The free market could stop radical change to the Chilean model

Juan Andrés Fontaine and José De Gregorio have been, with nuances, guardians of Chile’s free market economy for more than three decades from their positions as central bankers, finance ministers and academics.

That is why, like many of the old school in Santiago, they have watched with concern how widespread protests have led to an attack on Chile’s pension fund system, the drafting of a new Constitution and the possible election. of the first left-wing president “dura“Since Salvador Allende in the 1970s. The richest economy in Latin America, says Fontaine,” is going through a minefield, where you look there are possibilities of a dangerous explosion that damages the model. “

Regardless, what gives them hope is that the Chilean economic model is so open and free-market oriented that it should act as a safeguard. Any radical change, as they see it, will provoke such an intense negative reaction in the markets that the costs will force the government to moderate its policies.

“An open economy, both commercially and financially, punishes very quickly the adventures in which politicians can embark”Fontaine says. The market, when it gets angry, “kick very hard”.

Some signs of this are already becoming apparent. This year, the Chilean peso is among the worst performing currencies in the world. While the local bond market has rebounded in recent weeks, benchmark yields continue to rise 120 basis points in the past three months. Rate swaps hit a nine-year high in October.

The two come from different political sectors, one from the conservative side, and the other from the center-left. Fontaine, who worked in the center-right administration of President Sebastián Piñera and as director of research for the central bank, and De Gregorio, who was Minister of Economy for former socialist president Ricardo Lagos and former president of the central bank, spoke with reporters from Bloomberg News through of Zoom on what is coming for Chile.

They don’t agree on everything, but one thing they do agree on is that the grievances that resonate in lower-income neighborhoods across the country have some foothold.

While the framework established by former dictator Augusto Pinochet and the group of economists known as the “Chicago Boys” in the 1970s and 1980s (which included Fontaine) put Chile on a path of extraordinary growth and progress, politicians failed to achieve this. make – in the decades that followed – adjustments that could have strengthened the social safety net. That political failure is responsible for the unrest and unrest of the people, they said.

“What happened was that for years the precept of ‘if it ain’t broke, why fix it’ was followed, which was a big mistake”Said De Gregorio, who is now dean of the Faculty of Economics at the University of Chile. The strategy led us to “an impressive degree of polarization because what has dominated are the populists“, said.

The popularity of the system will be put to the test in the presidential vote scheduled for November 21. The two favorites, leftist Gabriel Boric and conservative José Antonio Kast, are at opposite ends of the political spectrum. Kast promises to reduce corporate and estate taxes, as well as to impose stricter immigration policies. Boric, promises to bury the model “neoliberal” From Chile.

One of the most contentious issues is private pensions, which are considered by some to be among the most revered aspects of Chile’s financial system and a model for countries around the world. By law, all Chilean workers must contribute part of their salary to an individual account. But many Chileans say the returns have been mediocre and insufficient to provide them with a secure retirement. And they distrust the financial companies that manage their money.

Lawmakers have allowed three rounds of extraordinary pension fund withdrawals since the pandemic began, totaling about $ 49 billion. The move proved popular with Chileans who needed cash to survive the COVID quarantines, but it has undermined local markets and helped drive inflation well beyond the central bank’s target.

While Kast advocates for the system to continue as it is, Boric proposes eliminating it in favor of a state administrator. Fontaine says it is the proposal that worries him the most, both because of the risk to savers and the potential damage to Chile’s capital markets, which depend on private pension flows.

“The solution they are suggesting compounds the problem“, said. “I have serious doubts regarding the capacity of the State to respond with good pensions in the future, in addition to the problem of the bad incentives that the State would have to manage those resources.”.

As economists like De Gregorio and Fontaine contemplate what the future holds, guessing which Latin American country Chile will most closely resemble in a few years has become popular practice in the country.

De Gregorio says it is possible that Chile, after some reforms to ease pressure on the incoming administration, will end up looking like Peru. There, state intervention has produced a relatively stable economy, but with consistently mediocre growth.

Fontaine says his most optimistic opinion would be that Chile ends up like Mexico, with a lot of state intervention, but with a very open economy.

But he does not rule out a future in which the government begins to shut down the economy, in an attempt to shore up the safety net and provide jobs for a restless population. If that happens, he said, Chile could end up looking like Argentina, a country constantly beset by a weak currency, strong inflation and slow growth.

De Gregorio does not believe that it will come to that.

“What gives me hope is that when an ideology reaches a time when it does not produce progress, that government has no choice but to delay its program.”Said the dean.