Chile does not need radical reforms

Chile does not need radical reforms
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As one of the stable and prosperous countries in Latin America, Chile has been a great success story in the region. Yet according to some popular narratives, the unrest that is currently engulfing the country is the result of rising inequality and persistent poverty, proving the unsustainability of the Chilean model. However, the premature obituaries to its political and economic system have downplayed the benefits to Chilean society and ignored the considerable progress in fighting inequality in the country. The fact that the widespread furor continues points to problems that should be addressed, but Chileans would be wise to avoid sweeping amendments to its highly successful political and economic model.

The merits of the Chilean model are clear. The country is economically stable with low inflation and per capita gross domestic product at nearly two times the regional average. Although income inequality is high in comparison to advanced economies, its level of inequality is still below the levels of emerging economies. Poverty has also fallen dramatically under the Chilean market system, going from 36 percent in 2000 to less than 9 percent in 2017. One measure of inequality is close to the mean for Latin America and has gone down steadily for more than 30 years now.

Chile has taken concerted action to provide ladders of opportunity for its poorest citizens, including providing free higher education to students from low income households. A recent report by the OECD found that such policies along with the engine of Chilean economic growth have led to high levels of social mobility in the country. For instance, 23 percent of children born to fathers from the bottom quartile of income earnings will eventually move up to the highest quartile of earnings. Remarkably, Chile outperforms all other OECD member countries on this critical measure.

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Still, there is a clear demand for the government to do more. In response to the protests, Chilean President Sebastian Piñera acknowledged the need for reforms to address national inequality and expand opportunity. Piñera even acceded to calls to discuss drafting a new constitution to replace the one that had been adopted under dictator Augusto Pinochet. There are key steps the government can take to create a more equitable society without undermining the traditional framework.

One prominent complaint regards the lack of access to high quality employment enjoyed by the upper class. While many Chileans benefit from stable permanent contracts and competitive wages and benefits, others are often left inside a cycle of unstable temporary employment. Significant restrictions on permanent contracts are a major barrier and leave many businesses and their employees dependent on temporary contracting arrangements. Loosening these restrictions on permanent contracting will increase access to stable and valuable high quality employment for a much larger proportion of the Chilean workforce.

Moderate raises in the relatively low spending on social programs are another way to address inequality without undermining the successful economic system of the country. This includes placing greater emphasis on family and old age benefits, raising pensions, boosting the quality of education, and targeted spending to further alleviate poverty. Such spending does not require upending the Chilean market system. The OECD has found some room for modest increases to the comparatively low levels of taxation of income and real estate. The country can expand its narrow income tax revenue base from its arrangement today that exempts 76 percent of Chilean citizens from the personal income tax.

Finally, the willingness of Piñera to work toward a new constitution is a significant concession, which could ensnare much of his presidency, even if the intention is primarily a symbolic rejection of historical dictatorship. Further, if not adequately controlled, the process could cause significant uncertainty for the economy. If Chile moves forward with rewriting its constitution, it should do so without upending the political system that has produced one of the healthiest and wealthiest democracies in the Western Hemisphere. To that end, Chileans must be wary of attempts to use the process as a stalking horse for radical reforms to the important underpinnings of the constitution or efforts for a new social pact that embeds a wide range of social benefits that the state cannot deliver.

In this regard, the Brazilian constitution serves as a cautionary tale. The Brazilian constitution mandates more than 90 percent of annual public spending, making reforms nearly impossible and leaving precious few resources for discretionary measures. The strong economic performance and political stability in Chile stand out in a region rife with democratic backsliding, low economic growth, and high economic uncertainty. While the latest uprisings demonstrate undeniable demands for reform, Piñera and political leaders would do well to safeguard against calls for radical reforms to the system that made Chile the exemplar across the region.

Ryan Berg is a research fellow at the American Enterprise Institute. Andres Martinez is a senior research associate at the American Enterprise Institute. Their research includes Latin American government and economic issues.