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Explore Chile's economic journey, from rapid growth to recent slowdowns, examining factors like free markets, income distribution, and development issues. Assess Chile's strengths and weaknesses in the global economy.
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Overview • Chile is one of a handful of countries that has made an effort to rely on free markets rather than state involvement to • Accelerate growth and • Move the country toward affluence • The results have been spectacular pushing the country’s per capita income to the top in Latin America • However in recent years growth has sharply decelerated • The slowdown raises questions about • The Chilean model and • Where it went wrong
Free Markets, Autocratic Rule • Chile’s free-market approach began as a series of economic reforms by a group of American educated economists – the Chicago Boys in early years of the Pinochet regime • The reforms • Quadrupled GDP per capita • So successful adopted by both center-right and center-left governments • Produced a prolonged period of policy continuity • The reforms also enabled the country to avoid the disastrous experiments in • Populist • Structuralist and • Heterdox policymaking
Tiger Economy • Early success invited comparisons with the East Asian Tiger economies • As with Tigers rapid growth achieved by • Unleashing the private sector and • Opening up the economy to foreign trade and investment • Even after the establishment of democracy in 1990,Chile’s growth rate • Averaged nearly 5% for two decades • Almost double for that of Latin America as a whole • Country seemed immune from the boom-bust-cycles that undermined productivity and living standards in Brazil and Argentina
Coming up Short • However unlike Asian Tigers where decades of sustained growth have led to convergence with the with advanced countries – Chile well short of the mark • Chile’s growth slowed gradually • 1990s -- 6.1% • 2000s – 4.6% • 2010-16 3.9% • Since 2014 growth has been very weak – IMF estimates 1.9% for 2014-17 • With no end in sight credit ratings agencies began downgrading bonds in 2017 • President Michelle Bachelet’s center-left economic team resigned soon after.
Causes of the Slow-down I • Full explanation of the causes of the slow-down eludes explanation. • Chile still ranks a very respectable 33rd out of 138 countries on the WEF competitiveness index • Ahead of Spain, Italy and Turkey and • First in Latin America • More promising explanation, while Asian Tigers and Chile carved out similar approaches to development their starting conditions were different in significant ways
Causes of the Slow-down II • When Tigers began their development push • They had already completed significant land reforms meaning income distribution good • Their reasonably healthy financial systems and commitment to quality universal public education insured the benefits of growth would continue to be spread through the population • By contrast Chile was • Highly stratified society in 1970s in which elites not only controlled a disproportionate share of income and wealth, but also the power to distort policy • Blocked land reform • Opted for a largely private and very expensive educational system • The Chilean financial sector was weakened by decades of high inflation -- sound investment decisions difficult
Development Problems Mount I • If Chicago Boys expected the rising tide would allow Chile to outgrow its inequalities – disappointed. • In 2013 World Bank data showed • The wealthiest 10% of Chileans received 41% of the nations income • Less than 2% of the national income trickled down to the poorest 10% • Chile has the highese levels of inequality among the 34 member OECD • Education system perpetuates this inequality
Development Problems Mount II • Only wealthiest Chileans can afford high quality schools that adequately prepare students for skilled work in the country’s increasingly sophisticated economy • Chileans lower on the income sale – especially in the middle class run up massive debts for education they discover later was substandard • In 2016-17 Chile ranked 99th of 138 countries in quality of math and science education • This income based disparity not only • Fosters widespread resentment but also • Deprives Chile of labor force required to propel the country to fully developed status
Development Problems Mount III • The pension system which Pinochet’s government privatized in 1980s another flashpoint for dissatisfaction • Defined contribution system compels workers to set aside 10% income • In early years of stock-market boom everyone looked good • Over time lower returns on investments brought on by lack of competition among the financial service providers have left may Chileans in bad financial shape • Average benefit of $340 per month, nearly 80% of Chilean pensions generate less income than the minimum wage.
Social Frictions • When growth was rapid the frictions between the haves and have-nots did not lead to much open unrest • Now demonstrations protesting the • Broken education system • Poor working conditions and • Dismal pension prospects • Demonstrations are predominately a middle-class phenomenon. • Fueled by rising frustration at unmet expectations
Declining Governance • As social tensions have increased, a marked deterioration in the quality of governance • During the 1990s and into the 2000s,Chile had scores on the World Bank’s governance indices approaching those of the advanced industrial democracies. • Since then Chile’s governance scores have either fallen or at best remained static. • Not surprisingly there has been a sharp decline in Chileans’ confidence in their government and institutions • Chile dropped 25 places in Legatum Institute’s social capital (measure of trust) between 2007 and 2016
Reform Attempts • In an attempt to reduce the sting of inequality the center-left government introduced a series of reforms to address imbalances in services and benefits • Met strong opposition from country’s elites. • Tax reforms to increase education funding were opposed by business groups • Labor reforms were challenged by the courty’s business owners and never made it through the Congress • Attempts to reform pension system were derailed by a series of government corruption scandals and President Bachelett’s low popularity
Assessment • After Bachelet’s Party swept out of office by conservatives in mid-December 2017 Chile’s future appears clouded • Lessons • Chicago Boys’ economic model has hit the skids. • Pure free market approach can produce high rates of growth as resources are initially allocate more efficiently. • Sustaining that growth usually requires • Good governance and • A broad commitment to social inclusion • Unfortunately, Chile shows few signs of finding ways to make that happen.
