Can Chile Reform the Neoliberal Model?

Can Chile Reformthe Neoliberal Model?

Reader Timotheus wrote:

I attach an article that I thought might be of interest to NC readers. It is not particularly unique in its analysis, but Chile (where I lived for many years) is often a social laboratory that gives us an advance view of what is coming down the road. We know that Thatcher (1979) and Reagan (1981) were inspired by Pinochet (1973)–just sayin’. I thought this would be a good corrective to the usual line on Chile, i.e., that everything is just marvy there and the rest of Latin America should imitate them. The context is that the university students (over-borrowed, under-employed) have been in the streets in open revolt for three years, and Bachelet said in her inauguration that she wants free university education. There are also big problems with pensions, wages and regressive taxes.

It’s my translation, and I tinkered with the original here and there for comprehension, but nothing major.

By José Miguel Ahumada and Hassan Akram, economists and researchers at the Chile 21 Foundation. Akram is the author of La Casa que Construyó Hayek: La Historia del Modelo Económico Neoliberal en Chile (The House that Hayek Built: History of the Neoliberal Economic Model in Chile, Ediciones UDP, 2014). Originally published at El Mostrador

No one now denies that Chile has changed. The student mobilization of 2011 unleashed a wave of social unrest. We see a challenge both to the political consensus that has dominated Chile since the transition [from Pinochet] as well as to the institutional framework that has sustained it. The students’ slogan, “We are the generation that’s not afraid!” spread throughout Chilean society and began to undermine the authoritarian structures by which neoliberal ideology has hung on despite the end of the dictatorship.

The future government of Michelle Bachelet promises to reform the neoliberal model. At least that’s what her allies in the New Majority think (especially the CP [communists] but also the progressives of the PS, DC and PRSD [socialists, Christian democrats and radicals—parties of the center-left government coalition]). The 17.41% of voters who opted for left-wing candidates in the first round and then supported Bachelet in the second round probably also believe it. She already has said that she wants to address the country’s appalling inequality that enables some Chileans to enjoy the income level of Norway and others that of Angola. But the big mystery is whether she will put together a program that can solve the problem.

The demands are many: a new constitution, tax reform, a new Labor Code, free education and a revamped retirement system. But the strategy emanating from her New Majority coalition is one of caution. The policy teams, coordinated by Alberto Arenas, have tried to foist their “moderate” vision on us so as to make sure the changes entail the least possible political cost. The problem for the Bachelet team is that it will have to please very diverse groups, from the radicalized university students to the Chamber of Commerce.

The False Security of Moderation

To succeed in this acrobatic game, the Bachelet team is doing a cold-eyed cost-benefit analysis. The costs are the popular demands, policies to reduce inequalities and maintain social peace. The benefits are economic dynamism and growth. The political team’s calculus has to tell them how much cost to sustain in terms of redistributive policies to assure governability and not put the country’s precious high growth rate at risk. According to this vision, if the government gives too much in redistributive terms, it will undermine business confidence and weaken investment.

Pragmatists within the New Majority think that their moderate approach will protect Michelle Bachelet. They think that by reducing the depth of the changes, they will assure macroeconomic stability and therefore the long-term stability and sustainability of her reforms. However, the international situation is telling us precisely the contrary: it is not radicalism but moderation that will make social reforms unsustainable.

Today, the countries that had slightly left-leaning governments during the 1990s and 2000s are in pretty bad shape. Most European countries are suffering from high unemployment and stagnation. (The U.S. is experiencing similar conditions although less drastically). Fiscal austerity imposed after the global financial crisis is destroying the [European] welfare state and increasing inequality and poverty on a continent that was famous for its social pact. However, the collapse of the egalitarian social transformations of Old Europe is not the result of an irresponsible radicalism via high levels of state spending and redistributive policies. Instead, Europe shows us that it was the moderation of the “Third Way” response to the neoliberal legacy that caused the crisis and undermined reform.

In the case of the U.K., the supposedly left-leaning government of Tony Blair made great efforts to cozy up to the financial sector and never revoked the deregulation installed during the Thatcher years. This “pragmatic” moderation planted the time bomb that exploded with the banking crisis. In France it was the Socalist Party itself under François Mitterrand that, in pursuit of “moderation”, promoted financial deregulation that led to the destruction of the social model. Something similar happened in the U.S. where the domination of Wall Street interests and the financial sector during the Clinton presidency brought about the dismantling of the New Deal regulatory structure (most famously the Glass-Stegall Act), which aided in the creation of the financial bubble that continues to weaken the global economy. In all these cases moderation in facing the neoliberal model did not promote but rather destroyed the desired economic stability.

Even worse, another result of this moderation is that today the European electorates blame the left parties (that were in government when the crisis blew up) for their economic problems even though these problems are the result of neoliberal deregulation. Similarly, in the U.S. there is a lot of discontent with the Democratic Party because its closeness with the finance sector blocks Keynesian policies that (as Paul Krugman explains) would end the crisis. In this context of a weakened left (caused by its moderation and association with neoliberal approaches), the right has been able to promote its discourse about how irresponsible government spending caused the crisis.

There is now a fiscal crisis because states have had to rescue deregulated banks, but the blame, according to the now hegemonic discourse, is due to the welfare state, not lack of regulation. No matter that Spain, the country most often accused of fiscal irresponsibility, had a surplus before the bank rescue—the facts are irrelevant. Thus moderation by the left not only permitted the deregulation crisis but also strengthened the neoliberal discourse through its negligence.

Could something similar happen in Chile?

The Economic Crisis and the Tax and Education Reforms

“What if the copper bonanza is transitory?” asks Cambridge economist José Gabriel Palma. Despite the export boom and the high price of copper, Chile today is starting to experience a current account deficit of 4% of GDP. Palma has called this situation the “Trojan horse” that [outgoing president Sebastián] Piñera is leaving for Bachelet. The export boom depends mostly on speculation in copper prices and the radical increase of imports concentrated mostly in consumer goods, which have more than quadrupled since 2003, instead of capital goods that could boost national production. So we have a boom without building the material basis that could sustain it Asian-style. Financial speculation and unproductive imports have generated the current account deficit, which lays the groundwork for a future crisis. Don’t we remember the pre-crisis conditions of 1982: the financialization of the entire economy, unproductive imports, a current account deficit along with a climate of euphoria and optimism?

As we have seen, those who construct the crisis are almost never those who end up paying for it. The dangerous present economic scenario in Chile is the result of almost four decades of neoliberal policies, but if the bubble bursts in the next few years, it will be the New Majority that will have to come up with answers to exit from the crisis while dealing with the right attacking the reformist program of Bachelet for causing it.

The economic impact of a crisis can lead to a consolidation of the regime and block progressive reforms despite the defeat of the hegemonic [neoliberal] model. Even worse, the crisis could not only impede reforms but also paradoxically strengthen the model politically.

It would be the perfect opportunity for the right to rearm itself politically. Only think of what they will say: “Piñera left office with a GDP per capita of almost US$20,000 and 6% growth anchored in a stable, orderly structural framework while the current government, because of its failed policies (constitutional change, educational and tax reforms), has generated institutional instability that has worsened the crisis.”

What to Do?

Progressive social policies are only sustainable over time with an economic regime that includes industrialization rather than the precarious and short-term approach of today. There’s a reason why development literature speaks of the need to link the welfare state with a development state. In Chile, social policy must be accompanied by an industrial policy.

Today we have the chance to begin down this road. Recovering copper production is a key objective if we are talking about a transformation in production. Together with a strong tax reform, earnings from copper will make it possible not only to implement solid social reforms but also for to elaborate new projects for a productive transformation that can bring new comparative advantages beyond the static current situation based on natural resources. The state, just as in the U.S. and Asia, has played an essential role in innovating business investment in new sectors. A strong state with a determined political bloc behind it and the necessary resources can open up new and dynamic comparative advantages.

We’re not talking just about increasing the state’s mining royalties. We need a state that isn’t afraid of utilizing its own tools. It should activate commercial and tariff policies that can temporariliy protect new sectors, and the political base for doing this is beginning to form. Let’s learn from what the developed countries themselves have done, not what they say we should do.

Only a state with access to important resources, without fear of its own capacities and instruments, and with the political will to create new dynamic sectors can generate a productive scenario that can “protect” the Chilean economy from speculation and dependence and construct the material basis for a welfare state.

The New Majority can only carry out its social reforms in a sustained way if it extends its policies to the productive sector. It has to be capable of linking social development with economic development and have the will to recognize that in the current economic scenario, radicalizing its policies by intervening in the arenas where economic power is concentrated, is a necessary condition to keep its reforms alive. The only way to stand still is to move forward.

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