Chile’s problems will not be solved at the polls

By Clara Ferreira Marques

Investors in what has long been Latin America’s most stable economy should tighten their belts.

This weekend’s presidential election in Chile is likely to lead to a runoff next month between a far-right candidate who admires General Augusto Pinochet and a left-wing candidate who remembers Salvador Allende, who was ousted by the dictator. in 1973.

While the more moderate candidates fall by the wayside, that result offers voters two radically different visions of the future, in a country still reeling from the double shock perpetrated by the 2019 protests and the pandemic. Voters will also elect MPs, deciding how much leeway to give the new leader. No one has a manual for dealing with what’s coming: an ambitious new constitution aimed at quelling popular anger won’t be ready until well into 2022.

Chile, the world’s largest copper producer and a major supplier of lithium, has for decades been an example of a free market and a haven in a turbulent region. Its strong macroeconomic and pro-business outlook has attracted more foreign direct investment as a percentage of the overall economy than its higher-profile regional peers such as Brazil.

It has a high credit rating and one of the lowest levels of public debt among the members of the Organization for Economic Cooperation and Development. Your vaccination campaign against COVID-19 It has been a success and the Government expects the economy to expand by more than 11% this year.

But the past is not necessarily prologue when voters demand change, traditional politics have given way to centripetal politics, and a new president and new legislature will take over a country with no clarity on long-term rules.

Clashes, and even paralysis, seem inevitable in the short term, whichever candidate wins.

If the ultra-conservative José Antonio Kast prevails, his promise to cut corporate taxes and fiscal spending, further strengthening the country’s neoliberal credentials, will face a lower house that appears to be dominated by a fragmented left. Vague plans to attract private capital to Codelco, the state copper giant, have already angered unions.

Meanwhile, former student leader Gabriel Boric, backed by a coalition that includes communist allies, wants to raise the minimum wage and corporate taxes and replace the current private pension system, a mainstay of Chile’s capital markets. His program is more like a large European-style state than Venezuela’s, but it is still one that may have difficulty financing or convincing investors of its benefits, and one that the right will fiercely resist.

Both candidates have adopted a more moderate tone as the presidential race progresses. Others, like the Christian Democratic candidate, Yasna Provoste, can still break through. But the winner will also have to grapple with a new constitution that could limit presidential powers and, if a regional precedent holds, it will almost certainly come with a long list of potentially unaffordable socio-economic rights guarantees.

Concerns about spending, coupled with the prospect of further withdrawals of funds from the pension system to alleviate the economic needs of households, has already helped raise government bond yields and has dragged the peso to be one of the worst performing emerging market currencies.

As pointed out Nikhil Sanghani from Capital Economics, fiscal policy is likely to remain flexible whatever the outcome of the presidential race, whether with the larger state Boric proposes or, as underestimated, with Kast’s promised tax cuts, which he may have a hard time covering. the costs. And that’s before considering the constitutional demands.

The profound neoliberalism of Chile it created an unacceptable inequality that the current tax and welfare system does little to correct. The Chicago school-style economy brought faster growth and helped reduce overall poverty, but it performed fewer miracles than is credited.

More than half of households are economically vulnerable, in part because higher paying jobs are scarce, leaving much of the middle class dependent on precarious alternatives. Social mobility has weakened and discontent with the quality of education, pensions, and available health care is widespread.

Discontent, populism, and politics taken to the extreme are not exclusive to Chile. The problem is that adding to that mix the creation of a new Constitution, drawn up by a group in which independents are strongly represented due to voters’ rejection of traditional politics, will not create the institutional solution that some hope.

Despite the problems with the previous iteration, with its roots in an autocratic regime, it is not clear that the benefits of starting over outweigh the risks of a prolonged period of instability.

In the short term, it will lead to Chile what Patrick Navia, a political scientist and professor at New York University, described me as a “valley of despair”. Writing a new Magna Carta, as he points out, has a high cost, given all that the country could lose.

Once drafted, by constituents elected by less than half of Chile’s electorate, the document must once again be submitted to the citizens for approval.

None of this uncertainty necessarily condemns Chile to permanent structural deficits, nor does it in Argentina. A new social contract is urgently needed, public sector debt levels are still manageable, and the country’s neoliberal roots run deep.

But the risks around constitutionally required spending or even a larger state crowding out much-needed private investment are real. Maybe the future of Chile not Venezuela, but it could resemble debt-burdened Colombia, or even Brazil: a little less miraculous.