Friday, 25 May 2012

Chile's discontent: Inequality and rethinking the economic model

By Carlos Fortin

Something that often puzzles international observers about Chile is why is it that, while the Chilean economy seems to be doing very well, there is widespread discontent among the citizens? A recent article in The Economist attributed this apparent paradox within society to persistent inequality, ‘as Chileans become better off, they want the government to guarantee a fairer society’.

This growing discontent is impossible to ignore, as it has been widely expressed through mass student demonstrations, regional protests that block access to whole areas of the country and a marked dissatisfaction with the centre-right government and indeed with the political class as a whole. A recent opinion poll asked do you approve or disapprove of the way the President and his team are managing the economy?  And the response?  24 per cent approve and 58 per cent disapprove. According to The Economist article the recent student protests have:
“struck a chord in a society that is increasingly middle-class but remains highly unequal. Only 15 per cent lived below the poverty line in 2009, down from 45 per cent in the mid-1980s. But the distribution of income in Chile is the most unequal in the OECD … Taxes and government transfers do little to reduce inequality. The education system has locked in social inequality rather than breaking it down.”  
The solution to this societal imbalance could come through the introduction of reforms to the economic model that would improve income distribution through transfers and facilitate access to education. The Economist , cites approvingly Carlos Peña Gonzalez, Rector of Universidad Diego Portales who says that popular support for the student movement is “not really a radical rebellion against the market economy”. Rather, it is the consequence of a “gigantic revolution of expectations”.

However, as ever, the problem by my reckoning seems to go much deeper.

As Bradford de Long* discusses the United States in his paper ‘Re-Capturing the Friedmans’, his argument is equally applicable to any country, like Chile, which has adopted a neoliberal economic model. Writing in 1979**, Milton Friedman, the father of the monetarist-neoliberal economic model, predicted that the market economy would produce a sufficiently egalitarian distribution of income.
“The Friedmans argued”, writes De Long, “ that a minimal safety net for those whom bad luck or a lack of prudence had rendered destitute, and elimination of all legal barriers to equality of opportunity, would lead to the most equitable outcomes possible. Profit-seeking employers, using and promoting human talents, would bring us as close to a free society of associated producers as is attainable in this fallen sublunary sphere.” 
Evidently, this has not occurred, in the US or in Chile. In De Long’s words, in the United States, “the end of American preeminence in education, the collapse of private-sector unions, the emergence of a winner-take-all information-age economy, and the return of Gilded Age-style high finance have produced an extraordinarily unequal pre-tax distribution of income, which will burden the next generation and make a mockery of equality of opportunity.”

In other words, “the world described by the Friedmans is not the world in which we live”. On this basis, what is called for is a more fundamental rethinking of the model itself. The Economist and, more importantly, political leaders in Chile and elsewhere would do well to take note.

* Professor of Economics at the University of California at Berkeley, a research associate at the National Bureau for Economic Research and former Deputy Assistant US Treasury Secretary
** Milton Friedman and Rose D. Friedman, Free to Choose: A Personal Statement, New York, Harcourt Brace Jovanovich, 1990