Boric has the opportunity to reconfigure Chile (and to the Latin American left)

By Shannon O’Neil

Leaders of the Latin American left celebrated the election of Gabriel Boric in Chile in December, while investors fell back, causing the country’s currency and stock market to crash. However, Boric has the opportunity to surprise both sides, charting a different left political path.

Instead of selling the economic populism of Argentina or Brazil or the authoritarian dogma of Venezuela, Cuba or Nicaragua, Boric could create a more progressive country and an inclusive welfare state. Swapping Chile’s neoliberal economic model for a social democratic one would put it on the path of other high-income countries, benefiting Chileans, making growth more stable and sustainable, and creating a new paradigm for its neighbors to follow.

Chile has experienced an economic boom since its return to democracy in 1989. Three decades of market-friendly neoliberal policies, including the privatization of public works, the reduction of trade barriers and the deregulation of capital markets, stimulated the foreign and national investment and economic growth.

This model brought per capita income from less than US $ 2,300 in 1989 to more than US $ 15,000 today (and US $ 25,000 if measured by purchasing power parity, or PPP), making Chile a one of the few Latin American nations that has gone from middle to high income in the World Bank ranking.

So why did a record number of Chileans vote for a candidate who promised “bury“Neoliberalism? Because while Chile grew richer, it did not become more generous. Social spending since 1990 has remained at around 10% of gross domestic product, roughly half the average for the 38 countries of the Organization for Economic Cooperation and Development (OECD). Worse, the structure of many public programs created a tiered system that provides a different and many times better service to the middle and upper classes.

For example, education. For starters, Chile does not spend enough per child, lagging far behind most of its OECD peers. Its grant system allows, in theory, parents and students to choose any school. But the schools are clustered in wealthy neighborhoods, creating geographic barriers for the underprivileged.

Many private schools receive grants, but they also charge additional amounts, leaving them out of their financial reach. And the lack of teacher training and coherent curricula results in uneven and low-quality teaching, especially in under-resourced public schools, which have fewer possibilities to hire and fire teachers. This situation leaves the poorest children at a disadvantage.

Health in Chile presents similar problems of inequality in access and care. Global spending is minimal, a third less than the OECD average. And although Chile offers universal health care by law, the reality is that those with money receive better treatment. The upper class channels their mandatory contribution towards a better financed private system, while two-thirds of Chileans with fewer resources pay for a public system.

As with education, the diversion of the wealthiest and healthiest to private providers leaves the state with fewer resources for the neediest and sickest.

Chile’s notorious private pension system also hurts its elderly. It has expanded and deepened the country’s capital markets, since Chilean pension funds manage more than US $ 200,000 million, approximately 80% of GDP. But it does not provide “social Security”. 80% of retirees do not save enough to avoid misery.

The problem is structural: individual accounts distribute temporary risk over a person’s life; they do not spread risk across society as a whole. Without any redistribution, workers who earn the minimum wage will never be able to save enough to have an adequate retirement (without considering the high commissions charged, especially in the early years of the system, which made the private pension fund managers, the AFPs, , in the most profitable arm of the country’s financial industry).

European countries, the United States, Japan, and other high-income market democracies created and expanded their welfare states long before they reached the per capita income levels that Chile enjoys today. US President Franklin Delano Roosevelt introduced Social Security and unemployment insurance when median earnings in America were just over $ 1,000 (less than $ 10,000 in today’s dollars), and not much more in real terms when Lyndon B Johnson introduced Medicare in 1965.

Post-World War II Europe greatly expanded public health, pension, disability, and other workers’ compensation systems in the late 1940s and 1950s, when per capita incomes were also less than $ 10,000. As Japan moved up the socioeconomic ladder, it vastly expanded public social programs.

During the 1970s, when Japan’s per capita GDP was much lower than Chile’s today, social spending doubled as a percentage of GDP. These expenditures increased worker productivity (fewer of the economically active population stayed out of the workforce caring for the elderly, the young, or the sick) and improved political stability, fueling more sustainable long-term economic growth.

Chile’s neoliberal model helped the nation move up the socioeconomic ladder. But as the 2019 protests and the 2021 election results show, that model can’t keep it up. The prevailing economic inequalities leave the nation too politically fragile to maintain stability and economic growth. Even the International Monetary Fund now believes that government spending does not curb, but stimulates, private investment, favoring a larger state over a smaller one.

Of course, if the Boric government or the Constitutional Convention turn out to be more socialist than social democratic, the detractors will be right. But so far, he has shown no affection for the region’s authoritarian left, criticizing Nicaragua, Cuba and Venezuela. And its economic proposals are intended to provide Chileans with government services and aid that citizens of other high-income countries have been demanding and receiving for some time.

For Chile to prosper again, it needs to change its way of thinking and, above all, its public spending. A minimal state will no longer bring long-term stability for investors, companies or their inhabitants. Chile successfully graduated in the high income category. Your policies need to be brought up to date. And if Boric succeeds and they do, Chile’s new president will have created a new model for the Latin American left, one based on economic and political inclusion that creates stronger economies and democracies throughout the region.