Not Just Another Recession
Why the Global Economy May Never Be the Same
Since its return to democracy in 1990, Chile has been heralded as Latin America’s exception. It has avoided the economic crises, populist governments, deep-seated corruption, and bitter social conflicts that have plagued other countries in the region. Instead, over the last 30 years Chile has boasted sound macroeconomic management; placid, stable, and almost boring politics; and generally restrained and strait-laced social manners.
Such steadfastness has served the nation well. Once one of the poorest countries in Latin America, in 2012 Chile moved into the World Bank’s high-income bracket, making it one of only two nations in the region to break out of the so-called middle-income trap. Today Chile outranks its Latin American peers on measures of competitiveness as well as on human development indicators such as infant mortality and life expectancy. These successes, based on years of consistent and often rapid economic growth, have made Chile into a model for Latin American success.
Yet over the last half decade, this tranquillity has come to an end, and the economic and social consensus of the postauthoritarian years has crumbled. In the capital, Santiago, it is now common for hundreds of thousands of protesters to fill government plazas and block the city’s main avenues. Miners, longshoremen, air traffic controllers, students, and public employees repeatedly shut down operations, leave classrooms, and walk off the job. And Chile’s prosecutors and courts have upended its previously clean image by uncovering collusion and corruption among the economic and political elite.
The national explosion of discontent reflects the country’s deep-seated and persistent inequality. In Santiago, only a lucky few live and work in the glittering high-rises that grace the capital’s tony “Sanhattan” area, with the majority of the population still relegated to shantytowns surrounding the city. Despite an impressive national per capita income of over $20,000, 75 percent of the population earns less than $700 a month, making it hard for them to meet even basic needs. Chile’s GINI coefficient, a common measure of inequality, is unchanged since the mid-1980s, and today the country outranks Rwanda and the Republic of the Congo as one of the most unequal nations in the world.
Whoever wins the upcoming election will need to move the country away from its dependence on copper.
Not only is the present unequal, but the current educational system means the future likely will be, too. Chile has made great strides in getting its youth into schools—90 percent now graduate from high school, and two-thirds enter university. Yet this success, paradoxically, only exacerbates embedded divides. The wealthy attend top-notch schools, while the poor receive a subpar education. As a result, the elite maintain their tight grip on admissions to the nation’s best universities—Universidad de Chile, Pontificia Universidad Católica de Chile, and Universidad de Concepción—setting them up for professional success. The less well-off overpay for mediocre private universities, where they struggle to complete their degree requirements and are left deep in student debt. According to the World Bank, participants in Chile’s largest student loan program have an average debt to annual income ratio of 174 percent; in the United States, the average is only 57 percent. And even those from the lower classes who do graduate are often overlooked in the job market in favor of the well-heeled and well-connected.
Chile’s labor market does little to lessen such structural inequalities. Job growth has been sluggish, and wage growth has lagged behind GDP. Chile’s once strong unions have atrophied under laws that date from the rule of former dictator Augusto Pinochet, limiting their reach and influence, particularly when compared with their counterparts in neighboring countries. Instead, Chile has seen a rise in self-employment—some 20 percent of the formal labor force now work as independent contractors or for themselves, sacrificing the social security protections or benefits of salaried employees. And the country’s lack of dynamism has hit the young the hardest: among Chileans 15 through 24 years of age, one in six is unemployed, far above the national unemployment rate of seven percent.
Finally, for too many, old age now means penury. In 1981, Chile privatized its social security system, moving from a public pay-as-you-go system similar to U.S. Social Security, which gives retirees a set monthly amount for the remainder of their lives, to a privately managed defined contribution system more like a 401(k) program, in which payroll taxes go into an individual account that the worker receives upon retirement. Although the privatization of pensions helped expand Chile’s capital markets and increase investment, thereby boosting overall economic growth, the system has failed the nation’s elderly. Some 60 percent of the work force hasn’t saved enough in their individual accounts to survive in retirement. The average monthly draw is $300, which is significantly less than the minimum wage and insufficient for covering basic needs. The government has stepped in to help the most destitute, providing $155 per month to hundreds of thousands of those without any pension savings. But many more elderly Chileans need assistance.
Not only has inequality persisted, but Chile’s political institutions have actively hampered efforts to address it. The Pinochet-era constitution created a unique “binomial” electoral system that lasted until 2015. Each district had two congressional seats; the party with the most votes got the first seat and the party with the next highest tally got the second, unless the winner garnered over two-thirds of the vote, which in practice rarely happens. These rules hurt small parties and encouraged the emergence of two large coalitions along ideological lines: the center-left New Majority (formerly Concertación) and the right-wing Chile Vamos (formerly Alianza). The electoral system also meant that despite the more progressive leanings of the population, the right almost always won a seat in each district, bringing the two sides close to legislative parity. Add in the overrepresentation of rural constituencies and the presence within the legislature of designated “senators for life”—many of them former military officers, including Pinochet himself until 2002—and the system worked to enshrine a conservative status quo.
Despite having a legislative majority since her landslide reelection in 2013, Chile’s current president, the leftist Michelle Bachelet, hasn’t been able to fix things. Her 2015 education reform expanded scholarships and other financial aid but stopped far short of student demands to change the underlying system. Her labor reforms foundered in the courts and later in the National Congress. A 2014 tax reform angered the private sector, which criticized the hike in corporate rates and removal of former exemptions as costly for economic growth. And Bachelet’s promises to reform the pension system seem unlikely to be fulfilled, given her government’s ongoing corruption scandals and low approval ratings.
Not only has inequality persisted, but Chile’s political institutions have actively hampered efforts to address it.
Bachelet’s biggest achievement has been political reform. A new proportional representation system, introduced in 2015, both reduces the number of districts and expands the number of seats. It should empower smaller parties and bring new voices to the political arena. Electoral laws now automatically register Chileans over 18, increasing the number and lowering the age of potential voters.
With presidential elections in November, these new political rules are about to be tested. Already, Chile is in campaign mode. Former conservative President Sebastián Piñera is currently the leader of the pack, promising a market-driven approach to boost economic growth and jobs. He is followed by a well-known, and more left-wing, former TV news anchor, Alejandro Guillier, who talks of a more active role for the state and deeper social reforms. Election watchers expect that other candidates may emerge from both the left and the right, but so far no one aside from Piñera and Guillier has garnered more than single-digit support.
Whoever wins the upcoming election will need to find a way to revive Chile’s impressive track record of growth—an average of five percent per year for 30 years—while also ensuring that more people benefit. This will involve further reforms. But more fundamentally, it will require moving the country away from its dependence on copper.
Metal has fueled Chile’s economy for decades: the country now supplies roughly one-third of the world’s copper. Successive governments have managed this cash cow quite admirably, especially in contrast to some of their resource-rich South American neighbors. Still, copper follows the boom-and-bust cycle of other commodities. When copper prices are high, the resulting boom pushes up Chile’s currency, undercutting local producers and exporters. When prices drop, the busts that follow have negative effects throughout the economy.
The copper industry, moreover, provides few jobs, and its future is uncertain. The quality of Chilean ore is declining, meaning that mining operations require huge investments just to maintain current levels of production. And the global market itself is changing, as the world’s biggest copper consumer, China, shifts its own economy away from building new power grids and infrastructure, thereby decreasing its demand.
To succeed in the long term, Chile needs to develop its economy much more broadly. To do so, it will have to boost productivity and innovation and, most important, spread its economic gains beyond the 4,000 families at the top.
For a small nation, trade is the most logical path to growth. Chile has made strides in this area, opening up its economy and signing trade agreements with 62 nations. Noncopper exports, led by wine, fish, and grapes, have grown rapidly in value, from hundreds of millions to billions of dollars each year. The main challenge is that with over 4,000 miles to the nearest North American Free Trade Agreement border, Chile remains cut off from the Western Hemisphere’s most prominent global supply chain hub.
Chile also has pushed to expand its knowledge economy. The publicly funded innovation platform “Start-Up Chile,” which gives global entrepreneurs a visa, money, and office space to launch their ideas and products, has supported over 1,000 new companies. Yet few have become viable commercial entities, limited as they are by the lack of qualified workers, disparities in education, distance to markets, and a generally weak investment ecosystem.
After years as a conservative outlier, Chile is joining many of its Latin American neighbors in the search for a pragmatic, democratic way to inclusive economic growth. The country is better positioned than most to address its challenges through market-friendly means. Its sound fiscal position and low debt levels give it the economic space to help those left out of past gains. And the recent political reforms give politicians a greater incentive and ability to address voter frustrations. If its leaders succeed, it could once again be exceptional.