikes by a population too hungry and desperate to fear bullets forced Pinochet to reverse course. He booted his beloved Chicago experimentalists. Reluctantly, the General restored the minimum wage and unions' collective bargaining rights. Pinochet, who had previously decimated government ranks, authorized a program to create 500,000 jobs. The equivalent in Britain would be a government program for 4 million workers.
In other words, Chile was pulled from depression by dull old Keynesian remedies, all Franklin Roosevelt, zero Margaret Thatcher. (The junta even instituted what remains today as South America's only law restricting the flow of foreigncapital.)
New Deal tactics rescued Chile from the Panic of 1983, but the nation's long-term recovery and growth since then is the result of - cover the
children's ears - a large dose of socialism.
To save the nation's pension system, Pinochet nationalized banks and industry on a scale unimagined by Communist Allende. The General expropriated at will, offering little or no compensation. While most of these businesses were eventually re-privatised, the state retained ownership of one industry: copper.
It's shocking that America could be going down the road to fiscal ruin, and the NYT is aiding and abetting it.