Chile’s Economic Transformation Under Pinochet and the Chicago Boys (1973–1990)

From Command to Market: Authoritarian Reform and the Rise of Neoliberalism

Abstract / Executive Summary

Chile’s economic transformation under General Augusto Pinochet from 1973 to 1990 represents one of the most controversial and studied experiments in market liberalization under authoritarian rule. After a military coup ousted socialist president Salvador Allende, Pinochet’s regime imposed a radically different economic agenda influenced by a group of U.S.-trained economists known as the “Chicago Boys.” They implemented free-market reforms, including privatization, deregulation, and trade liberalization. These policies ended inflation and restored macroeconomic stability, but also caused severe short-term hardship, increased inequality, and dismantled social protections. This case study examines the ideological foundations, policy choices, outcomes, and legacies of Chile’s economic shift, situating it within broader debates on neoliberalism, development strategy, and the ethics of reform under authoritarianism.

1. Introduction

Chile’s economic transition during the Pinochet dictatorship is a defining case in modern economic history. It illustrates how market reforms can be rapidly implemented through centralized power—but also raises critical questions about social costs and political legitimacy. Covering the period from 1973 to 1990, this study explores the causes, mechanisms, and consequences of Chile’s shift from a mixed economy to a liberalized, export-oriented model.

2. Background Context

Before the 1973 coup, Chile had experienced years of political polarization and economic instability. Under Salvador Allende (1970–1973), a democratically elected Marxist, the government pursued nationalization of key industries, land reform, and price controls. These policies triggered inflation, shortages, capital flight, and resistance from business elites and foreign governments. On September 11, 1973, a military junta led by Pinochet seized power, suspended the constitution, and initiated a brutal crackdown on opposition. The junta sought not only political control but a fundamental economic reset. Chile’s population was approximately 10 million, with urbanization increasing and a heavy reliance on copper exports.

3. Economic Description

Chile’s pre-coup economy was characterized by a large public sector, protectionist trade policies, and high inflation. Under Pinochet, the economic strategy shifted dramatically. The Chicago Boys—Chilean economists trained at the University of Chicago—advocated monetarism, open markets, and minimal state intervention. Reforms included:

• Elimination of price controls
• Massive privatization of state enterprises
• Reduction of tariffs from an average of 105% to 10%
• Deregulation of financial markets and labor laws
• Introduction of private pension and health systems
  These policies initially caused a deep recession in 1975, with GDP contracting by over 12% and unemployment exceeding 20%. Inflation eventually dropped from over 500% to single digits by the 1980s. The economy shifted toward exports (e.g., copper, fruit, salmon, forestry), with rising foreign investment and trade integration.

4. Events and Developments

Key developments include the 1975 “shock treatment” phase, marked by abrupt cuts to public spending and liberalization. The 1982 Latin American debt crisis hit Chile hard, revealing vulnerabilities in its deregulated financial system. The state intervened temporarily, nationalizing failed banks, but maintained its broader liberal policy trajectory. By the mid-1980s, economic growth resumed. Infrastructure investment, technological adoption, and agricultural modernization contributed to expansion. Pinochet faced growing internal dissent and international pressure over human rights abuses, leading to a 1988 plebiscite that resulted in a return to civilian rule by 1990.

5. Analysis

Chile’s transformation shows the capacity of authoritarian regimes to implement deep structural reforms without democratic resistance—but also at the cost of legitimacy and equity. The Chicago Boys’ policies reduced inflation, increased efficiency, and reoriented the economy toward global markets. However, social indicators worsened in the early years: poverty and inequality spiked, and labor protections eroded. Critics argue that reforms prioritized macroeconomic indicators over human development. Proponents view Chile as a pioneer of neoliberalism whose success influenced policies worldwide. The case also highlights the tension between technocratic planning and social consensus in reform processes.

6. Outcomes and Consequences

By 1990, Chile had become a stable, diversified economy with strong fiscal institutions and low inflation. Export-led growth became the engine of recovery, and institutions like the Central Bank gained credibility. However, inequality remained high, and many public services were weakened. The economic framework established under Pinochet was largely retained by post-dictatorship governments, with gradual reforms. Chile’s experience influenced development policy across Latin America and became a model—both admired and critiqued—of neoliberal transition.

7. Conclusion

Chile’s economic transformation under Pinochet remains a polarizing case. It illustrates both the potential effectiveness and the social cost of rapid market liberalization. The case challenges assumptions about the relationship between democracy and development, and forces reflection on whether ends justify means in economic policy. Chile’s trajectory underscores the importance of institutional design, sequencing of reforms, and the human consequences of economic experimentation.

8. Further Reading

• Valdés, J. G. (1995). Pinochet’s Economists: The Chicago School in Chile. Cambridge University Press.
• Silva, E. (1996). The State and Capital in Chile: Business Elites, Technocrats, and Market Economics. Westview Press.
• Ffrench-Davis, R. (2002). Economic Reforms in Chile: From Dictatorship to Democracy. University of Michigan Press.
• Edwards, S. (1995). Crisis and Reform in Latin America: From Despair to Hope. World Bank.
• Huneeus, C. (2007). The Pinochet Regime. Lynne Rienner Publishers.
• Central Bank of Chile historical macroeconomic data (1970s–1990s).