South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
How to stop a middle-class revolt from derailing a successful development model
Apr 14th 2012 | from the print edition
CHILE has long seemed set to become the first developed country in Latin America. Its income per head has tripled since democracy was restored in 1990, to around $16,000. Its success has been based on a simple formula: a free-market economy backed up by the rule of law and a fiscally responsible state. Far more than other Latin Americans, Chileans have trusted in the market to provide not only growth but also public services such as education, health, pensions and infrastructure.
Now Chile’s approach is under greater strain than at any time since 1990. For the past year, students have staged huge protests demanding that universities be free (for them, they mean). They want the state to assume a dominant role in education, while barring for-profit providers. Their cause has wide public support. While the conservative government of Sebastián Piñera has fumbled, young far-left leaders like Camila Vallejo, a nose-ringed geography student and Communist Youth leader, have seized the initiative. They have linked up with local protest groups around the country, and broadened their demands to include the nationalisation of copper mines. Unless Chile’s politicians respond to frustrations that lie behind the protests, the country risks succumbing to the populism that afflicts its neighbour, Argentina (see article).
As Chile’s middle class has grown, so has a sense that the benefits of prosperity are unfairly distributed. Statistics lend some credence to that: Chile’s Gini coefficient, a measure of inequality, while similar to the rest of Latin America, is high by world standards.
Some of the protesters want the government to remedy this perceived unfairness by taking a much larger role in Chile’s economy. That would be a mistake. The country’s success stems in large part from being a low-tax economy that has nurtured private investment and initiative.
That said, the students have a couple of fair points to make. One is that Chile needs to get better value from its spending on education. The economy is still uncomfortably dependent on mining, which provides fully 62% of export revenues. Sooner or later the copper price will fall back to earth. So Chile must develop other, higher-value businesses. For that, it is vital that it educates its people well.
Mr Piñera rightly argues that additional spending on education should go mainly on improving schools and extending pre-school facilities. All the evidence is that inequality in Chile, as elsewhere, starts in the early years. University students tend to come from more privileged families, so if the state assumed all their costs, it would be exacerbating the country’s inequalities. But state universities could help cut students’ costs by reducing the length of degrees—at present, they generally take a ridiculously long six years. And the government could help inform students’ choices about their tertiary education by publishing, or requiring universities to publish, more data on fees and on the salaries that graduates from different courses command. At present, according to a recent paper, around 40% of students lose money on their investment in higher education.
Milking the system
The universities also illustrate the students’ second justified complaint: that the system in Chile is biased in favour of the privileged. At present, students at “traditional” universities (who tend to be better off) get cheaper loans than those at other universities. A bill to end that favouritism is making its way through the legislature only slowly: the current system’s beneficiaries are lobbying quietly against it.
It is not just in higher education that insiders milk the system. Chile is riddled with cartels. In January the country’s competition authority found that the three biggest chains of pharmacies, which together control 90% of the market, had colluded to push up the price of more than 200 medicines by around half. The government has begun to tackle such cartels, but if it is to convince Chileans that they are getting a fair share of the country’s growth, it will need to be much tougher.
The biggest question in Chile is whether the political system has become too ossified to make the reforms the country needs to address these frustrations without stifling growth. It is a bad sign that the Congress, beholden to lobbies, is tarrying over the simple matter of equalising student loans. Chile still has time to change. But it will let the frustrations of its newly empowered middle classes grow at its peril.