Alice Bettencourt
March 12, 1999
Welfare #4

Chilean Economic Reform: Beneficial for the Upper Class or for All?

To the majority of Chileans, the end of the Pinochet regime in 1990 was gift from Heaven.  After seventeen years of a murderous dictatorship consisting of a combination of political repression but also with economic reform, Chileans were able to determine their own political and economic fate democratically.  Chile has emerged as a country that many Latin American nations are attempting to emulate, especially in their economic reforms. General Augusto Pinochet's regime consisted economically of reform from Allende's socialized economy (one important reason leading to the coup of 1973) to a neo-liberal economy that continues today. From 1973 to 1990, Chile transformed from a low growth economy in the 1970's to recession in the early 1980's finally ending with a high rate of growth. Patricio Aylwin's government in 1990 inherited this period of high growth. Chile was handed to the post-dictatorship government already on its way to a sound economic policy due to Pinochet's and the "Chicago Boys'" neo-liberal policies of foreign investment and decreased state involvement in the market.  Though the economy was growing, Chile needed to look at how these benefits were being distributed throughout society. During the Pinochet regime, public social service spending decreased.  Though the regime's economic reforms have been heralded a success, neo-liberal policies deepened social inequalities between the Chilean classes. Forty-four percent of all Chileans were living in poverty in 1987 and 16.8 percent were destitute. (Weyland, Pg. 40)  Similar to Thatcher and Reagan in the 1980s, Pinochet reduced taxes to encourage investment and decrease the state's role thus reducing money for social spending. Reforms targeted the upper and middle classes while the lower classes were left to hope that economic benefits would "trickle down " to them some day. In 1990, as the democratic government took power, President Patricio Aylwin and his government examined the remarkable economic situation and the new politics of democracy.  How would the two merge together without disrupting each other?  Pinochet's reforms were so immense due to the fact that no one was able to oppose what he implemented.  Repression was so great under his regime that the thoughts of resisting Pinochet's policies were sure to influence even more repression of the opposition. Alywin's government took the approach of disrupting neither economics nor democracy and actually intertwined them together to ensure prosperity. Aylwin's ideal was to pursue a policy of "Growth with Equity." Aylwin and his government hoped to promote social fairness without disturbing the new democratic society. Secretario General de la Presidencia Edgardo Boeninger and Ministro de Hacienda Alejandro Foxley "(b)oth feared that inequality and poverty would prompt a wave of demands for immediate benefits that would endanger sound economic policy." (Pg.40)  The government did not want a populist movement witnessed by both Chile and Latin America upon several occasions in the past and ultimately fail. Instead of promoting a policy to attempt to alleviate the poverty in Chile overnight, Alywin's government instead promoted gradual change. This gradual change would promote social spending without disrupting the neo-liberal economic policies.  (Weyland) Though the nation had been witnessing extensive economic growth, to increase social spending required an increase in taxes on the upper classes and therefore redistribution among the poor through social spending and increased income.  Many argued that an increase in taxes would threaten businesses and foreign investment thus there was a threat of investment leaving Chile. Businessmen, however, foresaw that to have economic growth increase while democracy existed, they would need to accept the tax increases to increase the long-term benefits. (Foxley, Pg.2-3) An increase in taxes was necessary to reallocate money from the well off to the poor.  Tax revenues increased to approximately 15% while fiscal spending on social policy increased to 11.7% of the GDP compared to an earlier 9.9%. Contrary to many worries, investment in Chile grew to 25.6% of the GDP in 1993, the highest in Chile's history. (Weyland, Pg. 43) With an increase in tax revenues, the post-dictatorship governments of Presidents Aylwin and Frei have been able to improve social conditions of the country paying specific attention to the poor.  Between 1990 and 1994, money spent on the health system increased seventy percent in real terms. (Weyland Pg. 41)  Hospitals were renovated and constructed. Those in the medical field saw their salaries rise and clinic services for the poor and in rural areas have also been expanded. Workers rights have improved due to the lifting of strict union-limiting laws and the prohibition of collective bargaining imposed under the Pinochet regime.  Once these laws were removed, workers were able to negotiate for better working environments and increased wages. The minimum wage had increased by twenty-eight percent between 1990 and 1993.  (Weyland, Pg. 47) (NOTE: However, former Chilean Finance Minister Alejandro Foxley noted that the minimum wage increased thirty-six percent. (Pg. 39) During 1993, the unemployment rate was a low 4.5%. Since the end of the regime, achievements in the arena of social spending have emerged including almost universal health coverage and improvements in primary education. Between 1989 and 1993, public financing for infrastructure and housing had increased sixty percent. Per capita, public spending on health services increased by thirty percent and free childcare for children ages two to five was accessible for extremely poor families. Low income women and mothers had access to periodic pre and postnatal care, vaccinations and immunizations for their children, birth control and to health and nutritional education including the promotion of breast feeding.. Social expenditures increased thirty-two percent during this time period. (See Montecinos). While some argue that these economic reforms have decreased inequality and have benefited the poor, others have argued that these decreases are marginal in comparison to the country's economic growth. They argue that the Chilean government could do much more to decrease inequality and improve the lives of the poverty stricken class. Chile's economic boom needs to benefit the poor as well as the upper and middle classes by implementing the Robin Hood notion of taking from the rich and giving to the poor. Chile's economic boom lead to an increase in the lower classes' income but compared to the middle classes' increase it was considerably low. By breaking down society's classes into quintiles, David E. Hojman explains who actually benefited from the boom the most. According to Hojman, the highest quintile increased their income by fifteen percent between 1989 and 1992. The fourth highest quintile increased their income by thirty-six percent, the third quintile by thirty percent and the second lowest by twenty-two percent. Even though the lowest quintile did increase its income between 1989 and 1992, it was only an increase of seven percent.  (Hojman, Pg. 9) The lowest and highest quintile classes benefited the least respectively, while the middle classes benefited the most from economic reform. In addition to a domestic comparison of incomes, Chile was the second lowest out of seven Latin American countries "in terms of the share of national income received by the poorest 40% of the population (10.5% in 1989, 10.2% in 1992).  Additionally, the country had the second largest ratio between household income shares of the top twenty percent and the lowest twenty percent, resulting in 17% in 1989 and 18.3% in 1992.  In both instances, Chile was second only to Brazil. (Hojman, Pg. 2) Though one of President Aylwin's top priorities in economic concern when his government took power in 1990 was to alleviate poverty and decrease inequalities, nine years later we have only witnessed a modest reduction in poverty and an increase in social spending in Chile. The poor have benefited in terms of an increase in their income and help by the government in the way of social spending. However, in comparison to the middle classes also benefiting from these increases in social spending and also incomes raising considerably for the middle class, this increase has not resulted in equal distribution of Chile's success. Economic inequalities in Chile have not decreased as President Aylwin had hoped. As we approach the new millenium, I wonder if it will continue to be a century where the rich get richer and the poor get poorer. Though Chile is now known for its remarkable economic turn around, especially since it is a Latin American country, has this economic boom combined with democracy helped the majority of Chilean citizens? Chile's policy of "Growth with Equity" has been known as Latin America's "middle way" (Foxley, Pg. 39) because it did not sacrifice economic prosperity for democracy and vice versa. Chile needs to continue to promote economic prosperity but also increase its commitment to decreasing inequalities between the classes. All Chileans should benefit from Chile's success.

WORKS CITED

1. Drake, Paul W. and Mathew D. McCubbins, _The Origins of Liberty_, Chapter 7, "When You Wish Upon the Stars: Why the Generals (and Admirals) Say Yes to Latin American "Transitions" to Civilian Government", Princeton, Princeton University Press, 1998
2. Foxley, Alejandro, "Chile: Latin America's Middle Way," _New Perspectives Quarterly_, Fall, 1996 v13 n14 Pg. 38(2)
3. Hojman, David E., "Poverty and inequality in Chile: Are Democratic Politics and Neoliberal Economics Good for You?," _Journal of Interamerican Studies and World Affairs_, Summer-Fall 1996, v38 n2-3, Pg.73(24)
4. Montecinos, Veronica, "Economic Reforms, Social Policy, and the Family Economy in Chile," _Review of Social Economy_, Summer 1997 v55 n2 Pg.224(11)
5. "Retirement Revolution", _The Economist_, November 23, 1996 v341 n7993 Pg. 95
6. Weyland, Kurt, "Growth with Equity in Chile's New Democracy?", _Latin American Research Review_, Vol. 32, No.1, pp. 37-67.