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22 July 2017

Chilean Update: in the balance

Tag(s): Chile, Politics & Economics, Foreign Affairs
I recently attended a two-day conference in London on the Chilean economy. Several high level officials from Chile attended including the Minister of Finance. This is an election year in Chile and that is adding to a sense of volatility. In my blog Chilean Update – wine, women and scandal 28th February 2015 http://www.davidcpearson.co.uk/blog.cfm?blogID=370  I wrote of the contrast in fortunes of the Chilean economy under the right wing President Sebastian Piñera in the years 2010-2013 with average growth in GDP of 5.3% and under the left wing President Michele Bachelet where growth has slowed right down. The current Central Bank forecast is for GDP growth between 1-2% in 2017 and slightly more than 2% in 2018.

Under Piñera it looked likely that Chile would soon break into the ranks of OECD developed nations but that now looks unlikely for some years to come. The primary elections to choose the party candidates have already taken place on 2nd July. The full presidential election takes place on 19th November along with those for the National Congress and the Regional Boards. The President will be inaugurated on 11th March, 2018. The President must win an absolute majority of all votes cast and, if this is not the case on the first ballot, a run-off between the top two candidates will take place in December, rather like the French system.

Over 15 years GDP growth in Chile has averaged 3.9% while over the same period inflation has averaged 3.3%. This should mean increased prosperity for all but unfortunately that is not the case and like in many nations there are divided aspirations of a country which has remained a nation of starkly separated classes. Piñera is again standing on the right and is favourite to win but he will need to offer more than just the neo liberal policies of the past. While carrying much of the nation’s income tax burden, the middle classes must also pay out-of-pocket expenses for private toll roads and utilities and often pay for privately run health care and education services. Their frustration gave Michele Bachelet victory last time on the promise of free university education and subsidised public services. Does that ring a bell, anyone?

The desire is not just for a restoration of economic fortune but for a more subtle and richer list of improvements and developments. Chileans are different from most of Latin America. For a start, they are better educated, not just for the number of years in education where their neighbours Argentina and Uruguay are similar, but more importantly by measure of the quality of their educational institutions, where Chile is unequalled in Latin America. 30 years of economic growth, constantly increasing GDP per capita, and declining poverty led Chileans to expect more.

Ranked 10th in the world on the efficiency of government services by the Heritage Foundation, Chile is the only Latin American country in the top 35. (Hong Kong is 1st, Singapore 2nd; the UK is 12th and the USA 17th.)[i]  Many Latin American societies have proven tolerant of corruption conducted in the billions of dollars but Chileans turned against their President Bachelet when her son was accused of using inside information for a gain of a few million (the scandal in my earlier blog.) Chileans demand much more from their public servants than any other Latin American society. No doubt that has pushed them up to such a high world ranking but also explains the depth of their anger presently.

They are unified in their contempt for the Bachelet administration. In a Cadem opinion poll in February 2017, 75% of Chileans disapproved of Bachelet’s performance, with less than 20% showing approval, levels sustained since 2015. It seems most unlikely that the socialists even with a different candidate can retain the presidency. The more likely second round opponent for Piñera is Alejandro Guillier, a nationally recognised journalist of 25 years. He is running on a platform of a Chilean form of populism. He criticises the established parties as equally neo liberal and promises a move to the left. However, he is equally quick to criticise the badly governed model of South American socialism exemplified by Venezuela’s and he supports Chile’s efforts to build an Andean economic block with Argentina, Colombia and Peru to rival the powerhouses of Brazil and Mexico. His approach is reminiscent of Emmanuel Macron in France and look where that got him.

Piñera is seeking to exploit a growing concern about immigration in Chile. It’s economic success and relatively small population has attracted hundreds of thousands of Latin American immigrants, mainly from Bolivia, Peru, Argentina and Colombia. More recently Haitians and Venezuelans have fled from the disasters in those two benighted nations. Last year alone 34,400 Haitians arrived. Chile’s immigration numbers are still only 3% of the population, far lower than the US and Germany, both 16%, UK – 13% or Canada – 22%. However, since 2000 Chilean immigration has grown four times faster than the US and twice as fast as the UK.  During the fast period of growth these immigrants were largely welcome as a source of low cost labour. Since the slow down unemployment has soared among the immigrants in the informal sector leading to social pressures. 75% of the population agree that the country needs stricter immigration policies.

It would be wrong to place all the blame for the economic slowdown at President Bachelet’s door. Copper accounts for about 55% of all Chilean exports (It was about 70% when I lived there in 1981-3) and generates 20% of the government’s revenues. Chile flourished under the copper boom when the price of copper nearly trebled from $3330 per metric ton in February 2009 to $9500 per metric ton in March 2011. But over the past five years, copper prices have fallen by over 25%. Bachelet’s government has proposed new initiatives to further wean Chile off its reliance on copper, targeting boosting productivity and innovation, education, and research related to a broad range of sectors beyond the natural resource industries, but so far with little to show for these endeavours.

One complex issue involves the pension situation. For many years institutions like the World Bank held up Chile’s defined contribution pension system as an example to follow, and more than 30 countries across Latin America, Southeast Asia, and Eastern Europe have used it as inspiration, with good reason. The Administradores de Fondos de Pensiones (AFP) was set up as a fully funded capitalisation system run by private sector pension funds in Chile under the administration of President Pinochet and his “Chicago Boys”, so-called because they had studied at the University of Chicago under economist Milton Friedman.  Chile’s capital markets grew strongly, and pension funds now exceed $170bn, or around 70% of GDP. It also played a key role in turning Chile into the richest country in the region, lifting millions out of poverty.

However, today things are very different. Chileans receive the lowest average pension among the 35 nations of the Organisation of Economic Cooperation and Development (OECD), other than Mexico.

Many also complain that lack of competition has allowed the privately owned AFPs to earn disproportionately high fees. Currently investment returns have averaged more than 8%, and it has been that way since the system was founded. But in practice – after commissions- net returns are closer to 3%, according to a report published in 2015 by the Commission of Pensions reforms.

In addition many self-employed workers and those with unstable, seasonal or low-paying jobs have failed to make sufficient or regular contributions while some unscrupulous employers have failed to pass on the money deducted from employees’ salaries.

The average monthly benefit is about $300, less than the minimum wage. The contribution rate has also not kept pace. Chileans’ contribution rate is just 10%, about half the average in the OECD. The common benefit, including a supplement paid to poor people, is 45% of a pensioner’s final salary, well below the OECD average of 61%. This hides a gender imbalance as men do get 60% of their final salaries compared with just 31% for women.

As Chileans struggle in retirement, the anger has been directed towards the AFPs. In July, 2016, almost one million protestors took to the streets to demand change in the pension system. If not dealt with this could prove dangerous but so far the socialist efforts seem mainly directed at placing more of the burden on employers. They are also tempted by the very healthy size of the funds and may spoil the long term for short term gain much as Gordon Brown did when he inherited a very healthy situation in 1997 and destroyed it.

My wife and I will be in Chile at the time of the Election and no doubt will find a very febrile atmosphere. But I hope this brief blog has shown that the developing nations of the world are facing similar problems to the developed nations. And the political ramifications can be just as unpredictable.

Consider this: In the French legislative elections in June in the first round Emmanuel Macron’s party won 32.33% of the vote on a turnout of 48.75, i.e. 15.74% of the electorate. In the second round his party won 49.11% of the vote on a turnout of 42.64%, i.e. 20.94% of the electorate. He won a landslide and is now seen as perhaps the most powerful politician in Europe.

In the UK General Election held a few days before, Theresa May’s Conservative party won 42.4% of the vote, the highest single party proportion since 1983. The turnout was 68.73% and so the party won 29.14% of the electorate, nearly 40% higher than Macron in the second round when he only faced two opponents and nearly double what he achieved in the open field of the first round. And Theresa May is seen as a busted flush.


[i] http://www.heritage.org/index/ranking
 
Source: Chile Special Report 2017 , Bonds & Loans




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