Chile’s Fall From Grace Shows the Failures of Neoliberalism

For many years, Chile’s economic growth and transition to democracy have made it the poster boy for neoliberalism. The current wave of protests highlights the extreme inequality caused by 40 years of neoliberal policies.

 

 

Protests in Santiago, Chile, October 2019. Photo by Carlos Figueroa, via Wikimedia Chile [CC BY-SA 4.0]

 

It is not common for an OECD country to shoot and kill 16 people in two days of socially motivated riots. Only Turkey, in its unending wars against the Kurds, comes close to that level of violence. This is, however, what the Chilean government, the poster child for neoliberalism and transition to democracy, did last month, encouraging a wave of protests that do not show signs of subsiding despite cosmetic reforms proposed by President Sebastian Piñera.

 

Chile’s fall from grace is symptomatic of worldwide trends that reveal the damages caused by neoliberal policies over the past 40 years, from privatizations in Eastern Europe and Russia to the 2008 global financial crisis to Euro-related austerity. Chile was held, not the least thanks to favorable press that it enjoyed, as an exemplar of success. Harsh policies introduced after the overthrow of Salvador Allende in 1973, and the murderous spree that ensued afterward, have been softened by the country’s transition to democracy, but the essential features of these reforms were preserved.

 

Chile indeed had a remarkably good record of growth. While in the 1960-70s it was in the middle of the Latin American league by GDP per capita, it is now the richest Latin American country. It was, of course, also helped by high prices for its main export commodity, copper, but its successful growth is incontestable. Chile was “rewarded” with membership in the OECD, the first South American country to accede to the “club” of rich nations.

 

Where the country failed is in its social policies which, somewhat bizarrely, were considered by many to have been successful as well. In the 1980s and 90s, the World Bank hailed Chile’s “flexible” labor market policies, which consisted of breaking up the unions and imposing a model of branch-level negotiations between employers and workers rather than allowing an overall umbrella union organization to negotiate for all workers. It was even more bizarrely used by the World Bank as a model of transparency and good governance, something that transitioning countries in Eastern Europe should have presumably copied from Chile.

 

The brother of Chile’s current president, scion of one of the richest families in Chile, became famous for introducing, as Minister of Labor and Social Security under Pinochet, a funded system of pensions where employees make compulsory contributions from their wages into one of several pension funds, and after retirement receive pensions based on investment performance of such funds. Old-age pensions thus became a part of roulette capitalism. But In the process, the pension funds and their managers, often charging exorbitant fees, became rich.

 

José Piñera had tried to “sell” this model to Yeltsin’s Russia and to Bill Clinton’s United States, but, despite strong (and quite understandable) support from the financial communities in both countries, he failed. Nowadays, most Chilean pensioners receive $200-$300 per month in a country whose price level (according to International Comparison Project, a worldwide UN- and World Bank-led project that compares price levels around the world) is about 80 percent of the United States’.

 

While Chile leads Latin America in GDP per capita, it also leads it terms of inequality. In 2015, its level of income inequality was higher than any other Latin American country except for Colombia, Paraguay, and Honduras. It exceeded even Brazil’s proverbially high inequality. The bottom 5 percent of Chile’s population have an income level that is about the same as that of the bottom 5 percent in Mongolia. The top 2 percent enjoy an income level equivalent to that of the top 2 percent in Germany. Dortmund and poor suburbs of Ulan Bataar were thus brought together.

 

Chile’s income distribution is extremely unequal, but even more so is its wealth distribution. When it comes to wealth inequality, Chile is an outlier even compared to the rest of Latin America. According to Forbes’ 2014 data on world billionaires, the combined wealth of Chilean billionaires (there were twelve of them) was equal to 25 percent of Chile’s GDP. The next Latin American countries with the highest wealth concentrations are Mexico and Peru, where the wealth share of billionaires is about half of Chile’s, or 13 percent of GDP. Moreover, Chile is the country where billionaires’ share, in terms of GDP, is the highest in the world (if we exclude countries like Lebanon and Cyprus where many foreign billionaires simply “park” their wealth for tax reasons). The wealth of Chile’s billionaires, compared to their country’s GDP, exceeds even that of Russia’s.

 

Such extraordinary inequality of wealth and income, combined with the full marketization of many social services (water, electricity, etc.), and pensions that depend on the vagaries of the stock market, have long been “hidden” from foreign observers by Chile’s success in raising its GDP per capita. But the recent protests show that growing the GDP is not enough. Growth is indispensable from economic success and reduction in poverty. But if there is no social justice and minimum of social cohesion, the effects of growth will dissolve in grief, demonstrations, and yes, in the shooting of people. 

 

Branko Milanovic is the author of Global Inequality: A New Approach for the Age of Globalization and Capitalism, Alone, both published by Harvard University Press. He is a senior scholar at the Stone Center on Socio-Economic Inequality at the Graduate Center, City University of New York. An earlier version of this post has previously appeared in Milanovic’s blog.

 

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