Whither the Chilean model?

Despite substantial gains, Chile’s market economy does not automatically generate either an appreciation or a defence of the principles that have made them possible

Camila Vallejo: The face of Chile's future?
Fernando Menendez
On 20 May 2013 07:37

Chile, once a model of what free markets can do to promote prosperity and lift millions out of poverty, was a poster boy of economic liberalization in Latin America. But today’s Chile is experiencing a period of political stagnation that could put its progress in peril.

During the 1970s the copper-rich nation fell into economic chaos under the socialist Allende regime, its economic performance stifled by massive nationalizations, expropriations, and price controls. Allende was toppled by a military coup led by Gen. Augusto Pinochet and the country became an international pariah.

A group of economists from the Catholic University of Chile labored to promote a series of reforms to unleash the productive power of Chile’s millions. After the Pinochet regime reluctantly adopted the reforms, markets put goods on the shelves, exports increased and economic growth reduced the poverty rate by some 40-50 percent. Millions of Chileans were lifted out of poverty.

By the late 1980s, the military, defeated in a plebiscite, stepped down. In 1990, democratically-elected President Patricio Aylwin continued with the economic reforms. Today Chile has an unemployment rate of 6.4 percent and poverty a rate at 15.1 in 2012, both among the lowest in the region.

With a GDP of $319.4 billion and a per capita GDP of $18,400, Chile is a successfully developing country. Exports account for a third of GDP. In 2012, foreign direct investment inflows reached $28.2 billion, an increase of 63 percent over the previous record set in 2011. The statistics reflect a rising standard of living for more Chileans.

Andean Schizophrenia

With so much going for it economically, however, Chile’s political establishment remains wedded to the spirit, if not the letter, of collectivism. Socialist and Christian democratic traditions and politics continue to dominate the political discourse. What the forces of markets and enterprise have created, the forces of collectivism work to take away.

One example is in Chile’s education system which has moved to competitive market-based alternatives to provide educational quality and choice. Enter the collectivists.

In 2006, protests were triggered when the government considered more funding for non-traditional universities. These and similar reforms have met with continual protests and mass mobilizations, which have often turned violent.

Radical student organisations have taken to the streets with riots, school occupations, and other violence to stop educational reforms. These groups have dominated the narrative and put Sebastián Piñera’s government on the defensive. He recently fired his education minister.

Led by a telegenic young member of Chile’s Communist Party named Camila Vallejo, the radical groups demand tuition-free education from kindergarten to graduate school and an end to the profit-driven sector. While a guest of Cuba’s communist government, Ms. Vallejo, portrayed as a revolutionary firebrand at home, praised that country’s state-dominated indoctrination system and rejected meetings with dissidents.

Back to the Future

The division of labor within Chile’s left is impressive. Threatening to take to the streets, the radical left pushes the climate leftward. Meanwhile, Mr. Piñera’s abysmal popularity and lack of initiative opens the path for the electorally respectful left to return to power.

In November 2013 Chileans elect a new president. The former socialist President Michele Bachelet, faulted for not fixing the educational situation during her first term, is expected to win the general election handily.

In office, Ms. Bachelet refrained from tampering too seriously with Chile’s successful market economy. The socialists and their allies, however, favour an expanding public sector and income redistribution on the back of a productive private sector. Politically, they have co-opted and constrained the radical left.

The contrast between a prosperous market economy and the politics of envy and redistribution is great. Despite substantial gains, Chile’s market economy does not automatically generate either an appreciation or a defence of the principles that have made them possible.

While having largely lost the economic argument, Chile’s socialists still control academia, the media, and the other institutions shaping public opinion. In this regard, the battle of ideas matters more than any election victory.

Fernando Menéndez is an economist and principal of the Cordoba Group International LLC, a strategic consulting firm providing economic and political analysis to clients

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