In Chile, the era of President Michelle Bachelet is entering its twilight. Her second term which began in 2014, will be ending on a sour note. Her center-left government, has failed to provide the economic growth, that her reforms were promised to bring. Now along with being tarnished with corruption, due to family scandal, her overall approval rating has dipped to just 23%.
Only 46% of those eligible to vote cast their ballots in the first round of voting, to choose a successor to the term limited President Bachelet. Chileans seem less than enthusiastic, about their present political choices.
Although the traditional center-right candidate Sebastian Pinera, did not do as well in the first round of elections on November 19 as expected, he is still favored to win the presidency in December. Polls had show him in the mid 40s, but he actually only garnered 36.6% of the vote. It is not a radical choice, the billionaire businessman held the office from 2010 to 2014.
His main challenger is the popular television journalist Alejandro Guillier. He is the political heir to President Bachelet, representing the center-left in the next round of voting. Mr. Guillier identifies himself as a political outsider, which is somewhat confusing for the electorate. His share of the vote was a dismal 23% of the ballots cast.
There was an emergence of a new political force, known as the Frente Amplio or Broad Front. The roots of this party can be traced back, to the student protests beginning in 2011. It is an anti-establishment movement, that is now being compared with the Podemos political party in Spain. Most of its followers can be identified, being on the left of center.
The Broad Front was led by the journalist Beatriz Sanchez. She came in with 20%, in the first round of voting. So although she will not participate in the second round of voting on December 17, her voters are more likely to support Mr. Guillier. This gives him 46%, which makes the upcoming election far closer than had been expected.
The other possible contenders were also eliminated in the first round of voting, deemed too radical in their approach, to be considered by most Chileans. There is little public appetite to really dismantle the liberal capitalist economic model, set up by the former President and dictator Augusto Pinochet, who ran the country from 1973 until 1990.
The reason for this reluctance, is the spectacular growth experienced by Chile, since the departure of Pinochet. Since 1990, the economy has increased by 300%, with the poverty rate sliding from near 40% to less than 10%. More than half the populace of some 18 million residents, is now considered middle class.
The political successors to Pinochet have been somewhat successful, in gradually diversifying the economy, away from the once total dependence on copper. However, this strategic metal still provides for nearly 50% of all Chilean export revenues.
The lower international price for commodities in general, including industrial metals like copper, is one reason why the economy of Chile has slowed somewhat in recent years.
Despite the push for change, by a number of leading politicians on the left, the central bank has mostly remained autonomous. It has continued its primary role, by keeping inflation in check.
Unlike many other advanced economies in the world, the Chileans attempt to follow a fiscal rule, that requires the central government to balance the national budget over the longer term. This financial conservatism, has forced the country to make difficult choices, on what the nation can afford.
Germany alone, among the major industrial powers, has achieved a balance in their national budget.
This has also allowed Chile, to avoid the problem of unsustainable national debt. Yet the GDP to debt ratio, has still been increasing. From a low of 3.9% in 2007, it has increased dramatically to 21.3% as of last year.
The first presidential term of Michelle Bachelet from 2006 to 2010, saw the national debt double during her tenure. The increase would slow considerably, under her more conservative successor. Her second term, has since seen the GDP debt ratio go from 12.7% in 2013 to 21.3% in 2016.
The present government deficit for 2017 is more than 3% of GDP, which has alarmed a number of Chilean economists. Bachelet has run a deficit every year of her second term and it has been rising steadily. It has gone from just -1.6% in 2014, to -2.8% in 2016.
This is partly the result of a slowing economy, along with the increasing government expenditures, on a number of new social priorities of President Bachelet and her New Majority political party.
The economic slowdown in general is attributed to a number of factors, that can be partly blamed on the present center-left government.
There are two elements of this trend which were beyond the control of President Bachelet. These were the lower international prices for copper and the gradual aging of the workforce. The latter resulting in a greater proportion of the citizenry, now being retired.
What the government can be faulted for is rising taxes and increasing regulations, which have in turn both discouraged further investment.
One of the first pieces of legislation pushed through by President Bachelet, was the reform of the tax system. This was done to increase revenues for the expanded social services, she wished to implement. Once passed, it added near 3% of tax revenue as a percent of GDP.
The tax and spend pledge, was a key component of her political platform to reduce inequality in Chilean society. More money was going to be spent on the education system and other programs. It is estimated that 84% of high school students,now go on to some form of higher education.
In reality, it raised the cost of doing business in Chile. Corporate taxes were increased and at the same time, a number of tax exemptions were closed. The former went from 20% in 2014 to 27% this year.
The Taxable Profits Fund (FUT) set up by the Pinochet government to encourage investment, was totally abolished. It had allowed companies to indefinitely defer tax payments on some of their profits.
President Bachelet insisted this tax arrangement, had cost the Chilean treasury some $50 billion USD in 30 years.
In addition, corporate dividends are now taxed on an accrual basis of a higher rate of 35%, regardless of an actual distribution, which had previously been the case. This change was levied against both domestic investors as well as foreign investors.
A carbon tax was introduced at the same time, to raise more money and to fulfill a campaign promise on the environment.
What followed was exactly foreseen by business leaders and numerous conservative leaders. There was a precipitous drop in investment, both from domestic and external sources.
The economy responded accordingly, economic growth had averaged 5% a year since the 1980’s. The government forecast of 4.9% for 2014 was quickly reduced to 3.4% for the first year of the Bachelet administration.
Economic growth has remained lower, throughout her second term. From a rate of 4% in 2013, it dropped to just 1.9% in 2014. The following year it picked up a bit to 2.3%, but by 2016 it had dipped again, to a new low of 1.6%.
Sebastian Pinera leads Chile Vamos (Let’s Go Chile), a coalition of center right and rightist parties that want to see an end to the Bachelet era, of higher taxes, increased spending and rising deficits.
It will be not be easy. Many of the social services are provided for by private firms. Although this makes them more efficient, it also makes the recipients of them feel far less secure. There are many in the newly rising middle class, that feel the government should actually, be taking a more direct role in the distribution of services.
The privatized pension system is an example of this. Although it is advertised in the West as a model to be emulated,the payout in benefits, has been lower than some retirees had hoped. Lower returns on investments and reduced economic growth, have taken their toll on the retirement funds.
The system is self sustaining and therefore outside of regular government expenditures. Among the advanced nations of the world, only the United Kingdom has a similar privatized scheme.
Last year, there were demonstrations and protests by tens of thousands of retirees, against the privately managed pension program. In the face of lower investment and growth in Chile, the only possible solution to their grievance, within the present rules,is to increase individual contributions for future pensioners. That is, unless the government wishes to become more directly involved.
The advantage for Chile over the long term, is that unlike most of the Western world, the country is not facing huge unfunded retirement entitlements. In the United States for example, these costs are likely to run over $100 trillion USD.
There were similar demonstrations from 2011 to 2013, by students in reference to education. The private sector used to play a far large role, in schooling throughout Chile.
Keeping this in mind, was why one of the first priorities of President Bachelet beginning in 2014, was to turn state-subsidized for profit secondary schools, into non-profit foundations. Her goal was to eliminate any tuition fees and make attendance at universities, virtually free of charge, for those in the bottom half of the income scale.
Bachelet also had the goal of increasing nursery attendance by toddlers from 17% to 30%, by the end of her term in office.
These reforms have become widely popular, because it makes higher education affordable, for most Chileans. However, the poor quality of education throughout the country remains a pressing issue. It cannot be solved easily and will cost significant amounts of money. Improving the quality of teachers will be an ongoing expense.
The billions of dollars in extra revenue raised to fund these educational reforms, have been inadequate, as witnessed by the rising government deficits. It will be next to impossible, to roll these expenditures back, once there is a change in government.
The distribution of income is more unequal in Chile than in any other advanced country, expect for Ireland. The relative recent changes in the tax system and the increased role of government in social services, did not alleviate the problem. President Bachelet will leave office with this issue largely unsolved. The problem is actually being magnified, by the overall slower economic growth.
The Bachelet plan to give more power to labor unions and maybe even change the constitution panicked investors. Overall fixed investment has now fallen for four consecutive years, the entire time of President’s tenure.
Candidate Guillier seems to have little to offer voters, except a consolidation of Bachelet agenda. He is unable to articulate, a new direction for the country. It is becoming increasingly clear to a growing share of voters, that more social spending will not be sustainable.
Returning the country to higher levels of economic growth, is what the Pinera platform promises. He is pledging to create more jobs and control the rising levels of crime. Pinera on the other hand, is unlikely to roll back the Bachelet reforms in education. Nor is he likely, to reduce the overall rate of taxation which is now near 20% of GDP.
Pinera does want to increase investment in Chile. He believes it can be achieved by cutting and streamlining corporate taxes. He also is looking at cutting, a number of unneeded business regulations.Pinera as President though, will not permit university tuition to be free for all students, which was the ultimate goal of the Bachelet administration. He is however, likely to provide more funding for the lower levels of education.
Pinera has committed himself to spend more in the health sector and on pensions. In addition, he has also mentioned a greater investment in infrastructure, that will be forthcoming.
How Pinera will fund these new initiatives, along with the Bachelet reforms remains unclear. He does reference inefficiency and waste, but these alone cannot provide the revenue needed.
Voters remember his term in the presidency, as a time of prosperity. This was partly due to the far higher price for copper. Economic renewal, seems to be what the voters are hoping for.
There will not be a dramatic shift to the political right. The electoral reforms put through earlier by the Bachelet administration, has now lessened the dominance of the major political parties.
Chile Vamos on the right and the New Majority on the left, are finding their influence reduced in the new legislature. This will make coalition building, far more important moving forward. The number of lawmakers that do not belong to traditional parties, has now increased from 3% to 17%.
The Broad Front alone, will control 12% of the 155 seat chamber of deputies or lower house of the Congress.
The legislative electoral changes now in place, will make governing far more challenging. If Pinera wins which still remains likely, he will not have a majority in Congress. Even a partial reversal of the more leftist policies of the Bachelet era, will not be easy to achieve.