Currently the President of Chile, Socialist Party leader Ricardo Lagos began his career as an economist and lawyer. He strongly denounced Gen. Pinochet's regime, and has served as minister of education and minister of public works. Interview conducted 01/19/02
See Video Chile in early 2002 [0:34]
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- Chile's Closed Economy of the 1960s
- Chile's Transition from Dictatorship to Democracy
- Pinochet's Economic Legacy
- On Social Services and Public Goods
- Public Services and the Role of the Market
- Dependency Theory as Applied to Chile
- The Advantages and Challenges of Free Markets
- Bridging the Income Gap Through Education
Chile's Closed Economy of the 1960s
INTERVIEWER: A few personal questions. You decided to study economics. Why did you make that decision?
RICARDO LAGOS: It's funny, you know. While in the last school, there were some courses in economics, and then I discovered that it was much better to study economics and to see how many houses can you build instead of deciding who is the owner of the house when you have a legal procedure. I thought that it was much more useful to have some economics rather than a legal background, so that's the reason why, even though I have a law degree in Chile. In the '60s it was much easier to convince an American university to accept somebody with a law background.
INTERVIEWER: And what ideas were floating around back when you were a student? What sort of things were being taught to you, and how did they affect your thinking?
RICARDO LAGOS: Living in a very closed world in this country meant that whiskey, Scotch whiskey, not to mention bourbon -- nobody knew bourbon -- but Scotch whiskey was something almost impossible to find here in Chile. Only a foreigner can afford to do that when you have a very closed economy. Then what you have is the sense that you can build your own economy in the way that you want, and this is the reason why, during the '60s in Chile, there were extreme political procedures in the area of economic policies, and these economic policies represented more market-oriented policies like Mr. Alessandri or some middle-of-the-road Christian solidarity based on the independent party based on progressive Christian principles founded by President Frei. And then later on there are also these policies of President Allende. But Chile to some extent became a country where all those policies were experimented with, and why was that? Because if you have a very closed country, a closed economy, then it's possible to think in some of those areas -- and this is the question -- why, with regards to copper, our major resource... Well, there was a big discussion, and finally all political parties of all the spectrum agreed on the nationalization of copper. That gives you an idea in a way of what is the meaning of living in a very closed economy.
INTERVIEWER: Talk to me a bit about how your thinking has evolved. In the '60s, what did you embrace, and how has that thinking changed over the years?
RICARDO LAGOS: Well, the change is the following: When you are living in a closed economy, then you have natural monopolies in the country in many areas. For a small economy like Chile, 15 million people is not many; therefore, with one or two beer factories, then you have almost a monopoly. Therefore, how are you going to combat that? How are you going to battle against monopoly? It's quite different when you have an open economy and you are asking for a very high price in beer. Well, you are going to import some beer, and today you go to the supermarket and you find foreign beers all over Santiago, all over Chile. Now, that's the big difference. So when you are living in that society, then regulations are going to be extremely important....
Chile's Transition from Dictatorship to Democracy
INTERVIEWER: I'll ask you more about that in a bit, but going back to history-of course you knew Salvador Allende. Will you describe that relationship you had with him?
RICARDO LAGOS: Well, I was designated by Allende to be ambassador in Moscow. I never reached Moscow. I think that Allende was what you can call today a Social Democrat. He was member of Congress here. In more than 25 years, Allende tried to introduce changes in the economic policies in Chile and economic structure of Chile. He nationalized not only copper but quite a number of industries that were in the private domain, and therefore all Chilean society became extremely polarized. It's true. It was polarized before Allende, but during Allende's period, society was extremely polarized. At the same time, it seemed to me that, from the point of view of the economic policy as such, Allende did commit some mistakes. We have a tremendous inflation and, therefore, I think that this was something that put us in very difficult times. His government nevertheless was elected by 56 percent of the vote. Allende did an election for Parliament. He was able to increase this majority vote -- called "majority" but only 36 to 43 percent -- but in that time the country was too polarized. Now it's true that Allende was a democrat. It seems to me that he knew that it was very difficult to introduce the changes that he was trying to introduce, but also the political system of Chile was such that it was possible, even though you have one-third of the electoral vote, to be elected president. This is what happened with some other cases.
INTERVIEWER: In the famous words of Milton Friedman, free markets bring freedom. [But] then there was Pinochet, who brought free markets, but he may not have brought freedom. Can you comment on that?
RICARDO LAGOS: Well, it's a little bit funny, because you have a dictatorship after [Allende], and it was possible to impose some kinds of economic policies without regard for what Congress may say. Now, what you had in Chile was the following, if you allow me to use this in the area of a market economy or in the area of economy. We were citizens over 21 years old, so we had a full command in the area of political rights. It was necessary to take some steps, you know. You had a constitution with a lot of [stipulations] in order to take care that citizens did not to go too much beyond what the people that controlled the constitution said it was possible to do. As somebody says, in the area of cultural ideas [there is a small clique that] has to tell you what are you supposed to see, what you are supposed to read, and [imposes] some sort of censorship. This is not exactly the case, but to some extent there has been some feeling in this connection. In other words, Milton Friedman's ideas, they came to Chile through the Chicago School, and the Chicago School was working in Chile with the Catholic University during the '60s and the '70s. It's my impression that they were able to provide to the military government some sort of ideas that fit to each other. There was a program there, and they took the program.
Now, what happened lately is that together with the period of Pinochet, particularly in the '80s, the world as we knew it was coming to an end. The world polarized between the Soviet Union and the U.S. The Iron Curtain of which Mr. Churchill used to talk about was vanishing. It's amazing. At the worst stage the Berlin Wall was coming down, and at the same time, in the case of Chile, Pinochet was being defeated. Now, what happened with this was that, while you have this case, at the same time the economy was opening, and therefore the changes introduced by the Chicago School according to Friedman's theories were changes that came at a time when the world was also changing, and therefore when democracy was recovered. Then what you had after democracy was recovered -- how are you going to take those measures, or those policies, implemented under the Pinochet regime and change those policies in such a way to have a more humanitarian face?
At the same time it seems to me people sometimes are amazed at the way the Chileans did their transition. It's true the transition from an authoritarian regime to a democracy is the major interest. How are you going to go from dictator to a president that is elected by the people? However, I guess it's much more difficult the other transition -- to go from those economic policies taken under the dictator regime when you don't care about opinion polls, you don't care what's going to happen in Congress because you don't have Congress; you don't care about anything. But when you go to democracy, then I think that the coalition that was able to perform this transition -- I was minister of education during those days -- has a tremendous challenge. How are we going to explain that there are some structural policies that have to be maintained? But at the same time we have to take care that the more humanitarian face is introduced. In other words, because the world changed, you couldn't go back to the policies of the '60s or '70s. It was necessary to go to the policies of the future....
As I say, it seems to me that it's extremely dangerous to have a general who likes to have a coup, but probably it's more dangerous to have a finance minister that is a populist and probably then we are going to end up with a mess in economic policies, [which is] what happened in some countries in the region. In other words, I do believe really that to have sound economic policies is not something of the right-wing or the left-wing parties. It's simply sound economic policies now took some time to learn.
INTERVIEWER: How did you learn that lesson?
RICARDO LAGOS: Chile was one of the last countries to have this transition. The transition was done first in Argentina, after the defeat in the British Falkland Islands, or the Malvinas. After that defeat it was very clear that the military people couldn't command Argentina anymore, and you had a transition to President Alfonsín. And the military in Brazil was going down, and then there was an opening also in Brazil, etc. But at the same time, you know, it was a trend in those countries to go back. In the case of Argentina it was very difficult at the end for President Alfonsín, because of the economic policy, to be able to end his term, and he just transferred to the new president, Menem, six months in advance. In other words, I would say you have to realize that the first question is to have order in your own economic and fiscal policies; second, to have growth; and then after you have growth, then we are going to discuss how are we going to distribute the outcome of that growth, and not the other way around -- first talking about distribution, then about growth, and finally about how we are going get the economy in good shape.
INTERVIEWER: How do you think the legacy of Pinochet has shaped the economy in Chile?
RICARDO LAGOS: I think that there are two questions in this. The first one I think is a cultural one, the first time in Chilean history when you have 10,000, 20,000, 30,000, 40,000 Chileans going abroad to New York, Washington, Stockholm, Rome, Paris, to the Eastern European countries. Either you are a leader because you are a trade union leader, or because you are a politician, or because you are a cultural figure. Many writers, painters, people were expelled, so what happened when so many Chileans suddenly start looking at Chile from abroad, the most important thing I would say is [they gain] some sort of cosmopolitan point of view of what's going on. I remember going to a congress of the Socialist Party in Bordeaux, a congress of those Socialists living abroad. They wanted to be together in Bordeaux to discuss what can we do with Mr. Pinochet and so on and so forth. So I went to Bordeaux. I was living in Chile. Everybody was coming from [all over]. We used to say those living here command tremendous respect because you were on the spot here. There was a very funny discussion, and if you had been in Bordeaux you could say this chap came from Germany, this one from Italy, this one from the U.S., in the sense that their politics had the [influence] of a Nordic country; the more sophisticated, renaissance political modelling in Italy; or the tougher one of the German friends, to say nothing about the French.... I mean, this is the reason why people start talking about some renewal in the thinking of socialism. To a big extent this renewal has to do with the way that the left-wing intelligentsia and the left-wing leadership were able [to come together]. So the [influence] of the European and American countries, that's a tremendous impact from the cultural point of view.
After that, then let's go to the second point of your question: What happened with Mr. Pinochet and the economic policies? The way to understand the legacy is after those people that were abroad perceived the functioning of the U.S., the functioning of the Nordic countries, the Socialists and the left wing had some sort of disdain for these Nordic countries, to say nothing about Social Democrats. Mr Mitterrand came to Chile in 1971. Nobody cared about him. The only one that cared about him was President Allende, who received him in the presidential palace and gave a dinner for him. In other words, what I'm trying to say is that the legacy of Pinochet I think is important in terms of making the necessary changes in the economic policy in Chile to open the economy. We used to have 170,000 textile workers, and you open the economy, and now you can import textiles from all over the world. Our industry came down from 170,000 to 30,000. It's a tremendous impact, but once you do that, now our industry is important ... [to] the U.S. so we [can] say, "Look, we already have paid the price of opening the economy, and we are in a small country; therefore we want to benefit from trade." So I would say that the legacy of Pinochet was that through the changes in economic policies, Chile was able to be prepared for a world that is going to be much more open.... I would say was that we were ready for what happened during the '90s after the fall of the Berlin Wall and after the changes in the global economy.
On Social Services and Public Goods
INTERVIEWER: This documentary is about a battle of ideas. It seems like the world over embraced free-market reform, and it seems like even you had certain ideas as a Social Democrat and now have embraced a lot of free-market reform. How do you view yourself within that battle?
RICARDO LAGOS: I don't agree much with that statement. Let me explain this way: It's very funny that with economics and with Mrs. Thatcher, even though they were extremely successful during the '80s, they never were able to catch the idea of social justice. The idea of social justice remains either closer to Democrats or to Labor in England.... What I say is this, because it seems to me that those market-oriented economies normally used to think that it is possible to solve problems through market solutions. This is not true. Let me explain. Since man lives in a community, there are some social services that have to be provided for the community. The first service, of course, is defense. Someone has to defend us from foreigners that attack us. Then you have social services, or public services, if you prefer, or public goods. In Chile there was a big discussion, like in the rest of Latin America, about education, and after 20 years, in 1920, we decided that every Chilean kid has to go to school at least four years. It was a tremendous effort for Chilean society. Four years of schooling -- that was a political decision taken by the citizens represented in Parliament, and they decided, look, we are going to have four years of compulsory schooling. Then another president says six years, another one says eight years, and now at the end of my term I will say 12 years. It means that we have an economy that can sustain 12 years of compulsory education for everybody. That's fine; that is a market decision. No, it's a citizen decision.
I was minister of public works, and as such I had to provide water in rural communities. Water in all communities is very easy: You have a company, and the company will charge you, and you have water. But what about rural areas? And what about in poor rural areas? To sum up that program, at least the state, the government, has to have spent something around $2,000 to $5,000 per family in order to provide them with drinkable water. Why is that? That is a citizen decision, not a market decision. This morning I had a radio interview. Normally about once a month I talk through the radio, and I got a question from somebody [in the audience from a city] in the Southern part of Chile. And she says, "Why in the hospital we don't have scanners?" She thinks that she is entitled to have a scanner in the same way that everyone thinks they are entitled to have an X-ray. If a physician says you have to take an X-ray, then you will have your X-ray. And what if he says you have to have a scanner, and the answer is "Sorry, madam, we don't have a scanner in this hospital"? So either you go to the Northern part of Chile, or you do not have a scanner. When are you going to make a decision that you are entitled to a scanner? And therefore to have a scanner is also a public good. You see what I mean? And that is a political decision. Why is there this long speech because I say look, when we decided 12 years of schooling, drinkable water in rural areas, or to have a scanner in a faraway hospital, citizens are making a decision? Water and services are going to be public and therefore have to be provided for everybody. Either you're going to pay for that, and if you're unable to pay you're going to receive a scholarship in the case of education, or you're going to receive a subsidy. Now, what is the real change? In the past, when you say four years schooling, the state built the schools; the state taught the professionals, trained the professors. The state did everything. In other words, to say "I want to have a public good" was equivalent to saying "I need the state to be able to provide the good itself." Do you see what I mean? ... Today you can have public and private schools, but I can give the subsidy for the private schools as we do in Chile. In Chile, 62 percent of all the students go to public schools; the others go to private. But of those private schools, the state pays subsidies so that the kids can go to school if it is private and you prefer to send your kid to a private school. But a decision that everybody has to be in school is a citizen decision. What is the difference? That I want to have a society defined by citizens. I don't want to have a society defined in the market by the consumers. All citizens are equal, one vote. All of us are consumers, but our voting capacity as consumers is quite different according to our income. Therefore, if we build a market society, we will have an unequal society. If we built a citizen society, I think that we can go in the direction more to a more egalitarian society.
Now after saying this, let me say this: It's one thing to say, "Look, we have a market economy." It's a different story to say, "I don't want to have a market society." I think it is really the big issue today in the world. It's true we are living in a global world where the market is allocating resources, but where to allocate resources in the area of public goods and services is something that remains in the domain of the citizen. Nobody will discuss that in connection with defense. It is not a question. Defense is a government decision. It's a government domain. And you see that, whenever you have some difficult questions in this area, the states are growing and growing and growing.... I think in the long run citizens are going to shape the societies where they want to live.
Public Services and the Role of the Market
INTERVIEWER: Do you believe that the term "socialist" used to describe you is an adequate term or a bad term?
RICARDO LAGOS: I think it's adequate. I mean, what "socialist" means is the very old aim of mankind to live in a world where you have some kind of social justice, where everybody has equal opportunities. Now, 200 or 300 years ago, the differences between the haves and the have-nots occurred over the ownership of land. One hundred and fifty years ago, the difference was what Mr. Marx used to say was the ownership of the means of production. How can you explain today the difference between the haves and the have-nots when you have a Mr. Bill Gates? Apparently today what explains the difference mostly is education, creativity. In other words, if you want to be socialist today, I would say that education is the most important. We have a tremendous challenge. All of our kids go to school, but the difference in quality in those schools is closely related to where they live, if they live in poor areas, middle-income areas, upper-income. And therefore, if you want to have equal opportunities in education, a socialist point of view is to give more resources to those areas where they lack resources. Let me give you a small example. I was in a campaign, and I went up to a small town where most of the people work in the fisheries. You know, we export salmon and things like that. And I told them: "Look, I have a grandson, and my grandson gets to my house and says, 'Hi, abuelo,' and then goes to play with the computer. And I wonder how many of your kids, when they go to see their grandfather, say, 'Hi there, abuelo,' and go to the computer." They look at each other and say, "None of us have a father with a computer." And I say: "Well, that is the difference. Because none of you has a computer in your house, we need to have a computer in your school; otherwise your kids are going to be not as well prepared as my grandson." This ... is not a market decision, that's all.
INTERVIEWER: So what role does the market play nowadays?
RICARDO LAGOS: The market would allocate resources. The market can -- this is very important -- the market also can provide those public services that society defines, and probably the market's more efficient to provide those. Let me give you an example. As the minister of public works, I had a tremendous challenge trying to build highways in Chile, and I discovered with the public money it was impossible to do, so I defined what kind of highways I wanted -- the design for a speed of so many miles per hour, etc. I did the whole thing, and then I said I'm going to charge tolls for the highway, and therefore, private money is welcome. And I built a business in Chile [to raise money for the highways and got]about US$6 billion. For Chile that's a lot of money [for] building highways, and now we have a change in our infrastructure, and we are using it. And many people say, "But how can you, a socialist, put private money in public roads?" And I say precisely because I am in a hurry. I need to build many highways if I want to get benefits of a Chile that is improving. But to do that, you know, I am using something that belongs to the financial and to the market area, but the service is public.
Dependency Theory as Applied to Chile
INTERVIEWER: Let's go back a bit in time. I understand that you had a chance to be with Fernando Henrique Cardoso [president of Brazil since 1995], and in those days there was a lot of talk of dependency theory. How do you view that theory after 30 years?
RICARDO LAGOS: Yes, we were good friends with Cardoso in the '60s. Cardoso came to Chile as a political exile from Brazil, and he was working at the Economic Commission for Latin America [ECLA] in the United Nations, and we used to work together in quite a number of areas. Now, the dependency theory was to some extent an explanation of the world as it was during those days, where you were "dependent" because you were providing primarily raw materials and you imported manufacturing goods, and then your terms of trade were very uneven vis-a-vis those countries that were purchasing the raw materials. The dependency theory plays a role, because to some extent, the economic policy that you can get from those [conditions] in theory was you have to build economic barriers very high; you have to protect yourself, not have a chain with the rest of the world. In other words, the dependency theory was an [outcome of] a particular stage of the world after the second world war when most of the trade concentrated between the Atlantic Ocean, the U.S., and continental Europe, and therefore most of the growth economy took place in another part of the hemisphere. And therefore we were "dependent" of what was going on in some other parts of the world, and we couldn't profit from the benefits of the technological changes because technological change was taking place there.
And here we were dependent also in another area. Let me put it this way: The U.S. economy, Japan, and Europe were complete economies in the sense that they produced consumer goods and capital goods, and the capital goods that they produced were capital goods produced for the factors of production that they have. They wanted to say they were doing this for productivity, and when we had to import this capital, we were dependent on the technology that was provided for the Northern part of the world and not for the Southern part. In other words, I would prefer to have a capital good more intensive in labor because I have too much labor, and in the North they wanted to have a capital goods intensive in capital and not in labor because the factors of production were very different. In that sense, we also were dependent because we were unable to produce our own capital goods. The difference is, I would say, that because we had a closed economy, we were in a situation to produce almost everything, which is nonsense. I mean, today I say, well, this is nonsense. When is Chile going to produce a car of our own? Never, because of the amount of [resources] you need to produce. You can produce cars if you're going to export, but not for the 15 million Chileans. We are going to have our own car; therefore, the dependency theory to a big extent had to deal with a world that doesn't exist anymore.
INTERVIEWER: Does that mean, for an audience that doesn't always handle these economic issues, that it meant that each country had to produce each product? Could you expand on that a bit?
RICARDO LAGOS: Oh, I don't think so. I don't think that each country had to produce each product. I think each country has to produce those products where they have a comparative advantage, and therefore, when you are living in a closed economy, then every country has to produce every product. When we are living in a more interconnected world, then we are going to produce wines, we are going to produce fish, we are going to export our fruits and some copper, and in addition to that we would like to provide some services, and if Chile has the consent of Latin America in Santiago we are happy with that. We are, because we are producing services for the rest of the Latin American countries, over the rest of the world. You see what I mean? Now the difference is that 30 years ago, because the theory was that you had to produce almost everything, and because the terms of trade were different between the more developed countries and the underdeveloped countries, then the question was, how are you going to change this? In other words, with one ton of copper I was able to buy two shirts. Later on, with one ton of copper I was able to buy only one shirt. So this means, you see, that even though the copper is exactly the same ton, the terms of trade change from one to two to one to one -- that's it.
The Advantages and Challenges of Free Markets
INTERVIEWER: Why did dependency theory go bankrupt? Why don't we hold on to that theory today in Latin America? Why did we move on?
RICARDO LAGOS: I think that primarily because the world changed in the sense that the we discovered that it was possible to have our own areas of export, if we do the things in the right way, to the rest of the world; that it's not going to be necessary to produce here in Chile products in every area, but we can export some, and we can import the others. And if we were to import, if we were going to have really free trade, we were going to improve our standard of living, and therefore it's cheaper for Chile to import a car from abroad provided that we are able to produce and to export with wine. The question is to discover what are the major areas where you have a more comparative advantage, and it seems to me this is what really makes a difference today. I'll give you a small example: I went to see a factory, and they were exporting fish, canned fish, to Malaysia and to England. In the case of Malaysia they have to add tomato with extremely hot chili. In the case of England the tomato was without chili but a little bit of oil, and somebody from England came every six months just to make sure that that can was done in the right way, according to the British taste. Our ocean changed, and suddenly the fish that we were able to can and export abroad began to disappear, and this entrepreneur decided then to import this fish from Ecuador. [But] we were not only exporting fish, but also the know-how: How are you going to export the fish that is right for the taste of the British or the Malaysian friends?
Second example: We produce the coho salmon... and I discovered that we were able to export the coho where you put it in ice and you take out the red part of the coho to sell to the Japanese friends. They think its red parts do some important effect on the human body, and they sell to the Japanese, and the rest of the coho is sent to Paris. The thing is that the moment you take the coho from the ocean till the moment that it is in the French restaurant in Paris has to take no more than 30 hours, and we do that, and our workers start taking out the red part of the salmon according to the flight of our friends from Santiago to Paris. Okay, what are you exporting, coho salmon, or you are exporting the know-how for being able to send all things in 30 hours? I wonder if I can say this, but the salmon that we produce is different if the salmon is going to America or if the salmon is going to Japan. And we feed the salmon with different ingredients in order to have a more orange or pink Oriental salmon or a more yellow salmon according to the taste of the consumer. [That allows us] to say: "Look, if we are able to do that, then this means that we profit from trade and we increase our standard of living. If we are able to sell our salmon to our friends in Paris ... then we may import some [items] from Paris, okay?" And that, I think, is the new world that is facing us in the 21st century.
And now the question is once the country's growing, how are we going to make sure that that growth ... improves the standard of living of the worker ... who is doing his job in the Southern part of Chile to export the salmon? And this means then that we need to have unemployment insurance. It means that we need to have some social security, to have some kind of pension system, etc. This is a tremendous fight, because not everybody will agree with that. Somebody will say the market will take care, and I say that's not my point of view. I'm in favor of the market in order to export coho, but I also want to know that worker has unemployment insurance. In a modern world you need to have flexible legislation in the area of labor. I think that some kind of unemployment compensation is essential, and this is really the difference between those that think that the market is going to solve everything and those that think that some kind of social security is going to be essential. Now of course I understand the discussion of what's happening in social security in Europe, that in Europe the flexible legislation is not much higher that the U.S., etc. But some middle of the road has to be found if we are going to live in a better society.
Bridging the Income Gap Through Education
INTERVIEWER: And with that very argument there are so many people who say that yes, free markets have improved the standard of life for everybody, but yet inequality is as large as it's always been. So the rich got richer and the poor got richer, but the gap hasn't been closed.
RICARDO LAGOS: I think that the only way in the long run is education. That's what really makes the difference. It seems to me that the correlation between education and income is very high. Therefore, what normally you have is that in the short run -- I mean short run, 10 years -- you are going to have a more uneven distribution of income. ... What I am trying to say is look, it seems to me that you can improve distribution of income through taxes and expenditures; that's very easy. I tax the higher income, and I provide goods to the poor. You can do that up to a point. After that you have to do the hard work, and the hard work is education, to invest in human capital, and that's the only way. And the differences in income are going to be much smaller when you go to Scandinavian countries than when you go to some other countries in Europe, but this is primarily because of education, and also because of the old discussion that you had in the first part of this interview of who is going to make a decision about public goods and services, because if you have public goods, and public goods will provide you at least a minimum that is provided and guaranteed, then it's much easier to discuss the position of income after you know that you have education for your kids, you have health for the mum and dad, you are old and you have a good pension when you are going to retire. And this is essential in a modern society. If you don't have those things, the position of income is going to be not only uneven but extremely unjust. Now, always you will have differences in income; that's normal. Fortunately not all of us are the same -- we are different as human beings.
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