Mises Wire

Chile’s Economic Model Is a Success Story in Crisis-Prone South America

The root causes of Chile’s ongoing protests are still being hotly debated. The conventional narrative is that a metro fare hike of 3.75 percent kicked off the demonstrations.

However, there is reason to believe that these increases in metro fares were only the straw that broke the camel’s back. Looking at the bigger picture, there has been a widespread feeling of social discontentment and a growing radicalization of the Chilean populace during the last decade or so.

From 2011 to 2013, Chilean students took to the streets to protest Chile’s higher education system and demanded “free” education. Fast forward to the present, free education (100 percent state-controlled education, if we’re being honest) is not the only thing on the list of protest items. While these protests have a pacific element within them, it is also true that vandals have taken advantage of the unrest to destroy private property, defile sacred places of worship throughout the country, and completely block traffic. The Chilean left is no longer playing games, and they’re willing to protest violently to reach their ultimate goal — the destruction of the Chilean Constitution of 1980.

Certain questions must be asked about the endgame of these protests. Is it really worth throwing away Chile’s constitution because of the exorbitant demands of an unruly outraged mob? Is Chile really as bad as many of its detractors say it is?

Chile’s Economic Success Cannot be Denied

Let’s take a look at Chile’s economic performance since the 1970s.

Chile’s economy is no pure free market, but the market liberalization it has witnessed since the 1970s has had a positive impact on the country.  The advice offered by the Chicago school economists, known as “the Chicago boys” was not without its flaws. But their advice was nonetheless a step in the right direction. Since 1975, Chile’s per capita income has increased fourfold, making it Latin America’s most prosperous country.

The poverty rate in Chile stood at more than 45 percent in the 1980s and is now 8.6 percent. Small business has been crucial in Chile’s market-based approach to fighting poverty. Small businesses across the globe provide not just economic benefits that make bean counters at the IMF and World Bank happy, but also build social capital for many young workers who aspire to be sole proprietors. Cutting their teeth in small business activities keeps troubled youths from engaging in antisocial behavior — as many of the protestors, who are literally lighting Chile on fire, are doing.

According to Gonzalo Jiménez, the CEO of Proteus Management, 78 percent of businesses are family owned in Chile. These same family enterprises generate 60 percent of sales and are concentrated in the commercial, agricultural, manufacturing, transportation, real estate, and construction sectors. Yes, Chile has flagship multinationals such as Cencosud and Falabella, but small businesses are at the center of the Chilean economic miracle. These kinds of enterprises will likely be the first to fold under a new constitutional order of intrusive governance.

Yes, Interventionism Is Growing in Chile

Although Chile has been successful compared to the rest of Latin America, it still has work to do in breaking free from the remaining shackles of government control in the economy. For example, the World Bank Group has placed Chile in  fifty-seventh place in its Doing Business rankings heading into 2020, whereas in 2012 it stood in  thirty-third place. Similarly, Chile has dropped in terms of economic freedom in that same time span. According to the Heritage Foundation, Chile went from being the seventh most economically free country in the world in 2012 to the eighteenth most free in 2019. The situation could be a lot worse for the Southern Cone country, but we are clearly observing a slowly festering statism in the background.

Axel Kaiser, the executive director of the free market think tank Fundación para el Progreso, warned about the Chilean right’s aversion to higher principles and refusal to make the cultural case for free markets in his 2011 book, La Fatal Ignorancia. After returning to democracy in 1990, the Concertación, a coalition of moderate left-wing parties, dominated Chilean politics from 1990 until 2010. Although these governments did increase social spending and slowly got the government more involved in the economy, they did not radically undermine the Chilean constitution or undo the market-based reforms that the Chicago boys instituted throughout the 1970s and 1980s. In fact, Chile built a strong reputation for maintaining low tariffs and signing reasonable bilateral trade agreements with countries such as South Korea and China throughout the Concertación’s time in power.

The Chilean political class should be given credit for its trade measures and for not trying to completely undermine Chile’s economic model, but the praise should stop there. Now they prefer to coast on the benefits of the Chicago boys’ successful reforms rather than try to expand upon their successes into other areas such as central banking, education, public administration, or taxation. Kaiser’s warning has proven to be prescient, as evidenced by his recent observation that the Chilean state grew by 50 percent during the last decade. Chilean political parties — left and right — have had both of their hands in the interventionist cookie jar.

Sebastián Piñera’s first administration offered promise but ended up delivering piecemeal reforms in regulatory and import tariff areas. On the other hand, it conceded ground on taxes and the government’s role in higher education. In the meantime, from 2011 to 2014, the Left built up its shock troops and constructed a powerful narrative against Chile’s economic model. From 2014 to 2018, President Michelle Bachelet partially heard their call. By implementing tax hikes, higher education reforms that banned educational establishments engaging in for-profit activities, and strengthening labor unions through the country, Bachelet was laying the groundwork for a shift in Chilean economic policy. In fairness, the Bachelet administration was known for its activist tough talk, but it never really followed up with any other destabilizing measures. Nevertheless, Bachelet’s discourse helped condition the public to embrace more radical proposals such as  discarding Chile’s present constitutional order — a talking point that has gained increasing popularity in recent years.

Given another chance to put Chile on the road to free markets, Sebastián Piñera has dropped the ball in his second term. Not only has he failed to decisively overturn Bachelet’s policies, Piñera has even endorsed the idea of a new “social contract” for Chile that entails a stronger state presence in the economy, just on more “reasonable” terms to pacify protestors.

Chile’s recent protests should serve as a wake-up call. The country may be living off its past reputation but if it doesn’t get its act together, it will soon stumble into Latin America’s hall of shame. Disappointing stories of once prosperous countries like Argentina, Cuba, and Venezuela already suffice.

Adding another country to this list would further validate Latin American revolutionary Simón Bolívar’s dying words: “[Latin] America is ungovernable. Those who serve the revolution plow the sea.’’

Image Source: Grauke/O via Flickr
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