The entire world sees Chile as an exemplary economy. Analysts usually talk about the ‘Chilean model’ when referring to the macroeconomic management of the governments of the center-left ‘Concertación Democratica’ [Democratic Harmony] coalition that has held power for the last 15 years. Its free-market approach involves opening its markets to the world, but with a strong component of social investment, and it has enabled Harmony to increase the per capita income of Chileans from $6,000 in 1998 to $12,000 in 2005, while reducing poverty from 40% to 18.7% of the population.
Despite this enviable reputation, the country has paid a heavy cost that it cannot hide: Chile has one of the worst distributions of income in Latin America. Its social inequality has been one of the key elements in the presidential and parliamentary elections of Sunday, December 11, which left Michelle Bachelet the first-round winner, and gave the socialist pediatrician the inside track to take over La Moneda, the presidential palace. The standard bearer of the current government’s coalition won 45.95% of the vote, not enough to become president right away. Her adversary in the second round on January 15 will be Sebastian Piñera, the affluent entrepreneur who represents the moderate right-wing. Piñera, who is closer to the political center, won 25.5% of the votes.
Two other candidates were the losers in this Sunday’s vote: The first was Joaquin Lavin, economist and former mayor of Santiago, who won only 23% of the votes; he represented the UDI, considered a ‘hard’ right party. The second was Tomás Hirsch, a small businessman who won 5.4% of the vote. Hirsch represented the “Juntos Podemos Mas” [“Together We Can Do More”] coalition, which comprises the Communist and Humanist parties, and other groups that have no representation in parliament. Everything indicates that Lavin will pass his votes on to Piñera, but it is still unclear if Hirsch will do likewise, and call on his supporters to support the socialist candidates. Nevertheless, all the polls point to Bachelet as the winner in the run-off on January 15.
Profiling the Possible Presidents
Bachelet, a 54-year old pediatrician, is the daughter of an air force general who died after being tortured during the dictatorship of General Augusto Pinochet (1973-1989). Between 2000 and 2002, Bachelet was health minister, and she was later the country’s defense minister, up until October 2004. At that time, Ricardo Lagos, the current president, removed her from that post so that she could focus on her presidential campaign. Bachelet, an agnostic and single mother of three boys, is an atypical mother in a country widely viewed as conservative. It was only a year ago that Chile approved a divorce law. It is equally odd that in addition to her specialization in public health and primary health care, Bachelet is an expert in defense affairs. In 1997, she was the most outstanding student in a course on military strategy provided by the Chilean Army. This earned her a scholarship at the Interamerican Defense College in the U.S., from which she moved on to the Ministry of Defense as a consultant.
Piñera, 56, is the leader of the National Renovation party, the most liberal and moderate faction of the right wing. He was the entrepreneur who introduced Chile to the credit card system at the beginning of the 1980s; it was the first in a series of businesses that enabled him to earn one of the greatest fortunes in the country. Currently, Piñera owns Chilevision, the TV chain. He is also the majority shareholder in LAN airlines, and owns ownership stakes in numerous businesses worth an estimated $1.2 billion. He is married and the father of four children. He comes from a family tied to the Christian Democracy party. A graduate of Catholic University of Santiago, with a master’s degree from Harvard, Piñera worked during the 1970s for the World Bank and for ECLAC, the Economic Commission for Latin America and the Caribbean.
If the new president is Bachelet or Piñera, transferring power will be easy. He or she will take over an economy closing out the year with Gross Domestic Product growth of about 6% because of strong internal demand and historically high prices for copper, the product in which Chile is the world’s largest producer. The new president will also enjoy the political and economy stability that has made Chile one of the favorite countries for investors in Latin America. Chile is one of the most open countries in the world, skilled at achieving trade agreements with larger global powers like the United States and China.
Correcting, but Not Replacing the Model
Nevertheless, the two candidates have presented programs that involve proposals for change that analysts call ‘corrections’ to the free-market social model of the outgoing government of Ricardo Lagos. Their goal is to address the enormous social inequality — Chile’s richest people earn 55% of its total income while its poorest share barely 4% — in an effort to reduce poverty and growing economic concentration.
“Correcting the model is a topic that sells quite well during the election campaign,” says Hector Martinovic, researcher at the Institute of Political Economics at Adolfo Ibáñez University (UAI). However, “If it is a question of making any fundamental change in the functioning of this country’s economy, I believe that no one, including not even Bachelet, is ready to do that.” Both the ruling ‘coalition of democratic harmony’ and the right-wing opposition are suggesting measures aimed at using the same free-market principles to achieve better results from the current ‘model.’ “In other words, this is about making the model work even better, and not about changing the principles on which the model is constructed,” he notes.
Bachelet has defined her proposal as one that provides ‘continuity’ with the governments of the current coalition, while also providing some change. As she closed out her electoral campaign, she said, “More than speeches, (my predecessors) have achieved their goals and brought the country to a level of development that today enables us to project that in 2010, Chile will be a country where no one is condemned to live in poverty…. However, there are also many people who view the future with fear; those who are afraid of illness, unemployment and old age. My government will create a social protection network that will accompany Chileans throughout their lives, and make them view the future with greater confidence and less uncertainty.” Bachelet has recognized that there are several different kinds of inequality. They involve not only income, but also inequality between men and women and between the capital of Santiago and the country’s interior regions. During her campaign speeches, she and the other candidates also mentioned great inequalities in access to education and health, as well as the socio-economic discrimination that many Chileans suffer.
Dante Contreras, director of the economics department of the University of Chile, argued in a recent opinion column in the newspaper La Tercera that long-term resources will be required to tackle these problems. It will require changing the distribution of opportunities in the workforce. “You can’t achieve this by making just a couple of moves, and you can’t do this during just one administration.” Contreras suggests two solutions. First, enact policies that involve more than one sector and are both technically correct and politically viable. Second, create a long-term social pact that is above the government itself, and which commits all the relevant players to several measures. Contreras explains that a ‘social pact’ refers to a commitment of the entire country that makes everyone responsible for generating changing, and for not being merely spectators. “When inequality involves the sort of complexities that we see in Chile, social policies are not enough. We are also going to need a change in our mindset. Often, inequality in opportunities is taken for granted because of our own prejudices when we discriminate by category, by place of origin, or by another personal factor.”
Martinovic agrees with Contreras that the country must focus on a long-term perspective. He adds that whatever structural changes are made, unequal conditions are going to be tied to education. “In the short term, the subject of unemployment is always going to have a strong impact. Every sort of policy that addresses this issue can influence what happens during a presidential administration (the four years that begin when the new government takes over in March 2006). However, when we talk about a longer time frame (and about structural change), we can only do that through better education.”
Andrés Velasco, an economist at Harvard University, could become the next minister of finance or economics if Bachelet is elected. Velasco applauds the fact that all of the candidates have addressed the issue of inequality. “It is very important because Chile is an unequal country, it’s something that has to be corrected,” Velasco told Universia-Knowledge at Wharton. Nevertheless, Velasco is certain that Bachelet has better answers to the problem than Piñera and stronger support. “Here, we have a coalition that has been in power for sixteen years, and has done well, and has demonstrated that it can bring stability and growth to Chile. You can’t say the same thing about the right wing. When it was in power (with Pinochet) the economy stagnated and we had major crises in 1975 and 1982. So, there are better proposals and a better approach.”
Velasco argues that a Bachelet government could emphasize job creation, “especially among young people and women.” Among other measures, Velasco stresses that Bachelet will establish greater labor flexibility by negotiating with the trade unions to introduce subsidies for hiring young people who are less than 25 years old. “Just as important, they have proposed that the government pay part of young people’s social security contributions so entrepreneurs will find it more attractive to hire them. In addition, we have talked about strengthening unemployment insurance so that every person who loses his job has at least six months of guaranteed income when he or she can look for another job.”
From the right wing of the political spectrum, Piñera has called inequality “an open wound that is bloody and painful, but can be solved.” He has promised to defeat poverty in four years at a cost of $1 billion. He has also said that he will create a million jobs, and that he is ready to raise investment from 22% to 28%, provide greater flexibility to workers, and improve pensions.
Focusing on the Pension System
In the social protection network promised by Bachelet, there may be room for improving something that the Lagos government has called a growing weakness of the Chilean model — the imperfections in the private pension system introduced in 1981. All around the world, people will be watching what happens because the Chilean system of savings and individual capitalization has been adopted by several countries from Mexico to Kazakhstan. Lagos’ probable successor has promised to make corrections in this system. Bachelet projects that by 2030, one out of every two Chileans will not have a pension. To resolve this crisis, during the second half of 2006, she would propose a law to the Congress that would provide funds to those people who currently have no right to a pension; give assistance to women, and eliminate discrimination against them. The law would also guarantee free competition among private-sector administrators of the pension system, and prevent concentration of this sector in only a few hands. The proposal also includes raising the minimum pension, and establishing a universal social security fund.
For his part, Piñera has promised to deliver pensions to housewives [and others who stay at home] through a program that would cost $120 million a year. He is aware that he must also avoid the social security crisis that Chile is on the horizon. His proposal also involves improving salaries, increasing jobs; improving pensions and retirement funds; and lowering the administrative costs for the private pension funds, which must be paid for by those who belong to them.
Marintovic stresses that the Bachelet program talks about introducing two types of changes to the pension system. “One involves generating greater competition in the system, which is perfectly within the framework of the Chilean model of development based on free competition. As a result, this is a perfection of the same principle.” Nevertheless, Marintovic adds, “Bachelet wants to also incorporate a ‘solidarity’ component, as she calls it. A part of the individual capital would go to a redistribution fund for compensating inequalities that are generic or otherwise. This is the only change in the rules of the game, and it could also occur when perfecting unemployment insurance.”
Changes to the Centers of Power
Sunday’s election results were widely predicted. Bachelet was the favorite among the four candidates. However, there was some uncertainty about the final distribution of the pieces on the board among the right-wing opposition parties. The fact that Piñera won second place in the first round means that there will be very important changes in the alliance that brings together the right-wing parties UDI and RN. That’s the prediction of Oscar Godoy, professor at the Catholic University’s Institute for Political Sciences. Godoy says, “It opens some room for an alliance of ‘Social Christian’ parties (which would include Bachelet’s ruling coalition), in a flexible system that has a clearly democratic plan.”
Godoy says that the leadership of Piñera on the right wing means rightists will play a major role in Chile’s democracy. It will restore the historical continuity that was interrupted by the support of rightists during the regime of Augusto Pinochet. Godoy believes that it is unlikely that the government center-left alliance will suffer a defeat on January 15, when voters choose the next president of Chile.
Jaime Insunza, professor at ARCIS University, also believes that it is unlikely that the government coalition will lose. However, he says that a Bachelet government will be obliged to lead the country into a new stage [of its development]. “The golden age of the current phase of ‘neo-liberal’ development seems to have already passed. Development is going to enter a new, critical stage. The current crisis results from success; not from having done things wrong. What’s happening is that new demands are emerging, and changes will be required.”
