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The Chilean Development Model and the Limits of Neoliberal Economics

Andrés Solimano

Chile underwent a free market revolution initiated by the Pinochet regime in the 1970s and 1980s. A very similar model, with some amendments, was followed after the restoration of democracy in the 1990s and 2000s by the social democratic governments. This economic revolution released entrepreneurial energy and a capacity for wealth creation and today the country has one of the highest income per capita levels in the Latin American region.

Chile has been portrayed as the development model to follow for emerging economies, as well as for the more mature and crises-ridden capitalist economies. Nevertheless, as emphasized in my new book on the development model followed in Chile during the transition to democracy after the Pinochet regime 1,  the positive results at the macroeconomic level, and for growth specifically, of this model are accompanied by the concentration of income and wealth in the hands of powerful and politically influential economic elites. Thus the country still needs to complete a further renewal of its democracy. Under this model ‘trickle down’ operated modestly, and although the middle class and the poor improved their lot, they still remain vulnerable to economic shocks and face highly segmented market-based systems of education, housing, and health.

Post-Pinochet democratic governments focused on steering a peaceful return to an (incomplete) democracy, keeping the economy growing and reducing income-poverty. The prevailing consensus is that they did very well on these fronts. However, the country still needs to tackle the more complex problems of entering into a knowledge-based economy, reduce inequality of income, wealth, and opportunity, and undertake political reforms to effectively deepen democracy.

A particularly controversial feature of the model has been the adoption of Friedman-Hayek receipt of full marketization of education, health, and pensions, which were completely transformed in those sectors of the economy guided by the profit motive. This has amplified existing inequalities and social segmentation triggering an evident fatigue of the population with free market orthodoxy. The retreat of the state in the provision of public education, and the lack of regulation of a vast and growing private university system, has complex effects on the quality of education and hampers effective equalization of opportunities and upward social mobility. Both the OECD and the World Bank have shown in their reports that Chilean families and students pay tuitions and monthly fees for university education that are among the highest in the world. Largely as a consequence of student protest movements in 2011, the expensive student credit system, handsomely profitable for commercial banks, is now being revamped.

OECD membership and standards

Chile is an atypical OECD member in its levels of inequality, the prevalence of the profit-motive in the delivery of expensive social services, the limited role of the state in the regulation of oligopolies, and the concentration of economic power and political influence of a small elite.

Chile has an uneven institutional matrix. Macroeconomic institutions (the finance ministry and central bank) wield much more influence in defining economic policy and development priorities than ministries in charge of productive development, social policy, cultural advance and the protection of the environment. Under socialist presidents, in the 2000s, Chile became a champion of the macroeconomic orthodoxy of fiscal rules, inflation targeting, free short-term capital inflows and floating exchange rates with occasional intervention by the monetary authorities. The growth record of these policies is far from spectacular and GDP grew at half the rate of the 1990s.

In Chile property rights are well protected for large corporations and multinationals, the costs of doing business are moderate to low, and macroeconomic stability is an achievement that all sectors defend. Nevertheless, economic rights have operated asymmetrically: consumer protection was largely neglected for decades until recently, and workers rights are impaired by the marginalization of labour unions and the flexibility of firing in current labour legislation.

Growth challenges

Chilean growth, which accelerated in the last quarter century with respect to its historic norm, will face various constraints and challenges in the years ahead—the need to be more geographically diversified across the different regions of the country, to diversify away from a high reliance on natural resources towards knowledge-intensive sectors, reduce high energy use, improve labour productivity and other factors.

Another set of dilemmas is how to grow based on the tradable goods sector in a scenario of a sluggish growth in advanced economies, relying mainly in the dynamism of China and other developing nations, and how to manage the volatility and loss of external competitiveness due to a secular appreciation of the real exchange rate that hampers the profitability of the non-mineral tradable sector and agricultural exports. A reduction of inequality would be a requisite for a growth path more oriented to the internal market and less sensitive to the cycles of the international economy.

Democracy and governance

The Chilean democracy of the 1990s and 2000s that emerged after the military regime has been limited by constitutional enclaves and restrictions oriented to ensure the consolidation of the economic model. The Chilean political system, albeit having restored basic political rights, protects the hegemony of economic elites and the political establishment, and provides the armed forces with budgets from the buoyant copper sector and pensions and health systems different from the rest of the population. The country´s constitution gives no room to hold plebiscites, and gives absolute primacy to private property and markets over state ownership and social rights.

The two party (binomial) electoral system has produced a super stable political equilibrium in which social democratic and neoconservative coalitions share, over time, power and perks, leaving little room for the political representation of more varied political and social movements, thus postponing the renewal of the political class. In turn, Chileans abroad are not allowed yet to vote in national elections in Chile.

The emergence of an active yet peaceful student and social movement caught everybody by surprise in demanding free education, the end of the profit motive in education, and far reaching structural reforms for more egalitarian and democratic development. The ability of the political and institutional system to process this new agenda remains to be seen. It is apparent that Chile needs a new social contract to marry the dynamism in wealth creation shown in recent decades with social equity, effective economic security and more democracy.

Lessons from Chile

The Chilean experience offers some interesting lessons on the road to reform and development. To name just a few: first, specific country circumstances and historical background are very important for the success or failures of policies. What apparently works in one country setting may not work in others. Second, the excessive zeal of seeing markets as an end in themselves, rather than an instrument, may be very costly. Marketization of education, health, and pensions, can be detrimental to social equity, mobility and the quality of social services. Third, the maximization of GDP per capita is not a balanced development strategy. It should be complimented by serious attention to reducing inequality, fostering regional development, improving the quality of life and protecting the environment. Fourth, an effective and participatory democracy, devoid of elitist enclaves, is a critical input for the design of balanced and fair development priorities besides being a value in itself.

1 Andres Solimano, Chile and the Neoliberal Trap: The Post-Pinochet Era, Cambridge University Press (2012). For more information: http://www.cambridge.org/us/knowledge/isbn/item6828673/?site_locale=en_US.

Andrés Solimano, a Chilean-Italian national, holds a PhD in economics from MIT. He is currently the chairman of the International Center for Globalization and Development, CIGLOB, based in Santiago, Chile.
 

WIDERAngle newsletter
May 2012
ISSN 1238-9544

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