Transcription
This is the Capitalism and Freedom 21st Century podcast, the official podcast of the Hoover Institution's Economic Policy Working Group, where we talk about economics, markets, and public policy. I'm John Harley, your host.
Today, we are at the Hoover Institution's 2026 Monetary Policy Conference, where I'm joined by my special guest, Sebastian Edwards. Sebastian is one of the world's leading authorities in Latin American economics, international macroeconomics, and economic development. A Chilean economist, Professor Edwards, uh, received his PhD in economics from the University of Chicago in 1981. That same year, he joined the faculty at the UCLA Anderson School of Management, where he remains on the faculty today.
Over the course of his career, Sebastian has served in a number of policy positions, including as chief economist of the Caribbean and Latin America at the World Bank. He is uh the author of numerous books, including most recently, *The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism*. Sebastian, welcome to the podcast.
>> John, thanks so much for having me.
>> So, I I want to uh start with your background. You grew up in Chile and you got your PhD in economics from the University of Chicago in 1981. One, what drove you to study economics growing up in Chile? And what was it like at the University of Chicago? Why did you choose there? And what was the environment like at the time in your formative years?
>> Um, well, um, Chile is uh a very long country and a very interesting one. So, people that look at the map and they see this spaghetti-looking country on the west of South America, they usually wonder, well, how is it there? When I was growing up, it was an economic disaster. Uh, inflation was, um, year in, year out, around 30%. Per capita growth, maybe one half of 1%. And Chile was a declining from an economic point of view, a country within uh, Latin America, and in particular, uh, it looked very bad relative to Argentina. And we'll talk some more about Argentina, um, I think, um, the the neighbor to uh, to the east, on the other side of the Andes. And so, I come from a generation where there was a lot of concern about the future of Chile, and there was a sense that, um, economics was something that had to be fixed one way or another. And that's why I decided to to do to do economics. Um, and, um, during the first part of my university studies, uh, there was a socialist experiment of Salvador Allende, um, and things went from bad to worse. And I, what, what I think, John, is very interesting is that now, uh, here at Hoover, there is this interest, uh, uh, uh, Victor Davis Hanson and and Neil, uh, Ferguson have been writing about what socialism was really about, because there is some interest among young people. And, um, after that, the coup came, the Pinochet coup, and, uh, a couple of years later, I did go to Chicago.
>> Chicago was extremely exciting at the time. Um, exciting. Um, I was there for five years or four years, four to five years. And I think every year, the Nobel Prize went to someone in the faculty. The year I arrived, Milton had just, Milton Friedman just got the prize. Uh, and then it, it went on and on and on, and most of my professors that were younger got the Nobel Prize later. So, very, very exciting indeed.
>> So, in, I guess, Friedman had won the prize in '76, I think, and and he shortly after, I think, came here, but my understanding is he was still back in Chicago.
>> So, this is, this is very interesting. I, um, I got to Chicago when Milton already had left. So, he did go, and I saw him a couple of times. He gave a couple of lectures, but I never talked to him. Now, um, who took over his, uh, monetary economics, um, sequence and, uh, and the workshop was, uh, uh, Robert Lucas, who won the Nobel Prize a few years later. And he, uh, Lucas took, uh, Friedman's views on the trade-off between inflation and unemployment, the Phillips curve, and then revolutionized macroeconomics with rational expectations with Tom Sargent and, and, and, and others. Uh, so, uh, Friedman left, but we got Lucas. Um, and it was extremely, uh, uh, like out of this world. Everything was new. Uh, the level of mathematics was very high. It was, we struggled a little bit with that. But I got to meet, uh, Milton, um, when, uh, he and I were colleagues in the Council of Economic Advisers of Governor >> Schwarzenegger. >> Which was another of my, in in terms of my professional career, Chicago, the four, four or five years in Chicago, extremely exciting. And then being a member of this council, which was chaired by George Shultz, and, uh, Milton was a member, and a lot of people from, from, from Hoover, John Taylor, Eddie Lazear, and we met in Sacramento, I think, once every five weeks or so. So, I got to know Milton very well in those meetings.
>> Fantastic. And, uh, what a great Hoover story. I mean, you, between Milton Friedman and George Shultz, certainly two of, uh, the, you, the most famous names that have, uh, come through, through Hoover. Um, I want to talk, I guess, also on the, the policy advising side of things. You spent some time at the World Bank. What was, what, what's it been like sort of advising politicians, I guess, like Arnold Schwarzenegger or the World Bank? Did working in policy institutions sort of change your view in terms of how economics was done and how influential and powerful it can be?
>> Uh, it did. Um, so, I, uh, so my career, undergrad economics in Chile, which, uh, is a country that has a continental university system. So, you don't get a BA in liberal arts, you go straight into a career stream. And so, five years of undergrad economics. So, the training is equivalent to a master's degree, uh, in the US.
>> And this is at the Pontifical University in Chile?
>> This is the Catholic University, right?
>> This is where also many of the undergrad Chicago Boys went as undergrads, and they would come to >> Chicago for their PhD.
>> Right. So, the Chicago Boys brand name, >> has its, uh, uh, it's anchored at the Catholic University in in Santiago, which is where I, I got my undergraduate from. So, I went from there to Chicago, Chicago to UCLA, um, as a young academic. Then, uh, at UCLA, I got tenure. Then I became a full professor, and then I was recruited by the World Bank, um, and I took leave from UCLA and I went to the World Bank in 1991 or 1992, I forget. Um, and this was particularly unique because the World Bank had a number of new members, and those new members came from Eastern Europe. So, the World Bank was moving, uh, away or, or, or expanding its purview from, uh, emerging markets, developing countries, uh, to developing countries and former Soviet sphere countries. And they moved a whole bunch of people that worked in Latin America to work on Russia and the Czech Republic and so on. So, there was a gap in Latin America. They hired me. And what was going on at that time is that there was a lot of cross-fertilization, and we were trying to learn, um, on how to do market-oriented reforms in Latin America, and what could be learned from that that was useful for, um, Russia and Eastern Europe. So, for instance, how do you privatize when everything is to be privatized? Do, who do you start with? Manufacturing firms? Do you start with agriculture, with land? When do you privatize the banks? Early, in the middle, gradually spread out? If you privatize them early on, and you don't have a regulatory system, the oligarchs use the banks to buy everything else as it's being privatized. That, it's very, uh, um, fragile. So, Chile did it one way, Mexico did it another way. So, we would learn lessons from Latin America and then pass them on to the people at the bank that, uh, were working. And, and, and something that is coming up now, um, back with this emphasis, uh, on industrial policy, people at the bank that worked on East Asia were also trying to convince, uh, the, the former Soviet countries, that that was the way to go, more, more government, uh, intervention. So, one of the things that I did at the bank, which was very interesting, was, uh, and I have a beautiful anecdote there, sequencing of reforms. What I was just telling you, what do you do? You do everything at the same time? Do you start with labor markets? Do you put an end to inflation before you attempt to privatize? So, sequencing, which is a very complicated issue because it involves dynamics, was something that was, we were trying to, to deal with. And, uh, so I have good anecdotes about that.
>> So, so I want to transition a bit to, uh, Chile, and, uh, really want to talk about, uh, your book. What motivated you to write *The Chile Project*? Who exactly were the Chicago Boys, and how influential were they really in shaping the economy as Pinochet took power from Allende in, uh, 1973? And how economically successful, you know, were these reforms? And I mean, at some level, you know, are, do you think, are they the reason, or the chief reason, why Chile today remains arguably the most prosperous nation in Latin America?
>> Yeah. So, let's start with your question about success. The reforms were incredibly successful. And as you point out, Chile today is, if not the most prosperous, one of the two most prosperous. And really, the country that, uh, people in Latin America look up to, uh, in terms of, uh, all sorts of policies and so on. So, uh, in 1974, the coup is in '73. Pinochet takes over in '73. He deposes President Allende. 1974, Chile, Costa Rica, and Ecuador have identical income per capita, identical, $3,300 and something dollars per capita. Chile today has double that of Ecuador, twice, >> and 50% more than Costa Rica. And as I said earlier, when I was growing up, we looked up at Argentina. They were better in everything, certainly soccer, >> and they continue to be, but everything. And in 2001, Chile surpassed Argentina in a number of indicators, including life expectancy, uh, nutrition, uh, social indicators, and income per capita. And in terms of the, the, the Chilean, uh, view of themselves surpassing Argentina was very, very important. So, the re, the Chicago Boys reforms were incredibly successful. And if you look at the data, that's what, what, that's what the data show. But more than that, the governments that followed the dictatorship, which were center-left governments, some of the cabinet members had been imprisoned by the military, some had been tortured, many of them had spent years in exile. They took the Chicago Boys policies and they actually, uh, uh, deepened them. They did not turn around. They did not suppress them. They said, "This is the way to go," because there's nothing more, um, attractive and seductive than success. And so, the, the, a very important, uh, uh, step in the history of Chile is that when the democracy came back, the e, new economic team, which had been very critical of the Chicago Boys in the early years, realized, "No, these guys really were able to transform this country. We're going to stick with this, these policies." And, and I mean, just for those that aren't familiar with what market reforms, what economists would call market reforms, could you give maybe a few examples of what some of these market reforms entailed? Like, I, I think, I guess, one example that would maybe come to mind is like, you know, price controls, you know, you know, the price of milk was set at, I don't know, you know, $2 a gallon or something like that, um, you know, below the market price. Um, you know, were the fiscal reforms? Were there other things that were part of this?
>> So, so, uh, uh, that's a great question. Uh, the main thing is that Chile is a little bit of a distortion in terms of looking at it, because the Chicago Boys took over a country that was trying to move to real socialism. Not social democracy, but socialism in the, uh, Soviet style. What is called, as known as real socialism, >> where a government wants to, you know, control >> no, the government wants to own all the means of production. >> Own everything. So, >> Everything is nationalized. >> Everything is nationalized, expropriated, uh, u, confiscated. So, >> Totally different from, you know, the sort of Nordic welfare state idea of, you know, generally free markets, you know. >> So, that's why we have to, we have to make a distinction between what, uh, the East Germans started calling in 1971 or so, real socialism, real in the sense that it's the socialism that really existed, uh, on the other side of the wall, of the Berlin wall. Okay? And not just having, and, and we have to, so realism is Soviet type, Cuba, China at the time, not now, uh, Vietnam at the time, not now. And it's not social democracy, welfare state. It's different. >> Like you see in the Nordics or >> Right. So, it's not Sweden and Norway or Denmark. So, um, what the market, so Chile had 3,000 prices were controlled by the government. Interest rates were controlled. Inflation was, uh, depending on how you measure it, but about a thousand percent per year. Uh, credit was allocated, uh, by bureaucrats. Um, um, u, there had been about 300, uh, large, uh, manufacturing firms that had been nationalized, uh, and the copper mines that, uh, were, uh, joint ventures between the Chilean government and large American multinationals, very famous companies, Anaconda Copper and Kennecott Copper, they were nationalized as well. So, everything, or, or, a very vast number of, uh, firms, uh, belonged to the state. Everything was controlled. And what, uh, the market reforms mean is to undo all of that and go back to some level of market operation. And what the Chicago Boys did is that they said, "No, we're not going to free 500 prices out of the 3,000. We're going to free them all, every single one of them. And we are going to allow the market determine interest rates. And, uh, we're going to privatize banks. Banks in Chile were privatized early. So, but we're going to privatize banks. And who are they going to lend money? Whoever they want to lend money to. They're going to look at projects and they're going to assess the risk, assess, um, how profitable those investment projects are, and they're going to lend to the better projects." And what they did is that they started moving in a direction that at the time was unthinkable, and that created a lot of fuss. Um, and, uh, people around the world, including in the, the World Bank and some people at the IMF, said, "This is not going to work." And after a period of adjustment, because bringing down inflation from a thousand percent to 2% ain't easy. Okay? So, that's why we don't want inflation to get out of hand. When it gets out of hand, it's very hard to bring it back down. But, uh, so, um, um, and after some mistakes that were, were, were done, Chile started growing, and then it was a, a true miracle. Uh, and, and the mechanics of moving a country from being totally government-controlled into being one of the freest, uh, markets in the world, uh, uh, that's very challenging and very difficult, and it was done in a very good way.
>> So, I think it's fair to say that, you know, this is an example of market reforms causing growth. Um, and I, I certainly subscribe to the idea that market reforms cause growth. I think it's something that I think a lot of political economists today have sort of forgotten since the global financial crisis. When people talk about say, neoliberalism in Latin America, what do they usually get wrong? Those critics. I mean, there was this big backlash against markets, uh, in Chile that was led by Gabriel Boric, was elected in 2021, attempted to change the constitution, failed, and, uh, just recently was, uh, you know, is now out of office with, uh, Kast now taking, uh, uh, the reins. And, you know, not a, uh, a reversion from socialism. Um, you know, what do you think that, uh, upset, sort of led by Boric, you know, several years ago now, uh, reflected? Was that something sort of that was cultural, political? You know, Chile sort of went from being this, you know, shining example in Latin America for a very long time to experiencing some major political unrest and near constitutional turmoil. What changed there? And was that sort of a flash in the pan, and we now sort of back to sort of what you could call free market, sort of economic success in your mind?
>> So, one of the questions that you asked me when we started this conversation was, what motivated me to write, uh, my book, *The Chile Project*, um, where I tell the story of the Chicago Boys and so on. And one of the reasons why I decided to write it is that, uh, many people who knew that I was born in Chile started asking me the question that you asked me. How come that this country, which went from being, out of the 20 Latin American countries, there are 18, but being number 10, number 10, 11, went to number one by a wide margin. And why is there now, are there riots and, and this, um, unhappiness? And they, they elect this, uh, far-left president, Gabriel, uh, Boric. And I decided, I'm going to tell the story of Chile, uh, in, in this book, um, starting from how these economists, the Chicago Boys, were trained, how they went to Chicago, how, uh, Milton Friedman influenced them, and Al Harberger, and the whole Chicago faculty. Um, and one of the things that happens is that, uh, there, there were several things. Uh, one is that, uh, the rate of growth of Chile, so Chile started growing at 7% for about a decade, started slowing down for a number of reasons, including the fact that the low-hanging fruit had already been picked, and a lot of, and regulation, overregulation started creeping in, and the economy slowed down. So, people had were aspiring that their incomes grew at the rate of growth of the economy in the past, six, 7%, and it started going down to four, three, 2%. So, there were frustrated aspirations, and that created some unhappiness. The second thing that that happened is that the pro-market people, uh, decided to declare victory in the battle of ideas and then went home. Basically, to put it in a sort of like a simple, uh, illustration, they joined corporate boards instead of doing research and doing what you do, having a podcast explaining market ideas, right? And the left did not join boards. They went to school, and they read Gchi, and they started, uh, uh, studying, uh, the, uh, radical environmentalists, and they, uh, uh, were able to produce a, a discourse, a narrative that was very attractive to young people. So, when you put the narrative that talks about unfairness, social injustice, uh, uh, collusion, and at the same time, the people who defend the market are not defending it anymore, you create a situation that is a spark can, uh, make, make things explode. And that's what, what happened in 2019. And there were demonstrations, protests, riots. Um, and then, uh, the, the political class said, "Well, let's try to solve this by rewriting the social contract." And a way of doing that is writing a new constitution. And that did, um, it was attempted. Um, we can talk about the details, but, uh, basically, the, the draft was very, very slanted to the left, totally crazy, in my opinion. And when there was the, the referendum, it lost big time. They got 38%, uh, in favor. So, the country is now back trying to find, uh, its, uh, its, uh, its footing, how to to move, move forward, and, and go back to faster growth. That's the, that's the challenge that the new administration is facing.
>> In, and I guess for the viewers that, that aren't familiar, I mean, at some level, um, you know, Milton Friedman's, I guess, reputation for a long time, certainly I think on the part of the left, I think, sort of got really wrapped into his, I think, only week-long visit with Pinochet.
>> Well, he spent 45 minutes with Pinochet. He was in Chile maybe for five days. I talked to Milton, uh, extensively about this in Sacramento. There were two topics that I tried to get from him. One was, uh, the abrogation of the gold clause, uh, in 1933 by FDR. Uh, uh, and he, he has, he covers that in his, uh, *Monetary History of the United States*, and I wrote a book about that. And the other topic was, uh, Chile. So, he spent 45 minutes with Pinochet, total. What really was problematic for Milton's perspective is that he wrote a letter to Pinochet that was leaked to the press where he said, "The only way to end inflation is to have a shock treatment." And the term shock treatment has been taken by the left as inhumane, uh, a way of of of of creating poverty and so on.
>> Shock therapy comes from >> Shock therapy, right? Shock therapy.
>> So, Milton said, uh, in, uh, and he gave examples, very interesting, how when in Germany, uh, uh, Adenauer, Erhard, freed prices, they did it on a Friday night, and there was a long weekend so that the, uh, occupying forces, the, in particular, the Brits, who are now, labor was in, could not turn that back. And said, and, and that's a way in Japan. And he, he gives examples and said, "Shock therapy, shock treatment." And that letter was leaked to the press, and that's what created a lot of problems for, for Milton. He has a long, in his, uh, book, um, uh, *Two Lucky People*, the autobiography, he has a very long appendix on Chile, which otherwise would have been unnecessary, right? And he, he reproduces the letter that he sent to Pinochet, the letter that Pinochet wrote back to him, and he goes over that episode, a 45-minute episode that takes like 30 pages of the book.
>> Oh, wow. Um, you know, Milton Friedman spent much of his, you know, later years here, you know, from 1976 to his death in 2006. Um, I, I think many of the viewers, I'm sure, are familiar with Milton Friedman and, um, you, some of his, um, uh, work and, and, uh, of course, his famous, uh, involvement in, in Chile. Um, talk to us a little bit about Al Harberger. I feel like Al Harberger is less well-known, but perhaps even more important in the story in terms of training these economists who were coming from Chile, you know, done their undergrad at Catholic University, Chile.
>> Right. So, >> So, Harberger is the real father of the Chicago Boys. And in the meeting of the Mont Pelerin Society, here at Hoover, a few years ago, George Shultz tells a story, and he says, he's the godfather, or I forget the term that, that he uses. So, everything goes back to T. W. Schultz, Theodore Schultz, who was the chairman of the economics department at Chicago for a long time. >> He's an agricultural economist. >> Agriculture economist. He got the Nobel Prize maybe in 1979. I was a student at Chicago when Ted got the Nobel Prize. And Ted was advising, uh, a number of agriculture, of Latin American countries on agriculture. And he came to the con, this is after the war, he came to the conclusion, so early '50s, through a, the, uh, predecessor of USAID, which doesn't exist anymore now, so it was called ICA. And Ted was, uh, advising, uh, agricultural, agriculture ministry, and he concluded that, uh, it will never work if only agriculture was addressed, that the Latin American countries needed overall good policy. Okay? So, if he gave a market-oriented advice for agriculture, and the central bank behaved in the wrong way, and, and the tax system was totally screwed up, and so, he said, "We need to create an environment where there are economists that understand how modern economies work." And, um, so, uh, he, he found someone at, uh, a Princeton grad who was a, uh, u, an official at, uh, at, uh, ICA, Pat Patterson, who agreed with him. And Patterson was in Paraguay, but he was transferred to Chile. So, they picked, "We're trying to do this in Chile." So, they said, "Well, but Chile doesn't have good economists." "Well, we'll train them at Chicago." And that's how the program starts. And the idea was that they would train about five or six. They would come back to Chile, and they would train others. Um, and they would be, um, so these would be like the grandchildren of the, of Chicago. They, they did not go to Chicago, but they were trained by, by Chicago. And that's a story that I tell in the book, right? And, um, so Ted Schultz goes to Chile in 1955, >> to see if a university in Chile is interested in this program. And he then decides, "I have to bring some of my colleagues from Chicago." He brings a very, very, uh, prominent economic historian called Earl Hamilton, who has, is he was an expert on Spain and had written a very important book on inflation in Spain after the discovery of America, because of the increase in the money supply, silver from Peru and Mexico, and silver was, uh, the, the medium of exchange. So, the money supply increased, inflation in Spain. So, Earl spoke Spanish. He, um, uh, uh, Rottenberg, Saul Rottenberg, Simon Rottenberg, who had worked in Puerto Rico and knew a lot about baseball. So, he was a baseball expert. Uh, and if you, uh, if you are a baseball expert, you need to go to the DR, the Dominican Republic, and Puerto Rico, at the time, Cuba. So, he spoke Spanish. And Harberger, a young assistant professor, he also was proficient in Spanish. >> Uh, and that's why they go to Chile. And Harberger then falls in love with the country. And a few years later, he marries a Chilean woman, Anita, and then he becomes sort of the first, like the older brother to the younger Chicago Boys, and then the father. So, he's, he's still alive. He's 101 years old.
>> Amazing.
>> And, uh, to my kids, he's like, like the grandfather, because my kids' grandparents were in Chile, so they didn't have a grandfather figure, and Al became the grandfather figure. So, he's the real father of the Chicago Boys. Um, a real giant in public finance and development, uh, economics.
>> Well known for the Harberger triangles, you know, the welfare loss, you know, triangles when trying to measure, uh, inefficiency in an economy. I think, you know, it's basically an economic, sort of 101, you know, textbook topic.
>> Yeah. I was, I, I, uh, traveled, uh, around the world with Al. Went, we spent time in Indonesia, spent time all over Central America. We went to the Dominican Republic. We were hired by the archbishop of the Dominican Republic, uh, at a point when there was a big, um, brouhaha in terms of the economy, and the archbishop decided, "I have to interfere here and be like the referee." And he said, "But I don't know any economics. I'm going to hire Professor Harberger." So, I went with Al to the Dominican Republic. We went to Russia. We're all over the world, Africa.
>> Amazing. That's fantastic. And, uh, yeah, I, you know, he's a huge figure. You know, he started the, the Alamos Alliance as well, you know, which is an annual gathering of Latin American and American economists. And, yeah, really, I think his influence, uh, uh, is.
>> He's also a nice guy. So, the combination of, uh, very bright and, and, and great economist with being truly generous and nice, uh, it's in short supply. Uh, so, that's a great, great guy.
>> And, and, uh, certainly, you know, um, under, underappreciated. And I think could, could take a lot more credit, uh, for all these things if, uh, if he wanted to. Um, I want to pivot, um, or zoom out a bit more from, from Chile to Latin America, just, um, more broadly. You, why, just from a, a development, economic growth standpoint, why has Latin America, in your mind, struggled so persistently with inflation, fiscal crisis, you know, socialism, and political economy issues, and economic growth overall, say compared to Europe, the United States, Canada? Um, you know, why, in your mind, has Latin America lagged?
>> Well, there's not, there's not one single explanation. So, it's like the old SAT question, "All of the above," right? And, >> Uh, so, um, uh, there's a lot to, a lot of it has to do with culture and institutions. >> Uh, so, there is a view, um, that, uh, so let me get to the fact. So, uh, uh, mid, uh, 18th century, uh, the, uh, main colonies of North America and the 13 colonies of Spanish America had roughly the same income per capita. And today, Latin America, Chile, which is the number one, it's like, say, 23% income per capita of that of the US. So, there's been this growing gap. And the question is, well, why? This is what you are asking. And I think that a very important reason is this, uh, cultural, um, institutional, uh, uh, difference. And that has to do with, um, Spain and, uh, England. And, um, this theory, which is a little bit sort of a, maybe an elaboration of Max Weber's theory of the role of Protestantism in, in, in helping the big jump of capitalism, is that, uh, North America was very decentralized. And Alexis de Tocqueville, *Democracy in America*, one of the things that he was impressed by is that every town had its own sheriff. It elected its officials. Uh, it's, it was decentralized. There was no central power. And, uh, Latin America was exactly the opposite. And that, um, has had to do, I think, with the Reformation and the Counter-Reformation. So, the Spanish decided to side with the Pope after the Reformation, and they were the armed, the armed arm, uh, of the Counter-Reformation. And in order to protect the Pope, they had to centralize things, uh, because otherwise, another Luther could come up, right? >> Or Henry VII. So, they, uh, everything was highly centralized, and you could not, in Latin America or in the Spanish colonies, make any decision unless it was ratified in Spain, and it took, I don't know, three months, four months. So, you ask a question, and they had to send some guy to go to Seville, and from Seville to Madrid, and come back. While North America was, local communities were making their own decisions and their own, and they were, uh, governing, uh, themselves. So, I think that that has a lot to do with it. So, it's culture. It also has to do with natural resources. So, uh, Latin America is, uh, as you go, especially to the south, mining is very important. And in order to do, to do serious mining, you need a different type of, uh, economic organization than if you have agriculture, in particular, in the plains of the US, where you can have family-owned, uh, farms. So, an interesting thing is *The Wizard of Oz*. So, it's the uncle, I forget his name, and the and the aunt, and the Dorothy. Toto is a dog. And then there are three hired helps. Okay? The lion, the Tin Man, and the, with the third guy is a >> And the, uh, the lion, the Tin Man, and, uh, what is it? The Scarecrow. >> The Scarecrow. Okay. So, there, there were basically no farms in Latin America that were family-owned with only three hired helps. Mhm. >> They, you had to have 75, 500 Indians, right? And so the property, so everything. And then bad policies. And the policies in Latin America, again, because of centralization, a lot of regulation, you couldn't start a business unless you had the, the permit from the king. So, Latin America was left behind. I have a book which I think I published in 2010 called *Left Behind*, and, and I, for the first time, I tell the story of Chile that is trying to get out of the pack. Um, and, uh, but now, at least, I think I, I'm very optimistic about Argentina. >> So, I think that Argentina is moving in the right direction. Chile now is trying to get back in the right direction after the four years of the, the, the far left being in charge. Uh, Uruguay, although it has a center-left government, it's always a very reasonable. Peru is a very strange country where the head of state is replaced every 10 months or so, and the vast majority of the, of previous ones are either, uh, in jail or have been, uh, prosecuted, but the economy continues to function, inflation is very low. Uh, so, I think that that, that Latin America, maybe is turning. For, Ecuador is moving in the right direction. Colombia is a concern, Mexico is a concern, Venezuela, we hope that it will improve.
>> So, um, I'm totally with you, uh, on, I think there there's some story, you know, perhaps about institutions. I mean, this is part of the story that Acemoglu and Robinson tell in *Why Nations Fail*, that >> Well, but Douglas North told the story before that, and Adam Smith before that. >> So, chapters, uh, part four, chapter seven of *The Wealth of Nations* is titled "On the Colonies." >> And it's everything. And at the end, there's a beautiful, uh, uh, passage where Adam Smith sort of ranks the colonial, um, um, forces, the colonial, the, the, and he says, "The Brits are the, the best, the Dutch are the worst." And then he's, and, and the, the French second, and the, the Spanish third. And he explains why, and it's all about institutions. >> So, the civil, civil service created in India, and the Brits do that. And the Dutch completely don't create any local institutions. Uh, and it's all extracting the wealth. And so, it's, it's everything comes from Adam Smith. It's that we didn't read that chapter because it was called "On the Colonies."
>> Well, in, you know, I, I think, you know, the inclusive versus extractive institutions, the, uh, the model of Acemoglu and Robinson. I think it's so wrong. I like the, I guess you could call, like, liberal versus more illiberal, or, or more, you know, decentralized, you know, liberal institutions, the sort of framing of Smith, um, versus, you know, more, more illiberal ones. You know, slavery, not only is it extractive, but is obviously illiberal. And also, you could talk about, like, just legal traditions as well, and legal origins. You know, obviously, the British had common law, you know, law that could, uh, very much be local, you know, two people can contract together, law can kind of evolve, adapt to technologies as it comes along. Um, whereas, you know, civil law, you know, you're dealing with, you know, >> So, it's all Napoleonic code. >> Exactly. >> Right. So, everything comes from Napoleon and >> France, which is >> Right. And, uh, but what is interesting is that the scaffolding is French, but the constitutions are all copied from our constitution, from the American constitution. So, they are all presidential countries. There's no parliament. There's no, not a single country in Latin America is a parliamentary democracy. >> Uh, the parliamentary democracies are in the Caribbean because they come from England.
>> So, um, and there, there's been a lot of discussion in these countries whether there should be more of a semi-parliamentary, like the French, that they do have a prime minister, although I don't think that you or I remember who is the prime minister right now in France. I don't. And they have a president. Um, but it's interesting that the scaffolding is from Napoleon, it's French, and the constitution is American. And, um, I, I, I, I haven't talked to historians that they think that this is a sort of a lethal cocktail.
>> Yeah. Certainly. I mean, because, you know, certainly, you know, you've got the, you know, the other issue of, I guess, separation of powers as well. I mean, the US, sort of, you know, is, is fortunate. You, the, the one downside, you know, parliamentary systems is, you, you don't have, uh, many separations of powers. You don't, you don't have many powers. You, it's very much, you know, parliament is supreme in the sense that, um, you, if you get a simple majority in a parliament, uh, you know, they can change everything. And you can, if you win parliament back, you can change >> You know, that's, that's what Maduro's argument was to stay in power for 13 years. He said, "Margaret Thatcher stayed in power for, I don't know, 10 years, and Billy Brandon said, these guys in Europe do it all the time. Why can I stay on forever?" And now he's, uh, he's not there anymore.
>> Yes. Yes. So, I, I want to sort of, uh, jump into some of that. Um, so, I mean, it seems like we, uh, uh, see, we've had some sort of a reversion to free market, uh, more free market Latin American >> Not everywhere. Mexico is a concern, and Colombia, I'm very worried about Colombia.
>> But I'm just saying, compared to sort of, I feel like past decades where we've had, you know, pink tides, um, of, of, you know, new, sort of, you know, leftist, more anti-market candidates. Um, you know, now we've got, obviously, Javier Milei in Argentina. We've got, uh, Kast in Chile, Paz in Bolivia, Fernández in Costa Rica, um, Esura in Honduras, possibly Fujimori in, in Peru. Um, and, you know, it's, it's possible that Lula could, uh, you know, be out in, in Brazil, and, you know, Bolsonaro, uh, uh, could be, uh, in, in power soon as well. Um, I mean, do you think that, you know, this new wave is, is something that could bring about sustained economic growth, or do you think it's going to be short-lived?
>> Um, >> It can break that political economy barrier.
>> I, I hope it brings back, uh, economic growth. Um, the one, the one case I'm following more closely for a number of reasons, including that I was born there, is the Chilean case. And the new government, President José Antonio Kast, it's only been in power for about two months now, and they are trying to do too much too fast. And although the left is in complete disarray, uh, they have been able to mount a campaign of saying, "You are trying to do reforms that only favor the rich." And I think that that, that, uh, you cannot do too much at the simultaneously. Uh, although, uh, one of the anecdotes that I was, uh, talking to you about when I was at the World Bank, which is interesting, and I think it's, we, we have to think about this more. So, in 1991, I still had not gone to the World Bank, but I, or, or I had done some work for the World Bank on sequencing. So, there's a big, big conference. Everyone in the profession went in Prague. And the minister of finance was, uh, Václav Klaus, who then became the prime minister, and then the president of the Czech Republic. And there was a reception, and it was with a long line of all us American economists, and he was shaking the hands of everyone. And when it was my turn, I said, "I'm Sebastian Edwards." And he said, "Oh, you are the sequencing professor." And I was very happy. I mean, I was honored. Said, "Oh, Mr. Minister, I'm so happy that you." I said, "You." And he said, "Professor, you got it all wrong. Your paper is completely wrong." And I said, "Why?" And he said, "Because when you are in power, you don't think about secrets, and you do as much as you can, as fast as you can, because your window of opportunity is very small." And the Czech Republic has done very well compared to the other countries. So, I am now criticizing or questioning what Mr. Kast is doing, too much too fast. On the other hand, I do remember that Václav Klaus told me that I was wrong by thinking that you should go more slowly. So, to answer your question, I think that there is a lot of hope. Um, in particular, I think that deregulation is the key. And regulatory, uh, uh, laws have crept up one on top of the other. And now we have Chile, the number one producer of copper in the world, by far the largest copper deposits and reserves in the world. And it takes 12 years to get the permits approved to open a new copper mine in Chile. Chile is the number two in lithium reserves in the world. It takes 12 to 15 years, if you get them the permits, to start, uh, a, a lithium, uh, uh, new lithium, uh, project. Chile has the best winds in the world in Patagonia for, um, wind energy. It takes 12 to 15 years to get the approvals. Has the best sun in the world in the Atacama Desert for solar. Takes 15 years to get approvals. It makes totally no sense. And I think that if they are able to bring these down to reasonable periods, now, reasonable is, I'm not saying 15 days, one year, two, three years, then there will be a boon in terms of investment. And that, but, but, but they have to really do it. And the, the, the adversaries are highly ideological. There is a group of degrowth people, even, and radical environmentalists that are trying to put a stop to this. Mhm.
>> So, countries like Chile and Uruguay generally performed better than Argentina and Venezuela. I think it's fair to say. Um, and, you know, due to, you know, these market reforms and, you know, pursuing more sort of economic freedom, their policies, um, you know, comparatively. I mean, Argentina, Venezuela, though, you know, were once amongst, you know, some of the richest countries in the world as of 1950. Um, you, what, in your mind, uh, you know, caused their sort of long-run decline? I mean, you know, socialists took over and, you know, in some cases, you know, were, were actually elected. And, and, and certainly changed very quickly, um, you know, thinking to say, you know, Venezuela, with Maduro gone, and Venezuela and Milei at the helm in Venezuela, sorry, with Milei at the helm in, in Argentina, is there hope, uh, for Venezuela and Argentina in your mind? Could Argentina and Venezuela realistically become high-growth, set of economies again?
>> I am very optimistic about Argentina. And um, I think that the work that, uh, Minister Federico Sturzenegger is doing in the deregulation sphere is fantastic. And he is totally convinced, and I think that he is quite persuasive. I think you've had him here at Hoover recently give a talk. Um, and he's unearthed, uh, the, uh, quote-unquote rationale behind many of those, uh, regulations, and it is very difficult to understand why they were put in place, uh, at all, ever. And, uh, so he's moving in the right direction. And I think that Argentina has a potential that is, uh, amazing. Um, again, the question is, it's not easy to bring down 200% inflation to 2%. And it's like, uh, a saying that we have in Latin America. I think we have it here too, that you cannot make eggs, an omelet, without breaking some eggs. You have to break the eggs, otherwise the omelet will never be made. Um, I, I, I am, I am hopeful about about Argentina. And I think that, uh, there is a generational, uh, contrary to other countries, it's a generational thing in Argentina where the young people are very promising. So, I, I think that that could work. Uh, Venezuela, I think it's more difficult. Um, but it's doable. Uh, now, Deli Rodríguez has to really control and, and, and clean things up before there are elections. And, and I, I think that, uh, uh, uh, uh, Secretary Rubio has said that the US is pushing for elections next year. I hope that that works out. And that, uh, now, one thing about Venezuela is that the opposition until recently had been so fragmented, or the, the pro-democracy, uh, forces, I hope that they unite and, and either behind María Corina, uh, or, or behind someone else.
>> And, I mean, it's an interesting situation too, you know, certainly, you know, who controls the military, um, matters. And, you know, I mean, the US is, um, you know, it takes time, uh, to make these things happen. Um, so, so I, I think that the US approach, being careful, it's, I think, more thoughtful than maybe some people.
>> Yeah, no, I think, I think, I, I think that they are doing the right thing. Um, the, the, there's an article recently in the New York Times, which I think they put it in an interesting way. Out of $2 from the oil, uh, business in Venezuela, $1 goes to corrupt people. It's stolen. >> So, it's interesting that they, they use as a basis the, the amount that goes to corruption. So, instead of saying, "Out of $150, go to corruption," they say, "Out of $2, one goes to corruption," which is the same, right?
>> Mhm. I, I want to talk, uh, just a bit, uh, you, close here, a little bit.
Uh, talking beyond Latin America and talking about, you know, markets, you know, free market, uh, market economies at at large, you know, some might call neoliberalism. Um, you, you've written a lot on inflation crisis, you know, during, I want to talk just a little bit about inflation, um, you know, that we recently had this, uh, inflation surge, uh, during the Biden years, um, in, you know, the post-pandemic years, um, do you see, sort of, and it wasn't exclusive to the US, this was, you know, inflation all around the world. I mean, do you see echoes of Latin America in some of these, um, I guess macro mistakes of, you know, there certainly was a ton of fiscal spending during this period, um, you know, how important do you think is, you know, our central banks in preventing inflationary spirals? Seems like there's an argument, you, some people argue that, uh, you know, the inflation, the global inflation of the early 2020s was largely, you know, supply shock, pandemic driven, but there's another view that, you know, is in part, you know, fiscally driven, um, it seems that, you know, Milei in Argentina has largely quelled inflation, um, which is fiscal reforms, and, uh, while, you know, real interest rates have actually been negative. I mean, do you subscribe to the view that maybe fiscal matters more than we thought previously for inflation, or, um, and, and hence, maybe, you know, Latin America is starting to to learn this lesson, you know, Milei and and elsewhere? I mean, many other countries have, I feel like, uh, got inflation under control over the years, um, you know, Chile, Brazil, and others. I think Latin America's doing much better in in that regard, but I'm just curious what you think about, you know, this early 2020s inflation surge. Um, are we learning or or are we unlearning old lessons, uh, that, you know, fiscal policy matters for inflation?
Well, uh, I, I, I think that, uh, the whole issue of fiscal dominance being in many cases, uh, at the basis of inflation is something that, at least, uh, some of us have always had in mind. And I think that now that we are at the Hoover Monetary Policy Conference, uh, I've been coming to this, uh, event for a number of years now, and it's something that everyone who comes here, including the incoming chair of the Federal Reserve, Kevin Warsh, have always had in the raiders. Um, and I think that, uh, also other people at at Hard, John Cochrane, and so on, have now insisted that there is a fiscal route to inflation. I think that that lesson has been learned. Um, and, uh, the problem is that it's hard to to know what the thresholds are after after, because it's very nonlinear. It's not that if you do a little more, it's going to be proportional. >> Uh, and I think that probably what happened, uh, uh, in the 2020s had to do, had to do, uh, with that. Um, I think that the the lessons are learned at the end. The the the thing that I want to, uh, policymakers to understand is that, uh, to put it in technical terms, and I'll try to explain it, it's R minus G. It's the interest rate minus growth. And, uh, one of the things that is very important is that you have to deregulate enough or avoid overregulation so that the G part, growth, is fast enough. So if growth is fast, then debt over GDP goes down, >> because the denominator starts growing fast. So, so let me go back to to Chile. Chile had debt to GDP, say, 30%. And then when it grew for a decade at 7%, the debt to GDP ratio went to 7% or 6%. It collapsed, not because they didn't issue more debt, it's because the GDP was growing so fast. So I think that the combination of maintaining the economy competitive through, uh, very, uh, uh, agile, uh, regulations, uh, making sure that we don't, um, kill, uh, investment projects, and so on, um, and the having a fiscal side that is healthy and sustainable, uh, it's the way to go.
Now, every time you say that in a group of economists that have different persuasions, someone will come up with, "What about Japan? They have 260% debt to GDP ratio and they seem to be doing okay." And that's part of the problem. We really don't know what the thresholds are. You, you're too young, John, but, uh, when the euro was being discussed, we all thought, we, the profession, that 60% of GDP was the absolute limit in terms of debt. And the US had 60% to GDP for about 20 years, >> if you inform the master treaty and >> master masters, if you had a country that had more than 60, could not join and the euro, and they had to do something about it, and Greece and Belgium had to reduce their debt. Uh, and then we had, uh, Lehman, the, uh, the Lehman crisis, then it went to 90, and then the pandemic, and now we're at 110 or so, and we haven't collapsed, we haven't disappeared, but we're worried, but we haven't disappeared. And the, what is interesting is that we really don't know what the number is. At this conference, we're going to have Ken Rogoff, >> who assured us a few years ago that 90% was the limit. >> We passed 90 and here we are. And this is in his book, um, with Carmen Reinhart. Yeah. >> This Time Is Different. That right? It's, it's, uh, fascinating how, um, I don't know if it's fair to say that governments have become, I guess, complacent about, you know, public debt, but, um, it's amazing too, just how you haven't, it doesn't seem like we've come close to hitting crises quite yet. I mean, you could argue maybe the inflation. >> I am concerned, but I, I, but I think that the solution, let me put it another way, we should not forget that growth is part of the solution. >> Absolutely. >> And if the country grows at a healthy rate, and that's the main difference between the US, which is a country that grows in spite of everything, and Europe, which does not grow. >> And we are seeing that the gap between the US and Europe, Europe is getting larger and larger. And so, uh, yes, let's worry about the debt. Uh, let's bring the public deficit under control, but let's not forget about growth.
>> I, I couldn't agree with you more. I mean, uh, I guess the other challenge too is even though, you know, the US is certainly a star compared to European and, you know, European countries, Canada, um, I'd say many Latin American countries and Japan, um, on a growth standpoint and GDP growth standpoint overall, um, including the US growth rates are still much lower than what they were in the middle of the 20th century when we had all these incredible innovations from, you know, air conditioning to commercial air travel, automobiles in the early part of the 20th century, you know, computers.
>> Well, that's that's Bob Gordon's, uh, book, right? >> So, the stagnation thesis in general. So it's >> but we'll see what AI does. Um, I, I, I was asked to give a talk in Latin America about AI a few years ago, and the group that asked me to do this was a group of AI enthusiasts, and they were very unhappy with what I said because I said it's very artificial and not very intelligent. And now, if I gave that same talk, I would say it's not very artificial and it's really super intelligent. And what is interesting to me is the rate at which the AI, the LLMs are improving. >> Uh, it's week by week. >> And I use now, I, I still have my array, a PhD student at UCLA who is a great guy, uh, but I almost don't use him. I mean, he gets paid, but I, he comes to me and says, "Do you need anything?" And I say, "No, I have my other array called Claude doing a lot of work for me." Yeah, Claude. Code. And it's, it's amazing, um, just, yeah, all these advances in AI. Um, also, I mean, part of that too is, you know, economic freedom and to what degree these technologies are, I think, allowed to develop. I obviously there are, I think, you know, some, um, you know, concerns about where things could end up in the very long run with AI, but I think it's least dangerous at the beginning. And >> Yeah, I'm not, I'm not, I'm not as op, as pessimistic and worried as say, Darren, as a Mogul. I think that he, uh, he's, he's, uh, way too pessimistic and too concerned about what's going on. I'm, I'm more, uh, more optimistic.
>> And just for my, uh, last question for you, you know, in your mind, you know, have, you know, thinking about the Washington Consensus, a lot of those ideas, um, you, some people sort of also label as neoliberalism. Have those sort of free market ideas, uh, in your mind, I mean, they, I think they sort of, it's fair to say that they took a pretty big beating, um, in the sort of general public sphere after the 2008 financial crisis and, um, in the rise of sort of this democratic socialist in the US, um, you know, you have labor, you know, echoing those concerns in the UK, um, you know, this massive surge in interest in inequality is being this major social issue of our time. Um, I mean, do you think that, you know, maybe there's some reversion that's maybe starting to go on? We talked a little bit about this wave in Latin America. Um, certainly, you know, we, we've had, um, you know, President Trump in in the US. >> Um, you know, there's certainly, um, some other examples as well out there. I'm curious what, what do you think about this?
>> Yeah. So let me, um, uh, there are two things we really did not talk about, which are related to our general theme. The first one is that we talked a lot about neoliberalism and we never defined it, you and I. So my definition in the book is that it is a system that relies on market solutions for almost every problem in the e in the in a society. Almost is very important because Michael Sandel said, uh, he built sort of a straw man and used Gary Becker, my former professor at Chicago, saying that Gary said that economics should be used for everything. He never said that. But so neoliberalism is that we use markets for to deal with issues like education, health, culture, almost everything. And that's what Chile did, okay? And it went well beyond market solutions for economic problems. It's, it, it made it much broader. And, um, so, so we don't need that broad approach necessarily in every country. I am happy if the economy is governed by market principles. Prices are free, interest rates are free, the exchange is allowed to float. We make sure that there's no inflation and so on and so forth. The other thing we didn't talk about is identity politics and wokeism. And I think that, uh, what is, uh, going on now is that the pendulum moved way too far into identity politics. And what we're seeing now is we're seeing it in the US. We're seeing, I think, almost everywhere that, uh, that that people got fed up with that. And so we're looking for a more, uh, reasonable, common sense solution to problems. And I think that we're seeing that in the US. We are seeing that, uh, in Europe, in spite of the differences between the the the two part, those two parts of the world, and we're seeing it in Latin America. And I think that, uh, Milei, he has a very, uh, personal way of phrasing things, but, but it's, it's bringing back some common sense. >> Uh, and, uh, and I think that that's, that, that is good for society. It's good for, uh, for the people. And, and, and, and I am hopeful that, uh, combination of less wokeism and identity politics, uh, it's going to bring us to to the center. Now, interesting question. Will Mandami do well in in New York? I don't think so, but, uh, we'll see.
>> Absolutely. Well, it's a real honor to have you on, Sebastian. Really want to thank you for coming on the show. >> John. Thanks for having me. >> This is the Capitalism and Freedom in the 21st Century Podcast, an official podcast of the Hoover Institution's Economic Policy Working Group, where we talk about economics, markets, and public policy. I'm John Harley, your host. Thank you so much for joining us.