Latin America’s new economic model could emerge in Chile

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Left-leaning leaders in Latin America hailed the election of Gabriel Boric in Chile in December as investors retreated, sending the country’s currency and stock market plummeting. Yet Boric has the chance to surprise both sides, forging a different left-wing political path. Rather than sell the economic populism of Argentina or Brazil or the authoritarian dogma of Venezuela, Cuba or Nicaragua, Boric could create a more progressive country and an inclusive welfare state. Abandoning Chile’s neoliberal economic model for a social democratic model would put it on the path of other high-income countries, which would benefit Chilean citizens, make growth more stable and sustainable, and create a new paradigm for its neighbors to follow. .

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Chile has enjoyed an economic boom since its return to democracy in 1989. Three decades of pro-market neoliberal policies, including the privatization of public works, the lowering of trade barriers and the deregulation of capital markets, have boosted foreign investment and national and economic growth. This model has raised per capita income from less than $2,300 in 1989 to more than $15,000 today (and $25,000 when measured in purchasing power parity or PPP), making Chile one of the few Latin American countries to move from middle to high income in the world. Bank classification.

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So why did a record number of Chileans still vote for a candidate who promised to “bury” neoliberalism? Because as Chile got richer, it did not become more generous. Social spending since 1990 has remained around 10% of gross domestic product, about half the average for the 38 countries of the Organization for Economic Co-operation and Development. Worse still, the structure of many public programs has created a multi-tiered system providing different and often better services to the middle and upper classes.

Take education. For starters, Chile is simply not spending enough per child, ranking far behind most of its OECD peers. Its voucher system theoretically allows parents and students to choose any school. But schools are clustered in affluent neighborhoods, creating geographic barriers for the less fortunate. Many private schools take the vouchers but also charge extra, leaving them out of financial reach. And a lack of teacher training and cohesive curricula leads to uneven, shoddy teaching, especially in less affluent public schools that have less leeway to hire and fire instructors. The configuration disadvantages the poorest children.

Health care in Chile suffers from similar problems of unequal access and care. Overall spending is minimal, a third less than the OECD average. And although Chile legally offers universal health care, the reality is that those with money get better treatment. The top layer channels its mandatory payroll taxes into a better-endowed private system, while the bottom two-thirds of Chileans pay into a public system. As happens in education, the diversion of the wealthiest and healthiest to private providers leaves the state with fewer resources for the neediest and sickest.

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Chile’s vaunted private pension system is also failing its elderly. This has certainly broadened and deepened the country’s capital markets, as Chilean pension funds manage over $200 billion, or around 80% of GDP. But he did not provide “social security”. Eighty percent of retirees do not save enough to avoid the shortage. The problem is structural: individual accounts spread temporal risk over a person’s lifetime; they do not pool risk across society. Without any redistribution, minimum wage earners will never be able to build up enough savings to support an adequate retirement (not to mention the high fees charged especially in the early years of the system, which made private pension fund managers of the AFP the most profitable arm of the country’s financial sector).

European nations, the United States, Japan and other now high-income market democracies created and expanded their welfare states long before they reached the levels of per capita income that the world enjoys today. Chile. US President Franklin Delano Roosevelt introduced Social Security and Unemployment Insurance when average American incomes were just over $1,000 (less than $10,000 in today’s dollars), and not much more in real terms when Lyndon B. Johnson introduced Medicare in 1965. Europe greatly expanded public health care, pensions, disability, and other workers’ compensation in the late 1940s and 1950s, when per capita incomes were also less than $10,000. As Japan moved up the socio-economic ladder, it greatly expanded public social programs. During the 1970s, when Japan’s GDP per capita was much lower than Chile’s today, social spending doubled as a percentage of GDP. This spending has boosted worker productivity (fewer people in the economically active population have been kept out of the workforce caring for the elderly, young or infirm) and increased political stability, promoting longer-term and more sustainable economic growth.

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Chile’s neoliberal model has helped the nation move up the socio-economic ladder. But as the 2019 protests and the 2021 election results reveal, this pattern cannot stay up there. Unmitigated economic disparities leave the nation too fragile politically to sustain economic stability and growth. Even the International Monetary Fund now believes that public spending attracts, not private investment, favoring a bigger state rather than a smaller one.

Of course, if the Boric government or the constituent assembly turns out to be more socialist than social-democratic, the opponents will be right. But so far he has shown no love for the region’s authoritarian left, criticizing Nicaragua, Cuba and Venezuela. And its economic proposals aim to provide Chileans with the government services and supports that citizens of other high-income countries have long requested and received.

For Chile to prosper again, it must change its way of thinking and, more importantly, its public spending. A minimal state will no longer provide long-term stability for investors, businesses or its people. Chile has successfully transitioned to high income status. Its policies must catch up. And if Boric succeeds, and they do, Chile’s new president will have created a new model for the Latin American left, based on economic and political inclusion that creates stronger economies and democracies across the region.

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