Allende himself had stood on what appeared to be a formidable rock of thinking. Why was Chile poor, much poorer than Argentina? The Argentinian Raúl Prebisch argued powerfully that in Latin America big estates counted as a bottleneck, and in Chile they predominated — 80 per cent of the land held by 7 per cent of the farms, each with a thousand hectares on average, whereas 37 per cent of the farms held 0.2 per cent of the land. These figures seemed to reflect ‘social injustice’, and development economists argued that, because there were so many very poor peasants, there was not proper demand for industrial goods. The rich just imported them, and otherwise did nothing for economic growth except employ servants who, in the poorest countries such as Haiti, themselves employed servants. In the USA, there was a great deal of head-shaking as to what had gone wrong, the role of the USA included. Kennedy, as part of a campaign to limit the appeal of Castro, promoted an ‘Alliance for Progress’, with grants of money for ‘structural reforms’ in Latin America, and the Chilean Christian Democrats promoted land reform, though they did so prudently: carried out too quickly it could damage production. There was a problem for Chile, in that half of the population lived in the central valleys, not in the immense areas to north and south: vast estates on endless tracts of valueless land hardly made any difference, one way or the other, and some of them worked efficiently enough. They would have worked more efficiently, as experience was to show, had Chilean produce been freely bought and sold in the richer markets. But these protected their own agriculture: no-one knew Chilean wines until much later. Over the pace of land reform, the Christian Democrats split three ways, and their alliance with the Right disintegrated, which was the background to the election of Allende. That had ended in tears.
The concomitant of the big state was printed money, which produced inflation, and inflation distorted everything. Augusto Pinochet led the field in what was to become a powerful counter-attack. His first move was to cancel the 300 per cent wage increases sanctioned by Allende, and some of the controlled basic prices were hugely increased. The great mass of the population had had its energy sapped, and accepted the immediate troubles easily enough, though no doubt the presence of the military helped. The essential move was to restrict the output of paper, which in turn meant a drastic curtailment of the State’s spending. There was no great secret in this: you needed some foreign support, high interest rates to prevent an expansion of borrowing, devaluation, and maybe bond sales at a well-judged rate, to attract some of the excess paper. These things had been done in 1923 in Germany, and a great inflation, which had brought the Mark to 11 billion against the dollar, stopped more or less overnight, in the context of a Communist takeover in Saxony (suppressed by the army, in what was known as a Reichsexekution) and then Hitler’s first attempt to seize power, with the Putsch in Munich. There, the change had come about because, at last, a government stretching from some way into the Left to some way into the Right had been strong enough to maintain control. There were problems in the short run, with bankruptcies and unemployment, but there followed an economic recovery. Now, the first step in Chile was to carry through the money reform. Reducing inflation is a slow business, and in 1974 it still stood at over 500 per cent. Milton Friedman came on a visit in March 1975, and an economic recovery programme was announced. There were three phases of liberalization — the first to 1977, then a council of state in 1981 and a constituent assembly in 1985 with direct election every eight years provided for. A constitutional article forbade attacks on the family. Control of inflation meant, not just management of a paper currency, but attacking the causes of the inflation — what a prominent English politician, Sir Keith Joseph, with excellent American contacts, famously addressed at this time.
There would have to be a dismantling of the State. It meant privatization, to encourage efficiency through competition. The State, with ignorant investment of other people’s money, with over-employment, with automatic further credit from some puppet bank and with inappropriate political appointments, could in effect ruin concerns to the point at which no-one would buy them. No-one would make a profit out of them. In Chile some of the firms taken over by Allende had not been so ruined, and by 1978 all of the 259 sequestered firms had been returned to the stockholders, and ninety-nine others were sold off cheaply, mainly to conglomerates. There were two concomitants. The peso, though stable enough, was devalued, to the point at which imports from Chile became very cheap, and a further concomitant concerned the outside world: trade was widely liberalized, with foreign competition allowed. Tariffs sank to 10 per cent by 1978. There was a recovery, led by exports, and not just by the copper and other raw materials that Chile produced. There was now a property boom in Santiago, and there was a rehousing of the poor, away from the shanty towns into tower blocks well-segregated from middle-class areas, which experienced a property boom, because the tax on capital gains in property was abolished, and conglomerates (piranhas) made great gains out of the proceeds. Prices, generally, were removed from controls. On the sixth anniversary of the coup, Pinochet made a speech referring to the ‘seven modernizations’, which included a new labour code, and a new principle, of privatization, to be followed. This latter included social security: there would now be competition among private firms to provide insurance, rather than blanket coverage by the State. The new principle meant that education was also devolved — first onto the municipalities — while private schools were encouraged. The University of Chile and the Catholic University had been placed under the military, and were now expected to be self — financing. Privatized universities now became part of the intellectual agenda: this reflected the success of the American model, as against the decline of state universities in every other country.