The Economist 14Mar2020

24 The Americas The EconomistMarch 14th 2020

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hemisphere summer holidays. But now

they have resumed, while vandalism never

really stopped.

Several other countries in Latin Ameri-

ca saw street protests last year, though not

on the same scale. But Chile? Over the past

30 years it came to be viewed as the one

country in Latin America on the path to de-

veloped-country status. The protests are a

big blow to that confidence, and threaten to

halt Chile’s progress. But they might also be

the spur by which it finally joins the global

top tier.

Chile “could become a country with a

more solid and sustainable social contract

that resolves the legacy issues [left by the

Pinochet dictatorship],” as Mario Marcel,

the president of the Central Bank, puts it.

He notes that those obstacles have contrib-

uted to what economists call the middle-

income trap, in which sociopolitical short-

comings slow growth and prevent coun-

tries reaching developed status.

But if violence continues and the state

is unable to contain it by democratic

means, and if conservatives block change,

others fear a darker future. Chile could face

“a classic Peronist moment in which a

country successful in growth has contra-

dictions it can’t manage”, says Óscar Land-

erretche, an economist aligned with the

Socialist Party, referring to the period in

the 1940s in which Argentina embraced

populism and dictatorship.

Middle-of-the-road rage

In many respects Chile has been a success

story since democracy returned in 1990.

Governed by the centre-left for 24 of those

years, it has combined economic growth,

political stability, fairly strong institutions

and expanding social services. Those be-

low the official poverty line (of $206 per

month) fell from 45% of the population in

the mid-1980s to 9% in 2017. Some 65% of

Chileans are middle-class, up from 24% in

1990, according to the World Bank’s income

criteria. Since Chile joined the oecd, a club

of mainly rich countries, in 2010, its elites

have taken to suggesting that it has little in

common with its neighbours.

What, then, prompted the social explo-

sion? “There are many theories,” says Mr

Piñera, a billionaire businessman. “I agree

with all of them, and they are contradic-

tory, which means we lack a shared diagno-

sis.” The first theory, favoured on the right,

is the slowing of economic growth since

2014. In Mr Piñera’s first term (from 2010 to

2014. growth averaged 5.3% a year, boosted
      by reconstruction after an earthquake. He
      won his second term in 2017 by promising a
      repeat but failed to deliver it. A second, re-
      lated theory concerns rising expectations.
      It sees discontent as the consequence of
      Chile’s success in creating a middle class
      that demands more of government.
      A third view, common on the left, is that
      the country is rebelling against inequality,
      which, it is claimed, is entrenched by Pino-
      chet’s “neoliberal” economic “model”. This
      gave private enterprise free rein and con-
      fined the state to a subsidiary role, even in
      providing social services. By oecdstan-
      dards, though not those of Latin America,
      income inequality is indeed wide (see
      chart 1). “You can’t go through a process of
      rapid growth and capitalist modernisation
      and persist with pre-capitalist levels of in-
      equality and absence of meritocracy and
      social mobility,” says Mr Landerretche. Yet
      income distribution has improved this
      century.
      A fourth theory highlights political fail-
      ures. During the second government in
      2014-18 of Michelle Bachelet, a Socialist,
      much of the left disowned its own past
      work of gradual, consensual reform, prop-
      agating the view that it was a failure. As for
      Mr Piñera, he and his team, who come from
      a privileged slice of society, lack political
      skills and empathy with the masses. In
      their first 18 months in office, they failed to
      get promised tax and pension reforms
      through Congress, where the opposition
      has a majority. Polls now put the presi-
      dent’s popularity at 6-12%. But they reveal a
      broader abyss between the people and the
      system: trust in institutions, from the po-
      lice to the press and the politicians to the

churches, has evaporated (see chart 2).

“It’s not [about] 30 pesos, it’s about 30

years of abuses,” goes a popular slogan.

Considered more broadly, inequality is in-

deed at the heart of the matter. It “isn’t just

about income, it’s about place, gender, skin

colour, where you live, what school you

went to, what surname you have,” says Her-

aldo Muñoz, who leads the centre-left Party

for Democracy. “The explosion is against

the arrogance of the elite.” More concretely,

discontent is focused on pensions, health

care and the privileges of a small minority

(see chart 3 on next page). These mean that

being “middle-class” in Chile often means

receiving second-class services.

One of the trademarks of Pinochet’s

model was a pension system of individual

savings accounts in private funds known

as afps, with no contributions by employ-

ers or governments. It was imposed in 1981

by José Piñera, the current president’s (es-

tranged) brother, who calculated that it

should deliver pensions averaging 70% of

final salary. Widely praised and copied, the

system provided Chile with a deep capital

market and cheap financing for big firms.

Andrés Uthoff, a member of a consulta-

tive committee on pensions under Ms Ba-

chelet, points out that José Piñera’s calcula-

tion depended on three conditions being

met: continuous employment with a

steady income, interest rates above 5% and

no increase in life expectancy. None has

been: Chile’s labour market is Latin Ameri-

can, not European, featuring low wages,

high churn and, for about a third of the la-

bour force, informal work. For every ten

people in the workforce, only four pay into

their afpfor their whole working life, ac-

cording to Ignacio Briones, who became fi-

nance minister in October. In recent years

millions of Chileans have reached retire-

ment age. Four-fifths of all pensions are

less than the minimum wage (301,000 pe-

sos per month, or $378) and 44% are below

the poverty line, according to Mr Uthoff.

Ms Bachelet introduced a safety net in

the form of a basic pension for the poor of

110,000 pesos. Following the protests, the

government has raised this to 160,000 pe-

sos. That does not help middle-class retir-

ees. Significantly, Pinochet did not require

the armed forces to join afps. The govern-

ment spends more on pensions for the se-

curity forces and on those who remained in

the pre-1981 system (more than 2% of gdp)

than it does for the whole of the rest of the

population (less than 1%), points out Ro-

berto Zahler, a former Central Bank presi-

dent. Government and opposition are close

to an agreement that would add employer

contributions to pension accounts.

The dictatorship set up a segregated

health service. All those in jobs pay a con-

tribution of 7% of salary for health care. In

theory, they are free to use that to join priv-

ate health schemes (with no waiting lists)

Trustbusted

Chile,publicconfidenceininstitutions,%

Source:CentreforPublicStudies

2

Political parties

Congress

The government

Newspapers

The Catholic church

The police

6050403020100

August 2015 December 2019

Some are more equal than others

Gini coefficient*, 0=everyone has the same income,

1=one person has all the income

Sources:OECD;ECLAC *Posttaxandtransfers

1

0.55

0.50

0.45

0.40

0.35

0.30

0.25

052002 10 1815

LatinAmericanaverage

Chile

OECD average