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Are protests ending the ‘Chilean model’ hegemony?

Bipartisan market-friendliness seen as trendsetting is now falling from grace

By | [email protected] | February 6, 2020 5:29pm

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The protests in Chile have continued for more than 100 days. What began with student demonstrations against a now-rescinded subway fare hike soon spread to encompass general discontent over high costs of living, privatization and inequality in the country led by center-right president Sebastián Piñera.

For months, hundreds of thousands of Chileans have been taking the streets. Protesters seized, vandalized and burned down 17 metro stations in Santiago as Piñera announced a state of emergency and declared martial law. Local and international media reported that the army and the Carabineros national police were systematically blinding protesters by shooting lead pellets into their faces, among other acts of police brutality. At least 27 people were killed as demonstrators continue to demand changes in pensions, education and health care while calling for a constitutional assembly.

The Chilean model

As in many other parts of the region, social tension emerged as the counterpart to unsatisfied social demands. But the unflinching nature of the protests was still a shock to most of Chile’s political and economic elites. Despite years of a growing undercurrent of discontent, trust in the regionally-famous “Chilean model” was still high until not long ago, at least among decision-makers, with center-right leaders elsewhere in the continent also using it as an example of what their countries should be striving for.

So what exactly is the Chilean economic model, how did it become so influential, and why is it now losing its hegemony?

If we adopt the definition by Rafael Rincón-Urdaneta Zerpa, director of Strategy and Global Affairs at the free-market think-tank Fundación para el Progreso, the Chilean model is the economic organization that resulted after the military government of Augusto Pinochet, featuring a combo of economic openness, deregulation of prices, a number of privatizations and an independent Central Bank.

More interestingly, the model was adopted and continued to be implemented after the dictatorship by two decades of a Socialist Party / Christian Democrat coalition known as the Concertación, who didn’t question many of its central tenets. “The implicit assumption is that the political and economic system has mechanisms and methods that allow for permanent adjustments and corrections,” Rincón-Urdaneta Zerpa explained in 2012.

But then things got out of control.

A violent birth

Although radical left questioning of the system was unthinkable during the heyday of the Chilean model, that had actually been the norm a few years before.

In 1970, Salvador Allende became the first president with a Marxist program to be elected in a non-Communist country. According to Richard Gott, a former Latin America correspondent for The Guardian, he was “the man who offered a peaceful road to socialism in Latin America as opposed to the path of armed struggle advocated by Ernesto ‘Che’ Guevara and his followers.”

Allende famously nationalized the foreign-owned copper industry, a move that had begun during the Christian Democratic government of Eduardo Frei, which had also overseen significant land redistribution initiatives. Allende went even further, moving forward with the nationalization of banking and credit and an even wider land reform as well.

Allende’s reforms were met with two distinct sources of trouble. One was political resistance, both at home and abroad. Richard Nixon’s government saw them as an attack on US interests, and launched an economic blockade that was joined by international organizations such as the Inter-American Development Bank and the World Bank, with orders to “make the economy scream”. At home, meanwhile, middle and upper-middle class neighborhoods gave birth to the modern cacerolazos, a protest tactic consisting of clanging pots and pans.

But the leftist government was also facing economic problems of its own. A massive stimulus package on the first year of Allende’s government helped bring strong growth initially, but the combination of low copper prices, deficit spending leading to skyrocketing inflation, and price controls that gave way to shortages of basic goods meant the good times did not last for long. The government quickly lost the political center, with many eventually supporting its violent overthrow.

On September 11, 1973, the armed forces led by General Pinochet brutally seized the government and bombed La Moneda, the presidential palace, where Allende committed suicide. (The tumultuous events that led to Allende’s downfall are well documented in Patricio Guzmán’s landmark film The Battle of Chile.) Economically, Pinochet turned to the pro-market right for ideas, and found them in the Chicago School of Economics, whose global influence was barely starting to grow.

The “Chicago Boys”

Students from Milton Friedman’s Chicago School, known as the Chicago Boys, were now launching radical reforms in the opposite direction, which would then spread from Chile to others in Latin America and even Europe and the United States, historians across the political spectrum agree.

“Friedman advised Pinochet to impose a rapid-fire transformation of the economy—tax cuts, free trade, privatized services, cuts to social spending and deregulation. Eventually, Chileans even saw their public schools replaced with voucher-funded private ones. It was the most extreme capitalist makeover ever attempted anywhere, and it became known as a ‘Chicago School’ revolution, since so many of Pinochet’s economists had studied under Friedman at the University of Chicago,” Canadian author and social activist Naomi Klein wrote in her best-selling book The Shock Doctrine, perhaps the most popular English-language critique of Chile’s economic reforms.

The changes were in fact radical. José Piñera, elder brother of the now-president, imposed a retirement system based on private personal accounts, known as the AFP system. Economy minister Sergio de Castro cut public spending by 27 percent in one blow, with health and education taking the heaviest hits. By the end of the decade, it had more than halved.

Inflation ended up declining from 1975 onwards, but the economy continued to suffer traumatic episodes. Unemployment—only at 3 percent under Allende—reached 20 percent, a rate globally unheard of at the time. In 1982, a run against Chile’s now highly deregulated banking sector and a massive debt crisis cost many of Chile’s “Chicago Boys” their positions.

But by the second-half of the 80s, however, the economy was stable and growing at impressively strong yearly rates. Poverty was still high and inequality had increased massively, but a market-friendly consensus was starting to emerge, and would continue after the restoration of democracy in 1990, even if some of the most extreme aspects of the Chicago years were adjusted.

Free market hegemony

During the 1990s, the Chilean model of development took the center-stage of discussions in financial institutions, academics and policy makers. R. L. Chawla, an associate professor at the Center for American and West European Studies, said the country had adopted a sustained free market ideology (at least for a longer time than other Latin American countries like Argentina or Brazil) and pursued a policy of keeping open access “to as many regional trading blocs as possible.” It also implemented a privatization program that achieved many objectives, including the financing of infrastructure and a reduction of its fiscal deficit while also creating a social fund.

But this generally pro-market scheme also included a key heterodox feature. “Unlike the major Latin American countries, which have given free reign to capital inflows, Chile imposed taxes on short time capital inflows and also reserves requirement on foreign investment inflows,” Chawla said.

Chile’s centrist governments also slowly introduced some poverty alleviating measures, which eventually showed results in terms of inequality. Some interesting statistics commissioned by local economist Óscar Landerretche show how, throughout the 1990s, growth continued to be very strong but income distribution also eventually improved, as opposed to the dictatorship years.

“Chile indeed had a remarkably good record of growth, and while in the 1960-70s it was in the middle of the Latin American league by GDP per capita, it is now the richest Latin American country. It was of course helped too by high prices for its main export commodity, copper, but the success in growth is incontestable,” wrote Branko Milanović, visiting professor at the Graduate Center of New York University.

Four governments of the Concertación (a coalition of Christian Democrats and Socialists, although with a much more moderate program than in the 70s) took turns to rule the country and in 2010 Chile was accepted as a member of the OECD, a club of developed countries. It was the first South American nation to get access to it.

By the turn of the century, the influence of the Chilean model became undeniable. “For years I’ve been championing Chile as an example,” former Argentine president Mauricio Macri said in 2008. He would repeat his praise in 2015, after meeting with Socialist president Michelle Bachelet, and last year during a panel with Piñera. Brazil’s Economy minister Paulo Guedes, an alumni of the University of Chicago, is widely seen as an “admirer” of the economic reforms pushed by the Southern Cone nation, and is especially fond of the dramatic overhaul of its pension system.

Cracks in the model

But Chile’s development model was also showing some cracks. And its most visible face was arguably the country’s education model.

Since 1981, the country has adopted one of the most radically pro market education reforms. In primary and secondary education, the reform included the creation of a voucher-like mechanism as the single state funding system for schools, forcing all schools –both private and public– to compete among them to enroll students. According to education experts, this model has led to significant problems of academic sorting and socioeconomic segregation “by prohibiting disadvantaged students from accessing the highest quality voucher schools”. Chile has the lowest level of social inclusion in their school among OECD countries.

“Education in this country is treated as an expensive commodity,” Chilean economist and former presidential candidate Marcel Claude told The Essential. “And to deal with that, the youth and their families have turned to loans and bank credits, which compound the brutality of the situation.”

Claude, who worked at the Central Bank and ran as an independent in the 2013 elections, said education had become “mercantilized” through a growing number of private institutions that compete against each other in a cost-cutting race to the bottom. “We are in the worst of worlds: costly education and of a very poor quality,” he said.

A series of major student protests erupted in 2006 after a new increase in fees for the university admissions test (PSU). The demonstrations, known as “The March of the Penguins” after the students’ uniform, marked the first political crisis of center-left President Bachelet. Two years later, the Chilean congress passed an update to the national voucher policy, the Ley de Subvención Preferencial (SEP), which introduced an incentive for private schools to enroll poorer students.

A second wake-up call was the 2011 crisis, a new wave of student-led protests demanding a new framework for education in the country. Piñera, who had taken office a year earlier, responded by making some minor concessions but insisted that the state could not provide education for all. By that time, Chile had 3.5 million students (1 million attending university) who got into debt to pay for their studies, with monthly payments similar to mortgage-style amortization systems.

Last decade, hundreds of thousands of citizens protested in Santiago against the private pension system. Projections by the OECD suggest that the average Chilean earner will get less than 40 percent of their final salary in old age. Many Chileans try to improve their situations through exhausting work schedules, which resulted in Chile having the longest working weeks in the world. Several Chileans live with high levels of debt and end up paying more for higher education or health care than their rich counterparts who can pay in full.

Professor Milanović illustrates the problem with a comparison. “In 2015, its level of income inequality was higher than in any other Latin American country except for Colombia and Honduras. It exceeded even Brazil’s proverbially high inequality. The bottom 5 percent of the Chilean population have an income level that is about the same as that of the bottom 5 percent in Mongolia. The top 2 percent enjoy the income level equivalent to that of the top 2 percent in Germany. Dortmund and poor suburbs of Ulan Bataar were thus brought together,” he said.

In 2018, the OECD urged Chile to up its game in several critical areas, saying the country needed to take steps to improve access to quality jobs and reduce high levels of inequality. The organization’s secretary general Angel Gurría said improving the education system was vital to the goal of diversifying Chile’s commodity export-dependent economy.

Francisco Castañeda, an academic at Universidad de Santiago de Chile, said the population was eager “to access more public services, to improve their quality of life and to feel that the country belongs to them as well”. Castañeda explained that the economic model worked in terms of creating growth, but that it had generated “high expectations” that would need to be met.

“The problem is not with macroeconomics, that is the country’s strength,” said Castañeda. “The Chilean model works in terms of growth, but it is not efficient in terms of distribution. Income distribution will always be a problem because the market inexorably amplifies inequities.”

For the hundreds of thousands of protesting Chileans, that trade-off is evidently not good enough.