Argentina and Chile

Privatization and Free-Market Reform

by Matthew E. Helming

April 20, 2002



Area: 1,072,745 sq. miles
Population: 34 million
Capital City: Buenos Aires
Ethnic Background: European (Spanish and Italian), Mixed Spanish and Indian ancestry
Principal Religion: Roman Catholic Christianity
Chief Commercial Products: Meat, Grain, Oilseed, Hides, and Wool
Currency: Peso
Per Capita Annual Income: $3,500 U.S.









Area: 286,322 sq. miles
Population: 13.6 million
Capital City: Santiago
Ethnic Background: Mestizo (mixed European and Indian)
Principal Religion: Roman Catholic Christianity
Chief Commercial Products: Copper, nitrates, iron, steel,
foodstuffs, processed fish, agricultural products
Currency: Peso
Per Capita Annual Income: $5,000 U.S.








Colonel Juan Domingo Peron


Argentina has a rich and violent history. Over the last 70 years, all aspects of this country- its economy, political structure, and culture- have been directly tied to the military. In 1930, inspired by the actions of Benito Mussolini in Italy, the army seized power of the government.

 Under the new conservative military government, Colonel Juan Domingo Peron came to power starting as minister of labor and then winning presidency in 1946. His power to draw support from the middle class and the labor class enabled his immediate success. He began his control over the labor force with the organization of the Descamisados(the shirtless ones) a popular mass of the labor class. Although he favored ideas that clashed with the ruling conservative military, he kept their favor through large military expenditure and frequent pay raises. He also bowed to the clergy through advocacy of religious education programs and through “adoption of a moderate position on church-state relations” (Latin America 2001).  He gained strength and favor by raising wages, but also raising prices at the same time to compensate. In an effort to gain support, he created many programs that made industries for the employment of the masses searching for work and coming into Buenos Aires. Creation of mass housing, schools, hospitals, and many labor friendly laws, were among his methods to gain power among the people. To pay for his “disorderly industrialization” he taxed agriculture, the backbone of Argentina’s economy. The result of this was quick decline in farm output and the foreign trade deficit that exists in Argentina even today.


Peron’s attempts to establish Argentina as the Latin American political leader were unsuccessful. Although Peron did take Argentina back into the international spotlight with “astute handling” of international relations, he failed to elevate it to the level of power he desired. In 1952, his wife Evita died of cancer and Peron’s power began to wane. Shortly thereafter, information about bankruptcy of the economy became public and opposition to Peron’s rule began to grow. Unable to staunch popular unrest or slow the worsening economic situation, Peron was removed from power in 1955 by the military which took the opportunity to free itself of his control.

   In 1973, with opposition military leaders mostly retired, Peron was able to return from exile in Spain and run again for president. He won easily with a staggering 61.9% of the majority. The economy was in ruins with high inflation and very low growth. He continued his conservative domestic policies, again siding with the labor party. He even tried to form closer political connections to Marxists and “hoped to make an official visit to Moscow. He extended this affinity in the form of credit offered to Cuba and restriction of investment in neighboring Argentina. As Peron’s political backing began to separate into the Peronistas and anti-Peronistas conflict broke out between the leftist guerillas and the more conservative union leaders. There was street fighting, terrorism, rioting, and general chaos, until the president died in 1974 of heart failure.

Peron’s power and influence on Argentina can be felt today as the economy is still reeling from the economic disaster of his presidencies. He brought the country out from under the power of the military for a short time and taught the labor class to use its massive political power in its favor.



Salvador Allende & General Augusto Pinochet


 Chile has a similarly strife-filled history with frequent military intervention overrunning the government and economy. In 1970, Salvador Allende, a committed Marxist, was up for election again after having failed in 1958. In what can only be described as unorganized, Allende won and brought in the first democratically elected Marxist government. The right wing opposition was divided and on top of that only 29% of the electorate voted, when voting was required by law. Allende was elected not because of his popularity, but because of unorganized opposition. Allende immediately set to work recreating Chile as a Marxist state. The Copper industry and the telephone system were quickly nationalized, warranting sanctions from the Nixon administration. The Soviet Union and China were ready supporters of Allende. With increased wages and frozen prices the illusion of economic well-being pushed Chileans into a consumer craze that Castro warned Allende was opposite to Marxist teachings of minimum consumption. Allende replied that he was acting in order to gain re-election so that a “dictatorship of the proletariat” could be established. Economic conditions continued to worsen: stores closed because of fixed prices, wages rose and no one could afford to re-stock shelves. Allende then ordered the nationalization of other industries, even ones privately owned by Chileans. On his orders, the government seized factories and farms throughout the country.

This move prompted huge strikes by workers opposed to nationalized industries. The same thing happened in the agricultural sector. Disorganization and mismanagement lead to a 20% drop in production . All this combined translated to a drop in output of enormous proportion. Following suit with his Marxist ideologies, Allende isolated Chile internationally. He vilified the U.S. Copper industry as foreign exploitation. Non-communist national support disappeared and the Soviet Union offered little monetary help. Allende’s government continued to print money and inflation exploded. Food was scarce due to frozen prices, increased monetary circulation, and diminished agricultural output. These situations lead to increased imports and a widening trade deficit. With economic collapse imminent and a strike against nationalization being held by the truckers union the military seized power September 11, 1973.


      As the military’s power rose, so did that of General Augusto Pinochet Ugarte. Democracy, which Chile had long been proud of pioneering in Latin-America, ended with the suspension of the constitution, neutralization of the courts, and the close of Congress. Pinochet was quoted saying that military rule would be lifted when “the ills of democracy had been erased”. The junta, which consisted of four military men, then began to systematically exterminate Socialist, Communist, and Marxist leaders and supporters. All political parties were suspended. Next Pinochet turned his attention to the economy and the mess left to him by the Allende administration. He began to return property seized by the government. Taxes and interest rates increased and currency in circulation slowed. Prices were allowed to return to natural levels. However as a result, high food costs lead the citizens to face the threat of starvation. Pinochet compensated for this with food handouts and low-paying jobs. Economically Pinochet had been a success. He consulted with economic advisors that had been trained under Milton Friedman at the University of Chicago. Pinochet, despite his rigid regime, was highly in favor of free market economics. Inflation had dropped from 600% a year in 1973 to under 10% in 1981.


           Human rights violation complaints against Pinochet resounded throughout the world and caused trouble for Chile. By 1983, things were bad again with unemployment reaching an estimated 21%. As opposition mounted and democracy was sought again guerilla warfare between the leftist parties and the regime increased and workers responded with strikes. Pinochet recognized the opposition and legalized political parties in 1987. This was also an attempt at creating better relations with the United States. While violence continued and as human rights atrocities increased, the economic conditions continued to improve as a result of economic reforms that favored free markets.

In 1988 Pinochet allowed another one of his plebiscites, or investigatory votes. His opposition comprising 17 parties united to oust him. The vote was close with 54% against Pinochet, but 43% commending his contribution to the country’s economic prosperity, low inflation and a $1.5 billion trade surplus. Pinochet announced that in 1989 there would be official elections. 17 years of authoritarian rule ended when citizens elected Patricio Aylwin of the Christian Democratic Party. On March 11,1990, Pinochet gave the presidential sash to his successor. 

Pinochet remained in power as the chief commander of the military until 1997 and then took a lifetime senate seat until he underwent trial for human rights violations which lasted through 2001. Although a stern dictator, Pinochet’s economic reforms helped Chile out of the “economic tailspin”(Latin America 2001) created by the Allende administration. He left the economy growing and stable. He is still under investigation for things the junta did during its regime and for the death and disappearance of some 3,197 people. He rid Chile of Marxism and restored its economy at the cost of democracy.


Privatization: Argentina and Chile


Although both countries have in the past had distinctly democratic governments, Argentina and Chile have gone through enormous amounts of change in the last 70 to 80 years. Both countries have a history of political and economic turmoil. One product of the last 20 years though is privatization of industry and economy.

 Chile’s Pinochet may have been a ruthless leader who exterminated his opposition, but his economic policy promoting free market economics was sound. Pinochet saved the country from the utter ruin that the Allende administration had left it in. He raised Chile to a position of international renown that gained it trade agreements, foreign investment, and stable foreign trade. He is responsible for the privatization of social security, something even the United States hopes to possibly copy in the future.

            Argentina though, felt the negative effects of the Peron administration’s, excess spending and Marxist tendencies for years to come. Argentina wasn’t ready for a free market system until 1976 when the military had finally taken over after the Peron administration. Argentina has had a far longer history of military rule than Chile and was under military control directly or indirectly from 1930 until the present. Peron’s policies proved disastrous for the Argentine economy, turning a country with an annual trade surplus of $1.5 billion into one with massive amounts of foreign debt and low economic output.

Argentine and Chilean governments have both been working to privatize their economies in hopes of fostering free market operations. Chile however got a head start and had a population of citizens that supported economic reforms. Where Chile has had a government and a people dedicated to privatization since the Pinochet administration took office, 60% of the Argentine economy was still under government control in 1976 when the military had removed Peron and the Peronistas. Peron’s increased spending in Argentina with frozen prices and increased wages, created runaway inflation and ended Argentina’s economic prosperity. The Menem administration, which followed Peron, responded with free-market reform measures taken by economic minister Cavallo. Additionally Cavallo pegged the peso to the dollar with the Convertibility Law in 1991. Ultimately, this decision proved to be the unraveling of the Argentine economy.


Recent Economic Development


With an economy traditionally based upon agriculture, Argentina was particularly devastated by the economic policies of Peron that taxed agriculture to promote industry. A committed Marxist, he wasted no time dividing himself from all political support as he nationalized the economy after coming to office in 1946. Over half of all industry was state controlled and run very inefficiently. This  disorderly industrialization had been created at the expense of the country’s only revenue generator, agriculture, in order to fuel support for Peron’s voter base in the labor class. Removed from power by the military in 1955 and then reinstated in 1973, Peron’s administration twice drove the Argentine economy into the ground. Corruption in the government, rampant terrorism, economic disintegration, and governmental loss of control, brought about the military’s removal of Peronista government.

            The military controlled by a three man junta headed by General Jorge Rafael Videla, immediately froze wages, released prices to their natural levels, increased taxes, and devalued the peso by 70%. The result was economic prosperity until 1981. Inflation decreased from 35% a month to 10% by 1978. Agriculture was stimulated through the rise of farm prices. And as the economy grew at an alarming pace domestic stability was sought through a campaign against the leftist opposition. This campaign resulted in some deaths or disappearances of 6-15,000 people. By 1981 the country was tired of military rule and the U.S. had suspended all military aid to the country in light of human rights violations. In 1983, the junta allowed elections to return , ending another eight years of militaristic regime. Carlos Saul Menem was elected in 1988 as president and began during his inauguration speech saying “Argentina has broken down”.            


As Menem’s presidency continued, the economy continued to worsen and eventually in 1990 he announced the privatization of 90 state monopolies. The purchase of these industries subsidized Argentina’s external debt at a rate of about 30 cents to the dollar. The telephone industry was the first to be privatized and brought the government $1.8 billion in hard currency. This privatization program was proposed in 1988 as a mechanism for decreasing the budgetary burden on the government. In the next few years, the government followed an accelerated time table gaining international recognition with the sale of the previously nationalized electricity parastatal in November of 1990. Additionally, the government ended its history of price setting and thus began its policy of reduced economic intervention. In 1991 Argentina launched the Convertibility Plan, a money creation rule, that limits monetary policy and central bank inflationary finance of public sector deficits. This plan was dependent upon deregulation and the privatization of the public sector. The policy set up the foundation for an independent monetary authority, whose dissidents would answer to the courts.

 Menem continued his pledge to privatize selling two television stations, the electric utility, the national telephone company, and the Argentine airline. The petroleum industry was restructured and auctioned off in pieces. Argentina was once again becoming attractive to foreigners. Then, in late 1991, government granted road and railroad privatization as it allowed the long-distance cargo lines to become decentralized. Railway employment was also decreased by 15%. As of 1992, the 1988 privatization scheme had created $2.5 billion dollars in capital receipts. In 1992, defense industries, Argentina’s largest electricity producer, ports, reinsurance, and the entire power sector were all privatized. Privatization continued to produce large results through 1993 as the decentralization of state-owned oil companies enabled the government to cancel debt obligations to pensioners in the amount of $2.7 billion and to oil producing provinces in the amount of $1.2 billion.


 Menem’s privatization scheme proved extremely successful as the economy enjoyed average growth of 7.7% per year between 1991 and 1994. 1995, however, proved to be a bad year as the Mexican crisis ensued and shocks were felt throughout Latin America as the peso devalued. Despite worsening conditions, in 1995 the economy continued to privatize as provincial banks and various public enterprises were sold off.

There is no doubt that the restructuring in Argentina was responsible for increased stability, as was proven during the Mexican peso crisis, during which decreased domestic consumption shifted production toward export markets, helping Argentina to control its trade balance.

            The other keystone of the Menem administration was the liberalization of trade policy in 1989 which allowed for the inflow of capital goods and facilitated the privatization and the revitalization of the economy. Menem’s plan had called for a revamp or modernization of domestic industry. It was the loosening of restrictions upon imports that allowed not only the opening of the economy, but the procurement of capital goods to modernize with. Privatized industries were then able to buy materials for both domestic and foreign production from foreign suppliers.

 In 1995, Argentina joined MERCOSUR (Mercado Comundel Sur or Common Market of the South), an agreement between Argentina, Brazil, Paraguay, and Uruguay offering reduced tariffs to members and setting higher external tariffs in order to channel trade among member countries. The regulations MERCOSUR put on Argentina counteracted its effort to increase free trade.

Today Argentina is in economic shambles. Just recently the country defaulted on $155 billion in public debt, the largest by any country in history. This comes after a decade of pegging the peso to the dollar (The Convertibility Plan). With a currency devaluation of 70%, the banks have lost $20 billion due to forced conversions of dollar deposits and withdrawals, and are continuing to lose $100 million a day in deposits. The banking system is in chaos and foreign banks are shutting down as a result of economic disruption in the chain of payment between consumers, businesses, and suppliers. The import market has all but dried up, worsening living conditions as hospitals can not even get imported medicines. Today things look bleak for Argentina as it works to implement economic reform with the help of the IMF.




1970 marked the beginning of the destruction of the Chilean economy. In and out of military rule since 1973, Chile has just recently restored its democratic roots. In 1970, Salvador Allende brought with him the first democratically elected Marxist government. He had wasted no time in nationalizing the economy starting with the U.S. owned copper industry and telephone system. This action earned Chile economic sanction by the Nixon administration. After Allende froze prices, increased wages, and failed in his effort to create a “dictatorship of the proletariat”, the military took control in a coup on September 11,1973. It was the military leaders who would reform the country economically during what is known as a reign of terror.

         The four man military junta immediately went to work “rooting out Marxism” and exterminating any suspected leftist enemies. The government was shut down and control was overrun by the military as it ended elections, closed congress, and dissolved courts. The main goal for General Augusto Pinochet Ugarte, the junta head man, was the resolution of the economic disaster that the Allende administration had left. First skilled managers were sent to the farms and factories to cure uncoordinated economic activity, while in the meantime property seized by Allende was returned to its private citizen owners.

 Pinochet methods differed from the Argentine economic reform in that he freed prices immediately on food and consumer goods, to stimulate agricultural sector growth and industrial production and to get free-market economics going as soon as possible. The rising taxes, interest rates, and decreased currency circulation caused problems for the people of Chile making food and consumer goods expensive, while at the same time increased unemployment forced wage levels down. To combat this, Pinochet created low paying public jobs and handed out food to the starving. This “shock” treatment soon proved to have disastrous effects with constant worker strikes.


Pinochet’s power in the military and control over the regime in Chile allowed for the Chicago economists to be absolutely protected from political pressure. The results were a controlled experiment in economic policy with amazing results. George Bush was quoted in 1990 saying,

      “Chile has moved farther, faster than any other nation in South America toward real free-market reform. The payoff is evident to all: seven straight years of economic growth…You deserve your reputation as an economic model for other countries in the region and in the world. Your commitment to market based solutions inspires the hemisphere” (address to the Chilean Congress on December 6, 1990).

Pinochet owed this recognition to the policies of the Chicago trained economists and free-market reform. Whether Pinochet acted for his own personal aggrandizement or for the good of Chile remains unclear, but the economic results were positive nonetheless. Pinochet had wanted “to be identified with a historic act of national renewal, and he decided these bold technocrats held the key to a new, prosperous future..” (Souther p.8). And it was because of this liking by Pinochet that the Chicago boys were granted complete protection from political pressure, and were able to complete economic reform with little or no opposition to their policy measures.

Despite Chile’s apparent economic boom after the declines of 1973-75 and 1982, it is seen after examining the data that the 7-10% growth rates during those years hardly covered the 17% and 14% drops in GNP. Sherman Souther points to the fact that even though growth was robust, “the magnitude of the 1982 decline was the key to the strength of the ensuing recovery…[and that] Undoubtedly, the statistics representing growth rates over the short and specific segments of time can appear quite favorable and lead one to believe that the Chilean model was a success. Overall, combining the periods of boom and bust, the growth rate of Chile’s economy hardly resembles a ‘miracle’” (Souther p.7). Regardless of the examination of the data, we can still see the Chicago economists’ responsibility for structural reform toward free markets that created a foundation for the free market success that Chile enjoys in its future.


 Souther argues that while the Chicago boys were responsible for Chilean economic restructure, the results were not as amazing or as fast as they appeared when examining data in the long run, and not during a boom. And the results were noticed, for example, in an article by Shirley Christian in The New York Times on October 8, 1990 stating that the Chicago Boys had, “slashed import duties, invited foreign investment, eliminated entitlement programs for the middle class, improved tax collection, and pushed local business executives and foreign investors to increase exports by exploiting the country’s advantages in areas like fruits, vegetables, fisheries, and forestry.”

Under Pinochet a “shock treatment” was applied to the economy that immediately implemented the plan to halt inflation and encourage growth. The effect was disastrous on the economy with unemployment peaking at 16.8% in 1976, higher than during the Allende administration, and with a 13% drop in GNP. Purchasing power dropped to 40% of the 1970 level and industrial production decreased a further 28%. This disaster was skillfully constructed and accomplished its goal of attracting foreign investors who carefully observed Chile’s increasing observance of neo-liberal economic reform. However, quickly after it was seen that something was wrong as inflation had remained at 343% in 1975 and so the “shock” treatment ended and attention turned to revaluation of currency and tariff elimination. A point of significance is that deregulation and privatization continued to flourish throughout the shock in the financial sector, as well as in the fishing sector and transportation sector.

          Following economic growth from 1977 to 1979 the Chicago boys privatized the public social security system, the educational system, and the healthcare system. 1982 brought about a crash very similar to Argentina’s present condition when the fixed exchange rate had to be freed because external shocks decimated the economy.


Where Argentina is experiencing similar problems now, Chile broke from its free-market tendencies and seized control of some businesses and banks to avoid a banking crisis, eventually returning them to the private sector after stabilizing them. 1984 to 1989 was a period of recovery and Pinochet returned all companies appropriated during the crash as well as public electric and the telecommunication monopolies. Like Argentina, Chile used revenue acquired from privatization to finance the reduction of public debt.

From 1975 to 1989 the Pinochet regime sold government ownership in 160 corporations, 16 banks, and over 3,600 agro-industrial plants, mines and real estate holdings, as well as returning 30 to 40% of the land seized by the Allende administration. From 1975 to 1981 the financial sector received the greatest emphasis and banks were sold to single individuals or investment groups. As happy as foreign investors were to see this adherence to free market reform, “the Chilean government’s privatizing of its industries illustrates the Pinochet regime’s tendency to sacrifice long-term growth for short-term gain” (Souther p. 16).

            In 1990, Chile returned to democracy and removed Pinochet from power. The country was in the middle of economic boom and Pinochet was under investigation for human rights violations.             As time passed into the 1990’s Chile saw economic success as it was discussing entering NAFTA and became an associate member of MERCOSUR. It has opted against the MERCOSUR tariffs in hopes to extend trade relations to North America and NAFTA, and already had agreements with NAFTA members such as Mexico and Canada. The economy had been slowed by fluctuations in the price of copper and by the Asian economic crisis of 1998; Asia typically buys 1/3rd of Chile’s exports. Meanwhile the arrest of Pinochet made headlines and kept political battles going.


Presently Chile is lead by President Lagos, its second socialist president, and maintains the strongest sovereign bond rating in South America, despite a high unemployment of 9%.    One particularly interesting facet of Chilean privatization that may have effects upon the U.S. is Chile’s privatized social security program. It began in 1981 as the public system was phased out and replaced by AFP’s or Pension Fund Administrators. The AFP’s actually compete for retiree withholdings which get held in individual accounts and get invested in stocks and bonds. However, Chile’s employers contribute nothing to these funds. The AFP system is the only system available to the public and offers 2 options upon retirement. One is a programmed monthly withdrawal adjusted for life expectancy and remaining account balance, the other is an insurance annuity guaranteed to be paid. Although less than the programmed withdrawal, it provides reassurance and comfort against a fluctuating market. And statistically, the privatized social security helped directly to finance privatization within Chile in the mid to late 1980’s through direct investment. The system is having troubles, particularly for low income contributors in the beginning who are receiving negative returns for the first few years. But as a model the system is very interesting and has provided U.S. proponents of social security privatization with a practical model.






After having examined the past of both Argentina and Chile it is hard to draw a conclusion and point to an executor of better policy or structural reform. Both have come a long way after dealings with interventionist states, militaristic regimes, and Communist leaders. It is safe to say that both have made tremendous progress and are well on their way to free market economy, perhaps not immediately in the case of Argentina.

In the stability arena, Chile seems to be faring better with somewhat constant economic growth and a high level of foreign trade. Argentina is in the middle of economic crisis due to rigid trade policy and a fixed exchange rate that has destroyed its banking system.

Privatization played a major role in both countries and was the result of a combination of democracy, desire for stable economy, and relation with foreign national powers. It was the method of privatization that differed. Argentina privatized over a long period of time initiated by the military and aided by an interventionist state. Chile privatized utilizing “shock” policy implemented by the Chicago Boys and suffered for it as revenues from privatized business and industries fueled the failing government and allowed it to balance itself and stay afloat longer. Meanwhile these newly privatized industries were ruined by international competition and lack of protection in an open economy prone to external shock and devoid of organization. This Chilean-style rapid privatization, although it seems to have laid a foundation for present day competitiveness and prosperity, was achieved through a sink or swim ideology that hurt many people and has resulted in polar extremes of wealth/income distribution that plague the country today. 


 As one can point to Argentina today and it’s pegging of the peso to the dollar as a destructive economic policy, one can also point to the Chilean currency crash of 1982 during worldwide recession and an overvalued peso.

            One definitive difference between the two countries over the last decade is their stances on protectionism. The Convertibility Law in Argentina, combined with protectionism and a weak banking system, were completely responsible for the situation in Argentina. One Columbia University Economist is quoted saying,

 “In other crises, the weakness of the banking system created the expectation of future fiscal problems, because of fears the government would have to bail out failed banks. This was the opposite: fiscal weakness led to banking weakness, as the government ended up using the reserves of the whole banking system” (The Economist March 2, 2002).

It seems that the combination of fiscal laxity and the currency board Convertibility Law were strangely paired and held heavy consequences for Argentina. This isn’t to say that Chile succeeded where Argentina failed, merely that they have already learned from that mistake as they did in 1982.

Argentina’s situation is one of rigidity. The Convertibility Law placed in effect in 1991 killed inflation, and staunched fears of devaluation, bringing foreign capital in droves. Menem continued to privatize almost everything the state owned, and from 1991 to 1997, the economy grew at 6.1% per year. Production was up, and investment was modernizing farms, factories, and harbor ports. But shock struck soon after “prices for Argentina’s commodities stopped rising; the cost of capital for emerging economies began to go up; the dollar appreciated against other currencies; and Brazil, Argentina’s main trading partner, devalued. The rigidity of the currency board made it difficult to respond to these shocks” (The Economist March 2, 2002). Privatization had set many of these businesses up for failure as Brazil devalued and Argentina’s prices became high and uncompetitive. It could not respond to an appreciating dollar pegged to its currency.


Argentina’s rapid privatization exposed many businesses and industries to failure in open market competition with international competitors through its exchange rate policy. Recognizing that newly privatized industries are often not strong enough to stand on their own feet in the international market place and require some assistance in the form of government subsidy so that they can become competitive, the Chilean government intervened in private enterprise to help prevent bankruptcy and provide solvency in the same situation during the 1982 crisis

An interesting facet of this comparison of Chile and Argentina is the number of variables that contribute to a country’s economic stability. Privatization, requiring free-market reform and the establishing of competitive efficient industries, is only a small part of what went on in these countries. It was important and helpful in establishing independently operating businesses, but no more so than the importance of trade regulation, political stability, democratic rule, and the coordination of policy with action. Argentina and Chile both implemented policies that conflicted with free-market reform, such as a fixed currency exchange rate that laid the economy bare to external shock and provided little room for adjustment.

Yet, privatization has been instrumental in transforming both Argentina and Chile from resource-exploiting countries to industrialized, service-oriented economies able to compete and trade with NAFTA, MERCOSUR, and the rest of the world.


One particularly interesting facet of Chilean privatization that may have effects upon the U.S. is Chile’s privatized social security program. It began in 1981 as the public system was phased out and replaced by AFP’s or Pension Fund Administrators. The AFP’s actually compete for retiree withholdings which get held in individual accounts and get invested in stocks and bonds. However, Chile’s employers contribute nothing to these funds. The AFP system is the only system available to the public and offers 2 options upon retirement. One is a programmed monthly withdrawal adjusted for life expectancy and remaining account balance, the other is an insurance annuity guaranteed to be paid. Although less than the programmed withdrawal, it provides reassurance and comfort against a fluctuating market. And statistically, the privatized social security helped directly to finance privatization within Chile in the mid to late 1980’s through direct investment. The system is having troubles, particularly for low income contributors in the beginning who are receiving negative returns for the first few years. But as a model the system is very interesting and has provided U.S. proponents of social security privatization with a practical model.




“Foreign Banks May Head for the Exits”. Business Week. April 15,2002


John Lear, Joseph Collins. “Retiring on the Free Market: Chile’s privatized social security.” NACLA Report on the Americas. Jan-Feb 2002

“A decline without parallel-Argentina’s collapse”. The Economist. March 2, 2002.


Paper: Sherman Souther. “An Analysis of Chilean Economic and Socioeconomic Policy: 1975-1989”.University of Colorado at Boulder. May 1998


Argentina Country Website. <>. Spring 2002.


The CIA World Fact Book-Chile. <> Spring 2002.


The International Monetary Fund. <> Spring 2002.


The World Bank Group. <> April 15, 2002.


Latin Focus. <>


Export Council for Energy and Efficiency. <> April 8, 2002.


Latin Investor. <> April 8, 2002.


Buckman, Robert T. The Republic of Chile. Latin America 2001: The World Today Series. Harper’s Ferry, West Virginia: Stryker-Post Publications, 2001.


Buckman, Robert T. The Argentine Republic. Latin America 2001: The World Today Series. Harper’s Ferry, West Virginia: Stryker-Post Publications. August, 2001.


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