The Hindu Business Line : Chile: Breaking the market myth

CHILE has a market-oriented economy characterised by a high level of foreign trade. After a decade of highly impressive growth rates, Chile experienced a moderate recession in 1999 brought on by the global economic slowdown. Despite the effects of the recession, Chile maintained its reputation for strong financial institutions and sound policy that have given it the strongest sovereign bond rating in South America.

The Chicago School routinely takes credit for the strong economic performance of the Chilean economy in the 1986-1997 period. In 1982, Nobel Laureate Milton Friedman, pronounced the market-driven politics of the military dictatorship "an economic miracle". Arnold Harberger, Professor of Economics at the University of California, Los Angeles, stated in the American Economic Review in 1993: "Chile has had the longest and most successful economic modernisation process of any Latin American country." Even Dr Joseph Stiglitz, a strong critic of Chicago School policies, saw Chile as a success story.

It is commonly held that the restructured Chilean economy is a uniquely successful model to be emulated by other Latin American nations. The Chicago School economists gave free rein to the resource extracting industries (mining and forestry especially) while encouraging other resource-based activities such as aquaculture/fish farming of salmon, specialty fruits and vegetables (non-traditional exports), and viticulture/winemaking, ignoring the manufacturing industry. Once several niche markets were developed — including some facing high income elasticity of demand conditions — the incentive to invest faded, and declining terms of trade took their toll. By 1995, the `model' had reached its limits. Investment by the large `groups' slumped, and from 1997 through 2003 the per capita income barely grew.

The dictatorship was one of economic instability, including two deep crises (1973-75,1981-84) and, then, from 1985 through a period of economic boom. In 1987, the per capita income was the same as in 1981, but by 1998, it was 88 per cent higher. By 2002, Chile had the highest average per capita income in Latin America. Workers, however, enjoyed average wage increases of only 53 per cent in 1987-98. In contrast, the average per capita income rose 105.3 per cent (Banco de Chile 2001). By 1998, a triumphalist attitude was sweeping Chile. The message seemed to be that if a nation stuck to the precepts of neoliberal economics (through a difficult period of `transition', the economy would eventually soar.

Fat from the Utopia of the free market, under the dictatorship, the state was also heavily involved in projects designed to massively transfer economic rents to the private sector. These transfers can be primarily seen in two areas:

massive and corrupt privatisations which transferred billions of dollars of state assets to both the large Chilean `groups' (interlocking financial/service/production conglomerates) and to multinational corporations; and

the selling of high-yield copper reserves to MNCs without regard to undertaking asset value, while simultaneously granting the private-sector mines virtual tax-free status in the course of the 1980s.

The short-term effects were straight-forward, more foreign direct investment, leading to dynamic multiplier effects in the broader macro economy. The longer-term effects are purely predatory — a non-entrepreneurial, rentier national social strata is reinforced/revived, while multinational mining corporations are left to do as they wish — avoiding taxes that potentially could be used either to raise the level of production and/or constructively contribute to the task of building/reproducing Chile's "social capital" through education, health care, infrastructure, and so on. That is, the heavy wave of multinational mining investment received from 1989 through 1995 has a short-term positive impact on the macroeconomy, while the longer-term impacts in terms of backward and forward linkages, technology transfers, professional/managerial learning which creates spin-off firms, research and development at universities, high value-added activities through the processing of minerals, and so on, appear virtually absent. In the late 1990s, 46 per cent of Chile's vaunted export boom was explained by traditional mining exports — roughly 41 percent of total exports are unrefined or barely refined copper.

From 1990 through 2006, the coalition of Left and Centrist parties — known as Concertation — has been elected to hold the office of the presidency. As the Concertation governments have become more established and assertive (after winning three consecutive presidential elections) they have also moved to reverse the many steps the Chicago School economists made to undercut social legislation. In doing their best to destroy nearly a century of social reform, the Chicago School economists rationalised their actions as being both in the broader interests of the citizens of Chile and the only possible `reforms' consistent with `human nature'. The election of non-Chicago School governments certainly is a solid indicator of where the mass of voting Chileans stand on the issue of market versus state and the consistency and the inevitability of the "free market" ideology.

But even more indicative are the results of a systematic attitudinal survey undertaken by the United Nation's Development Programme (UNDP) in 1999. Chileans sought an end to an `unjust' degree of income inequality, while the eradication of poverty was viewed as the first necessary step to be taken to achieve other objectives. Nearly all interviewed desired greater social investments in public health, education, old-age pensions, urban infrastructure, and recreation. In open challenge to the Chicago School, the results of the survey showed that, overwhelmingly, the citizens believed that the areas of health care, education, old-age pensions, and so on, were social goods, and it was not the responsibility of individuals to provide on an individualistic basis (through market forces) for these public goods. Chileans wanted a society that encouraged the values of social solidarity and social responsibility, including one wherein business owners exhibited a sense of social responsibility toward their employees. Overall, the survey demonstrated a longing for "a sense of community" and "a sense of social identity".

Below are three new, creative programmes that Concertation has attempted to introduce in the past three years:

Chile Solidarided: This innovative programme is designed to eliminate extreme poverty (indigence) in Chile by 2006. It is also designed to reduce non-indigence poverty while creatively orchestrating programmes in housing, health care, urban facilities, education, and food subsides along with income support programmes that approach `poverty' in a much broader context than a defined income level. Chile Solidarided is premised on the view that empowerment is the objective of the programme — not merely income support. This programme will potentially lift 5.7 per cent of the population (roughly 900,000 individuals) out of extreme poverty. As of late 2003, the programme was "on track". If maintained, it will eliminate extreme poverty in 2006.

Programa de Cesantia (Unemployment insurance): Unemployment insurance is virtually non-existent, although it may exist by statue, throughout Latin America. Begun in 2001, Chile's programme has 1.7 million affiliates — about 28 per cent of the labour force (servants and houseworkers and the self-employed are excluded). All newly hired workers from 2002 onward will be automatically incorporated into the programme. After 12 months of payments, unemployed workers are eligible for replacement of 30-50 per cent of their previous wage.

Plan Auage (Universal access to health-care): With the full backing of Concertation, an ambitions programme to deliver a broad array of health care programme to all Chilean, some without cost, some with modest co-pay arrangements, was introduced into the legislative process in June 2002. Although some aspects have raised debate, a limited version of the plan will begin in 2005. Chile will have a minimum health plan available to all of its citizens. This is in stark contrast to the Chicago School's attempt to fully privatise health-care in Chile.

(The author is a Chennai-based management consultant.)