Chile is no longer the shiniest star in Latin America

Patricio Navia

Buenos Aires Herald, July 12, 2016

 

After being celebrated as the most successful case of democratic consolidation and economic development in Latin America since 1990, Chile has now lost its appeal. As other countries make significant progress in implementing market-friendly reforms and democratic consolidation, Chile is no longer the brightest star in the region, it seems.

 

Ever since its transition to democracy in 1990, Chile was the poster child of market-friendly policies in Latin America. Four successive centre-left governments led the country through an astonishing 20-year period of economic growth, poverty reduction and democratic consolidation. Since the Concertación governments had to build a democratic system under the straitjacket of the authoritarian 1980 Constitution, pragmatism and consensus-building were the key ingredients in a policy-making environment that fostered long-term commitments and gradual change.

 

As it espoused moderate left-wing views, the Concertación administrations also became an alternative to more radical left-wing political movements that began to emerge in the region as a response to the adoption of neoliberal policies in the 1990s. Right-wing parties in Latin America looked to the Chilean experience for clues as to how successfully implement market-friendly policies and win elections. Left-wing parties had to explain why their programmes and policy proposals would be more successful than those adopted by the Concertación. The fact that poverty declined rapidly and social inclusion became widespread — and even inequality began to decline after the mid-1990s — meant that Chileans were better off both in absolute and relative terms than ever before in their history.

 

When the Concertación eventually lost its appeal and Chileans voted the moderate right-wing opposition into power in 2010, the inevitable conclusion was that people were overwhelmingly satisfied with the market-friendly policies. The administration of Sebastián Piñera (2010-2014) kept in the place the fundamentals of the economic model and moved forward with market-friendly initiatives. Yet, signs of discontent began to emerge. A massive wave of student protests in 2011 called into question the power of market mechanisms and called for a stronger role for the public sector in the provision and regulation of education. In the 2013 election, the old Concertación renamed itself Nueva Mayoría (“New Majority”) and offered a radical foundational programme to undo much of the reforms that were implemented under previous government. The Nueva Mayoría candidate was former Concertación president Michelle Bachelet — but her new discourse was markedly different than what the Concertación had previously tried in government.

 

After President Bachelet’s inauguration in early 2014, she championed a number of reforms that have sought to strengthen the role of the state in the provision of public goods and regulate — even eliminate — markets from a number of sectors. Though Chileans overwhelmingly voted for Bachelet, discontent with her reforms emerged shortly after she returned to power. Chileans wanted to mend the market-friendly model, not end it. Uncertainty over the reform and the end of the boom cycle for commodity exports made it impossible for Bachelet to deliver on her promises of lowering inequality. More than two years into her administration, the president has one of the lowest presidential approval levels in the region — an overwhelming majority of Chileans feel the country is going in the wrong direction. Average growth will be less than two percent for the third consecutive year. Poverty indicators are expected to go up.

 

In the meantime, other countries in Latin America have embraced market-friendly policies and have experienced sustained growth. Peru is a new rising star. Colombia is expected to become even more successful when the peace accords (with FARC guerrillas) are in place. Even Argentina, the country that experienced a tumultuous era in the early 2000s, has consolidated its democracy and recently voted a market-friendly government into power. Though the economic and political crises in Brazil and Venezuela, and the declining prices for Latin American commodities have sent shockwaves through the region, a number of countries that are giving Chile a run for its money, in terms of adopting market-friendly policies in a context of democratic consolidation and poverty reduction.

 

As normally happens to champions who get used to winning, Chile might have fallen victim to its own success. The Bachelet administration might have thought that, because of the reforms the country implemented in the 1990s, strong growth could be taken for granted and that she should only focus on promoting redistribution. But other countries are now eagerly competing with Chile for foreign investment. Because they are less developed, Peru and Colombia have competitive advantages, in terms of productivity gains. Because it has more competitive human capital, Argentina will also soon position itself as a threat to Chile’s position as a leading market-friendly economy.

 

Chile was successful when it introduced competition into its economy and political arena. Yet, the country has failed to realize that other countries are now competing with it like never before, in world markets and for foreign investors. Unless Chile realizes that to remain regional champions, the country has to win every year, the former brightest star in the region will find it very difficult to recover the leadership position it used to hold in Latin America.