Friday, August 17, 2012

Friedman¨s legacy and the Chilean economy

Almost six years after his death ; for most of the Chilean economists listed on the center right political spectrum ,Milton Friedman is still a prominent icon of free markets policies and freedom. His legacy on monetary policy, is also revisited in the USA ,to evaluate the current approach and implications, for the purpose of a better monetary policy design and results.( Friedman´s monetary policy in practice. Edward Nelson, Federal Reserve Board, Washington D.C. April 2011) Two years ago, an article (How Milton Friedman saved Chile.WSJ march 2010),stressed the contribution Friedman did to laid out the new foundations of the Chilean economy ,following the failure of the state based experiment (1970-1973). According to that article, these foundations were specially tested with the consequences and implications of the earthquake of February 2010 which took place in Chile.(An earthquake of 8,8 grade (RS), with capital losses estimated in U$$ 30 billion. Was this earthquake a good measure to such evaluation?.Maybe, but I do believe it was not. Since the sixties, Chile has strict rules for building constructions .Therefore, it was not because of Friedman concern that Chile had implemented such a framework. Perhaps the article would have gone on a different direction, analyzing the cost of not following Freidman prescription of small Government because of its risk of inefficiency, or the contribution to freedom arising from a more political competitive system. No matter this considerations, after two years, the percentage of the reconstruction effort, has a wide range of achievement percentages starting at 11% ( NGO watchers), up to 47%Government officials). Whatever the real value, there are still 50% of the reconstruction job still pending .- How come for this economy, which claim to be on track to become a developed nation?. Friedman supported decentralization as far as market transactions, works better and more efficiently that way. Price signals allocate resources, in a way that any government action cannot replace. Government can not substitute the nature of wealth creation. Having said that, although with a share of 22% of GDP, and better evaluated that some European countries (France) ,Chilean Government still has a centralized model of public services(Housing, health, education ), which make harder to implement fast solution to demanding problems arising from regional economies, or from reconstruction needs. Besides, it has not solved yet the local Government requirements for different management model and financing, which make centralization cost even higher, because of bureaucracy and corruption. Thus, solutions are far away from the problems. Friedman contributions to Chilean economy , were partially applied as far as decentralized government and more competitive political model is concern. Chilean economy has become an oligopoly, and its political system a duopoly. Therefore, the main characteristic of this economy is not that much the efficiency ,as it is the rents it creates for those who are able to be part of the game. Entrepreneurs are making its way, but with important restrictions. More than 60% of them ,are in the secondary markets (not formally included in the system).