Friedman: Chilean advisers erred
Economist Milton Friedman often gets blamed for the economic mess in Chile. And, he admits, several economists trained at the University of Chicago, where he taught his ''monetarist'' views, have presided over the Chilean economy during recent years.
But, he said in a telephone interview, these former students made a key mistake. His advice was that a small developing country like Chile should either abolish its central bank and tie the value of the currency firmly to the United States dollar, or let the currency float freely in value according to demand and supply on the foreign-exchange markets.
Chile did fix its currency to the dollar. But it did not abolish the central bank and, instead, let its reserves run down when the peso came under pressure on the foreign-exchange markets. If this had not been done, maintains Dr. Friedman, deflation of the economy would have started earlier and been much milder. As it is, he admits, ''Chile is in very deep trouble.'' It is not pulling out of the severe recession quickly, and inflation is rising again.
Some have charged that Dr. Friedman has supported the military junta. Contrariwise, the Nobel Prize-winning economist holds that the maintenance of free markets in Chile requires the abolition of the military government. A fundamental principle of juntas, he noted, is rule from the top down. Free markets work from the bottom up.
When looking at the current economic problems, he cautions, ''don't overestimate the reaction.'' Chile has put its tariff rates on imports back up again, but not to their previous high elevation. It has far greater freedom of international trade than before. The government budget has been cut from 40 percent of national expenditures to 25 percent. Many former government enterprises are now private. The social security system is individually funded, rather than pooled. In the school system, parents are provided a government voucher with which they can ''buy'' whatever type of education they wish for their children.
''The structural reforms remain almost untouched,'' he said.