Is This The End Of The Chilean Economic Miracle?

It is about time to take the populist path of Hugo Chavez

By Axel Kaiser

This November, Chile will face what could prove to be the most important presidential and parliamentary election since the one which brought democracy back to the country in 1990. For the first time in more than two decades, the Chilean people will choose between two opposing economic and social projects. On the one hand, the center right candidate Evelyn Matthei promises to continue Chile along the successful economic path of the last decades. And on the other hand, former president Michelle Bachelet’s new socialist platform promises to make radical changes to the current Chilean economic system.

The political parties of the the coalition that governed Chile from 1990 to 2010, the Communist party, and other minor left-wing groups merged into Bachelet´s coalition called “Nueva Mayoría.” The Communist party has historically been a destabilizing factor in Chilean politics and has been absent from government since 1973. Fully embedded in the logic of the Cold War, it still considers Fidel Castro´s Cuba the ideal political and economic system. Despite its anti-democratic features and its limited number of supporters, Chilean communists have managed to become increasingly influential in national politics through the massive student movement that brought President Piñera´s government to its knees in 2011 and 2012.

Along with a systematic campaign against the free market economic model by leading progressive intellectuals, the leftist student movement — whose most emblematic leader is a member of the Communist Party — has contributed to an ideological radicalization of the classical left-wing political parties, including the Christian Democrats. As a result of the radicalization, Bachelet´s political platform breaks away from the previous consensus among all major political parties on the need to preserve an economic model based on free market institutions. Questioning this economic consensus hasn’t happened since the return of democracy in 1990. Back then, the Concertación accepted and even deepened the free market economic model created by the military regime of General Augusto Pinochet, which brutally took over power in September 1973 after the disastrous socialist experiment of president Salvador Allende and the Unidad Popular Government.

Back then, Chile was in the throes of hyperinflation, a bankrupted government, chronic scarcity of basic goods, and the complete collapse of economic and political structures. The new military regime decided to put a group of classical liberal experts in charge of the economy. The members of the economic team were called the “Chicago Boys” because most of them had attended postgraduate programs in economics at the University of Chicago. Once in government positions, the Chicago Boys immediately engaged in several structural reforms, including price liberalization, the elimination of trade barriers and privileges to national industries, the enforcement of property rights, tax reduction, privatizations of state-owned companies, spending cuts, monetary stabilization and the privatization of social security.

As a result of this free market revolution, the Chilean economy boomed. In the last 35 years poverty has fallen from 50 percent to 11 percent, per-capita income has increased from 4.000 dollars to almost 20.000 dollars and inflation was reduced from over 250 percent per year to less than 7 percent per year. This remarkable record has been known as Chile’s ‘economic miracle’.

Key to the entire free-market transformation were the political institutions established in the Constitution of 1980, which despite several reforms in the last two decades continues to be the highest law of the country. Like the American Constitution, the Constitution of 1980 established a limited democracy. Its central aim was to secure economic liberty and private property so that the country would not fall prey again to collectivist tendencies that could threaten to destroy both the economy and the democratic institutions.

Accordingly, unlike the previous Constitution of 1925, the current Chilean Constitution severely restricts the ability of politicians to alter the foundations of the economic model. To a large extent, it has been these Constitutional constraints to political power what has enabled Chile´s economic and political success.

But the next four years could change that. Misses Bachelet, who will most likely win the coming election, has argued for a substantial rewrite of the 1980 Constitution, even by means that are not permitted under it. The aim of such a rewrite, according to her advisers, would be to end what they regard as an unjust „neoliberal“ system. Instead, Misses Bachelet proposes to create a massive welfare state that provides all sorts of benefits to the people and will replace the market as the main engine of economic growth with government-led industrialization.

Some of the proposals include a takeover of the education system by the government, a dramatic increase in taxes for corporations, free higher education, switching the funded social security system back to pay as you go, and the re-election of the president of the republic.

The spirit of Ms. Bachelet, whose government program basically aims to revive many of the failed policies implemented by Chile from the 1940s to the early 1970s, has led some members of the center right to accuse her of following the populist path of former Venezuelan President Hugo Chavez. This comparison may seem exaggerated. What is in any case clear is that if Ms. Bachelet wins the next presidential election and her coalition manages to put forward the new socialist agenda, Chile´s economic miracle will face an unprecedented challenge which might seriously endanger its survival.