How Inequality Tore Chile’s Free Market Success Story Apart

Chile was the poster child for economic growth and poverty eradication — until the yawning inequality created by its market-friendly policies sparked an intense backlash

Riot police fire tear gas at demonstrators during a protest against the Chilean government in Santiago, on January 10, 2020. Photo: Claudio Reyes/Getty Images

IfIf you want a glimpse of the future, head to Santiago. Until recently, the Chilean capital was the beating heart of an economy lauded for its rapid growth rate and the speedy eradication of poverty, a place so successful it was called an “economic miracle” and made a poster child for development by economists who urged others countries to replicate “the Chile model.” Yet the city welcomed the new decade with intense protests, as millions marched in its streets to protest rising inequality and the unaffordability of daily life. This ongoing tumult represents a fall from grace that we need to understand, since many other emerging economies are heading down the path first beaten by Chile.

Santiago is by far the biggest economic hub in Chile: With a population of 5.2 million it is home to a third of the Chilean population, is 10 times the size of the next largest city (Antofagasta), and is the source of almost half of the country’s economic output. A poor country in the 1970s, Chile had a national income per person half of that in Argentina. Today, national income is almost $14,000 per person, the highest in Latin America, and not far behind Greece or Portugal. Reflecting its exceptional performance, Chile was accepted into the Organization for Economic Cooperation and Development (OECD) in 2010, becoming the first South American country officially to graduate from “emerging” to “developed” status.

The wrinkle in the success story was the fact that with Chile’s miraculous growth came extreme inequality. As well as being the OECD’s newest and best-performing member, Chile was also the most unequal economy in the rich-world club, with huge disparities. One popular measure of inequality, the share of income going to the best-paid tenth of workers, rose from 30% in the early 1970s to almost 50% by the late 1990s. It has since edged higher, meaning that everyone outside the top tenth — nine out of 10 people in Chile — now share less than half of the national income among them. On the face of it, the sporadic rioting in Santiago, which started in October 2019, was triggered by a rise in Metro fares. While subway prices may have been the spark, the ongoing public disorder is being fueled by deeper and longer-standing concerns over inequality and the injustices of the private market model Chile has embraced.

If growth eradicates poverty, does inequality really matter?

Today the path Santiago has already taken — fast growth with sharply rising inequality — is becoming the best-trodden route to development, with the Chilean level of inequality fast becoming a global norm. Together, India and China account for more than a third of the world’s population, and both have become more unequal over the past 30 years as their economies have expanded. The world’s fastest-expanding cities, from Lima in neighboring Peru, to Lagos in Nigeria and Kuala Lumpur in Malaysia, are becoming the most unequal on the planet.

I went to Santiago to meet those at the top and the bottom of the city’s income scale, and the controversial policymakers who had designed its extreme economic model. Chile-style economics had been praised and then pushed on others to copy and I wanted to understand ordinary Chileans’ views on their country’s development: If growth eradicates poverty, does inequality really matter?

Image: Richard Davies

The rise and rise of the Chicago Boys

“Back then we thought that inequality would, in the end, disappear.” Rolf Lüders, 83, casts his mind back to events in the early 1970s that still echo in Chile today. As a younger man, Lüders pulled all the strings of Chile’s economy, running both the finance and economy ministries in the early 1980s. He is also one of a small group responsible for a unique economic experiment.

The Chilean experiment had its roots in a policy set out by Franklin D. Roosevelt in his 1933 inauguration speech. Starting in the late 1930s, a U.S. body called the International Cooperation Administration (ICA) began to fund the sharing of skilled instructors and trained personnel with Latin American countries, a policy known as “technical assistance.” One ICA project aimed to boost the quality of Chile’s universities, and as part of this the University of Chicago and the Catholic University of Chile signed an ICA-sponsored technical assistance agreement in 1955. Chilean PhD students would go to Chicago for two years and study economics, then return home and teach in Santiago. This student exchange would improve the standard of economics in Chile and would encourage the country’s lecturers and students to move away from left-leaning and socialism-inspired ideas. The eventual impact went far beyond these modest aims: The exchange students, now known universally in Chile as the Chicago Boys, ended up with complete control of the country’s economy.

The blend of economics taught in Chicago in the 1950s was already famous by the time the Chilean students arrived. Methodologically rigorous, with a commitment to testing theories against data, the so-called Chicago School developed conclusions with big political implications. Their analysis led them to trust markets as a way to allocate scarce resources and be wary of politicians and the state. The best person to spend a dollar, the Chicago economists reasoned, was the person who earned it — and since state spending rested on taxes that drained workers’ pockets and entrepreneurs’ tills, Chicagoans thought government should be small and its involvement in the economy limited.

Two Chicago School academics stood out as the preeminent influences on the exchange students and, later, Chile. One was Milton Friedman, who by the mid-1950s was in his late forties and had been a leading light in the economics department for a decade. The other influence was Arnold Harberger, who, like Friedman, was interested in practical economic questions, from the regulation of monopolies to the taxation of companies. Harberger — who became known as “Alito’”— was the Chicago Boys’ day-to-day adviser, adopted uncle, and drinking companion.

Rolf Lüders (second from left) and Sergio de Castro (far left) at a conference in honor of the late Milton Friedman. Lüders and de Castro are two of the most important “Chicago Boys” to reshape the Chilean economy. Photo: LOOKSfilm

The first group of exchange students trained in Chicago returned to Santiago in 1958. Brimming with ideas and plans, their main achievement in the first few years was to earn a reputation for setting exams that were far too hard, their Chilean colleagues and students unable to meet the exacting standards they had picked up in the U.S. Over time the roster of Chicago Boys began to grow, most of them returning to jobs in academia and think tanks. Measured against its stated aims, the educational exchange had worked: Santiago economics was now more rigorous, and its socialist bent tempered by an infusion of market-friendly ideas from Chicago. But this was all in the world of academia: For more than 15 years, the real-world impact of the Chicago Boys on the average Chilean was zero.

The first experiment

Everything changed in Chile in the early 1970s. Salvador Allende, the 62-year-old leader of the country’s left-wing Socialist Party, was elected as president by a narrow margin at the beginning of the decade. Allende was a committed Marxist and ran on a ticket promising to improve the lives of blue-collar and agricultural workers by nationalizing industry and “collectivizing” farmland.

Allende made good on this manifesto. The government took over the financial system, buying up every foreign bank, taking control of domestic credit provisions, taking direct control of 40% of industry by forcing entrepreneurs to sell their companies, and expropriating around 60% of Chile’s farmland. Allende set new, higher minimum wages for both blue- and white-collar workers, and set the prices of goods across the country.

At first, these moves were hugely successful and popular in Chile. Government spending rose by over a third, and economic growth jumped from 3.6% to 8% in 1971, the best year since the 1950s. Unemployment fell sharply and workers’ buying power rose 22% in a single year as price controls ensured that inflation fell. Chile’s growing economy was more equitable too: Mandatory wage increases for low-paid workers were 56%, higher than the (still generous) 23% rise that professional Chileans received. The wage gap between the skilled and unskilled fell and income inequality was driven down. In just a year, Allende’s promises seemed to be paying off.

But the success of this huge shift in economic approach was an artificial and unsustainable short-term boom. Rampant spending meant the government deficit soared from 3% in 1970 to over 30% by 1973. Unable to pay their rocketing wage bills, firms began to cut back production, and strikes meant that many factories lay dormant. Inflation had always been high — around 25% per year was normal — but as the central bank printed money to support Allende’s spending, it rose to 250% in 1972 and to over 650% in 1973.

With prices rising much faster than wages, Chileans were becoming poorer, and early 1973 saw a general strike. At the same time, a concerted newspaper campaign — which declassified documents now show was part-funded by the CIA — criticized Allende and his Marxist policies. Unrest began to build and culminated in a bloody coup. Salvador Allende took his own life, and a military junta led by the head of the army, General Augusto Pinochet, took power, promising to rid Chile of the “Marxist cancer.”

A man holding a poster with a sketch of Salvador Allende, the late Chilean president. Allende’s thinking is still influential in Chile: The sign says “History is ours and the people make it.” Photo: Martin Bernetti/AFP/Getty Images

Dictating the free market

Following the military coup, Pinochet warned that he had a “strong fist” and immediately censored the media, requiring all stories to receive military approval, and crushing all dissent through detention and torture of critics. During his 17-year dictatorship, some 40,000 Chileans had suffered human rights abuses ranging from imprisonment to torture. At least 3,200 are known to have died.

When it came to the economy, Pinochet took a different tack. The dictator knew nothing about economics but rather than control and plan Chile’s markets in meticulous detail, Pinochet turned to the Chicago Boys and their free-market ideas. The men, dismayed by Chile’s shift toward Marxism, had been working on their own alternative blueprint for right-wing candidates. (While their work is rumored to have received indirect CIA funding, the men involved deny knowledge of this.)

By 1973, the plan the Chicago Boys had been working on ran to a 200-page tome so fat that it became known as “el ladrillo” (the Brick). The men delivered el ladrillo to Pinochet, who decided to adopt it wholesale, and made Sergio de Castro, one of the first Chileans to be trained under the ICA’s exchange program, the economy minister. In the space of 18 months, the Chicago Boys had rocketed from academic backwaters to become a dictator’s economists with near-total control of the Chilean economy.

El ladrillo diagnosed many problems in Chile including inflation, volatility, and poverty, but the big discussion was of estatismo exagerado — the bloated state. Reducing the role of the government in the economy meant unwinding everything Allende had done, and then going further. Take the ownership of private industry: Between 1970 and 1973, the number of state-controlled companies had risen from 46 to 300 as Allende’s socialist government nationalized industries. By 1980 the number had fallen to 24 as the Chicago Boys pushed a privatization agenda. The financial system saw the same pattern: Nationalized Chilean banks were sold to private buyers and international lenders were allowed back in; previous rules on interest rates were scrapped, allowing the banks to set their terms freely. Government spending was pared back, with big cuts to budgets for infrastructure, housing, education, and social security.

By the late 1990s Chile had become the darling of international bureaucrats based in Washington, D.C., and Geneva who advise countries on growth, development, and trade.

The initial results were mixed. Shoppers’ options widened as quotas on goods like cigarettes and chickens were abolished and Chile opened its doors to trade, and cut import duties. Growth was much worse than expected, though: The economy expanded by a little under 3%, better than under Allende but behind the country’s long-run average.

Although the first decade of Chicago School economics fared poorly and was capped by an acute slump, with a Latin American financial crisis in 1982 that hit Chile the worst, the lackluster decade and the crash at the end of it were put down to the teething pains of opening a country to international trade and finance and, untroubled by democracy, the Chicago Boys pushed on. The pension system, education, health care, and low-income housing all saw decentralization, reduced government control, and privatization. Finally, Chile started to bloom, growing at an annual average of 7% between 1985 and 1997. Such a fast expansion can stoke up inflation, but in Chile price rises were small and steady. The country’s investment and export rates, previously lagging behind its peers, became the best in South America. Neighboring countries such as Peru and Ecuador, which had long been comparable in economic terms, were left in Chile’s wake. Argentina, a historically far richer country, had income almost double Chile’s in the mid-1970s, but by 1996 Santiago had bested Buenos Aires too.

By the late 1990s Chile had become the darling of international bureaucrats based in Washington, D.C., and Geneva who advise countries on growth, development and trade. Conferences were held in honor of Chile’s take-off, with the International Monetary Fund saying that Chile was now in the “home stretch” of economic development, the World Trade Organization saying that liberal trade had made its economy “one of the most resilient,” and the World Bank publishing a 450-page book on the “pioneer” country and recommending that other countries follow Chile’s “replicable lessons.”

Image: Richard Davies

The importance of economic growth, the Chicago Boys say, is that it pulls up incomes for the poorest, ensuring that poverty falls. This was certainly true in Chile: Poverty fell from 45% in 1987 to 20% in 2000, with the indigence rate (being unable to afford food) falling over the same span from 17% to 6%. Poverty reduction was greatest in years of fast growth and lowest during more sluggish years, and these improvements in the nation’s statistics have shown up as real changes in people’s lives.

The fact that inequality was simultaneously rising was seen as a snag, but not a fundamental problem. Chile’s “miracle” years show how these measures, key to debates of inequality, can move in opposite ways as an economy grows richer. Between 1973 and the late 1980s, the incomes of the poorest tenth of Chilean workers rose so that in “absolute” terms they were better off: This explains the impressive drop in poverty. But high incomes rose much faster over the same period, with pay for the top tenth of earners shooting from seven times the average Chilean’s to almost 35 times. The pie in Chile was now bigger, but the slices of it going to everyone outside the richest tenth had fallen. In “relative” terms, those on lower incomes had become worse off.

For the Chicago Boys, the fact that poverty fell was proof that their model of economic development worked. Set against the drop in poverty, an increase in inequality seemed to them like a price worth paying. Besides, the Chicago economists had another big idea they thought would help those at the bottom by guaranteeing igualdad de oportunidades (equality of opportunity) to unleash Chile’s “innate potential.”

That big idea was a radical reform of educational policy that would make it easier to get a degree. The benefits of higher education fell primarily to graduates, the thinking went, and so it should no longer be state-funded. Instead, student loans should be made more generous so that young people from poorer families could fund themselves. With raw talent evenly spread across society, boosting access among the poor would harness Chile’s latent human capital: It would be fair, and growth-enhancing too. The Chicago economists recommended the central government cede control of the university sector, seen as outdated and inefficient, to local politicians and to the universities themselves. Pinochet duly granted these new freedoms for regional lawmakers and deregulated the sector.

The result was an education boom. In the 1970s there were eight universities in Chile, all government-funded. By 1990 there were 60, two-thirds of them private, along with almost 250 professional and technical institutes. The total number of Chileans receiving higher education more than doubled, rising from around 120,000 to almost 250,000 in a decade. Higher education was no longer free, but the courses being offered were more diverse and more young people were gaining degrees. The pattern — more universities and more students — has continued and seems to suggest that the goal of igualdad de oportunidades as set out in the original 1973 blueprint has been met.

Today, the Chicago-trained economists are octogenarians who still see their system as complete, coherent, and fair. By following their market-oriented blueprint, Chile has grown fast, its poverty rate has fallen, and many more university places mean enhanced educational opportunities.

Yet, despite being lauded by institutions such as the World Bank, today in Santiago, the Chicago Boys’ brand of economic development is the subject of regular demonstrations. The men are puzzled by this and cannot understand why their lives’ work is not valued. Lüders says he does not understand the protests: “It must come from envy,” he suggests. Reacting to protests in 2011, their mentor Arnold Harberger was flummoxed too: “This is the best economy in South America, but the people don’t appreciate it.” For these men, the job of modernizing Chile is complete. They can’t see what people are complaining about.

Educational stratification

The Chicago Boys’ idea that education should act as an equalizing force in Santiago makes many of the low-income families I spoke to bristle. Santiago’s low-wage earners live hand to mouth, and besides the unaffordable prices in the shops, the cost of education is their main complaint. Getting a place in a state-funded school means demonstrating that you are economically vulnerable and cannot afford to pay for a private one. The process is time-consuming, and the price of mandatory textbooks can be crippling.

“The education market in Santiago is a cake with many layers,” says Mario Waissbluth, the director of research at Educación 2020, a local think tank. “There are schools for rich kids, schools for half-rich kids, schools for less rich kids, lots of layers for the middle class, and then schools for the poor.”

The amount you spend on education matters. Employers in Santiago ask potential hires to list the high school they attended on job applications, even when the applicant has completed an advanced university degree. This makes business sense, locals say: A manager hiring someone educated at a top-tier private high school is also buying their contact network. Hire an equally talented person from a less prestigious school and you get less for your money. If you want your kids to do well in Santiago, aggressive educational competition is a must.

Despite its “growth miracle” and new advanced-nation status, Chile’s high school kids perform at the level of much poorer Latin American countries like Colombia.

The way high schools in Santiago work cements economic stratification rather than churning it up. This is a challenge to the economic program set out in el ladrillo, which relied on education as a type of insurance. The Chicago Boys’ blueprint aimed for sustained growth that would counter poverty, and open access to high-quality education that would deliver equality of opportunity. To reform education they relied on Chicagoan ideas: the importance of choice and competition, the freedom to innovate that deregulation and privatization bring, and above all, the role of the market. But as Chile’s education market demonstrates, markets do not guarantee good outcomes: It is bad at the high school level, and when it comes to the market for university degrees, things are worse still.

Graduate tax

Any student who manages to navigate the stratified high school market enters a Wild West if they go to university in Santiago. The Chicago Boys’ plan was for a private system with little state spending but lots of choice, and it has been followed to the letter: Chile commits just 0.5% of GDP to higher education, the lowest in the OECD. The expansion of the university sector has continued with over 150 institutions offering degrees, two-thirds of which are for-profit outfits run by private companies. There are universities everywhere in Santiago: on main roads, up side streets, and between car showrooms. Metro stations and bus stops in the city are plastered with posters showing beaming students from one university or another, many promising improved employment prospects.

Melissa and Emmanuel, a young couple living in an encampment set up on an informal waste dump known as Nuevo 14, both believed that university degrees would lead to well-paid jobs. Melissa completed a course in psychology but it has helped little: She works as the assistant to a childcare worker in Las Condes. Her husband completed three years of an information technology course, but when the couple’s second child was born, he dropped his studies, taking up work as a security guard. Emmanuel tells me he would like to finish the course when the kids are older; Melissa says she is looking for something better. Until then, both earn the same working-class salaries as the members of their community who have no higher education. The only difference is that they now shoulder student debts that will take years to pay off.

The Gran Torre Santiago is a symbol of Chile’s success and inequality — located in a suburb known as “Sanhattan,” it includes a huge mall and can be seen from Nuevo 14, the poor district where the people who work there live. Photo: Richard Davies

When market competition works effectively, rivalry between firms should drive prices down and quality up. In Chile’s education system, built on free market ideals, the ratio of the cost of the average university course to average incomes is 41%, the highest in the OECD. This means students who complete their degrees must make massive debt repayments — 18% of income for 15 years for the typical graduate. The profit motive ensures prices are high and costs are cut. As a result, Chile has a 50% university dropout rate. In this troubling statistic the country is a world leader, with Santiago full of people like Emmanuel with half-baked degrees but fully loaded debts.

While the prices are high, the quality is not. The Comisión Nacional de Acreditación is supposed to regulate things but accreditation is voluntary and around 70% of courses don’t have it, meaning there is no vetting or quality control. Most students are the first generation of their family to attend university and the sector is characterized by cynical behavior that takes advantage of the naive or credulous. As one senior ex-minister described it to me, “The best business in Chile in recent years has been to set up a university, collect the fees, and then simply strip the place of assets.” Education — more, cheaper, better — was central to the Chicago Boys’ plan. With hope and promises leading to disappointment and debt, education has become the totemic issue in Santiago. In this trendsetter city, I found that inequality of income and opportunity had already revolutionized politics, and may well give birth to an entirely new brand of economics.

From penguins to presidents

The backlash began with a strike staged by almost 800,000 high school children in 2006 that became known as the Penguin Revolution. (The white shirts and black blazers Chilean children wear mean “penguin” is a friendly nickname for a school kid.) By 2011, the student movement had grown: Large demonstrations involved 600,000 marching in Santiago, carrying posters decrying the Chicago Boys and their market-orientated policies. The 2011 protests (known as the “Chilean Winter”) catapulted the students’ leaders — Camila Vallejo at the University of Chile and Giorgio Jackson at the Catholic University — into the public eye, and in 2013 both were elected as national politicians. Vallejo joined the Communist Party, which supports Chile’s center-left coalition. Jackson was more radical. He remained independent, founding a new party — Revolución Democrática — and coaxing other small parties to create a new coalition, Frente Amplio. In 2017, the first general election it fought, Frente Amplio won 20% of the vote. Jackson received 60% of the votes in his constituency, making him one of the best supported of the country’s 120 senators.

Chilean student leaders (from left) Giorgio Jackson, Francisco Figuerora, and Camila Vallejo attend a meeting at Unesco headquarters in Paris on October 14, 2011 as part of a series of meetings with international organizations to demand a free and higher-quality university education. Photo: Stéphanie Cadel/AFP/Getty Images

Born to an upper-middle-class family, Giorgio Jackson did not intend to go into politics, he says, but was drawn to it by the education demonstrations and a sense of the growing injustice of the economy in Santiago. Feelings of guilt and anger started to build inside him, he confides, so he decided to do something. While many of the politicians propelled to power by the student movement want to swing Chile back toward Allende-inspired socialism, Jackson is offering something new, and it is catching on.

Free from party line and intellectual baggage, he is refreshingly honest and admits that Revolución Democrática is developing its policies on the fly. The thinkers he cites as influences are an eclectic bunch, ranging from classical philosophers to modern political theorists. He is particularly impressed by the recent work of Byung-Chul Han, an academic born in Korea and based in Berlin. Han is a modern-day pamphleteer, producing scores of thin books that have made him a star of German philosophy; he is a critic of Milton Friedman, and by association the Chicago Boys and the Chilean economic model. Under modern capitalism, Han argues, people are told they are free to choose the goods they buy and the careers they pursue. In fact, we are “slaves” to consumerism, enticed by markets that exist to create false wants. Fashion exists, for example, to make people feel they have a deep need — in a Maslow sense — for the latest cut of jeans or pattern of dress. The economics of data are the same, in Han’s view. Our data is in mass supply and freely supplied by us. But we are slaves here too, chasing tokens of approval — likes on Facebook and Instagram — that we mistakenly feel are valuable.

The big idea Jackson takes from all this is the notion of “false scarcity” — markets where prices are so high they exclude many people when it should be possible to provide the underlying resource to everyone. This comes about, he says, because of “facilitated monopolies” that control supply of goods. He is particularly critical of the patent system, intellectual property rules, and anything else that shields markets from competition. Once you understand how vital industries work in Santiago’s free market economy — from banks to booksellers, from pensions to pharmaceuticals — you can see what he is getting at, and why his ideas strike a chord with the public.

Cozy capitalism

The high prices of everyday purchases like chicken, bus tickets, and toilet paper make life harder for Chilean families with low incomes, and there are also problems in markets that play a deeper role in the fabric of a country. The same two companies control 85% of the market for newspapers, 85% of online news, and 80% of advertising revenues. Health care is concentrated too: A small number of health insurance providers control the markets. Just three pharmacy chains handle 90% of drug purchases — all three of them involved in recent collusion cases.

“The market does not care,” says Daniel Jadue. “The supply of prescription drugs shows this.” Jadue, 46, is the mayor of Recoleta, a poor district to the east of Santiago, and is a representative of the Chilean Communist Party. The problem, he explains, is that the residents in his district are just not worth supplying with medicines because their incomes are too low, so the pharmacies don’t bother. Las Condes, he maintains, has a ratio of one pharmacy per 20,000 people, while in Recoleta there is just one between 140,000, and across Chile, millions live in places where there are no pharmacies at all. This means, as Melissa of the Nuevo 14 community had pointed out, that poor people pay more. The cost of medicines is higher in Recoleta as locals must travel by bus to get them; this makes things particularly hard for the elderly and those with chronic conditions.

In response, Jadue has taken matters into his own hands, opening a farmacia popular or “people’s pharmacy.” Located on the ground floor of the town hall, and named after Ricardo Silva Soto, a pharmacist murdered by Pinochet’s secret police, it sells prescription antibiotics, antihistamines, and a wide range of products for the elderly, from eye drops to incontinence pads. To escape the grip of the collusive Chilean market, the outlet imports drugs from abroad and can pass on savings of up to 70% compared with the price in Santiago’s private pharmacies.

Mayor Daniel Jadue holds up a poster showing the huge savings available in the “people’s pharmacy” he has been forced to set up in Recoleta. Photo: Agencio Uno

Eyeglasses are another problem — there are no opticians at all in Recoleta — so the óptica popular has been set up to fill the gap in the market. They sell glasses for 6,200 pesos (around $9, or 7 euros) and prescription sunglasses for 8,800. This saves locals a costly journey, says the manager proudly, and their imported goods offer savings of 90% on the prices charged by private opticians outside Recoleta. The fact that a communist mayor is forced to import basic goods suggests that those who lauded Chile and sought the “replicable lessons” from its model of capitalism might have missed something.

Public parks, private spaces

While I saw plenty of informal cooperation in Chile, I left Santiago thinking there were more reasons to worry.

Start at the top. In private, members of the Santiago elite worry about the state of their city: Look harder, they say, and there are cracks that affect both rich and poor. Many are concerned about the lack of diversification of the formal economy: Having experienced striking development, Chile is now seen as resting on its laurels. The country is still as dependent on mining as it was in Salvador Allende’s time, with copper providing 30% of government revenues a year. Plans set out in the Chicago Boys’ blueprint, el ladrillo, to diversify away from basic activities such as mining and build up more advanced industries, have come to little, making the country vulnerable to swings in global commodity prices.

Proud locals explain this away by arguing that Chile’s size and hard-to-reach location make diversification hard. Immigrants and more critical locals say these excuses are nonsense: Chile is easily in the world’s top third of countries by population and has been trading successfully by sea since the early 1800s. The real reason for the reliance on copper and the failure to diversify is related to inequality. There is no reason to rock the boat here: For those managing established businesses, many of them in cozily concentrated industries, life is a little too good.

Parents among the elite chatter too, privately, about the effect that extreme comfort can have on their kids, often raising a new upper-class archetype known as the “zorrone” as a concern. Essentially a U.S. frat boy with a twist of grunge, the zorrone wears chinos and cashmere sweaters but has tattoos and greasy hair, too. They have no aspiration to attend old elite universities and instead attend new private ones with middling academic performance and ultra-high fees. A zorrone need not compete with his cleverer countrymen because jobs in companies their parents own or manage have already been lined up. “The Chilean elite does not expose its kids to the tests that those in the U.S. and Europe do,” says one worried father.

Inequality in Santiago also affects how public space is used. “The social layers here do not mix at all,” explains one foreigner, recalling a failed attempt to organize a summer picnic as an office outing. The problem was an unwritten division that delineates places and activities as “cuico or not. (Cuico loosely means higher-class and can be used negatively by the working class or endearingly by the wealthy.) “People could not meet outside work, because there are cuico parks, and non-cuico parks, and people from one class will not visit the other.” In formal terms, Santiago’s parks are public spaces funded through general taxation and accessible to anyone; in practical terms, inequality has turned them into private places with access based on income.

With resilience in mind, this is concerning. Recent studies have shown that “social infrastructure” — places like libraries and parks — are a kind of insurance policy against bad times. But in Santiago the public sphere has been closed off. The city’s crime rate is low, yet there is a huge investment in security in poor and rich neighborhoods alike, with many homes encased in iron bars. The back roads running through neighborhoods are sealed off, turning public thoroughfares into private spaces and making it hard to walk or cycle through the city. A huge helium balloon carrying CCTV cameras floats over Vitacura, one of the most expensive neighborhoods of Santiago, day and night, helping soothe the fears of its wealthy residents. Only one in five Chileans says they trust their countrymen, far lower than the developed-world norm.

A view over the Nuevo 14 encampment, with the shining tower Gran Torre Santiago in the distance. Photo: Richard Davies

While envy over pay seemed to be absent at the bottom of the Santiago income ladder, there is certainly some bad blood. “The maids in Las Condes are expected to wear their uniforms outside, when they go to the shops on their lunch break or on the way home from work,” explains Melissa of Nuevo 14. “It is a way of showing that they are different — that they do not belong there.” It is not a rule or a law but a cultural norm, a way of maintaining the divisions of class and status. If social capital and social infrastructure matter for resilience, then Chile’s economy is weaker than people think.

While many basic needs are easier to meet, the higher needs — education, agency — have moved further out of reach.

Results, not intentions

For many young people in Chile, men like Rolf Lüders and his fellow Chicago Boys are symbols of greedy capitalism and callous self-interest. Yet it is impossible to read el ladrillo without concluding that its authors had the country’s best interests at heart — the text brims with ideas and ambition. The young men could see the potential of their nation; they were tired of seeing Chile falling behind its neighbors. Their economic plan was based on what they had been taught by Friedman and Harberger in Chicago, and what they promised was a rising tide of poverty-eradicating growth.

But one of Friedman’s most famous dicta was that when it comes to economic policy it is not intentions that should be judged, but results. Seen narrowly, the results in Chile mean it is still possible to view the country as a victory for the Chicago-inspired model of economic development. The nation remains the crown jewel of Latin America, and a favorite case study for supporters of reform through privatization. Indigence — the most acute form of poverty that means people cannot meet the basic need for food — has been almost eliminated. In the poorest parts of Santiago it is easy to find people who grew up cold, hungry, and living in precarious campamento temporary housing. Decades of sustained growth drove down the poverty rate year after year, making basic needs easier to meet and vastly improving life in these neighborhoods.

Chile’s path — fast growth coupled with extreme inequality — is one that many emerging countries and their ever-expanding cities are following. For its followers on the same road, Santiago offers a warning. Just as free markets do not always create value, strong growth does not always deliver the development that it seems to promise. In particular, Santiago has become a city where Abraham Maslow’s pyramid has been stretched: While basic needs are easier to meet as poverty falls, many higher needs — education, agency — have moved further out of reach. Chile has the highest per capita GDP on its continent. But within its developed-world OECD group, it has the fastest-rising obesity rates, the worst school results, the highest university costs, and the worst dropout rates. My time in Santiago shows that all of this is linked to inequality.

These practical failures mean that Santiago has once again become a fascinating place, the site of a new battle for ideas. The Chicago Boys took the helm after a period of tight economic control, in which artificial markets were tethered to socialist agendas; they wanted to show that free markets were the best way to run an economy and the “miracle” they delivered seemed to win the case. But on the ground in modern Santiago it is clear that markets have delivered perverse forms of competition, with the rampant yet corrosive rivalry in education being the most important example. Here, the market makes delivering equality of opportunity impossible, entrenches inequality, and has created neighborhoods with such low incomes that shoppers do not matter, and basic goods must be provided by the state. Pushed through this extreme system, the young people of Santiago, economic trendsetters whose path so many around the world will follow in the 2020s, are asking whether markets can be relied upon at all.

Excerpted from EXTREME ECONOMIES: What Life at the World’s Margins Can Teach Us About Our Own Future by Richard Davies. Published by Farrar, Straus and Giroux. Copyright © 2019 by Richard Davies. All rights reserved.

Economist and writer. Author of Extreme Economies (2020) and The Economist’s Guide to Economics (2015)

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