Understanding the Protests in Chile (Nov 2019)
Having worked off and on in Chile for the last four years (see https://www.lasanozfinance.com/the-latin-american-mobile-job-201518), and having become a friend of that country and its post-dictatorial economic development as well as its amazing nature, it has been disquieting to see the strong (and partially violent) protests of the last four weeks; giving rise to an urgent need to try to understand what drives this widespread societal unrest and evident need for deep change in the way the country operates.
Picture of >1m peaceful protesters in Santiago on 25 October 2019.
Except for a few cognoscenti (e.g., LSE professor Kirsten Sehnbruch, see bibliography below), for whom this was evidently an accident waiting to happen, most observers of democratic, stable and economically successful Chile have been somewhat surprised by the depth and width of resentment and reform ambitions that the last four weeks of mostly non-violent protests have brought to the fore.
To any frequent traveler to, and friend of, Latin America, social protests, general strikes, political upheaval, populist setbacks, military coup d’etats, egregious levels of corruption and manipulation of constitutional checks-and-balances as well as electoral statutes of limitations by power-hungry politicians are, unfortunately, par for the course. But Chile, along maybe with Uruguay and Costa Rica, would be the country such travelers would least likely suspect them. A recent Radio Chile broadcast characterized the population as ‘resignado’ – resigned to their fate. Which fate?
Chile’s 2017 GDP on the basis of purchasing power parity (PPP) per capita was some USD 25,700 per capita, slightly behind Turkey and Greece (USD 27k), level with Russia, Romania and Croatia (USD 25k), and ahead of regional peers Argentina and Uruguay (USD 21-23k), according to a WB Study cited on Wikipedia. It is the first South American country to join the OECD (Colombia has recently followed), the quintessential ‘1st world club’ of economies. Its 2018 rating by Transparency International is 67/100 placing it at #27 globally, and above such countries as Portugal (#30), Poland (#36), and Spain (#41); Argentina ranks #85, Colombia #99, Peru #105, Brazil equal #105, and Mexico #138; only Uruguay is ranked higher in Latam at #23. Its average growth rate of GDP over the last 20 years has been an impressive 3.8%, its PPP GDP p.c. over that same period has more than doubled. It has had 7 peaceful changes of president from the centre-left to the right and back since dictator Pinochet abdicated in 1990. Not a track record to belittle, one would have thought.
But look at other economic indicators usually only pored over by social scientists, such as the Gini co-efficient of inequality, and you suddenly realise that this relatively well-to-do, stable, less-corruption-afflicted country of immense natural beauty and riches (copper being the main export), working infrastructure, and first world aspirations, has inequality levels that are nearly as galling as those in Brazil – which has benefited from the massive poverty alleviation effects of president Lula’s social policies in the years 2003-2010. While inequality has fallen somewhat (as measured by the Gini coefficient), it ranks as one of the highest in the world. Moreover, what is evident from a chart by The Economist reproduced below, inequality is not that much lower in countries such as France or Spain, but their social transfer systems reduce effective inequality to more tolerable levels by both a redistributive fiscal regime and a social welfare state – something that is nearly absent in Chile.
Source: The Economist
Inequality, of course, is becoming the all-explanatory buzzword for populism and democratic setbacks around the globe, and there is now a wide body of literature not just of inequality of outcomes, but of inequality of opportunity. Two key hypotheses to explain recent protests are therefore identified in the relevant analyses and literature: (1) high and persistent levels of inequality; and (2) lack of social mobility. Both of which deserve closer scrutiny in this note.
A quick purview of select literature (see bibliography) establishes a few data points and insights:
A. The most authoritative recent study of inequality in Latin America, written by a team of economists at the World Bank in 2013 headed up by Francisco Ferreira, Lead Economist on its research programme on poverty and inequality, and incoming inaugural Amartya Sen Chair in Inequality Studies at the LSE’s International Institute of Inequality (as well as my colleague from our undergraduate years at LSE), highlights as one of its conclusions that social mobility in Chile has actually been the highest in Latin America, relatively speaking (specifically, 60% of the Chilean population improved its economic position between 1992 and 2009 while 40% maintained it, putting it best in class in Latin America). It also states, however, that of the impressive intragenerational social mobility observed in Latin America over the 15-year time horizon from 1995 to 2010 (with >40% of Latin Americans moving upwards in social class from poor (defined as less than USD 4 per person per day) to vulnerable (above USD 4 but less than US 10 per person per day), or from vulnerable to middle class (above USD 10 but below USD 50 per person per day), 66% was due to GDP growth, with only a minor share due to redistributive policies. Economic mobility was also found to be positively correlated with public health and education spending (both being among key demands of the Chilean protesters). The report also concludes, however, that origin-independent intergenerational mobility in Latin American continues to be very low – i.e. it matters more who your parents are and into which socioeconomic background you were born, not necessarily how talented or resourceful you are.
B. That study also highlights the huge role played by Brazilian President Lula’s progressive and redistributive social policies, including the signature Bolsa Familia programme, a conditional cash transfer programme, which incentivizes mothers to keep children in school and to get regular health inspections. These policies lifted over 20 million Brazilians out of poverty and halved the poverty rate from 40% to 20%, highlighting the important role that the state has to play to correct for unacceptable and divisive economic outcomes from free market economics. One of the key policy conclusions of said World Bank study is that a more inclusive social contract with higher taxation and better quality of (public) services may be needed to break the intergenerational cycle of poverty.
C. But it also clear from the literature that inequality of outcomes (income distribution) is possibly not the biggest driver of resentment and frustration. A number of studies point to the fact that perceptions of limited social mobility, of inequality of opportunities, is a more pressing social issue in Latin America. A 2017 Yale studied cited in Ian Bremmer’s Time article (see bibliography) concludes that: “There is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness.”
D. That same conclusion is reached by one of the pre-eminent liberal journalists of Chile, Daniel Matamala, in more metaphoric language, in an article published in La Tercera (see bibliography): ‘Porque occurio hoy, en octubre 2019? Las planillas excel otra vez quedan sin respuesta. Ni el costo del trasporte, ni la inflacion, ni el desempleo, ni los sueldos reales son peores que hace dos o tres dias. Lo que ha despararecido es el horizonte.’ [It is not that cost of transport, inflation, unemployment or real salaries are worse than 2-3 years ago. What has disappeared is the horizon.]
E. A recent paper by a Harvard graduate student reaches similar conclusions (see Protzer in bibliography). In an FT letter responding to the Chilean coverage, he writes: ‘In fact, behavioural science shows that people do not systematically dislike unequal economic outcomes. People do not value equality but fairness […] People are taking to the streets not because they are jealous of the success of others, but because they themselves have not been given a fair opportunity to succeed.’ His policy conclusions offer a clear road map for the Chilean discussion, and relate back to the earlier references on the erosion of the Commons:: ‘There is a strong backing for the public goods that create widespread opportunity – such as education, healthcare and public transit – and buy-in to market competition, which converts that opportunity to tangible rewards.’ (Financial Times, 24 October 2019)[1]
However, those analyses on their own are somewhat too easy, as the origins of Chile’s troubles appear to lie deeper. Allow me a little historic digression for context. In the 1970s and 1980s, many Latin America countries experienced long bouts of military dictatorships: Brazil (1964-85), Argentina (1976-83), Uruguay (1973-85), and Peru (1968-80), to name just a few of Chile’s southern Latin American neighbours where I have had a chance to live and/or travel over the last 30 years. In Chile itself, the democratically elected and radically socialist government of President Salvador Allende was overthrown in a bloody coup in 1973 by the Chief of Staff of the army, General Augusto Pinochet. Dozens of thousands of people were interned and tortured, over 3,000 killed, tens of thousands emigrated the country, some to never return, like one of our teachers at the UWC of the Adriatic in Italy – who shares his very personal and rich perspective on current events with his FB friends.
Pinochet’s atrocities have been exemplarily researched, documented, and exhibited, at Santiago’s outstanding Museum of Memory and Human Rights, and in a number of well-researched historic reports available online (e.g., https://www.usip.org/sites/default/files/resources/collections/truth_commissions/Chile90-Report/Chile90-Report.pdf); for a discussion of the 3rd of 4 official reports, see https://www.menschenrechte.org/en/2005/06/03/dealing-with-torture-in-chile-achievements-and-shortcomings-of-the-valech-report/. The ignominious role of the CIA and the Nixon/Kissinger administration in fostering the coup d’etat and condoning the unspeakable human rights abuses (incl. targeted extraterritorial killings of political opponents in Italy, the US, and throughout other Latam countries post-1973, the infamous Operation Condor) is well documented, too. In Chile, Uncle Sam gained (once more) an ungainly reputation in enforcing the Monroe Doctrine of 1823 (which posits, colloquially put, that Latin America is the US’ back yard and it will damn well do there as it pleases.)
When the military dictatorships lost support and were becoming untenable, the transition to democracy was never facile. How to ensure justice, while also allowing for a stable transition back to electoral democracy and the rule of law? The answer was usually a fudge. In Argentina (1986) and Uruguay (1986), the respective amnesties for the military and their many human rights abuses were called ‘punto final’ laws – full stop laws. Let bygones be bygones. That allowed a return to democracy, but justice, transparency, and legitimacy suffered in many individual cases of those left behind, and there was no healing of society. (The Argentinian law was repealed in 2003 and declared unconstitutional by the constitutional court in 2005. The Uruguay law was subject to a referendum in 1989 which voted to repeal it, but despite later congressional and constitutional attempts, it has never been taken off the books; in 2009 the Uruguayan Constitutional Court declared it illegal.)
Pinochet’s Chile had not just been a brutally repressive regime, but also a top-down social and economic experiment without many parallels. Economic liberalization, often as advocated by a group of economists associated with the University of Chicago and known as the ‘Chicago boys’, was taken to extremes. (As an aside, in a 1976 Newsweek article, Milton Friedman, acclaimed Chicago economist and Nobel Prize winner, is quoted as follows: ‘In spite of my profound disagreement with the authoritarian political system of Chile, I do not consider it as evil for an economist to render technical economic advice to the Chilean Government, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean Government to help end a medical plague.’ He was awarded the Nobel Prize in economics in that very same year.) Many industries were privatised, and often only to a handful in Chile’s well-connected conservative circles, creating many uncompetitive industries or oligopolies, which – unrestrained by any meaningful regulation – were licenses to print money; or to collect rents, as economists would phrase it. Even worse, the government also privatized what many consider public goods or ‘the commons’, such as education, transport, health services, and even social security systems.
There is a growing literature, following the 2008 post-Lehman global depression and induced austerity by governments having to bail out banks with public funds and consequently cutting back on public services, seeking to explain the global waive of populism and popular revolts at elites and globalization, which thematizes this ‘loss of the commons’, the erosion of the provision of quality public goods, which provided key services to the wider populace irrespective of income, and thereby fostered social inclusion, societal cohesion, and reduced perceived inequality. See, e.g., the book published this year by SOAS professor Guy Standing, ‘The Plunder of the Commons’, or the incisive legal analysis of the accelerated encroachment of ‘enclosures’ on English public land from the 16th century and extending into intellectual property rights and financial products in the 21st century, by Columbia University law professor (and former Harvard study colleague of mine), Katharina Pistor: ‘The Code of Law’.
In Chile, the erosion of the Commons was by and large completed by Pinochet in 1988, and over the 30 years since, careful centre-left administrations, burdened by similar constraints like the ‘punto final’ legislation in Argentina and Uruguay, have only rectified this at the margin:
· There are no free public universities of quality.
· Quality secondary education requires private fees. To get into good private universities from underfunded and low-quality public schools is very difficult, reducing social mobility.
· The social security system was largely privatized from an intergenerational pay-as-you-go system to a system of individual capital accounts, putting retirement responsibility on the individual and not on society. Monthly retirement payouts by the AFP in September 2019 were some USD 135 for woman and USD 175 for men (according to Chilean daily El Dinamo), significantly less than the minimum wage (which stands at USD 260-426 per month, depending on the economic activity).
· Motorway tolls, through generous concessions, are at the level of USD 0.03 per km, comparable to Hungary and Malaysia. When the private motorway programme of over 2,300km was conceived in the 1990s, including with help from the Inter-American Development Bank, it was held up as a model of a well-executed public-private-partnership, as this IADB press release shows: https://www.iadb.org/en/news/webstories/2004-01-01/chiles-toll-road-revolution%2C4940.html. A World Bank report also laudes the programme, without taking into account social elements.[2] (http://siteresources.worldbank.org/INTGUARANTEES/Resources/TollRoads_Concessions.pdf)
· Subway fees in Santiago for one-way tickets are the equivalent of USD 1.2, comparable to much more well-to-do Barcelona. A nominal rise of 4% triggered the protests. Some families are said to spend 30% of their income on commuting costs.
Over the last 4 years of working off and on in Chile, several observations have struck me as a reflection of the long shadows that the dictatorship and its economic regime have bequeathed onto modern Chilean society, such as:
1. ‘Punto final’ heresy has been cued into the post-dictatorship set-up in a number of ways. While Pinochet left the Presidency in 1990, he was then Commander-in-Chief of the Chilean Army, and when he quit that in 1998, he became Senator-for-life (further to a constitutional provision in the 1980 constitution that he had had drafted), a political office that conveniently included immunity from legal persecution …
2. The current Chilean constitution was crafted in 1980 by a government appointed commission and approved in a plebiscite widely acknowledged to have involved massive voter fraud.
3. Justice has been haphazard. When Pinochet visited the UK in 1998 (he was well liked by Margaret Thatcher, having assisted the UK in the Falkland war against Argentina in 1982), Spanish investigative judge Baltasar Garzon sought to process Pinochet on the universal principle of violation of human rights. The UK placed him under house arrest but in the end Home Office Secretary Jack Straw accepted a dubious medical examination brokered by Chilean President Frei and PM Toni Blair not to extradite him to Spain (or Spain, Belgium, France and Switzerland, all of which also sought his extradition to put him on trial), but to send him back to Chile (where subsequently a number of investigative judges started processing him and his underlings; while he escaped without juridical consequences for his crimes, others were finally judged, often 40 years after the atrocities had been committed.)
4. One of the most galling examples is that of Victor Jara, a theatre director and musician that was professedly socialist. Some of the 1.2m record-size demonstrators at a peaceful rally in Santiago on 25th of October, 2019, sang a famous song by Jara, ‘Queremos vivir en paz’ (We want to live in peace). His story is exemplary of the lack of justice and accountability of the ancient regime. He was arrested a few days after the coup, tortured and shot (40 times). The perpetrator was only convicted by a Florida jury in 2016 (43 years later), with another 8 military offices sentenced by a Chilean court in 2018. And he was one of the most famous victims of the regime.
5. Chile’s regulatory regime continues to be extremely business friendly. As an example, while tax losses carried forward are often limited to 5 years in OECD economies, in Chile they have no term limit. It is not coincidental that Chile’s tax take, at 20% of GDP, is much lower than the OECD average of 34%, limiting the country’s ability to provide quality public services, or to reduce inequality through public redistribution and social transfers.
Source: OCED Revenue Statistics, 2018
It is therefore not surprising that the menu of demands articulated by the protesters includes not just social and economic measures, but also a political process that allows Chile to correct some of the historic defects of the return to democracy in 1990s – including a constitutional assembly that re-writes the constitution to create the basis for a new social contract, an inclusive social policy, and economic structures that allow wider sections of the society to benefit from Chiles riches and competitive advantages.
Thankfully, on November 14th, all major parties represented in Chile’s parliament agreed to call a referendum in April 2020 on whether Chileans want a new constitution, and how they want it drafted; polls indicate that 78% of Chileans do want a new constitution. However, the accord stipulates that 2/3 of congress’ votes will be required to pass every single paragraph in the new constitution – effectively giving a veto to the economic interests mostly likely to be affected by major changes-to-be. That, ironically, may highlight the continuing blocking power enjoyed by the conservative and affluent minority of Chileans, a historical trend also highlighted in one of the most authoritative accounts of Chile’s history by Edwin Williams.[3] But for sure it is a major departure, and may just allow Chile to gain some respite, and commence a peaceful process towards progressive change.
For it is possible to create welfare, widespread consumer benefits, and value-for-money services in formerly uncompetitive sectors of the Chilean economy. This has been amply demonstrated by a recent 4th entrant into the Chilean mobile market, whose former CEO, Chris Bannister (see bibliography), styled himself as a pirate fighting the ‘dark side’, i.e. the anti-competitive establishment of existing players and their cosy regulatory relationships. WOM, as the company is known, was able to build a new network, and has introduced competitive mobile and data services, contributing inter alia to a 96% reduction of the price of the download of 1 GB of mobile data (comparing price points from early 2015 before WOM started its activity and late 2017). Professionally, it has been my privilege to assist WOM to raise the necessary debt financing to bring such overwhelming consumer benefits to Chilean society (with some 6 million mobile customers). It is but one example which demonstrates that it is entirely possible to create a profit-making private enterprise which also provides value-for-money and provides massive social benefits to the wider population; may it serve as an example to other less competitive business segments in Chile, and reduce perceived inequality of opportunity.
Bibliography / Further Reading:
1. Bannister, Chris, El norte de Chile está operando como Nigeria y no creo que el presidente Piñera quiera ese legado, Interview with former CEO of WOM, www.paiscircular.cl, 26 October 2019
1. Bremmer, Ian, How Chile’s Protests Reflect Our Unequal Times, Time Magazine, 24 October 2019
2. Dammert, Lucia, Chile, un modelo fracturado, La Republica, 21 October 2019
3. Fernandez Melleda, Barbara, The Chilean Spring (Part One): Tip of the Iceberg, Alborada Latin America Uncovered, 21 October 2019
4. Fernandez Melleda, Barbara, The Chilean Spring (Part Two): It’s Thirty Years, not Thirty Pesos, Alborada Latin American Uncovered, 24 October 2019
5. Ferreira, Franciso, et alteri, Economic Mobility and the Rise of the Latin American Middle Class, Preliminary Findings, LAC Regional Flagship, The World Bank, 2012
6. Ferreira, Franciso, et alteri, Economic Mobility and the Rise of the Latin American Middle Class, The World Bank, 2013
7. Gaentzsch, Anja and Gabriela Zapata Roman, More educated, less mobile? Diverging trends in income and educational mobility in Chile and Peru, University of Manchester GDI Working Paper Series No. 2018-031, May 2018
8. McKinsey Global Institute, Latin America’s Missing Middle, May 2019
9. Matamala, Daniel, La ciudad de la furia, La Tercera (Chile), 19 October 2019
10. Modest, Gayo, Maria Luisa Mendez and Berta Teitelboim, Tertiarization in Chile: cultural inequality and occupational structure, Cepal Review 119, August 2016, pp 175-196
11. Norris, Pippa and Ronald Inglehart, Cultural Backlash: Trump, Brexit and Authoritarian Populism, Cambridge University Press, 2019
12. OECD, A Broken Social Elevator? How to Promote Social Mobility, June 2018
13. Olaberria, Eduardo, Bringing all Chileans on Board, OECD Economics Department Working Paper No. 1289 (6 May 2016)
14. Pinera, Sebastian, No supimos entender el clamor por una sociedad mas justa, Interview with Chilean President in El Pais, 9 November 2019
15. Pistor, Katharina, The Code of Capital: How the Law Creates Wealth and Inequality, Princeton University Press, 2019
16. Protzer, Eric S.M., Social Mobility Explains Populism, Not Inequality or Culture, Working Paper, Center for International Development, Kennedy School of Government, Harvard University, October 2019
17. Sachs, Jeffrey, Why Rich Cities Rebel, Jeffrey Sachs Blog, 22 October 2019
18. Sehnbruch, Kirsten; The cost of multidimensional inequalities in Chile underlines the need for a new social contract, LSE Blog, 29 October 2019
19. Sehnbruch, Kirsten; How Pinochet's economic model led to the current crisis
engulfing Chile, The Guardian, 30 October 2019
20. Standing, Guy, The Plunder of the Commons: A Manifesto for Sharing Public Wealth, Penguin Books, 2019
21. Williamson, Edwin, The Penguin History of Latin America, Penguin 2009 (1992)
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[1] His paper, which analyses voting patterns from the US 2016 Presidential Elections, the 2017 French Presidential Elections, and the 2019 European Parliamentary Elections, and the political stability of developed countries in 2017, concludes through cross-sectional regression analysis that neither economic (income inequality) nor cultural factors (ideological polarization, unprecedent levels of immigration, and older generations reacting against millennial values) have much explanatory power, but social mobility (or its lack thereof). – However, there is very well grounded recent research, also undertaken at Harvard, that posits the major role played by culture in fostering populism, see Pippa Norris and Ronald Inglehart (2019) in the bibliography and at https://www.menschenfreund.pl/menschenfreund/reposting-lse-public-lecture-on-the-causes-of-populism-oct-2019).
[2] Most car drivers pay USD 35-130 per month to use the highways around Santiago, when monthly salaries are in the range of USD 560-760; i.e. up to 23% of a monthly salary might be expended on road tolls. (The Guardian, ‘Chile’s congress evacuated as inequality protests paralyses Santiago’, 26 Oct 2019)
[3] William’s excellent history of Chile (pp 485-510) highlights that in the decade running up to the 1973 coup, both the left and the centre in Chile sought to bring about social change, land reform, an expansion in education and public investment, and satisfy the ambitions of Chile’s growing middle classes and industrial labour force. His analysis of the presidency of Eduardo Frei (1964-70), who preceded radical socialist Salvador Allende in the presidency, is worth quoting to provide some historical context to the current attempt to forge a political consensus between the Chilean left and centre to overcome the reform resistance of the entrenched but minority conservatives: “But the electoral programme of the Christian Democracts did have a genuinely radical edge: it would take the process of state intervention and income redistribution much further than any previous government, and it advocated extensive land and taxation reforms, measures which would have seriously affected the interests of the great landowners and the free-enterprise right; a radical shift in the balance of social forces was in the offing. […] But by the early 1960s, centre and left had entered into a fierce competition which precluded such an alliance. […] And yet neither bloc could achieve profound change on its own. Indeed, the attempts of each to do so, successively, between 1964 and 1973 would result in the collapse of the democratic state, and a violent swing to the right at the hands of the armed forces.’ (p.495) And his conclusion, in light precisely of the fractured parliament at the time (which is mirrored in current Chile), is not auspicious: ‘There was a general sense that the volatility of the parliamentary system had prevented a fundamental restructuring of an economy which had been in decline since the 1930s. But by the late 1960s radical change seemed inevitable, but it was doubtful whether the liberal parliamentary system could survive such change intact. As in the time of Alessandri in the 1920s the question was: to what extend could change come about within the prevailing constitutional rules of politics? It was a question that neutered the Christian Democrats and would shortly divide and destroy the left. In the final reckoning it was to be the right that would show the greatest determination to impose the sort of radical change it wanted, regardless of the constitution.’ (p.498) [The tragedy of Chile is well embodied in President Frei. Having failed to implement much of his radical reform programme in 1964-70 and having lost the general elections to Allende in 1970, he supported the 1973 coup, but then turned a Pinochet critic. He was murdered in 1981, with a court only condemning six suspects in January 2019 (18 years after his death and a mere 8 months ago!). His eldest son also became President and was instrumental in the non-extradition of Pinochet to Spain and his return to Chile in 2000.]
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