Undoing the Damage in Chile

Yves here. America hates taking lessons from other countries, but Chile looks about to embark on tackling a student debt/overpriced educational system mess that makes ours pale by comparison. So it will be instructive to see how this reform effort takes shape.

By Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Cross-posted from International Development Economics Associates (IDEAs); originally published in the Frontline

It was no surprise to anyone in Chile or outside when Michelle Bachelet romped home convincingly in a landslide victory in the run-off for the Presidential election in December. Indeed, the only surprise was that while she took 62 per cent of the vote, the voting rate itself fell to only 44 per cent of the electorate.

Bachelet, the pediatrician mother of four who was also among the students persecuted by the military dictatorship in the 1970s, has already served as President once. She completed her first term with an incredible 84 per cent popularity rating, which must be a record for any democratically elected leader after four years in office. But the current Chilean Constitution does not allow consecutive terms as President, so she could not contest again. In the interim, between 2011 and 2013, she was the first Secretary General of the newly founded international organization UN Women, but resigned from that position earlier this year to run for President again.

This time around she campaigned on the basis of a more explicitly progressive and transformative agenda, leading a coalition (Nueva Mayoría or New Majority) that includes a wide spectrum of political orientation, from the Christian Democratic Party in the centre to Bachelet’s own socialist-leaning Concertacion to the Communist Party and an array of even more radical student leaders on the left. The very emergence of this coalition and its electoral success suggests that Chile has is finally shaking off some of the torpor induced by the acceptance of neoliberal economic policies by both centre-right and centre-left parties over the past decades.

Of course, it is not that all politics in Chile was in a state of torpor, as young people in particular have been active in questioning structures and strategies that increased inequality and material insecurity. Indeed, the increasingly lively student movement in Chile has been raising important progressive demands relating not only to the privatization of education, but also much else that characterized the neoliberal consensus. Thereby it has arguably been responsible for radicalizing the wider population as well, and pushing the mainstream political discussion significantly to the left.

As it happens, the student movement has harked back to an earlier tradition, when the Communist party and the Socialist party were significant players on the political scene. In the early 1970s the Socialist Salvador Allende became President with the explicit goals of nationalizing the copper industry and pursuing egalitarian economic policies, only to be toppled and killed by a military coup on 11 September 1973, a move that was certainly applauded by the United States and possibly actively assisted by the CIA.

The Pinochet dictatorship that emerged from that violent takeover turned out to be one of the most vicious and brutal regimes in a continent already known for oppressive military rulers. When it was finally terminated at the end of the 1980s, the general bequeathed an economy that had been the laboratory of the neoliberal economic experiment, the happy hunting ground of “Chicago boys” who effectively privatized everything that did not move and much that did. So deeply integrated into global markets had the Chilean economy become, so thoroughly market-centric and driven by the activities of capital in pursuit of ever more profits, that there was little space available for alternative economic policies even in a more democratic setting after the dictatorship ended. So the Socialist party that governed Chile for much of the subsequent period accepted the basic principles of the Washington Consensus in terms of both macroeconomic and microeconomic decisions.

To some observers, Chile is seen as a model of macroeconomic stability because of the strict rules that have constrained its economic policy making. But others point to the dramatically increased inequalities in assets, incomes and access to basic goods and services over this period, making Chile one of the most unequal societies in the region as well as in the world. They also note the massive insecurities faced by workers whose rights are not respected, older people whose access to pensions is uncertain and inadequate and students who are crushed by massive (and often un-repayable) burdens of debt in the course of paying for their education.

These are some of the problems that Michelle Bachelet already had to contend with in her first stint as President. During that tenure, she and her government maintained the generally conservative macroeconomic policies that had become the norm. This included ensuring that with the government fisc was generally in balance and that revenues from copper exports (which still dominate in total exports) were used to finance public spending only in proportion to a reference average price, with windfall gains from global price increases being saved to a war chest for future use.

But that government brought in one major change: undoing the ravages created by the pension systems put in place under Pinochet. The Pinochet regime had created a contributory system managed by private insurance firms. This was both inequitable and inefficient: it excluded large numbers of working people who did not have any social security after their working years were over; it had very high capital costs; it was prone to many market imperfections including moral hazard and opaque and often unjust behaviour of the profit-oriented private insurance companies. In 2008 the Bachelet government changed back to tax-funded social pension system, which coves self-employed and other excluded workers and provides guarantee of a minimum income. This move has been copied by other governments in Latin America thereafter. However, the pension reform is not complete – it stalled during the government of Sebastián Piñera who will remain in office until March 2014 – and it will require additional funding if universal and stable coverage of the elderly is to be ensured.

There are some important concerns at present, which relate to two issues that have been central to recent popular protests: the huge student debt and unequal access resulting from a heavily privatised system of secondary and high education; and the fiscal reform that will necessarily be required to fund the public takeover of most higher education that appears to be the only way to solve the problem. The high cost of education, the uneven quality across institutions, the long years spent in gaining degrees only to face uncertain prospects of employment, are all features that have traumatised the younger generation in Chile for some time now.

Student protests began in earnest in 2006, during Bachelet’s earlier tenure, led by high school and university students. The current system is heavily privatised (more than two thirds of enrolment is in private institutions) and even the better public institutions charge very high fees, especially relative to per capita income and future potential earnings. The tertiary education process is also very prolonged, with even undergraduate degrees taking 4-8 years to earn.

In this high-cost system, banks enable young people from the middle classes to access private universities and the more expensive public universities through a programme of state-guaranteed credit for students. Even with the loans, middle-class families spend around 40 per cent of their income on higher education for their young. The poor are squeezed out altogether. Even among those who do get into the system, dropout rates are high. This affects the students as well as the educational institutions, which are financially responsible for dealing with that cost, so that many such institutions are also deeply indebted and no longer financially viable, creating a mountain of bad debt for banks to deal with eventually. Overall, the system fails everyone because it generates poor public schools, expensive private universities, unprepared teachers and unaffordable loans, which have grave financial consequences for households and eventually for banks.

The student movement has expressed its anger and resentment through a combination of traditional and innovative protests – strikes, huge demonstrations and marches, mass “kiss-ins”, and other means. Their demands include universal access to free public schooling and massive increase in state support to universities, which currently rely mainly on tuition fees. Achieving this will require significant revenue mobilisaiton by the state, which is where the proposals on tax reform and increasing the share of tax revenues raised from corporations and rich households are important.

The Nueva Mayoría coalition has managed to get a simple majority in the Congress, which will be necessary for the tax reform. But they have not got the larger majority required to push through the education reform. Still, there is clear recognition that this must be a major thrust of the new government that will take over in March next year, and already moves to persuade other elected representatives to support this are on. It helps that four important student leaders – all under 30 years old – have been elected to Congress, including the charismatic Camilla Vallejo of the Communist Party and Gabriel Boric.

It is evident that the damage done to Chilean economy and society through all these decades of aggressive neoliberalism was immense and pervasive, and it will take time, patience and a lot of effort to undo it and to create a more equitable and secure society. Even so, it is clearly a time of hope in Chile. As Michelle Bachelet said in her victory speech, “The social and political conditions are here and at last the moment has arrived. If I’m here it’s because we believe that a Chile for everyone is necessary. It won’t be easy, but when has it been easy to change the world?”

Print Friendly, PDF & Email


  1. Ruben

    I don’t think the Chilean experience in educational reform would be transferable to the USA.

    In the USA students with large debt, condemned to debt-servitude for decades, would blame themselves and their families for being losers, unable to pay up front, whereas more cynic peoples, less gullible peoples, like the Chileans, well they blame the system mind you.

    1. Martin Finnucane

      Belief in the system is the patrimony of the American middle class. In fact, that’s what being middle class means.

      That is the pearl of great price which we will not relinquish, even if such tenacity to principle results in self-loathing, and loathing of one’s neighbors. Better loathing, fear, isolation, etc., than to surrender one’s fundamental belief in grandeur of the “American way.” That is why so many left/liberal types for so long, and even today, insisted on seeing Obama as something more and better than what he is (and what he is is a confidence man working for the kleptocracy). This perversity is not so much allegiance to Obama the man, or even enthrallment to the spectacle of a black president of the U.S., so much as it is a commitment to the premise that our system pits real choices, in varying shades of white and gray, against each other, with the citizen-consumer left with a real choice between more-or-less well articulated options. That is, we may grouse about the limitation of choices, the position of the Overton window, etc., but still we believe ultimately that our hallowed institutions work as advertised. That the whole game is a rigged and a scam – higher education most definitely included – is simply unthinkable to many of us.

      1. allcoppedout

        Good luck to Chile. That our hallowed institutions don’t do what is claimed on the tin has long been obvious. They are little more than the sacred cows of our sunk costs now. Debt is not a sensible method of allocating resources and has revolting origins in such as blood debts. If you tried to sell your daughter’s unborn child into such today I’m fairly sure I could get you in front of a court. Nearly all knowledge and means of academic teaching could be available free now, as with much else if we prevented the excesses of intellectual property rights. Thinking up and implementing radical new forms of education and employment probably isn’t hard. The massive barrier to new entry is finance based on greed and various associated cautionary tales on skyfall if we do anything about the rich. In all the middle eastern juntas I’ve worked in, the people question where the oil revenues go. Back in Democratic Paradise I find money-trails equally obscured. When I was a kid, France reduced its old franc to a cent more or less overnight. It survived. Surely we could survive a debt jubilee. The key would be to stop offshore hoarding.

      2. Ruben

        In all fairness, Americans are currently living under the most powerful State that has ever existed. It’s only natural that they fall in love with their idea of the “American way”, their Nation, their System. It takes a lot of effort and courage to shake off those collectivist notions.

  2. timotheus

    A minor correction: the Socialist Party did not govern alone after the end of the dictatorship. It was the Concertación (incorrectly referred to later as Bachelet’s party), which was not a party but rather a coalition of four, three of them historical (Christian Democrats, Socialists, Radicals) and the Democratic Party, an amorphously centrist recent creation. The point is that the entire opposition to the remnants of the Pinochet period was united (minus the Communists who were excluded), giving those unhappy with the continued neoliberal straitjacket nowhere to go politically. That’s why the student movement concentrated on the streets and made so much trouble for so long (and with the broad sympathy of the populace who knew they were right) that the neoliberal consensus broke apart–at least rhetorically. We’ll see if Bachelet & Co. are serious about trying a new approach. In any case, a good lesson for our own reality where people continue to drink the Democrats’ Kool-Aid. Once again, Chile is a social laboratory for the future.

  3. Jim Haygood

    ‘The damage done to Chilean economy and society through all these decades of aggressive neoliberalism was immense and pervasive.’

    Yep. During those awful years, Chile ended up with the strongest credit rating in LatAm (AA- at S&P, vs. BBB for Brazil), and in 2010 became the first and only South American country to join the OECD club of developed nations.

    Tragic, tragic!

    Meanwhile the ad hominem tactic of attempting to attempting to discredit Chile’s current economic policies by waving the bloody flag of Pinochet is a predictable part of Ghosh’s screed. By this logic, since Hitler was an early adopter of anti-smoking laws, we should start subsidizing tobacco. Adolf was a bad, bad man; therefore every policy he endorsed must be wrong.

    1. allcoppedout

      Come on Jim, we have a mound of laws on smoking and new speech crimes, none of which would stop a new deluded Adolf-puppet.

    2. Crazy Horse

      So Jim, I take it that you believe that promoting economic inequality is a good thing? One of the products of Chile’s “success” is an inequality of wealth that is the most severe in the hemisphere, even outranking the USA in #2 position.

      So the lesson to be learned is not that billionaire oligarchs and multinationals should be taxed to help fund education and allow access for lower and middle class students without making them permanent debt slaves? Perhaps if we in the US would only cut Social Security payments by 5% a year and tax private pension income at 30% per year we could divert more tax breaks to our deserving oligarchs like Jamie Dimon and Tom Perkins and overcome Chile in the race to have the most unequal distribution of the nation’s wealth?

      1. Jim Haygood

        ‘Chile’s “success” is an inequality of wealth that is the most severe in the hemisphere, even outranking the USA in #2 position.’

        Care to provide a link to support your claim? Here, let me help. As of 2011, Chile had a World Bank Gini coefficient of 52.1 … easily outpaced by Brazil (54.7), Colombia (55.9), Guatemala (55.9), Honduras (57.0), and Haiti (59.2).


        Do they have Google in your country?

    3. afisher

      The technocrat is saying that the only way to judge what the Chicago Boys did when they ran the gov’t for Pinochet was the credit rating….seriously?

      The international debt crisis unleashed in 1982 hit the Chilean economy with particular severity, as foreign loans dried up and the international terms of trade turned drastically against Chile. The policies implemented initially to face the 1982 crisis can best be described as hesitant. In early 1983, the financial sector was nationalized as a way to avoid a major banking crisis, and a number of subsidy schemes favoring debtors were enacted. The decision to subsidize debtors who had borrowed in foreign currency during the period of fixed exchange rates, and to bail out the troubled banks, resulted in heavy Central Bank losses, which contributed to the creation of a huge deficit in publicsector finance.

      You do know that people have written books on the Chilean “free-market” miracle….that wasn’t.

      1. Jim Haygood

        ‘the only way to judge what the Chicago Boys did when they ran the gov’t for Pinochet was the credit rating’

        Chile’s credit rating is the product of its current policies. Fitch rated Chile at BBB+ in 1994, and has upgraded Chile by several notches in the succeeding 20 years.

        Chile’s credit rating today can no more be attributed to the ‘Chicago boys’ than America’s deficit can be blamed on the jaunty shade of Frank Roosevelt. Let it go, dude.

    4. lolcar

      Colour me surprised that adopting neoliberal policies gets you a pat on the back from Western credit rating agencies. The same agencies that rated sub-prime MBS as AAA.
      And joining the OECD club doesn’t change the fact that the country with the highest per capita GDP in South America in 2010 was Argentina. Hard to reconcile that with your usual depiction of Argentina as a country on the road to socialist rack and ruin.

    5. Yves Smith Post author

      Please read ECONNED. The reports in the US on what was happening in Chile are often out and out falsehoods. For instance, in the early 1980s, Reagan and Friedman were depicting Chile as a success. In fact, following a leveraged-fueled boom and plutocratic land grab, the economy collapsed into depression. Pinochet embraced Keynesian responses, including deficit spending, and stronger union rights, which IIRC included a minimum wage.

      1. Gonzalo Lira

        Yves wrote, “in the early 1980s, Reagan and Friedman were depicting Chile as a success. In fact, following a leveraged-fueled boom and plutocratic land grab, the economy collapsed into depression. Pinochet embraced Keynesian responses, including deficit spending, and stronger union rights.”

        Sorry, Yves, but on this issue, you simply do not know what you’re talking about.

        I was in Chile in the early 1980’s: The ‘82–‘83 crisis was a financial crisis very similar to the GFC in 2008. Financial firms were over-leveraged because of the fixed dollar exchange rate (thanks to the Chicago Boys), which created a bubble which burst in early ‘82. During the fall-out of that bust, Pinochet (apart from kicking the Chicago Boys to the curb) broke the oligarchy, and sent most of them to jail, precisely because of their self-dealing. The Cruzat-Larraín group, the Valdés group, the Ross group, they all got hammered by the dictatorship.(As to a “plutocratic land grab”, you just have no idea what you are talking about: Land reform, such a big deal during the 1960’s, was over by 1981, and was a non-issue during the ‘82 crisis.)

        Most of the banks and the large companies owned by the self-dealing oligarchs were nationalized by the Pinochet dictatorship, and began to be spun off to the public in 1985–‘89, in the “Capitalismo Popular” program of the dictatorship.

        As to deficit spending: The Pinochet dictatorship did NOT engage in deficit spending to prop up the economy because no one would give Chile credit after 1982. Chile’s sovereign debt was being renegotiated, and no further credit was available. There were jobs program for the poor—the PEM and POJ—but no big Keynesian-style stimulus program: Just a lot of austerity. I know this because I was there, I saw this.

        Union rights only started coming back in Chile around 1986–‘87, and had little to do with the economic situation, and everything to do with the upcoming 1989 plebiscite.

        Trying to beat up neo-liberalism—which I myself do not fancy—by distorting the historical record and playing to false stereotypes helps no one but the defenders of neo-liberalism.

        I would be very surprised if you allowed this comment to run.

        Gonzalo Lira

        1. Yves Smith Post author

          Go read my book. I have numerous citations of scholarly papers (I read at least a dozen papers, they were all largely consistent, and IIRC cited at least six and perhaps as many as nine) that cite official data showing that Chile did engage in deficit spending AND engaged in policies that were significant rollbacks of Pinochet’s anti labor policies.

          I believe you were also all of 14 year old when this happened, and therefore in a position only to get domestic propaganda and whatever your parents and people at school told you. Hardly a great position to make an assessment of events.

          And it’s rather curious that you defend neoliberalism yet admit that Pinochet’s reforms quickly produced a GFC level crisis in Chile.

          Better trolls, please.

          1. Gonzalo Lira

            I’m a troll for pointing out that your appraisal is wrong?

            Maybe you and Pinochet are more alike than you realize, Yves. He didn’t tolerate dissent either.


  4. Jim Haygood

    ‘the country with the highest per capita GDP in South America in 2010 was Argentina’

    Care to provide a link to support your claim? My source, the World Bank, shows per capita GDP for 2010 as $10,120 in Chile and $9,133 in Argentina. By 2012, the gap had widened to $15,452 in Chile vs. $11,573 in Argentina. And it will get bigger still when 2013 data is published.


    By the way, where does an academic from India (per capita GDP $1,489) get off lecturing rich Chile on the ‘damage’ done to its economy by policies which he doesn’t approve? As Samuel Johnson quipped about a dog walking on its hind legs, ‘It is not done well; but you are surprised to find it done at all.’

    1. Dennis Redmond

      Osgood wrote:

      “By the way, where does an academic from India (per capita GDP $1,489) get off lecturing rich Chile on the ‘damage’ done to its economy by policies which he doesn’t approve?”

      I’m sorry, but India is the world’s biggest democracy, with 1.237 billion people, hundreds of languages, astounding human diversity, and magnificent cultural, literary, philosophical and scientific traditions which go back literally thousands of years. The country was one of the poorest places on earth when it became independent in 1947, but has vastly expanded its economy since then — but without Pinochet-style mass murder and torture, and without neoliberal bankster scams (they nationalized their banks, one of the reasons they’ve grown so fast). Finally, India threw off the yoke of British empire not with guns, but through nonviolent civil rights campaigns. This isn’t to argue India is an earthly paradise — it’s an imperfect democracy and an industrializing nation with plenty of problems. But its achievements are truly epic, and have much to teach us.

    2. heresy101

      Per capita GDP only looks at the overall economy, and poorly at that. The 1% of Chile could have a huge share of economic output and the average Chilean (99%) could be barely surviving. It would just mean that the higher average GDP than Argentina was supporting the 1% in their obscene lifestyles. The 99% may be far better off in Argentina than Chile if the wealth distribution is more equal even though the per capita GDP was lower.

Comments are closed.