South America is changing before our eyes. A continent that was once known for centralized, top-down governments is quickly moving away from its past. Venezuela, formerly the international poster child for leftist economics, is a case in point. Ten of Venezuela’s fellow Latin American nations, including regional powers Argentina, Brazil, Chile, and Colombia, recently staked out positions against the socialist Nicolas Maduro government, a turn of events that would have been unthinkable a decade ago during former President Hugo Chavez’s heyday.
Perhaps coincidentally, this January in Chile, the Instituto de Estudios de la Sociedad published a translation of The Federalist Papers, only the second time in history that those important founding ideas of the United States were translated into Spanish. Perhaps these two seemingly-unrelated events signify a renewed interest in reforms that limit government power and can bring prosperity to the continent.
There is at least one particular area, however, where we in the U.S. should look to the south for ideas about reform. In 1970, when Chile was still a developing country, they elected a far left president, Salvador Allende. He won with less than a third of the vote, but was set on implementing an ambitious socialist agenda that included nationalization of industries, land seizures, redistribution, and price controls. In other words, Chile was going the way of Venezuela today, including cozying up to the Soviet Union and Cuba.
Unlike in Venezuela, when the Chilean Supreme Court and national legislature protested Allende’s revolutionary direction, their military intervened to prevent a communist transformation. While the resulting regime was undemocratic, this turn of events allowed a window of opportunity for the implementation of economic reforms that have made Chile the model of prosperity in a continent otherwise beset with economic challenges.
The design of these reforms was the work of a group of economists dubbed “the Chicago Boys,” because many had studied at the University of Chicago. One in particular, however, was a Harvard boy: José Piñera. He was the architect of the private pension system that has made nearly every worker in Chile a capitalist. By investing personal savings into private accounts, the Chilean pension system fuels economic growth, rather than simply transferring money from workers to current retirees, as Social Security does in the U.S.
In fact, Piñera released a study in January 2018 that found “72 percent of the capital accumulated in the personal retirement account of the average Chilean worker, after 36 years in the private pension system, comes from the return on the investments done with their contributions.”
Not surprisingly, given the tremendous personal savings by Chileans, the Organization for Economic Cooperation and Development (OECD) recently ranked Chile first among member countries based on upward social mobility. Denmark is second. The U.S. came in last. Chile has maintained a commitment to low tariffs and relatively free trade. This, along with the private pension system, helps account for the fact that Chile’s GDP per capita of just over $24,000 (USD) ranks first in South America. The percentage of Chileans living below the poverty line has fallen from 50 percent of the population to under 8 percent in just 40 years.
It is clear from Venezuela’s current experience that it doesn’t take long to destroy a nation’s prosperity through misguided government policy. Thanks to the government’s backward economic approach, Venezuela has been plunged into misery that will require decades to recover. However, it helps to know that Chile was once in that same place, and reforms enacted more than 40 years ago triggered a transformation from the poverty of the pre-reform era to the prosperity that is being created to this day.
Although, while we may yet see change in Venezuela, it appears that Piñera’s revolutionary pension reform ideas will definitely be coming to Brazil. The newly appointed Minister of Economics, Paulo Guedes, a “Chicago Boy” himself, announced plans in January to create such a system “for future generations,” and President Jair Bolsonaro delivered a pension reform bill to congressional leaders last month. Like “the Chicago Boys” in Chile, Guedes studied under Nobel Prize-winning economist Milton Friedman at the University of Chicago.
It is hard to think of another reform that can do more to spark economic growth than encouraging people to save a portion of their earnings, so that any country will have the capital necessary for investment in business expansion and job growth. Let’s hope Brazil, and eventually Venezuela, can both implement this reform. If so, American policymakers will have one more positive example from south of the border to import to our shores.
Roger Ream is president of The Fund for American Studies (TFAS), which has reached more than 500 students and young leaders in South America through its program in Santiago, Chile.
