Why Chile woke up
Photo by Hugo Morales, Wikimedia Commons
On October 25, 2019, more than one million people marched in the streets of Santiago and other cities across Chile to demand structural change to reduce that country’s extreme inequality, to replace the dictatorship-era constitution, and to protest against the government’s excessive and indiscriminate use of force to quell mass social protests that started October 18.
After an impressive, decades-long period of economic growth, Chile is now Latin America’s highest-income country and has been a member of the Organization for Economic Cooperation and Development (OECD) since 2010. The irony of Chile being asked to join this “rich nations club” is not lost on the demonstrators. The country’s economic model has funnelled most of these gains toward an oligarchic elite made up of hyper-wealthy families whose interconnected companies run much of the economy, and whose scions exert significant political influence in Chile.
Pension security, health care and education are largely provided on a for-profit basis. People feel exploited having to pay inflated prices for basic services and are demanding that the government change the free market policies first imposed during the 1973–1990 dictatorship. In addition to privatization, the dictatorship reduced taxes, opened up the country to free trade and broke up unions. Starting in the 1980s, that “neoliberal” playbook would be followed in the U.K., the United States and Canada under Thatcher, Reagan, Mulroney and their successors.
But nothing has driven protestor anger more than the knowledge that these harsh economic policies have been perpetuated by all seven of Chile’s post-dictatorship governments, including five led by centre-left or centrist presidents. Referring to the modest fare increase in the Santiago subway that sparked the mass demonstrations, the saying goes: “It is not 30 pesos, it is 30 years.”
Not surprisingly, most Chileans have turned away from the electoral process. For Chileans who believe that the market and politics are rigged, taking to the street was the only remaining way to be heard and to demand respect and justice.
Inequality
The inequalities and injustices against which the protestors in Chile are raging are multifaceted. They include inequality before the law—impunity—as corporate collusion and other types of white collar crimes, political corruption or sexual abuse in religious institutions appear not to be prosecuted, or with the perpetrators given relatively light sentences. They also include ethnic inequality, as Chilean Indigenous peoples continue to fight against centuries of mistreatment; and gender inequality, as women consolidate long-denied political and social gains. With respect to economic inequality, which I focus on here, it is possible to show how Chile’s oligarchic democracy has narrowed the scope of politics to matters that are not likely to challenge concentrated wealth.
We can measure income or wealth inequality by focusing on the share of national wealth captured by a certain percentage of the population, say, the top 1% or the top 10%. Or we can look at one of a series of indices that capture the shape of the distribution of income, the most popular of which is the Gini index. The Gini varies between 0 and 1, with 0 meaning no inequality (with all persons having the same income) and 1 meaning the most inequality (one person has all the income). Very high inequality has been shown to have a number of negative social, political and economic effects and is also considered by many to be morally repugnant.
Economic inequality has long been of concern in Chile, the enduring legacy of Spanish colonial economic institutions first imposed on the region’s Indigenous peoples. These institutions have produced a rigid social class system based on genealogy, income and race, wherein the many feel aggrieved by the privileges and impunities of the oligarchic few. To put today’s rage against inequality in historical and international context, Figure 1 tracks inequality over the last century, as measured by the share of income held by the top 1% in Chile and four other countries including Canada.
The graph shows that inequality in Chile and the other countries slowly declined over much of the 20th century, only to climb back up starting in the 1970s and ‘80s. The general decrease and then increase in inequality is due to a complex combination of historical events (the Great Depression, Second World War, the fall of the Soviet Union, etc.) and economic policies (the introduction and then decline of progressive taxation, rates of unionization, etc.) in each of these countries. Differences in economic policies explain much of the variations among countries around the general trend.
Chile’s inequality is higher and has been more variable than the other countries, reflecting its oligarchic legacy, smaller size and historic reliance on the export of a small number of raw materials. But Chile’s situation also reflects its recent political history.
Privatization, free trade, union repression and the dismantling of fledgling welfare institutions during the 17-year-long dictatorship resulted in an unprecedented jump in inequality in Chile that came earlier and was more severe than in the other countries, including the U.S., where policies have raised inequality to levels not seen in a century. Canada’s inequality also increased starting in the 1980s, but not as much as that of Chile or the U.S.
I include France and Sweden in this and other charts to counter the selection “bias” that would result if Chile was compared only to the U.S. and Canada. I also include them to demonstrate that high inequality is not inevitable: the socialist and social democratic governments in power in France and Sweden in the 1980s mostly continued with inclusive growth policies and did not adopt the neoliberal policies implemented by conservative governments in the U.K., U.S. and Canada, and as a result their inequality increased less and later.
Permanent austerity
What are some of the symptoms of extreme income inequality and why have Chileans now woken up? One is the primacy of the market over social services. The oligarchic strategy is to reduce taxes and cut public funding of social services so that the services people need can be provided by the for-profit firms that they own.
Indeed, a key demand of the Chileans marching in the streets is increased public financing of social services, including those for retirement, health and education. Tax revenues in Chile hover at about 20% of GDP, which is well below the average of more than 35% in our other comparator countries. But this is a matter of policy choice, not national income. Those same countries—Canada, the U.S., U.K., Sweden and France—had comparable tax revenues well before they reached Chile’s current GDP in the 1990s.
Some progressive economists in Chile have called for an increase in revenues to fund social services in the order of 5% of GDP in the medium term, but even that would only get Chile one-third of the way to the average of the other OECD countries. Given the historical social debt built up after half a century of austerity, the longer-term objective may be closer to an increase in the order of 10% of GDP.
Low government revenues mean less ability to provide social services. Figure 2 shows that Chile funds pensions, health care, education and other social services at about half the rate of the other countries. This is done in Chile in order to provide economic space for the privatized provision of services, and thus Chile has parallel public and private systems in all sectors.
The publicly financed systems are designed to be universal and have relatively modest or no user fees or contribution charges. In practice, however, many middle-income and almost all high-income Chileans opt out of what they perceive to be lower quality public systems by subscribing into a retirement or health plan offered by a user-fee-based, for-profit private provider. In fact, many of the grievances of the marchers are directed at these economic institutions—the private retirement plan administrators (“AFPs”), the private health care plan providers (“ISAPRES”) or the for-profit universities.
As we see in Figure 2, public funding has barely budged since the end of the dictatorship. This is because none of the successive governments undertook the structural economic reforms to provide the free, quality and universal health care or education that Canadians, the French and Swedes take for granted. This means that, as in the U.S., Chileans pay about 50% of health expenditures privately. But the impact is worse in Chile because health care plans are paid for out of pocket by individual Chileans rather than by employers as in the U.S. By comparison, private health expenditures average only about 25% in Canada, France and Sweden. A comparable situation holds for education and retirement security.
Chile’s parallel public/private system perpetuates high market income inequality because it relegates lower-income households to generally lower-quality public systems that are less conducive to building (education) and maintaining (health and retirement) human capital. At the same time, the privatized systems allow for the creation of financial capital, further concentrating oligarchic wealth.
Chileans’ struggle for comparable public services to those of other industrialized countries highlights the need for Canadians to protect what prior generations in Canada have achieved. The reduction of 3% of GDP (all levels of government) in social expenditures since the 1990s shows the precariousness of past gains. It is why university fees are so high in Canada, leaving students with huge debts; why hallway medicine exists; and why social assistance rates are even more inadequate than before.
Redistribution
Democratically elected governments in Chile have also failed to reduce market income inequality. They could have done so by redistributing income, for example by taxing higher-income households and providing cash transfers to targeted groups. Canada’s federal old age security (OAS) and guaranteed income supplement (GIS) programs, the Canada Child Benefit (CCB), and provincial social assistance (welfare) are prime examples of such transfer programs.
Redistribution is measured by the change in inequality after taking into account how market income is modified by such taxes and transfers into “disposable” income. Figure 3 shows how much inequality was reduced in Chile and our other comparator countries since 1990 as measured by the change in the Gini index. We can clearly see how little Chile has redistributed income since the end of the dictatorship. Both Canada and the U.S. have about three times the level of redistribution, while Sweden and France are even higher.
And so while Chile, the U.S. and France start off with high market income inequality (Gini indices of about 0.50) and Canada and Sweden with lower Gini indices of about 0.44 for the latest numbers, redistribution reduces market inequality to around 0.30 for Canada, France and Sweden, 0.40 for the U.S, but barely budges it in Chile to 0.46. Similar to the 1% measure, this Gini number confirms Chile’s rank as one of the most economically unequal countries in the world.
So, what does it mean to be in the bottom economic half of the population in Chile? It means your employment income is low because the minimum wage has been kept low by market-friendly legislation and the labour market is marked by precarious and informal jobs at the bottom end. Unemployment insurance is meagre and only available to designated contract workers, not those labouring in the large informal sector. There is virtually no social assistance if you become destitute. Private health insurance premiums are unaffordable, so you make do with the underresourced public health system.
There is no public pension in Chile like the Canada Pension Plan; instead, it is mandatory to pay into for-profit retirement funds (if you are lucky enough to be a designated contract or permanent worker). Day-to-day you pay higher prices for many goods and services because many sectors, including banking, foodstuffs, medicines, etc., are controlled by a small number of oligopolistic firms often owned by the oligarchic few.
Low incomes and high expenditures lead many Chileans into debt. Indeed, the median debt service ratio—the amount of disposable income devoted to service all debt—for a Chilean household with debt at the bottom half of the income distribution increased from 20% to more than 27% in the decade to 2017. That is not mostly mortgage debt or asset investment but student and retail and other consumption-oriented credit card debt. Many households are living paycheque to paycheque and have to borrow to make it to month’s end.
Of course, this is not a uniquely Chilean phenomenon. Many lower-income households in Canada and the other countries, including the working poor and those on social assistance, are in a similar situation and have to borrow and resort to food banks. But at least they can rely on some high quality, publicly funded social services like health care.
Redistribution is fundamentally a political choice and social contract with real societal consequences. In principle, in a democracy people decide on the level of redistribution and the provision of public services by electing a government that will carry out that program. But extreme inequality appears to short-circuit that process. An oligarchic democracy seems to limit the scope of the politically possible, regardless of citizens’ wishes.
Disenchanted citizens
Can democracy counteract oligarchic power? Research suggests that voter engagement, a critical democratic input, is suppressed by increasing inequality and that this effect is particularly pronounced in post-dictatorship countries where democratic governance does not deliver on citizen expectations. This certainly describes Chile, where political parties vying to form government have competed on narrow economic platforms that have delivered economic growth without economic justice.
To take into account differences in voter registration, researchers often use voting age population (VAP) turnout as an indicator to measure voter turnout. Figure 4 presents VAP turnout for Chile and the comparator countries from 1964 on, for presidential elections in Chile, the U.S. and France and parliamentary elections in Canada and Sweden.
We can see that VAP turnout in Chile was low compared to the other countries in the 1960s and peaked in the first post-dictatorship election of 1989 at 86%. After that there was a precipitous decline in Chile, to well below 50% in both the most recent presidential elections, including the one in 2017 that elected the current president. In contrast, VAP turnout in the other countries has been steady or declined moderately over the last 55 years.
The euphoria of being able to cast a ballot for the first time in a generation in 1989 soon turned to disappointment and ultimately outright disgust with politicians and the electoral process after a series of governments offered similarly inadequate economic visions. Lack of citizen engagement is a hallmark of oligarchic democracy: why bother playing if you know you’ll lose? The electoral process ends up driven by those who can commit the most resources to maintaining the status quo.
Is reform possible? Since October 25, a parade of political leaders from the left and sometimes from the right have apologized for not having “heard the people” and not doing enough to reform or change the neoliberal economic model. But many in the centre and centre-left governments in Chile seemed to actually believe in what they were doing, much like the “Third Way” governments of Tony Blair, Bill Clinton and Jean Chrétien/Paul Martin. All adopted the mantra of maintaining the “responsible” neoliberal policies established by earlier conservative regimes.
The political situation in Chile has been in is a dangerous negative feedback loop for some time. The political spectrum is narrowed to promote and defend concentrated wealth, making government policy less responsive to citizen demands. This leads to citizen disenchantment and exit from the political process, which in turn results in decreased political competition against concentrated wealth.
What’s next?
At the time of writing, Chileans were still massively protesting in the streets. The current conservative president, one of the wealthiest men in the country, has offered only modest one-off initiatives, but no medium or long-term plans to reduce inequality and improve quality of life. Opposition demands for serious reform, including a multi-year plan for Chile to finance quality universal social services, appear to have fallen on the deaf ears of a government committed to the neoliberal model.
Along with this economic incrementalism there has been positive news on the constitutional front: a congressional agreement to establish the framework to review and replace the dictatorship-era constitution that constrained certain economic policies. The process was top-down and driven by a highly discredited congress, and the agreement was not unanimous. But it now appears that Chileans will decide on whether they want to start this constitutional process in a historic plebiscite in April.
While the mass peaceful protests have continued, so has the destruction of property and looting, and the pitched battles with the police. As in other countries, there is often a “first line” of protesters that engage the security forces, often violently, using the mass peaceful protests as cover. In this volatile context, public attention has focused on strategies to achieve social peace, while ensuring justice for those killed and injured by the police and the military.
Human rights organizations have accused the security forces of excessive and indiscriminate use of force. Five confirmed deaths from live ammunition or beatings by the security forces and two suspicious deaths in custody are being investigated. Thousands of protestors and security personnel have been injured, including hundreds of demonstrators with serious eye injuries or loss of vision from the use of anti-riot shotgun pellets by the police.
The police continue to hold more than 1,000 of the more than 20,000 that have been detained. Human rights entities have documented ill treatment, sexual abuse and torture of some detainees. The national police, whose image had begun to be rehabilitated after their role in the dictatorship, will need another generation of real reform, including stronger political oversight, to be trusted by most of the population.
Chile’s path is uncertain. Mass mobilization has not yet resulted in the structural reforms that would provide Chileans with what most advanced democracies have had in place for generations: policies to substantially moderate income inequality and to finance high quality, universal social services. There is no administrative or economic constraint to implementing these policies in Chile. But that has never really been the issue. Rather, until October 25, the political space was so narrow that structural reforms did not seem feasible.
Chileans generally support the mass peaceful demonstrations because they have opened up political space that can result in change. They abhor the vandalism and looting and are tiring of the street barricades and battles with the police. Most also acknowledge that the perpetrators are often dispossessed, lower-income youth that have borne the brunt of Chile’s class injustices and permanent austerity—inequality’s offspring. Thirty years since the end of the dictatorship, it is well past time for Chile to move beyond minor tinkering at the margins and begin addressing the structural issues bringing Chileans into the streets.
Chile’s struggle against inequality matters because it is not theirs alone. Starting with the 2011 Occupy movement, this generation has seen protests against inequality with limited policy impact. But as income and wealth gaps continue to widen, the policy debate in the U.S and elsewhere about the dangers of inequality is now the most robust in a century. Inequality in Canada is less pronounced, but we should also be very concerned that the top 1% of Canadians hold 17% of total wealth and that many policies seem designed to favour them.
We see how political and economic ideas cross national boundaries. Does the call for economic justice in Chile signal the break in the 40-year increase in inequality there and elsewhere? Canadians can and should feel emboldened to insist on a turnaround in this country, too. Policies to reduce income and wealth inequality, and to counteract the outsized influence of the few over the many, are the least we should expect from government today.
Edgardo Sepulveda is an independent consulting economist that writes about inequality, electricity and other economic policy issues at the Progressive Economics Forum, where a version of this article first ran on October 31.
