Pinochet is hailed for his support of free markets and condemned for the consequences. Both verdicts ring true

By ANDRES VELASCO

Assessing Pinochet is like eating oysters--one either loves them or hates them. That is as true about economics as politics. For two decades after Pinochet began changing the face of Chile's economy in 1973, the business community, both in Santiago and on Wall Street, painted a picture of pioneering reforms that had decades of government intervention and set Chile on a path of rapid growth. Pundits lauded Pinochet's commitment to open markets. Critics countered with grim tales of painful downsizing, mass unemployment, social-budget cuts and an economy in which the rich got richer at the expense of the poor. As exports of timber, fish meal and other raw materials took off in the late 1980s, charges of environmental devastation were added.

Over time, both views have been vindicated. With nearly 25 years of hindsight, Chile's early economic reforms seem nothing short of visionary. Today Chile's open economy, balanced budgets and privatized utilities and social-security system are widely accepted within the country (even by those who at first opposed them)--and imitated in so-called emerging markets, from Buenos Aires to Bangalore. That this small country should have shown the way remains remarkable. And why an army man of limited sophistication chose such an uncharted course is an enduring mystery.

The Chilean military establishment might have preferred a large government and an economy closed to foreigners--and, indeed, early policies after the 1973 coup seemed to be headed in those directions. When first adopted, free-market policies provided much pain and little gain. Inflation proved stubborn even to the most bitter monetarist medicine. Growth, when it finally arrived in the late 1970s, caused a flood of consumer imports but little productive investment. Then, in 1982, Chile experienced the first modern emerging-market financial crisis, of which the 1995 Mexican blowout and the current Asian meltdown are enlarged copies. The largest banks had to be taken over by the government and their debts abroad guaranteed with taxpayer money. The resulting credit squeeze caused national output to shrink some 14% in one year.

Pinochet had a brief flirtation with populist policies (he allowed the budget to go into deficit while increasing trade tariffs and farm subsidies), but then he stuck to the free-market course. By the mid-1980s, his stubbornness began to bear abundant fruit. Economic growth accelerated in an atmosphere of low inflation and swelling confidence among businesses and consumers. A decade of exposure to international trade had made firms highly competitive. A second round of privatizations gave additional impetus to growth. By the end of the decade, Pinochet's economic model was on a roll. This was to prove the general's undoing. As soon as they could afford it, Chileans switched from demanding bread to demanding freedom--and courageously voted Pinochet out of office in a 1988 plebiscite.

The liberalization of politics prompted a rethinking of Chile's economics--and longstanding critics found much to gripe about. There remained great scarcity amid growing plenty. The distribution of income had become more unequal in the 1980s. Social conditions were a mixed bag. While some health indicators--in particular infant mortality--had improved dramatically, quality health care remained available only to the 25% of the population that could afford private insurance. Chileans were better educated than most Latin Americans, but on average they got one-third fewer hours of schooling per year than the citizens of then fast-growing East Asia. It became evident that a labor force of limited skills and training and a degraded environment were themselves formidable obstacles to further economic growth.

Chile's democratic governments since 1990 have shifted gears and begun trying to address these problems. Taxes were raised to finance higher welfare spending; schools were built; and children now have to attend classes an additional three hours a day. Overworked and underpaid Chilean judges are being relieved by a sweeping judicial reform. The early results are encouraging. In this decade swift growth has continued while, according to the United Nations, 1.5 million Chileans (10% of the population) have pulled themselves out of poverty.

In the meantime, however, democracies throughout the hemisphere have liberalized their economies just as drastically as Chile did. In the process, they have disproved the once fashionable notion that it takes a Pinochet to accomplish real economic reform. With luck, Latin America's legacy from the 1990s will be one of democratic capitalism with an increasingly human face. And that face will not be Pinochet's.

Andres Velasco is an associate professor of economics at New York University.