Covid-19 Accelerates Changes in Chilean Market-Driven Economic Model

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ONA STREET corner in El Bosque, a poor neighborhood in Santiago, Dixa Contreras serves porotos con riendas (“Beans with reins”: that is, bean and spaghetti soup) in a large saucepan. Boy takes enough for a family of four sick at home with covid-19. Ms. Contreras and six helpers provide 250 free meals a day and fresh bread every other day for the evening once (tea). Neighbors, shops, stalls at the weekly produce market and EPES, a charity, provide the food.

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Soup kitchens like this have popped up across Chile since the pandemic hit in March. They were last seen during a recession in the early 1980s, when Augusto Pinochet, a dictator, ruled the country. Aided by pro-market policies introduced by Pinochet, the economy has grown rapidly in the years since his departure in 1990, although recently the pace has slowed. They have given the private sector an important role in providing pensions, education and health care. Chile’s poverty rate fell from 45 percent in the mid-1980s to 8.6 percent in 2017, according to the government’s biennial socio-economic survey. In the years following Pinochet, Chile acquired a reputation for good economic management, relatively low levels of corruption, and stable institutions.

Even before covid-19, his reputation took a hit. Pensions, which Chileans save for themselves, were lower than many expected when the regime was introduced in 1980. Wealthy Chileans enjoyed better health care and education than poor people. Massive and sometimes violent protests against inequality began last October and did not dissipate until the onset of the pandemic. They forced Sebastián Piñera, the center-right president, to pledge more social spending and a referendum, to be held in October, on whether to rewrite the constitution, which is based on the one Pinochet left the country. . “There is a consensus that the state must provide more and better public services,” said Rodrigo Vergara, former president of the Central Bank. The pandemic, and the government intervention it provoked, could accelerate an evolution towards social democracy already underway.

The government’s record in managing the pandemic is mixed. As a proportion of its population, Chile’s 321,205 confirmed cases and 7,186 deaths are among the highest in the world. Rather than locking down the entire country, the government has just closed Covid-19 hot spots. He started talking about a return to a “new normal” in mid-April, before the disease reached its peak. The government did not impose a full lockdown of the capital, where a third of the population lives, until May 15. “It’s a story of pride,” says Eduardo Engel, director of Espacio Público, a think tank.

The government has mitigated these failures by testing a lot (one of the reasons its workload seems so heavy). He has increased the number of ventilators and intensive care beds. The containment of the capital, followed by a tightening of restrictions in quarantine zones, have finally led to a drop in the number of new cases nationwide.

The government expects GDP to contract 6.5% this year. This is the largest drop since the 1982-83 recession (although below the expected regional average). The average unemployment rate from March to May reached 11.2%, its highest level since the current calculation method began in 2010. The poverty rate is expected to reach 15% this year, says Dante Contreras, an economist at the ‘University of Chile.

Dense neighborhoods, cramped houses, and the need to take public transportation all help the spread of covid-19 among the poor. Health Minister Jaime Mañalich admitted in May that he did not know how much poverty and overcrowding there was in parts of Santiago, making the government appear helpless. He resigned.

The government has also been clumsy in protecting Chileans from the economic ravages of Covid-19. He acted slowly. Its measures, while important, have failed to meet the needs. Its under-reaction could cause a backlash that wanders in the opposite direction.

The first package to protect jobs, small businesses and poor households, introduced in March, amounts to $ 17 billion, or nearly 7% of GDP. (Some are in the form of loans and therefore are not counted as budgetary expenditure.) It includes a leave scheme, which allows workers to benefit from unemployment insurance while officially keeping their jobs, as well as cash and boxes of food for the poorest. But the support they provided to families fell below the official poverty line. Protests erupted in poor neighborhoods. The activists projected the word bedroom (hungry) on the Telefónica tower in Santiago. Under pressure, the government on June 14 reached an agreement with the opposition parties to spend an additional $ 12 billion over two years.

He followed up with a $ 1.5 billion middle-class package, which includes mortgage deferrals and zero-interest loans. Middle-class Chileans were unhappy that much of the aid took the form of loans. To appease them, on July 14, the government again offered a late reminder: a one-time payment of $ 632 to formal workers whose incomes have fallen.

Most post-Pinochet governments have kept budget deficits low. This year, the government expects the deficit to reach 9.6% of GDP, the highest level for almost 50 years. His expenses must go from 24% of GDP in 2019 to around 30% this year.

If Mr. Piñera was successful, the expenses could decrease. But his mandate ends in early 2022. Protests and the pandemic have weakened him. The role of government will be determined by its successor and, if Chileans approve, by a constitutional assembly. It is subject to change. Calls for a more active state from the left are now echoed by right-wing politicians, like Joaquín Lavín, the mayor of a prosperous neighborhood in Santiago, who could become the next president. In their support for social benefits, such as social housing, they look more like European Christian Democrats than laissez-faire liberals.

It is widely accepted that tax revenues must rise from 20% GDP. Already, in response to protests last year, the government has raised the tax rate on top earners. New health minister Enrique Paris, a technocrat, is in favor of capping the profits of private health insurers, although this is not government policy.

Popular anger inspires more radical ideas. The rebellion against the first version of the middle class aid plan led to a proposal in Congress to allow Chileans to withdraw 10% of their retirement savings to help them weather the pandemic. This would reduce future profits, which Chileans already deem too low, or, more likely, force the government to plug the hole, at a cost of at least $ 16.5 billion. Either way, if passed, the bill would weaken a central institution of the Chilean model. Some members of Mr. Piñera’s coalition joined the opposition in support. The extra money for formal workers was a way to win them back. The same goes for Mr Piñera’s promise of “major surgery” for the pension system. It does not work. On July 15, the lower house of Congress passed the bill, sending it to the Senate.

Such radicalism presents a risk. Most Chileans agree that the state should act to reduce inequalities and raise the needy. But their anger could create support for populist policies that would make the country poorer. The success of Chile’s reinvention “will depend on the ability of the political system to set limits,” says Vergara. The next batch of leaders will have to do better than the current ones.

This article appeared in the Americas section of the print edition under the title “Gimme shelter”


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