Economic Freedom and Market Reforms in Latin America With Sebastian Edwards

- This is The Capitalism and Freedom in the 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 Jon Hartley, 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, 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 his chief economists of the Caribbean, in Latin America at the World Bank. He is 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 wanna 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?

- Well, Chile is 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. Inflation was 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 Latin America. And in particular, it looked very bad relative to Argentina. And we'll talk some more about Argentina, I think the, the neighbor to, to the east on the other side of the Andes. And so I, I come from a generation where there was a, a lot of concern about the future of Chile, and there was a sense that economics was something that had to be fixed one way or another. And that's why I decided to, to do, to do economics. And during the first part of my studies, there was a socialist experiment of Salvador, and things went from bad to worse. And I, what, what I think John is very interesting is that now here at Hoover, there is this interest. Victor Davis Hanson and and Neil Ferguson have been writing about what socialist was really about because there is some interest among young people. And after that, the coup came, the Pino Sheku, and couple of years later I did go to Chicago. Chicago was extremely exciting at the time, exciting. 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, 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 Freeman 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 often. I, so this is, this is very interesting. I, 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, who took over his monetary economics sequence. And, and the workshop was Robert Lucas, who won the Nobel Prize a few years later. And he re Lucas took Friedman's views on the trade off between inflation and unemployment, the Phillips curve, and then revolutionized macroeconomics with rational expectations with Tom sart and, and, and, and, and others. Soman left. But we got Lucas and it was extremely, like outta this world. Everything was new. The level of mathematics was very high. It was, we struggled a little bit with that, but I got to meet Milton when he and I were colleagues in the Council of Economic Advisors of Governor Schwarzenegger, which was another of my, in, 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 Schultz and Milton was a member and a lot of people here from, from from Hoover, John Taylor, Eddie Lazier. 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 what a great Hoover story. I mean, you know, between Milton Friedman and George Schultz, certainly too of the, you know, the most famous names that, that have come through through Hoover. I wanna talk, I, I guess also on the, the policies 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?

- It did. So I, so my career, undergrad economics in Chile, which 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 in the US and

- This is at Pontifical University in

- She, the Catholic University, right?

- This is where also many of the,

- The Chicago undergrad

- Chicago

- Boys - Went as undergrads and they would come to

- Exactly

- Chicago for their PhD,

- Right? So the Chicago boys brand name has, it's, it's Ancor 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 as a young academic. Then at UCLA, I got tenure, then I became a full professor, and then I was recruited by the World Bank and I took leave from UCLA and I went to the World Bank in 1991 or 92, I forget. And this was particularly unique because the World Bank had a number of new members, and those members came from Eastern Europe. So the World Bank was moving away, or, or or expanding its purview from emerging markets, developing countries 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 on how to do market oriented reforms in Latin America, and what could be learned from that that was useful for 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 is being privatized, but it's very 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 were working. And, and, and, and something that is coming up now back with this emphasis on industrial policy, people at the bank that worked on East Asia were also trying to convince the, the, the former Soviet countries that that was the way to go. More, more, more government intervention. So one of the things that I did at the bank, which was very interesting, was, 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 'cause it involves dynamics was something that was, we were trying to, to deal with. And so I have good anecdotes about that.

- So, so I wanna transition a bit to Chile and really wanna talk about 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 Pinoche took power from Ida in 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 Latin America?

- Yeah, so let, let, 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 represent, and really the country that people in Latin America look up to in terms of all sorts of policies and so on. So in 1974, the CO is in 73, Peter Rashad takes over in 73, he deposes President AE 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. Wow. 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 here. But everything, and in 2001, Chile surpassed Argentina in a number of indicators, including life expectancy, nutrition, social indicators, and income per capita. And in terms of the, of the, the, the, the Chilean view of themselves, surpassing Argentina was very, very important. So the ref, 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 boy policies and they actually 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 attractive and seductive than success. And so the, the very important step in the history of Chile is that when the democracy came back, the new economic team, which had been very critical of the Chicago wars in the early years, realized, no, these guys really were able to transform this country. We're gonna stick with this, these policies.

- And, and I mean, just for those that aren't familiar with what market reforms, what Congress 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, you know, both below the market price, right? You know, were there were the fiscal reforms, were there other things that were part of this?

- Yeah, so, so that's a great question. 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 Soviet style, what is as known as real socialism

- Where government wants to, you know,

- Control industries. But no, the government wants to own all the means of production. Yes, own everything. So

- Everything is nationalized,

- Everything is nationalized exp ated confiscated. So the first totally

- Different from, you know, the sort of Nordic welfare

- State - Idea of, you know, generally free markets.

- So that's why we have to, we have to make a distinction between what the East Germans started calling in 1971 or so, real socialism real in the sense that it's the socialism that really existed on the other side of, of the, of the wall, of the Berlin wall. Okay. And not, not just having the Empire State. And, and, and we have to, so real socialism is Soviet type Cuba, China at the time, not now, Vietnam at the time, not now. And it's not social democracy, welfare state that's different like you see in

- The Nordics or,

- Right. So it's not Sweden, Norway, or Denmark. So what the market, so Chile had 3000 prices were controlled by the government, interest rates were controlled, inflation was, depending on how you measure it, but about a thousand percent per year credit was allocated by bureaucrats. There had been about 300 large manufacturing firms that had been nationalized. And the corporate mines that where joint ventures within the Chilean government and large American multinationals, very famous companies, Anaconda Copper and Icut Copper, they were nationalized as well. So everything, or, or, or, or very vast number of firms were belonged to the state. Everything was controlled. And what the market reforms mean is to undo all of that and go back to some level of market operation. And whether Chicago boys did, is that they said, no, we're not gonna free 500 prices out of the 3000. We're gonna free them all, every single one of 'em. And we are going to allow the market to determine interest rates and we're gonna privatize banks, banks in Chile, were privatized early, so, but we're gonna 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 gonna assess the risk, assess how profitable those investment projects are, and they're gonna 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. And people around the world 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 outta hand. When it gets outta hand, it's very hard to bring it back down. But so, and after some mistakes that were, were, were, were done, Chile started growing, and then it was a, a, a true miracle and, and the mechanics of moving a country from being totally government controlled into being one of the freest markets in the world, that's very challenging and very difficult. And it was done in a very good way.

- So I think it, it's fair to say that, you know, this is an example market reforms causing growth. And I, I certainly subscribe to the idea that market reforms cause growth. I think it's something that I think a lot of even political economists today have sort of, sort of forgotten since the global financial crisis. When, when people talk about, say neo neoliberalism in Latin America, what do they usually get wrong in those critics? I mean, there, there was this big backlash against markets in Chile that was led by Gabriel Bork, who was elected in 2021, attempted to change the constitution, failed. And just recently was, you know, is now out of office with a cast now taking the, the reigns and, and you know, not a, a reversion from socialism, you know, what do you think that upset, sort of led by boric, you know, several years ago now reflected? Was that something sort of those 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 in your constitutional turmoil and what changed there? And was that sort of a flash in the pan? And are we now sort of back to sort of what you could call free market sort of economic success in your mind?

- Yeah, so one of the questions that you asked me when we started this conversation was what motivated me to write my book, the, the Chile project 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 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, and this unhappiness? And they, they, they elect this far left president Gabriel Borich. And I decided, I'm gonna tell the story of Chile in, in this book, starting from how these economists, the Chicago boys were trained, how they went to Chicago, how Milton Friedman influenced them, and Al Harberger and the whole Chicago faculty. And one of the things that happens is that there, there were several things. One is that the rate of growth of Chile. So, 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 over regulations 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 decided to declare victory in the battle of ideas and then went home basically to put it in a sort of like a simple 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 ramche and they started studying the radical environmentalist, and they 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, 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 make, make, make things explode. And that's what, what happened in 2019. And there were demonstrations, protest, riots, and then the, the, the political class said, well, well, let's try to this by rewriting the social contract. And a way of doing that is writing a new constitution. And that did, it was attempted. We can talk about the details, but 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% in favor. So the country's now back trying to find it's, it's, it's footing how to, to, to move, to move forward and, and go back to faster growth. That's, that's the challenge that the new administration is facing.

- And, and I guess for the viewers that, that aren't familiar, I mean, at some level that you bill and 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 Pinoche.

- Well, he spent 45 minutes yes, with Pinoche. He was in Chile maybe for five days. I talked to Milton Extensively on this in Sacramento. There were two topics that I tried to get from him. One was the abrogation of the gold clause in 1933 by FDR. And he, he, he has, he covers that in his monetary history of the United States. And I wrote a book about that. And the other topic was 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 was, has been taken by the left as inhumane, a way of, of, of, of creating poverty and so on. So where shock

- Therapy comes from

- Identity shock therapy, right? Shock therapy. So Milton said in, and, and he gave examples very interesting how when in Germany, I, our neighborhood freed prices, they did it on a Friday night. And it was a long weekend so that the occupying forces, the, in particular the Brits who are now labor was in Germany, could not turn the turn that back and said, and, 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 frauds for, for Milton. He has a lot in his book, joined with Rose, two lucky people, the autobiography. He has a very long appendix on Chile, which otherwise would've 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 minutes episode that takes like 30 pages of the book.

- Oh wow. You know, Milton Friedman spent much of his, you know, later years here, you know, from 1976 to his death in 2006. I, I think many of the viewers I'm sure familiar with Milton Friedman and, you know, some of his work and, and, and of course his famous involvement in, in Chile. Talk to us a little bit about Al Harberger. I feel like Al Harberger is less well known, but perhaps even more important in this story in terms of training these economists who are coming from Chile, you know, had done their undergrad at, you know, Catholic University of Chile,

- Right? So, so Har is Harberger is the real father of the Chicago boys. And in the meeting of the Monte Pean society here at Hoover a few years ago, George Schultz tells a story and he says he's the godfather, or I forget the term that, that he uses. So everything goes back to TW Schutz. Theodore Schutz, who was the chairman of the economics department at Chicago for a long time,

- He was an agricultural

- Comm, agricultural economies. He got the Nobel Prize, maybe 1979. I was assure that Chicago, when Ted got the Nobel Prize, and Ted was advising a number of agriculture of Latin American countries in agriculture. And he came to the, this is after the war, he came to the conclusion of early fifties through a, the, the predecessor of U-S-A-I-D, which doesn't exist anymore now. So it was called ICA and Ted was advising agricultural agriculture ministry, and he concluded that it will never work if only agriculture was addressed, that the Latin American countries needed overall good policy. Mm. Okay. So if he gave market oriented advice for agriculture and the central bank behaved in the wrong way, and, and the, 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 economists work. And so he, he, he found someone at ICAA Princeton grad who was a, a or an official at, at, at ICA, pat Patterson, who agreed with him. And Patterson was in Paraguay, but he was transferred to Chile. So they picked, we tried 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 and they would be, so these would be like the grandchildren of the, of Chicago. They, they, they did not go to Chicago. They were trained by, by Chicago. And that's a story that I tell in the book, right? And so Ted Schulz 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. So he brings a very, very 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 the, the medium of exchange. So the money supply increased inflation in Spain. So Earl spoke Spanish, he rottenberg Cy Rottenberg, Simon Rottenberg, who had worked in Puerto Rico and knew a lot about baseball. So he was a baseball expert. And if you, if you are a baseball expert, you need to go to the Dr the me Republic in Puerto Rico in, at the time, Cuba. So he spoke and, and Harberger a young assistant professor, he also was proficient in Spanish. Oh. 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, and he, 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, he's still alive. He's 101 years old. That's

- Amazing.

- And I, to my kids, he's like, like the grandfather because my kids' grandparents were in Chile, so they didn't have a, a grandfather figure. And al became the, the, the grandfather figure. And so he's the real father of the Chicago boys, a a, a real giant in public finance and development economics,

- Well known for the Har worker triangles.

- Exactly.

- The weight loss, you know, triangles.

- Exactly. - Trying to measure inefficiency in economy, I think, you know, it's basically a economic sort of one-on-one, you know.

- So I, intro textbook topic, yeah, I was, I I I traveled around the world with al all over. We went, we spent time in Indonesia, spent time all over Central America. We went to the Dominican Republic, we were hired by the arch bishop of the Dominican Republic at that point when there was a big rou 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 gonna hire Professor Harberger. So I went with Al to the Dominican Republic, we went to Russia, we all over the world. Africa.

- Amazing. That's fantastic. And yeah, I, 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, it's

- Big, bigger, and he's, he's also a nice guy. So the combination of very bright and, and, and great economists with being truly generous and nice, it's in short supply. Absolutely. So that's, that's great. Great guy.

- And, and certainly, you know, you know, under underappreciated and I think could, could take a lot more credit for, for all these things. If, if you wanted to, I wanna pivot or zoom out a a bit more from, from Chile to Latin America, just more broadly, you know, why, just from a, a development, economic growth standpoint, why is Latin America in your mind, struggled so persistently with inflation, fiscal crises, you know, socialism, political economy issues and economic growth overall, say compared to Europe, the United States, Canada, 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? So there's a lot of, to, a lot of it has to do with culture and institutions. So there is a view that, so let me get get to the fact. So mid 18th century, the 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, 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 cultural institutional difference. And that has to do with Spain and England. And this theory, which is a little bit sort of maybe elaboration of Max Weber's theory, of the role of Protestantism in, in, in, in helping the big jump of, of capitalism is that North America was very decentralized. And Alexis Tokyo, democracy in America, one of the things that he was impressed by is that every town had its own sheriff, it elected its officials. It's, it was decentralized. There was no central power. And Latin America was exactly the opposite. And that 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 armed of the counter reformation. And in order to protect the Pope, they had to centralize things because otherwise another Luther could come up, right? Or Henry vii. So they, everything was highly centralized and you could not in Latin America or in the Spanish colonists 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 governing 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 Latin America is, as you go, especially to the south, mining is very important. And in order to do to, to, to do serious mining, you need a different type of economic organization than if you have agriculture in particular in the plains of the US where you can have family owned 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, the, the third guy is the,

- And the the lion, the tin man. And what is it? The Scarecrow. The

- Scarecrow, okay. So there, there were basically no forms in Latin America that were family owned with only three hired helps. They, you had to have 7,500 Indians, right? And so the property, so everything and then bad policies and the policies in Latin America, again, because of the 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 told the story of Chile that is trying to get out of the pack. And, 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. Uruguay, although it has a center left government, it's always very reasonable. Peru is a very strange country where the, the head of state is replaced at risk 10 months or so. And the vast majority of the, of, of previous ones are either in jail or have been prosecuted, but the economy continues to function. Inflation is very low. So I think that that, that Latin America maybe is turning for the Ecuador is moving in the right direction. Columbia is a concern. Mexico's a concern, Venezuela, we hope that it, it will improve.

- So I'm totally with you on, I think there, there's some story, you know, perhaps about institutions. I mean, this is part of the story that Aal Glu and Robinson tell and why nations fail that.

- Well, but Douglas North told the story before that, and Adam Smith before that, so chapter part four, chapter seven of the Wealth of Nations. It's titled on the Colonies and it's everything. And at the end that there's a beautiful passage where Adam Smith sort of ranks the colonial forces, the colonial, the, the, the, and he says the Brits are the, 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. Mm. So the civil, civil service created in India, and the bridges do that, and the Dutch are completely the, don't create any local institutions 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, and, and you know, I I think, you know, the inclusive versus extractive institutions nomenclature of AAL Glenn 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, you know, maybe the sort of framing of Smith versus, you know, more, more illiberal ones. And you know, slavery, not only is it extractive, but I it's 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 very much be local, you know, two people can contract together. Law can kind of evolve, adapt to technology as it comes along. Whereas, you know, civil law, you know, you're dealing with, you know,

- Yeah. So Latin America is all Napoleonic code.

- Exactly.

- Right? So everything comes from Napoleon and France,

- Which is

- Right. And, and, 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. It's a parliamentary democracy. The parliamentary democracies are in the Caribbean because come from England. So, and 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. But it's interesting that the scaffolding is from Napoleon, it's French, and the Constitution is American. And IIII haven't talked to historians that if they think that this is a sort of a lethal cocktail.

- Yeah, certainly. I mean, 'cause you know, certainly, you know, you've got the, you know, the other issue of I guess separation of power as well. I mean, the US sort of, you is fortunate, you know, the, the one downside, you know, parliamentary systems is, you know, you don't have many separations of, of, of power. So you don't, you don't have many powers. It's very much, you know, parliament is supreme correct in the sense that, you know, one, you know, if you get a simple majority in a parliament, you know, they can change everything and you can, if you win parliament back, you can

- Change it all back. Well that's, you know, that, that's, that's what mad, that's was Maduro's argument to stay in power for 13 years. He said Margaret Thatcher stayed in power for, I don't know, 10 years. And Billy Brandon, he said, these guys in Europe do it all the time. Why cannot I stay on forever? And now he's he's not there anymore.

- Yes, yes. So I, I wanna sort of jump into some of that. So, I mean, it seems like we see we've had some sort of a reversion to free market, more free market Latin American,

- Not everywhere. Mexico is a concern. Yes. And Columbia, certainly I'm, I'm very worried about

- Columbia, but I'm just saying compared to sort of, I feel like past decades where we've had, you know, pink tides of, of, you know, new sort of, you know, leftist more anti-market candidates, you know, now we've got obviously heavier Malay in Argentina. We've got cast in Chile, PAs in Bolivia, Fernandez and Costa Rica, Asura and Honduras, possibly Fujimori and, and Peru. And, you know, it's, it's possible that Lula could, you know, be out in, in Brazil and you know, Bolsonaro sun could be in, in power soon as well. 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 gonna be short-lived that can break that political

- Economy or

- Barrier?

- I, I hope it brings back economic growth. 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, Jose Antonio cast, it's only been in power for about two months now. And they're trying to do too much too fast. And although the left is in complete disarray, 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 you cannot do too much at the same simultaneously. Although one of the anecdotes that I was 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 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 VLA Klaus, who then became the Prime minister and then the president of the Czech Republic. And there was a reception, and it was with there a long line of all US American economists, and he was shaking the hands of everywhere. And when it was my turn, I said, I'm Sebastian Edward Edwards. And he said, oh, you are the sequencing professor. And I was very happy. I mean, I was honored, said, oh, Mr. Ministry, 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 sequencing. 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 in, so I am now criticizing or questioning what Mr. Cast is doing too much, too fast. On the other hand, I do remember that Vcl 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 in particular, I think that deregulation is the key. And reg regulatory laws have creeped 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 lithium, new lithium project. Chile has the best winds in the world in Patagonia for wind e energy. It takes 12 to 15 years to get the approvals has the best sun in the world. In the atta caama desert for solar takes 15 years to get approvals. 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 to three years, then they will be a boom in terms of investment and that, but, but, but they have to really do it. And the, 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.

- So countries like Chile and Uruguay generally perform better than Argentina and Venezuela, I think it's fair to say. And you know, due to, you know, these market reforms and you know, pursuing more sort of economic freedom in their policies, 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, you know, what in your mind, you know, caused their sort of long run dec decline, you know, you know, socialists took over and you know, in some cases, you know, were were actually elected and, and, and, and certainly changed very quickly, you know, thinking to say, you know, Venezuela with Maduro gone and Venezuela and Malay at the Helman, Venezuela, sorry, with Malay at the Helman in Argentina, is there hope for Venezuela and Argentina in your mind? Could Argentina, Venezuela realistically become a high growth set of economies? Again,

- I am very optimistic about Argentina and I think that the work that Minister Federico Zenger 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 and he's unearthed the quote unquote rationale behind many of those regulations. And it is very difficult to understand why they were put in place at all ever. And so he's moving in the right direction. And I think that Argentina has a potential that is amazing. Again, the question is, it's not easy to bring down 200% inflation to 2%. And it's like a saying that we have in Latin America. I think we have it here too. You cannot make eggs an omelet without breaking some eggs. You have to break the eggs, otherwise the omelet will never be made. I, I, I am, I am hopeful about, about Argentina and I think that there is a generational contrary to other countries. There's a generational thing in Argentina where the young people are very pro millet. So I I I think that, that, that could work Venezuela, I think it's more difficult, but it's doable now. Del Rodriguez has to really control and, and, and, and clean things up before there is election. And, and I, I think that Secretary Rub has said that the US is pushing for elections next year. I hope that that works out and that now one thing about Venezuela is that the opposition until recently had been so fragmented or the, the, the pro-democracy forces, I hope that they unite and, and either behind the Maria Corina or or behind someone else.

- And I mean, it's, it's an interesting, you know, situation too. You know, certainly, you know, who controls the military matters and, you know, I mean the US is, you know, it takes time you to make these things happen. So, so I I I think that the US approach being careful is, is I think, more thoughtful than maybe some people.

- Yeah, no, I think, I think I, I I think that they're doing the right thing. 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 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 $1 50 cents go to corruption, they say out of $2, one goes to garage, which is the same. Right.

- I, I wanna talk just a bit, you know, close here a little bit, talking beyond Latin America and talking about, you know, markets, you know, freedom market, market economies at at large, you know, some might call neoliberalism. You, you've written a lot on inflation crises, you know, during, I wanna talk just a little bit about inflation. You know, that we've recently had this inflation surge during the Biden years in, in, you know, the post pandemic years. 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, I guess macro mistakes of, you know, there's certainly, there was a ton of fiscal spending during this period, you know, how important do you think is, you know, are central banks and preventing inflationary spirals? It seems like there's an argument, you know, some people argue that, 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. It seems that, you know, Malay in Argentina is largely que inflation, which is fiscal reforms. And 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, and, and hence maybe, you know, Latin America is starting to, to learn this lesson, you know, Malay and, and elsewhere. I mean, many other countries have, I I feel like gotten inflation un under control over the years, you know, Chile, Brazil and others. I think Latin America's doing much better in, in in that regard. But I'm just curious what you think about, you know, this early 2020s inflation surge. Are we learning or, or are we unlearning old lessons that, you know, fiscal policy matters for inflation?

- Well, I, I, I think that the whole issue of fiscal dominance being in many cases at the basis of inflation is something that at least some of us have always had in mind. And I think that now that we are at the Hoover Monetary Policy Conference, I've been coming to this event for a number of years now, and it's something that everyone who comes here in including the incoming chair of the Federal Reserve, Kevin Walsh, have always had in the Raiders. And I think that also other people at, at, at who are John Cochran and so on, have now insisted that there is a fiscal route to inflation. I think that that lesson has been learned. And the problem is that it's hard to to know what the thresholds are after, after, because it's very non-linear. It's not that if you do a little more, it's going to be proportional. And I think that probably what happened in the 2020s had to do, had to do with that. I think that the, the, the lessons are learned at the end. The, the, the thing that I want to policy makers to understand is that, to put it in a technical terms, and I'll try to explain it's R minus G since the interest rate minus growth. And 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 very agile regulations, making sure that we don't kill investment projects and so on, and the having a fiscal side that is healthy and sustainable, it's a way to go. Now, every time you say that, in a group of economists that have different persuasion, 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 when the euro was being discussed, we all thought we as 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.

- It informed the master treaty and

- Fiscal rules masters, ma masters, if you had a country that had more than 60 could not join and the Europe and they had to do something about it and Greece and had to reduce their debt. And then we had Lehman, the, the, the Lehman crisis, then they went to 90 and then the pandemic, and now we're at 110 or so. And we haven't collab, we haven't disappeared, but we are worried, but we haven't disappeared. And the the, what is interesting is that we really don't know what the number is at this conference. We're gonna have Ken OV 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

- Carmen

- With

- Carmen Raynard. Yeah.

- This time is different. That's

- Right.

- It's, it's fascinating how the, I don't know if it's fair to say that governments have become, I guess complacent about, you know, public debt. But it's amazing too, just how, you know, we haven't, it doesn't seem like we've come close to hitting crises quite yet. I mean, you could argue maybe the inflation.

- Yeah, I am concerned. But I I, but I think that the solution that, lemme 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 is getting larger and larger. And so yes, let's worry about the debt, let's bring the public's deficits under control. But let's not forget about growth.

- I I couldn't agree with you more. I mean, 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, I'd say many Latin American countries and, and Japan on a growth standpoint, GB growth standpoint overall in 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 yes. Book, right? So,

- So

- The

- Stagnation thesis in general.

- So

- It's,

- But we see what AI does. Absolutely. 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, the LLMs are improving. It's week by week. And I use, now I, I still have my ra a PhD student at UCLA. He was a great guy, 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 RA called Claude doing a lot of work for me.

- Yeah, Claude Co. And it's, it's amazing just, yeah, all these advances in AI 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 mean obviously there, there are, I think, you know, some, 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 opt as pessimistic and worried as say Darren as ammo. I think that he, he is, he's way too pessimistic and too concerned about what's going on. I'm, I'm more, more optimistic.

- And, and just for my last question for you, you know, in your mind, you know, have, have, you know, thinking about the Washington consensus, a lot of those ideas yes. Some people sort of also label as neoliberalism have those sort of free market ideas in your mind. I mean they've, I think they sort of, it's fair to say that they took a pretty big beating in the sort of general public sphere after the 2008 financial crisis and, and, and you, the rise of sort of this democratic socialists in the us you know, you have labor, you know, echoing those concerns in the uk you know, this massive surge in interest in inequality as being this major social issue of our time. 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 yeah, this way in Latin America, certainly, you know, we, we've had, you know, president Trump in, in the us you know, there's certainly some other examples as well out there. I'm curious, what, what do you think about this?

- Yeah, so let me, there are two things we really do 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, in the, in a society almost is very important. 'cause Michael Sandel said he built sort of a strawman 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, ev 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 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 wok. And I think that what is going on now is that the pendulum moved way too far into identity politics. And what we are seeing now is we're seeing it in the us we're seeing I think almost every, everywhere that, that, that, that people got fed up with that. And so we are looking for a more reasonable common sense solution to problems. And I think that we're seeing that in the us we are seeing that in Europe, in, in spite of the differences between the, the, the, the, the two parts of those two parts of the world. And we are seeing it in Latin America. And I think that millet, he has a very personal way of phrasing things, but, but it's, it's bringing back some common sense and, and I think that that, that, that is good for society, it's good for, for the people. And, and, and, and I am hopeful that combination of less woke and identity politics, it's going to bring us to, to, to the center Now. Interesting question. Will Manami do well in, in New York? I don't think so, but we'll see.

- Absolutely. Well, it's a real honor to have you on Sebastian, really wanna thank you for coming on the show,

- John. Thanks for having me.

- This is the Capitalism and Freedom and 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 Hartley, your host. Thank you so much for joining us.