sebastian edwards, is the Henry Ford II Professor of International Economics at UCLA’s Anderson Graduate School of Management. His latest book is American Default: The Untold Story of FDR, the Supreme Court and the Battle Over Gold (Princeton University Press, 2018).
Published May 4, 2020
Last fall, Chile, the most prosperous country in Latin America, erupted in fury. Thousands took to the streets to demonstrate against the elites, the democratically elected government — and the hardcore free-market policies often referred to as neoliberalism that had enabled the economy to prosper.
The night of October 19, some 20 metro stations were set on fire, and another 50 were badly damaged. In the days that followed, more and more people joined the demonstrations. And on October 25, one million occupied the streets of Santiago. Protesters embraced all sorts of causes, but one demand united them: they were against inequality and privilege, and what they called the “neoliberal model” imposed by Gen. Augusto Pinochet and the “Chicago boys” (the economists, mostly trained under Chicago’s Milton Friedman) who advised Pinochet during the 1973- 1990 dictatorship.
Toward the end of what had been a peaceful demonstration, a small group of protesters and self-proclaimed anarchists crossed the line into violence. They looted supermarkets, banks and pharmacies and left them in flames. They controlled complete neighborhoods, where they directed traffic and demanded monetary contributions from motorists. The cash, they said, was “for the cause.”
The police responded with force. As tempers frayed over the weeks, the authorities were accused of multiple human rights violations. The sheer size of the protests and the violence of (some) demonstrators had no precedent in contemporary Chile. Indeed, in terms of ferocity and destruction, Chile’s events surpassed anything seen in the past decades around the globe — much worse than what has transpired in Hong Kong, France, Barcelona, Ecuador or Colombia.
What made these events particularly surprising was that, for many years, mainstream economists (including officials at the International Monetary Fund and the World Bank) considered Chile to be a shining example of how to run a solid middle-income economy. Chile was seen as the model for implementing market-oriented reforms that enhanced productivity and accelerated economic growth, even as they broadly improved quality of life. In particular, experts admired Chile’s pension system based on individual savings accounts, along with the country’s high degree of openness to trade and investment with the rest of the world.
Chile was thus, for many, the poster country for globalization. Economic development specialists marveled at the fact that, within one generation, Chileans living below the poverty line had declined from more than onehalf the population to less than one-tenth.
Equally important, Chile’s political system and institutions were widely celebrated. Freedom House, the NGO that has been advocating for democracy and human rights for 80 years, classified Chile as the most democratic country in Latin America in 2019 by a very wide margin. And it did very well by global metrics: Freedom House ranked Chile just below Switzerland, and above Germany, the United Kingdom and Spain. In early 2020, The Economist declared that Chile was one of only 22 countries around the world with a political system characterized as a “full democracy.”
Beneath the rosy numbers lies a paradox. While conventional indicators, show a significant decline in inequality since 2000, the perception among Chilean citizens was that inequality had greatly increased.
To be sure, there were inklings of a very different Chile. Critics, including Nobel laureates Joe Stiglitz and Paul Krugman, pointed out that the dictatorial origin of Chile’s economic reforms constituted an original sin that linked neoliberalism to political repression. In addition, they argued that inequality was Chile’s Achilles heel, and noted that in spite of some progress, its Gini coefficient — the most commonly used measure of inequality — was one of the highest in the OECD. By their lights, the Chicago Boys had created a system that was extremely fragile to economic and financial shocks, and prone to crises.
But the numbers look awfully good. As the figures to the left show, Chile went from being the poorest country among this sample of Latin American countries (jointly with Peru) to having the highest GDP per capita in the region. And as the first figure on page 9 documents, although Chile’s degree of economic inequality was high, its Gini coefficient was equal to the median for Latin America.
The good news continues: in spite of its high inequality compared to Europe and North America, Chile was moving in the right direction. Between 2000 and 2016, the Gini coefficient went from a pretty awful 0.56 to a semi-respectable 0.46. And, as noted earlier, the gains were wide as well as deep. According to the World Bank, the poverty head count declined from 53 percent in 1987, just three years before the return to democratic rule, to barely over 6 percent in 2017. Other broad indicators of social progress, such as the UN’s Human Development Index, rank Chile in the first place in Latin America.
Chile’s Paradox: Vertical and Horizontal Inequality
Beneath the rosy numbers, though, lies a paradox. While conventional indicators, such as the Gini coefficient, show a significant decline in inequality since 2000, the perception among Chilean citizens was that inequality had greatly increased.
Analysts offer three explanations. First, it is possible that most Chileans have chosen to trust ideological critics of neoliberalism over their proverbial lying eyes. Analysts who favor this interpretation argue that the dominance on social media by critics of the government helps explain why so many came to believe that the economy was not cutting them a break.
The second explanation is that people recognize progress, but believe that things are moving forward too slowly. This is an “impatience” argument that compares reality with aspirations. The disconnect between reality and aspirations is captured vividly by the privately run pension system that might be described as a cross between Social Security and a 401(k). While people expected — because they were promised by politicians — that their nest eggs would be sufficient to sustain a decent living standard in retirement, after a lifetime of work the accumulated savings in individual accounts allow them to draw pensions that amount to less than one-third of the average Chilean’s earnings during their last decade of work.
The third explanation is that people are really talking about two different meanings of “inequality.” While most economists focus on income inequality, there is a broader concept 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.
Each of these explanations contains a nugget of truth. Having said that, though, to me, the most interesting one is the disconnect on what constitutes inequality. It is useful to distinguish between “vertical” or income inequality, and “horizontal” or social inequality. (What I call horizontal equality is very similar to the concept of “relational” or “democratic” equality developed by philosopher Elizabeth Anderson.) While vertical inequality is narrowly defined and can be measured with some degree of precision, horizontal inequality turns on how people perceive their lives in the context of their communities and places of work.
Those pressing the horizontal equity theme are on to something. In the last few years, the OECD launched an ambitious effort to analyze a broad array of indicators of social conditions and quality of life, which add up to a comprehensive notion of “horizontal inequality” they call the Better Life Index. And, as it turns out, Chile does poorly in almost every one of these indicators.
In the table below we list the 11 subcomponents of the index along with Chile’s ranking within the 40 countries sampled and the Latin American country with the highest rank. When Chile is compared with the other Latin American countries in the OECD sample (admittedly a small sample that, besides Chile, only includes Brazil, Colombia and Mexico), the picture that emerges is checkered and ambiguous. Chile is ranked first in the Latin American group in only 4 of the 11 indicators. And, strikingly, it is dead last among all 40 countries in the “civil engagement” category.
In contrast, when traditional measures are used, Chile is always ranked first among these Latin American nations, and often by a wide margin. Take, for example, income per capita.
In 2018, Chile’s GDP per capita in terms of purchasing power stood at $23,000, Mexico’s at $18,000, Brazil’s at $14,500 and Colombia’s at $13,600. And in comparisons of income inequality, Chile has the lowest degree of inequality in this (admittedly small) Latin American sample. According to the United Nations Economic Commission for Latin America and the Caribbean, in 2017 the Gini was 0.43 in Chile, while it was 0.54 in Brazil, 0.51 in Colombia, and 0.50 in Mexico.
A number of studies undertaken by the United Nations Program on Economic Development during the past decade have shown that, at least since the late 1990s, there has been a subterranean dissatisfaction among Chile’s population — a belief that the playing field is not even, that the elites enjoy massive privileges, that access to social services is profoundly skewed. There is a growing sense that private firms can collude and abuse workers and consumers without being penalized, that the education system feeds a network of privileged graduates who get all the good jobs, and that the health care system is profoundly unfair and segregated by social class. In short, for almost two decades, a period in which Chile placed first in almost every economic and social ranking in Latin America, a large fraction of the population believed that there was a very dark side to “modernization.”
In Chile, this hypothesis of simmering discontent is called the malestar hypothesis. Possibly the best translation of malestar is malaise or restlessness. According to a number of analysts, the economic development model followed since the 1980s was successful in generating growth and reducing poverty — as noted above, poverty has almost been wiped out. But at some point the development strategy ceased to be effective. What worked in a very poor nation was not appropriate in a country with a growing middle class with soaring aspirations and a chronic sense of vulnerability. This middle class wanted better social services, better health care, better education and better pensions; it wanted a sense of solidarity among Chileans, and less privilege for the elite. In short, they wanted greater horizontal equality.
The malestar hypothesis has been brushed aside by conservative intellectuals, who assert that people were satisfied with the neoliberal model with its emphasis on material gain. It was claimed that, although people had some grievances about specific aspects of the development strategy, they were satisfied with their lives. This perspective informed the views of Sebastián Piñera (who holds a PhD in economics from Harvard, not Chicago) during his successful 2017 presidential campaign.
What makes the Chile story particularly interesting is that the center-left was in office during 24 of the 30 years since the return of democratic rule. The popular uprising, then, was not against the policies of a succession of conservative governments. It was a revolt against a model supported and nurtured by both the right and the left.
The students called their movement “Evade” and pointed out that the elite systematically evaded taxes so it was the people’s turn to dodge the government’s fiscal bite.
Days of Fury and the End of Neoliberalism
The proximate trigger of Chile’s uprising was a modest increase in Santiago’s Metro fares (3.7 percent). As a way of protesting, local high school students decided to jump the Metro turnstiles. They called their movement “Evade” and pointed out on social media that the elite systematically evaded taxes so it was the people’s turn to dodge the government’s fiscal bite.
After a series of unfortunate moves by the government, including insensitive statements by cabinet members — one of them said that if people were unhappy with the fare increase, they could go to work earlier and avoid the peak-hour tariff — the protest movement mushroomed. People who rejected low pensions, highway tolls, school segregation (by social class), inadequate public education, environmental degradation, the privatization of water rights, the high cost of prescription drugs and substandard public health services joined the marches.
Meanwhile, anarchist groups, who in the past had planted bombs in the Metro and mailed packages with explosives to copper company executives, sprang into action. On October 18, arsonists used fire accelerants and advanced incendiary techniques to destroy seven Metro stations. The police reacted with tear gas and rubber bullets, arresting thousands. This only fed populist outrage: rallies became even bigger and spread far beyond Santiago. A day later, President Piñera declared a state of emergency, and the military left their barracks to patrol the streets.
For many people this was a turning point, a reminder of the murderous reign of Pinochet. In reaction, people from all over the country — including from the most affluent neighborhoods — protested by banging pots night after night.
On October 25, and after more than a million demonstrated peacefully in Santiago, violence broke out once again. From that point on, a toxic daily routine took over. Peaceful demonstrations began around 4 p.m. At dusk, the protests become violent and police responded in kind. The daily protests continued for months, fed by fake news and a more innocent rumor mill. A host of public events, ironically intended to show off Chile’s successes on the international scene, had to be canceled.
On November 15, 11 political parties negotiated a way out of the immediate crisis. The core of the accord was an agreement to support a constitutional convention to replace Pinochet’s 1980 constitution, which had survived his regime. There will be a referendum on April 26 (just after this article is published), where voters will have the last word on whether the convention will take place. If, as every poll indicates, the answer is yes, delegates to the convention (who will be popularly elected in October) will have two years to draft the new constitution.
By almost everyone’s reckoning, this agreement marked the beginning of the end of the neoliberal experiment in Chile. But whether the model will be dismantled quickly or in a gradual and parsimonious way is still to be seen. It is also too early to know if some important features of the model that have kept Chile on a fairly stable growth path, including an autonomous central bank and a fiscal rule that helped maintain budget discipline and a low public debt, will be maintained in the future.
Nor is it really known whether, once unleashed, the populist genie can be put back in the bottle. In spite of this political agreement, the violence has not ended. In January, demonstrators interrupted the national university entrance exam — Chile’s version of the SAT. They set exam booklets on fire, threw rocks at examiners and invaded many of the test sites. The government rescheduled the test for a few weeks later. But again violence marred the procedures, and thousands of high school graduates were unable to take the exam.
The core of the accord was an agreement to support a constitutional convention to replace Pinochet’s constitution, which had survived his regime.
Going forward, only a few things are clear:
- The economy is suffering as a consequence of the rioting and destruction, unemployment is already in double digits and investors are backing off. Access to capital, domestic and foreign, is bound to get harder.
- Chile’s political class has learned a lesson about inequality — especially horizontal inequality. Improvement, which turns on trust as well as action, will be slow, but will happen. Whether the country will remain vulnerable to the sort of populism that has thrown it into turmoil is an open question.
- The new constitution will depart significantly from Pinochet’s hands-off-private-enterprise approach. It will give 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, in which markets were used to allocate goods and services that were allocated by government almost everywhere else, is DOA. It will likely be replaced by a third-way welfare state in the spirit of Scandinavia. Whether Chile can sustain growth and stability on a third-way path without the fiscal resources of northern Europe or the traditions of a mixed economy is the big question.
Chile’s seemingly easy recovery from a pathological right-wing dictatorship captured the sympathy of the civilized world, offering hope to policy analysts that economic development could be divorced from political development — that economic success was mostly a matter of putting the right policies in place and waiting for the dust to settle. What we don’t know yet is whether the damage from societal trauma so long hidden from sight can be repaired without a long period of uncertainty and hardship. Here’s hoping that Cinderella Chile can be born again, and soon.