The Reality of Inequality and Its Perception: Chile’s Paradox Explained

While conventional indicators show a significant decline in inequality, the perception among Chile’s citizens is that inequality has greatly increased. The development model Chile followed since the 1980s was successful in generating growth and reducing poverty. But it did not function properly in a middle-income country.

 

 

The social explosion in Chile in October took everyone by surprise. The massiveness of protests and the violence of demonstrators have no precedent. At the time of this writing, and after 25 days of demonstrations, riots, and looting, millions of people continue to march demanding “change.” Protesters embrace all sorts of causes, but one thing unites them: they are against inequality and privilege. The police have responded with force, and have been accused of multiple Human Rights violations.

 

Chile is a fascinating case of what can go tragically wrong during a modernization process.

 

For a long time, economists praised Chile’s market-oriented reforms and referred to them as an example of how to run an economy. Moreover, its political system and institutions were ranked highly by think tanks such as Freedom House.

 

However, many analysts pointed out that inequality was Chile’s Achilles heel. Its Gini coefficient is one of the highest in the OECD. It is high but has declined rapidly. During the last two decades, there has been significant progress in the social conditions front.

 

Figures 1 through 3 summarize the evolution of Chile’s economic and social conditions. As may be seen in Figure 1, Chile went from being the poorest country in this group (jointly with Peru), to having the highest GDP per capita in the Latin American region.1)IMF WEO data. Figure 2 shows that in 2016 Chile’s Gini was equal to the median of the region; in terms of inequality, Chile is a typical Latin American country. Figure 3 indicates that Chile is among the countries that have reduced inequality the fastest since 2000–the Gini declined from 56 to 46. Other indicators of social progress, such as the Human Development Index, rank Chile in the first place in Latin America.

 

Figure 1: GDP per capita, selected Latin American countries, 1980-2019 (IMF) The picture is maintained if other nations are included.

 

 
Figure 2: Gini Coefficient, Latin America, 2016: Source IDB

 

Chile’s Paradox

 

The data discussed above shows a (relatively) positive picture. But, behind these rosy figures, there is a big paradox: While conventional indicators show a significant decline in inequality, the perception among Chile’s citizens is that inequality has greatly increasedSee Figure 4.

 

This contrast between “reality” and “perception,” constitutes “Chile’s paradox.” There are three possible explanations for it:

 

The first is that we are talking about two different meanings of “inequality.” While most economists focus on “income inequality,” as measured by the Gini, the people are talking about a broader concept, one that includes quality of life, social interactions, access to basic services, the nature of interpersonal relations, and the degree of “fairness” of the political and economic systems.

 

Second, it is possible that people don’t realize that conditions have greatly improved. It is conceivable that the narrative about the county’s social and economic trajectory has been captured by the left and by the critics of “neoliberalism.” This is a “veil of ignorance” type of argument.

 

The third possible explanation is that people recognize that there has been progress, but believe that things are moving too slowly. This is an “impatience” argument that compares reality with aspirations. The disconnect between the two is captured vividly by the privately run pensions system. While people expectedand were promiseda high replacement rate, this has been, on average, a very low 30 percent.

 

 

Which of these three possible explanations is correct? As in the old SAT question, the right answer is “all of the above.”

 

Figure 3: Reduction in inequality (Change in GINI 2000-2016): Source IDB
Figure 4: Change in Perception of inequality: Source ECLAC

 

 

Vertical and Horizontal Inequality

 

Having said that, the most interesting factor behind the paradox is related to different notions (or dimensions) of inequality. In that regard, it is useful to distinguish between “vertical” or income inequality, and “horizontal” or social inequality. While the former is narrowly defined and can be measured with some degree of precision, the latter is a somewhat vague concept that many times depends on how people perceive their lives and their social interactions with others in their communities and workplace.

 

During the last few years, the OECD has made an effort to analyze a broad array of indicators of social conditions and quality of life, which add up to a broad notion of “horizontal inequality”–see the OECD’s Better Life Index for details. As it turns out, Chile does poorly in almost every one of these indicators. In what follows, I provide a list of the eleven components of this index. I show Chile’s ranking within a sample of 40 countries (most of them OECD members), and I provide information on which Latin American country is the most highly ranked in each category:

 

  • Housing: Chile 25 out of 40; Chile top Latam country.

  • Income: Chile 35 out of 40; Chile top Latam country.

  • Jobs: Chile 31 out of 40; Mexico top Latam country.

  • Community: Chile 37 out of 40; Brazil top Latam country.

  • Education: Chile 35 out of 40; Chile top Latam country.

  • Environment: Chile 32 out of 40; Brazil top Latam country.

  • Civic engagement: Chile 40 out of 40; Brazil top Latam country.

  • Health: Chile 29 out of 40; Brazil top Latam country.

  • Life satisfaction: Chile 21 out of 40; Mexico top Latam country.

  • Safety: Chile 35 out of 40; Chile top Latam country.

  • Work-life balance: Chile 34 out of 40; Brazil top Latam country.

 

Of course, one may have disagreements with the methodology used to construct these Better Life Indexes, but it is worthwhile noting that, when compared with the other Latin American countries in the sample (Brazil, Colombia and Mexico), the picture that emerges is checkered and ambiguous. Chile is ranked first in only 4 out of the 11 indicators, and is dead last within the 40 countries sample in “Civil engagement.”

 

 In contrast, when traditional measures are used, Chile is always ranked first among these Latin American nations, often by a wide margin. In terms of GDP per capita (PPP), in 2018 Chile stood at $23,000, Mexico at $18,000, Brazil at $14,500, and Colombia at $13,600. (See Figure 1).2)IMF WEO data. Regarding the Gini, Chile has the lowest degree of inequality in this (small) sample; according to ECLAC, in 2017 the Gini was 0.43 in Chile; it was 0.54 in Brazil, 0.51 in Colombia, and 0.50 in Mexico.3)The figure for Mexico is for 2016.

 

The above discussion, then, shows that as soon as one moves to broader measures of horizontal inequality, the view of Chile as Latin America’s “paradise” becomes somewhat blurred.

 

A number of studies undertaken by the United Nations Program on Economic Development during the last decade show that, for some time now, there has been a subterranean dissatisfaction among Chile’s population, a sense that the playing field is not even, that the elites enjoy massive privileges, that access to social services is profoundly eschewed.

 

There is a growing sense that private firms can collude and abuse workers and consumers without being penalized and that the education and health systems are profoundly segregated. In short, a very large fraction of the population believes that there is a dark side to “modernization.”

 

In Chile, the hypothesis of brewing unhappiness received the name of the “malestar” hypothesispossibly the best translation of “malestar” is malaise or restlessness.

 

According to a number of intellectuals, the development model followed since the 1980s was successful in generating growth and reducing poverty. But, at some point in time it stopped being effective. The model did not function properly in a middle-income country, and needed major adjustments. What worked in a very poor nation was not appropriate in a country with a growing middle class with massive aspirations and a sense of vulnerability. This middle class wanted better social services, better health, better education, and better pensions; it wanted more solidarity, and less privileges for the elite. People wanted more “horizontal equality”; people demanded respect and “dignity.”

 

The “malestar” hypothesis was systematically rejected by conservative intellectuals, who argued that people were satisfied with the so-called “neoliberal” model. It was argued that, although people had some grievances about aspects of the development strategy, they were satisfied with their lives, and that the model did not require major adjustments or changes. This perspective was at the center of candidate Piñera’s economic and social platform during the 2017 presidential campaign.[3]    

 

Days of Fury and Destruction

 

Chile’s uprising was triggered by a modest3 percent increase in Santiago’s Metro fares. As a way of protesting this increase, local high school students decided to jump the Metro turnstiles. Through social media, they called their movement “Evade,” and repeatedly made the point that the elite–including the President–systematically evaded taxes and that now it was the people’s turn to dodge Metro fares.

 

After a series of unfortunate decisions by the government, the movement became massive and peaceful demonstrations ensued. People that rejected low pensions, highway tolls, school segregation, and poor public health services, joined the marches. At the same time, anarchist groups that in the past had planted bombs in the Metro sprang into action.

 

On October 18, twenty Metro stations were simultaneously set on fire. The police reacted with force, firing tear gas and rubber bullets. Demonstrations became even more massive, and spread throughout the country. On October 19, more than a million protesters congregated in Santiago. Since then, there has been a daily routine that begins with peaceful demonstrations, around 4 PM. At dusk, the demonstrations become violent, when anarchists and extremists set supermarkets, pharmacies, churches, government offices, and banks on fire; they set barricades in streets and boulevards.

 

Rumors and fake news spread through social media, and the country has become paralyzed. Demonstrations, looting, rioting, and repression have reinforced each other in a horrible circularity, in a spiral of sorrow and destruction.

 

The Way Forward

 

In the early morning of November 15 (2:30 AM), eleven political parties sealed an agreement to stop the violence. Its sole component is a call for a Constitutional Convention to replace Pinochet’s 1980 constitution. For three decades, the right had refused to do this; the massiveness of the protests forced them to agree on to this move. There is very little certainty regarding what will happen, going forward. Only a few things are clear; here are three of them:

 

  • From an economic perspective, Chile will experience severe problems. Unemployment will skyrocket, foreign investment will dry up, and capital will leave the country. Whether there will be complete reversion to the Latin American mean is still to be seen. It also remains to be seen whether Chile will become a more egalitarian country.

 

  • Chile will have a new Constitution, one that gives a central role to the state in economic and social affairs, and will guarantee at the constitutional level social rights such as education and health.

 

  • The neoliberal experiment is completely dead. It is likely to be replaced by a welfare state that will attempt to follow the Nordic countries.

Sebastian Edwards is the Henry Ford II Professor of International Economics at the University of California, Los Angeles. 

 

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References   [ + ]

1, 2. IMF WEO data.
3. The figure for Mexico is for 2016.