Chile
For almost forty years, Chile has had the best
performing regional economy, one based on a free market model designed by the Chicago Boys[1]
and on the development of globally competitive export industries (orchestrated
by the Fundación Chile, ironically an
offshoot of ITT, the “Great Satan” of the 1970s).
Remarkably, this strategy which had been elaborated
by a military regime, has been pursued with only minor alterations by a
succession of center-left governments and most recently by center-right
President Piñera. For the first time
however, there are some doubts as to whether this continuity will be maitained.
President-elect Bachelet has campaigned on a
platform of broad fiscal and social reforms to be funded by higher tax
revenues. Interestingly, her political
discourse is significantly to the left of her actual policies when she was in
office in 2006-2010. Some of her other
proposals include creating a public pension program and the elimination of the
bedrock of foreign direct investment, the Decree Law 600.
Why would President Bachelet change tack? Is she doing what she wanted to do back in
2006, but politically couldn’t do? More
likely, she is responding to popular pressure and weak global economics, combined
with regional populism and reform fatigue at home.
Perhaps the most emblematic proposal is the
elimination of the DL 600[2]:
in a country where half of the foreign investments are very long term
(mining), the DL600 has provided the critical assurances of regulatory and
financial stability. The results have
been impressive: US$51 billion in foreign direct investments over the last 10
years in a country with a GDP of $164 billion.
And DL600 was no gift to foreign investors either, as they had to accept
paying income tax at a higher rate to avail themselves of the benefits of the
DL600.
The proposed termination of the DL600 is all the
more surprising since Chile is more reliant on exports (mostly from mining) than its regional
peers[3]:
these account for 34% of GDP vs. 17% for Argentina and 11% in
Brazil. Despite a sustained
diversification effort, copper and other
minerals still represent the lion's share of exports. It is one thing to
tell foreign investors that their income will be taxed at a higher rate; it is quite
another to imply that the terms under which they made a large investment
can now be changed at any time and affect such issues as non-discrimination
vis-à-vis local competitors, accounting and profit remittance rules, access to
foreign exchange, etc.
In truth, Chile has long had active leftwing
political parties and movements, and with populism on the rise in the region,
they too have upped the ante. This has
been apparent with demonstrations for free education for all, with blocking
electric power projects which had received the approval of government
environmental authorities, with blocking mining projects in coordination with local communities, NGOs and some
governmental units (in truth, some of these projects were not
in full compliance) and recently with a union strike
shutting down the main ports of the country and stopping copper and fruit exports[4].
As the speed of regional events seems to be
overtaking this blog, it may well be that, once again, Chile will be out of
phase with its big neighbors, Argentina and Brazil: successful when these were
floundering and declining when these start to shape up. For even if market forces extract a price for
her policies, President Bachelet will be forced to deliver on some of her
electoral promises.
In conclusion, it is likely that President Bachelet
will be forced to water down some of her new policies, simply because they are
unaffordable and because the opposition is nor without recourse. At the same time, Chile is
like an ageing Olympic swimmer who, after 15 years of twice-a-day hard
practices, finds it increasingly harder to go on, particularly when his friends
and neighbors stay in bed until 9 a.m. and play video games.
Foreign investors will take notice, and so will local ones.
[1] The term
refers to a group of young Chilean economists who studied at the University of
Chicago and later returned home to formulate and execute free market
policies. Among them were Sergio de
Castro (minister of finance 1977-1982), Jose Piñera
(minister of labor 1978-1980 and author of the groundbreaking private pension
reform), Sergio de la Cuadra (minister of finance 1982-1983), Miguel Kast
(minister of planning 1978-1980), and Hernan Büchi,
(minister of finance 1985-1989).
[2] For greater
details on the DL 600, please refer to my post of June 28, 2013.
[3] Countries with
GDP per capita of at least US$10,000.
2012 data.
[4] Current value
of affected exports is estimated at US$ 1 billion. By their nature, fruits are expected to
suffer the more serious losses.
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