Augusto Pinochet's Uncomfortable Legacy

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" Although some industries vanished in the face of foreign competition, others had risen to take their place: Exported fresh fruit, wine, and farmed salmon became familiar sights in the world's supermarkets.

International economists praised Chile's privately run pension funds, which over the past 25 years have delivered average annual returns of around 11%. Neighboring countries began to emulate some of Chile's policies, from pensions to privatizations, but none of them seemed able to carry out the economic reforms with the same flair—or success—as Chile.

Prosperity without Democracy

It's too difficult, Chile's democratically elected neighbors said, to ram through harsh economic reforms without debate as Pinochet had. Academics from Buenos Aires to Boston agreed that Chile's success might not have been possible without Pinochet's rigid rule.

"I don't think there's a doubt in many people's mind that Pinochet turned this country around and that authoritarian rule might have been the only way to implement the dramatic economic policies he did," says Michael Grasty, a lawyer who heads Oracle's Chile operations.

"We were headed in the Cuban direction, and now we're an example, at least for Latin America." But the country paid a high price, he adds. "I'd rather have a more perfect democracy and not be able to go ahead with some of these pressing economic reforms we still have, rather than have someone ram them through."

The Washington Consensus

It's impossible to know whether Chile would be the economic success it is today if it hadn't been strapped into a straitjacket for all those years. It undoubtedly made a difference that Pinochet was free of electoral pressure and could effectively banish labor protests through unspeakable means. But Chile might well have continued along its rational path toward economic stability anyway.

The country suffered much hardship during the economic chaos of the Allende years, and many Chileans knew the economy had to be restructured. And the 1980s and early 1990s were the years of the so-called Washington Consensus, a series of free-market policy recommendations that multilateral lending institutions urged developing countries to adopt to straighten out their economies and attract foreign investment.

The fact that Chile ended up being the star pupil of the Washington Consensus may be partly due to the fact that the Chileans are, well, different from many of their Latin American neighbors. Perhaps it's the country's isolation—a long, skinny geographic strip that is separated from the rest of the region by the towering Andes mountains and the huge Atacama Desert—or the country's mix of industrious immigrants from Spain and Germany. The Chileans have a pragmatic streak that has served them well over the years.

A Cooperative Economy

Less inclined than their fellow Latin Americans to cling to a nostalgic past of price controls and subsidies, Chileans are quick to adopt promising new ideas. In the 1980s, when Argentine supermarket cashiers were still snarling at customers, Chile had welcomed Carrefour, the French hypermarket chain, where gracious hostesses strolled around offering samples of cheese and sausage to shoppers.

When Chilean scientists noted that the country's Pacific coastal fjords would be ideal for commercial fish farming, a government-backed technology incubator, Fundación Chile, developed the scientific expertise needed to launch the salmon farming industry and private sector investors quickly turned it into the world's second-largest producer. That kind of public-private collaboration, so common in successful economies such as Korea's, isn't seen much in Latin America, save Chile.

Thanks to years of steady economic growth, Chile managed to halve the country's poverty rate since 1990, to just 18% today—much better than the 50% rates seen in most of Latin America. The country still has problems, including a huge gap between the rich and the remaining poor (see BusinessWeek.com, 10/3/05, "Chile: A Lopsided Miracle").

A Better Way

Even the much-vaunted private pensions program is in need of revamping to trim the excessive profits of fund managers. And Chilean students took to the streets in massive demonstrations earlier this year to demand greater spending to improve the country's inadequate educational system.

Still, with high world prices for Chile's substantial copper exports, the economy is set to grow more than 4.5% this year, so reforms might not seem as urgent as they once were. "We should be growing at 8% if we want to reach our full potential," says Oracle's Grasty. "The problem is that we're too comfortable—you have to be really uncomfortable in order to make the difficult changes a country needs."

Fortunately, Chile has left behind the years of extreme discomfort and suffering it went through while undergoing economic shock therapy in the early 1980s. Today, its challenges are being debated openly and resolved through consensus, by a democratically elected congress. And that is the way most Chileans seem to prefer it—even those who believe Pinochet contributed something valuable by turning the country's economy around.

Smith is BusinessWeek's Mexico bureau chief.