Chile does not need radical reforms
As one of the most politically stable and prosperous countries in Latin America, Chile has long been a great regional success story. Yet according to some increasingly prominent narratives, the widespread unrest currently engulfing the country is the result of rising inequality and persistent poverty, proving the unsustainability of the Chilean political and economic model. However, the premature obituaries to its political and economic system have downplayed the benefits to Chilean society and ignored the considerable progress in fighting inequality in the country.
The fact that the furor continues points to problems that should be addressed, but Chileans would be wise to avoid sweeping changes to its highly successful political and economic model.
The merits of the Chilean model are clear. Chile is one of the most economically stable countries in Latin America with consistently low inflation and per capita gross domestic product at 1.8 times the regional average. Although income inequality is high compared to advanced economies, it has levels of inequality that are below the levels of emerging economies. Poverty has also fallen dramatically under the Chilean market system, going from 36 percent in 2000 to less than 9 percent percent in 2017. Its Gini coefficient, a broad measure of inequality, is close to the mean for Latin America and has fallen steadily for more than 30 years.
Chile has also taken concerted action to provide ladders of opportunity for the country's poorest citizens, including providing free higher education to students from low-income households.
Indeed, a recent OECD report found that such policies along with the engine of Chilean economic growth have led to high levels of social mobility in the Andean country. For instance, 23 percent of children born to fathers from the bottom quartile of income earnings move up to the highest quartile of earnings. Remarkably, Chile outperforms all other OECD member countries in this regard.
Nonetheless, there is a clear demand for the Chilean government to do more. In response to the protests, President Sebastián Piñera has acknowledged the need for reforms to address the country's inequality and expand economic opportunity. Piñera even acceded to calls to discuss drafting a new constitution to replace the one adopted under Chilean dictator Augusto Pinochet.
There are several steps the country can take to create a more equitable society without undermining the framework that has produced decades of stability and economic growth. One prominent complaint regards the lack of access to high-quality employment enjoyed by much of Chile's elites. While many Chileans benefit from stable, permanent contracts and competitive wages and benefits, others are often left in a cycle of unstable, temporary employment. Chile's significant restrictions on permanent contracts are a major barrier, which make them prohibitive for many firms.
This leaves many firms and their employees dependent on temporary contracting arrangements. Loosening these restrictions around permanent contracting will increase access to stable, high-quality employment for a larger share of the Chilean workforce.
Moderate raises in Chile's relatively low levels of social spending are another way to address inequality without undermining the country's successful economic system. This includes greater emphasis on family and old age benefits, augmenting pensions, boosting the quality of education, and targeted spending to further alleviate poverty. Funding such spending does not require upending Chile's market-oriented economy. The OECD has found that there is room for modest increases to Chile's comparatively low levels of taxation of income and real estate. Chile can expand its narrow income tax base, for example, from its current arrangement, which exempts 76 percent of Chilean taxpayers from the personal income tax.
Piñera's willingness to work toward a new constitution is also a significant concession, which could ensnare much of his presidency-even if the intent is primarily a symbolic rejection of the Pinochet dictatorship. Furthermore, if not adequately controlled, the process could cause significant uncertainty for the Chilean economy. If Chile moves forward with rewriting its constitution, it should do so without upending the political system that has produced one of the hemisphere's healthiest-and wealthiest-democracies. To that end, Chileans should be wary of attempts to use the process as a stalking horse for radical reforms to the constitution's underpinnings, or push for a new social pact that embeds a wide range of social benefits that the state cannot deliver.