Covid-19 hastens changes to Chile’s market-led economic model
On a street corner in El Bosque, a poor district of Santiago, Dixa Contreras
serves porotos con riendas (“beans with reins”: ie, bean-and-spaghetti soup)
from a large pot. One lad takes enough for a family of four, sick at home with
covid-19. Ms Contreras and six helpers provide 250 free meals a day, and fresh
bread every second day for evening once (tea). Neighbours, shops, stands at the
weekly produce market and epes, a charity, provide the food.
Soup kitchens like this have appeared across Chile since the pandemic struck in
March. They were last seen during a recession in the early 1980s, when
Augusto Pinochet, a dictator, ruled the country. Helped by pro-market policies
that Pinochet introduced, the economy grew rapidly in the years after his
departure in 1990, though lately the pace has slowed. They gave the private
sector a large role in providing pensions, education and health care. Chile’s
poverty rate dropped from 45% in the mid-1980s to 8.6% in 2017, according to
the government’s two-yearly socioeconomic survey. In the post-Pinochet years
Chile won a reputation for sound economic management, relatively low levels
of corruption and stable institutions.
Even before covid-19 its reputation took a knock. Pensions, which Chileans
save up for themselves, were lower than many had expected when the scheme
was introduced in 1980. Well-off Chileans got better health care and education
than the poor. Massive and sometimes violent demonstrations against inequality
began last October and dissipated only with the pandemic’s onset. They forced
Sebastián Piñera, the centre-right president, to promise more social spending
and a referendum, due to be held in October, on whether to rewrite the
constitution, which is based on the one that Pinochet left the country. “There is
consensus the state needs to give more and better-quality public services,” says
Rodrigo Vergara, a former president of the Central Bank. The pandemic, and
the government intervention it has provoked, may hasten an evolution towards
social democracy that was already under way.
The government’s record in handling the pandemic has been mixed. As a share
of its population, Chile’s 321,205 confirmed cases and 7,186 deaths are among
the world’s highest. Rather than locking down the whole country, the
government just sealed off covid-19 hotspots. It started talking of a return to a
“new normal” in mid-April, before the disease had peaked. The government
imposed a total lockdown of the capital, where a third of the population lives,
only on May 15th. “It is a story of hubris,” says Eduardo Engel, a director of
EspacioPúblico, a think-tank.
The government mitigated those failures by testing a lot (one reason its caseload
looks so big). It has boosted the number of ventilators and intensive-care beds.
The capital’s lockdown, followed by a tightening of restrictions in quarantined
areas, have at last led to a decline in the number of new cases nationally.
The government expects GDP to contract by 6.5% this year. That is the biggest
decline since the recession in 1982-83 (though it is smaller than the expected
regional average). The average jobless rate from March to May hit 11.2%, its
highest since the current way of reckoning began in 2010. The poverty rate is
likely to reach 15% this year, says Dante Contreras, an economist at the
University of Chile.
Dense neighbourhoods, cramped houses and the need to take public transport
encourage covid-19’s spread among the poor. The health minister, Jaime
Mañalich, admitted in May that he had not known how much poverty and
overcrowding there is in parts of Santiago, making the government look
clueless. He resigned.
The government has been as maladroit in shielding Chileans from covid-19’s
economic ravages. It has acted slowly. Its measures, though large, have not met
the need. Its under-reaction could cause a backlash that errs in the opposite
direction.
The first package to protect employment, small businesses and poor households,
introduced in March, is worth $17bn, nearly 7% of GDP. (Some is in the form
of loans, and so is not counted as budgetary spending.) It includes a furlough
scheme, which lets workers draw unemployment insurance while formally
keeping their jobs, plus cash and food boxes for the poorest. But the support
they provided families was less than the official poverty line. Protests broke out
in poor neighbourhoods. Activists projected the word hambre (hunger) on the
Telefónica tower in Santiago. Under pressure, the government reached
agreement with opposition parties on June 14th to spend an extra $12bn over
two years.
It followed up with a $1.5bn package for the middle class, which includes
deferrals of mortgage payments and zero-interest loans. Middle-class Chileans
were angry that much of the help took the form of loans. To assuage them, on
July 14th the government again offered a belated booster: a one-off $632
handout to formal workers whose incomes have dropped.
Post-Pinochet governments have mostly kept budget deficits low. This year the
government expects the deficit to reach 9.6% of GDP, the highest level in
nearly 50 years. Its spending is to jump from 24% of GDP in 2019 to around
30% this year.
If Mr Piñera had his way, spending might recede. But his term is up in early
2022. The protests and the pandemic have weakened him. The government’s
role will be determined by his successor and, if Chileans endorse it, by a
constitutional assembly. It is likely to change. Calls for a more active state by
the left are now echoed by politicians on the right, such as Joaquín Lavín, the
mayor of a prosperous district of Santiago, who may become the next president.
In their support for social benefits, like low-income housing, they sound more
like European Christian Democrats than laissez-faire liberals.
There is broad agreement that tax revenue needs to rise from 20% of GDP.
Already, in response to last year’s protests, the government raised the tax rate
for the highest incomes. The new health minister, Enrique Paris, a technocrat,
favours a cap on the profits of private health insurers, though this is not
government policy.
Popular anger inspires more radical ideas. The rebellion against the first version
of the middle-class aid package led to a proposal in Congress to allow Chileans
to withdraw 10% of their pension savings to help them through the pandemic.
That would reduce future benefits, which Chileans already deem too low, or,
more likely, force the government to plug the hole, at a cost of at least $16.5bn.
Either way, if passed the bill would weaken a central institution of the Chilean
model. Some members of Mr Piñera’s coalition joined the opposition in backing
it. The extra cash for formal workers was a way to win them back. So was Mr
Piñera’s promise of “major surgery” for the pension system. It is not working.
On July 15th Congress’s lower house passed the bill, sending it to the Senate.
Such radicalism poses a risk. Most Chileans agree that the state should act to
reduce inequality and uplift the needy. But their anger could create support for
populist policies that would make the country poorer. The success of Chile’s
reinvention “will depend on whether the political system is capable of setting
limits,” says Mr Vergara. The next lot of leaders will have to do better than the
current ones.
This article appeared in the The Americas section of the Economist June 2020