Growth Without Equality Chile Solimano September 24 2011

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Andrés Solimano

Prosperity without Equality: the Chilean experience after the Pinochet Regime

by

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1 The author is founder and President of the International Center for Globalization and Devlopment, CIGLOB, based in Santiago, Chile. Mail:

September 25, 2011

[email protected], homepage: andressolimano.com. The author has been previously Director of FLACSO-Chile (Latin American School of Social Sciences), Country Director at the World Bank, Executive Director at the Inter-American Development Bank and Regional Advisor at UN-ECLAC.

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Acknowledgments: Assistance and collaboration from Luis Valenzuela is

acknowledged. Conversations and comments by Andrew Mold of the Development Centre of the OECD are appreciated. The views of the paper are solely of the author.

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Preface

Economic growth in Chile accelerated above its historical record in the

last quarter century helped by a generally supportive external

environment, macroeconomic stability and lack of open social conflict.

This growth process has been led by exports (largely based on natural

resources) boosted by an extensive web of increased economic relations

with the rest of the world. Chile´s GDP per head increased from a level

close to U$ 4500 in the late 1980s to near U$ 14,000 in 2010, placing

Chile at the top of income per head in the Latin American region. While

poverty has declined there is controversy on the actual poverty levels in

the country. In turn, Chile shows high and persistent levels of inequality

of income and significant wealth concentration in influential economic

elites besides strong differentiation in the access to social services

according to the purchasing power of the population. The (income) Gini

coefficient of Chile for income is around 53 percent way above the

average level of OECD countries, where Chile belongs since 2010, which

is around 38 percent. This Working Paper examines the causes of

persistent inequality that seems impervious to accelerated economic

growth and to the advent of democracy. The study documents the

increasing wealth concentration by the elites, discusses the policies of

social protection implemented in the 2000s, their strengths and

shortcomings and identifies deeper policy reforms that can shift

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development orientation towards a more socially cohesive and

egalitarian society in Chile.

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Abstract

The combination of stability, open markets and democracy in Chile in the last two decades, after years of authoritarian rule by the Pinochet regime (that however set the basis of the prevailing economic model) has been praised in several corners. In spite of growth acceleration and modernization a disturbing feature of the Chilean model is the high and persistent levels of inequality of income, significant wealth concentration in powerful and influential economic elites and high levels of social differentiation in the access to social services. This Working Paper investigates the causes of persistent inequality and wealth concentration by the elites and identifies genuine policy reforms for more egalitarian development in Chile.

Keywords and JEL Classification: Economic growth, inequality, development, Chile, social

policy, wealth distribution, democracy.

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I. Introduction.

The Chilean economy has undergone a deep process of structural

transformation in the last three decades along free market lines that has

been over time complemented by policies of social protection and

poverty reduction. The result has been a much prosperous country but

also very socially unequal. Chilean economic policies, in a region often

prone to populism, instability, commodity and political cycles and

recurrent economic crises, have been presented as a model for other

developing countries to follow. The combination of stability, open

markets and democracy in Chile in the last two decades, after years of

authoritarian rule by the Pinochet regime (that however set the basis of

the prevailing economic model) has been praised in several corners.

Economic growth in Chile accelerated above its historical record in the

last quarter century helped by a generally supportive external

environment, macroeconomic stability (low inflation, absence of

persistent fiscal and external imbalances) and lack of open social conflict

although Chile is a nation with one of the largest proportion of its

population in jail compared to the Latin American region. This growth

process has been led by exports (largely based on natural resources)

boosted by an extensive web of increased economic relations with the

rest of the world. The acceleration in growth has not been even over

time and average growth slowed –down in the last 10-12 years, starting

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in the late 1990s. Still, as a result of the development strategy adopted,

Chile´s GDP per head increased from a level close to U$ 4500 in the late

1980s to near U$ 14,000 in 2010, placing Chile at the top of income per

head in the Latin American region along with Argentina. While the

combination of steady growth and social policies has led to fast poverty

reduction, there is controversy on the actual poverty levels in the

country.

In spite of these positive developments a disturbing feature of the

Chilean model is the high and persistent levels of inequality of income

and wealth and high levels of social differentiation in the access to social

services such as schools, hospitals, and housing and more generally of

access to opportunities. There is, in turn, significant wealth

concentration in powerful and influential economic elites. Large firms

and economic conglomerates assert their leverage over resources and

markets and account for high market shares in banking, mining, pension

funds administration, private health services, retail and other activities

that yield handsome profits to them. Persistent inequality poses

important policy and analytical challenges. The (income) Gini coefficient

of Chile for income is around 53 percent way above the average level of

OECD countries, where Chile belongs since 2010, which is around 38

percent. Strikingly, inequality seems impervious to accelerated economic

growth and to the advent of democracy in 1990 that could have

triggered redistributive social demands for a more equitable sharing of

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the benefits of progress and prosperity. Chile is not alone in the trend to

significant inequality as this phenomenon has been pervasive in

countries that have embarked in market-driven development regimes

around the world in the last two to three decades.

The democratic governments of the last twenty years have aimed at

improving social conditions and reduce social risk. Progresses have been

achieved in the social area; nevertheless centre-left governments,

departing from their historical tradition avoided tackling the structural

roots of inequality such as the concentration of productive wealth and

market shares, a highly segmented education system, weak bargaining

power of labour and other factors that we review in this paper. The

political-economy equilibrium developed after the Pinochet regime is

one in which the stability of inequality mirrors the stability of a system of

political representation extremely difficult to modify. The different

governments after the restoration of democracy in the early 1990s tried

to approach social problems with an anti-poverty focus placing the

reduction of inequality in the back seat. The social policies of the 1990s

led to increased social spending which were complemented in the 2000s

with policies of social protection aimed to reach also the middle class.

Social benefits started to be backed by legislation in an approach of

“social rights”. Policies were oriented to extend access to health,

education and universal pensions. An unemployment insurance scheme

(of limited coverage) was also created and several changes were

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introduced to various social programs. However, in spite of their positive

features the social reforms of the 2000s did not affect the system of

profit-oriented AFPs (private administrators of pension funds) and

profit-oriented ISAPRES (private health service providers) and did not

redress the deterioration in public education accumulated after years of

market-oriented education policies. The private providers of social

services turned out to be a powerful actor almost immune to effective

regulation and increased competition.

It is apparent that the Chilean economy and society face various

dilemmas, opportunities and contradictions. The country is, since 2010,

a proud member of the OECD, the government is a net saver, inflation is

low, and the productive structure has certainly modernized. However,

the country´s export structure is still dependent on commodities and

natural resources, energy needs are mounting to support ambitious

growth targets, income and wealth concentration is high, the quality of

social services is highly segmented according to the purchasing power of

the beneficiary. Democracy has brought social peace and a degree of

legitimization to the economic model (compared to the Pinochet period)

but electoral participation by the youth is low and politics remains an

elitist affair with low degrees of social participation in public decision-

making. The degree of environmental awareness in public opinion has

increased but the interest of the corporate sector tends to dominate

public policy decisions when trade-offs between environmental

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protection and the launching of certain private investment projects

should arise.

A purpose of this paper is to examine the empirical relationship between

inequality, poverty and growth and offer some explanations for the

persistence of inequality in Chile; the paper also reviews the social

reforms undertook in the 1990s and 2000s oriented to reduce poverty

and broaden the benefits of stability and growth to the middle class and

the poor but it also points-pout the limitations of these policies given the

political economy constraints of Chile. Social cohesion will remain

elusive if inequality is not reduced to more acceptable levels. The paper

makes the point that broad and genuine social reforms in Chile to

improve income and wealth distribution and enhance social protection

are constrained by the high concentration of economic power and

political influence of the dominant elites that block any serious attempt

to shift income distribution to the middle income and the working poor.

A large majority of the population has improved their living standards in

the last two decades but around a still relatively moderate level; in turn,

this majority remains vulnerable to economic and nature shocks, has low

levels of empowerment and its influence in public policy is reduced.

Targeted social policies have benefitted the very poor but a growing

middle class entertaining new aspirations after years of aggregate

prosperity is still largely vulnerable to debt, face fragile jobs and

expensive social services.

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II. Growth and the Persistence of Inequality in Chile

II.1, Growth.

Chile’s economic growth accelerated in the second half of the 1980s and

continued in a steady path until 1998 when growth halted as the country was

hit by the effects of the Asian and Russian crises. The resumption of economic

growth was a slow process and the high growth rates of the 1990s remained

difficult to restore. The acceleration in growth of the last quarter century is

noticeable in figure 1 that shows a turning point in the growth dynamics of the

country. In numerical terms, the average rate of growth of GDP was 5.4

percent in 1986-2010 compared with 3.4 percent in the period 1940-85 (the

corresponding averages in per capita GDP growth rates is 4 percent and 1

percent, respectively, see table 1). Higher growth transformed Chile

economically and socially in different ways although important indicators of

economic development such as inequality, education attainment, and

technological capacities are certainly not at the level of advanced OECD

economies.

The growth dynamics of the past 20 years has not been uniform as already

mentioned. In fact, the average annual rate of growth of GDP in 1986–97 was

7.6 percent compared to only 3.4 percent annually in the 1998–2010. It is

worth noting that the average rate of GDP growth in 1998-2010 is roughly the

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same average of 1940-1985 (3.4 percent). However, GDP per capita

accelerated by 1 percentage point per year in 1998-2010 compared to the

historical reference years 1940-85. This shows that an important part of the

increase in GDP per capita of the later period is due to a lower growth rate of

population rather than a significant increase in total GDP growth which starts a

slowdown by around 1998.

More rapid growth helped legitimize democracy, and introduced a climate of

social and political stability. However, the slowdown in growth we have shown

mentioned may now be a signal that the new democracy after the

authoritarian period must be deepened and extended so as to retain its

legitimacy. Maintaining reasonably rapid economic growth has been the

cornerstone of the economic strategy of the past two decades of the post-

Pinochet administrations. The reliance on growth and targeted policies for

attaining a reduction of poverty has been another cornerstone of the

development strategy.

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Figure 1.

Source: Solimano (2012, forthcoming) based on data from Díaz, Lüders and Wagner (2007) and Central Bank of

Chile.

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Table 1

Chile: Growth and Macroeconomic Indicators, 1940-2010

1940–1985 1986–2010 1986–1997 1998-2010

Selected Macroeconomic Indicators

Real GDP Rate of Growth (% annual change) 3.4 5.4 7.6 3.4

Real Per-Capita Growth Rate (% annually) 1.4 4.0 5.8 2.3

Gross Fixed Capital Formation (% of GDP) 14.3 22.0 22.8 21.3

Gross National Savings (% of GDP) 16.4 22.5 22.7 22.4

Exports of Goods and Services (% of GDP) 16.5 33.8 29.8 37.4

Fiscal Balance (% of GDP) -1.3 1.6 1.9 1.4

Inflation Rate (% annual change) 38.3 8.7 14.5 3.3

Unemployment Rate (% annual) 13.3 8.5 8.1 8.9

SOURCE: Solimano, (2012, forthcoming).

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II. 2, Declining Poverty and Persistent Inequality

The increase in per-capita income associated with more rapid growth led

to a decline in poverty from 45 percent in 1987 to 15.1 percent in 2009 (table

2).In turn, acute poverty declined from 17.4 percent in 1987 to 3.7 percent in

2009. The decline in poverty was sustained from 1987 but a small increase

took place in 2009 (last year of the CASEN survey) probably associated with the

recession of that year, among other factors. The significant reduction in

poverty is generally explained by the combination of reasonably rapid growth

and targeted social programs suggesting a confirmation of the importance

attached to growth as a critical condition to improve social conditions and

reduce poverty (but not necessarily inequality). However, the actual level of

poverty in Chile was questioned in a study by the economist Felipe Larraín

(Larraín, 2008).2

2 Currently Mr. Larrain is the Finance Minister of the government of President Sebastian Piñera.

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Table 2

Chile: Official Poverty (1987–2009)

Year Poverty Rate (%) Acute Poverty Rate (%)

1987 45.1 17.4

1990 38.6 12.9

1992 32.6 8.8

1994 27.5 7.6

1996 23.2 5.7

1998 21.7 5.6

2000 20.6 5.7

2003 18.8 4.7

2006 13.7 3.2

2009 15.1 3.7

SOURCE: Solimano (2012, forthcoming). Data is from CASEN surveys (1987-2009)..

Table 3 below, presents the differences between the incidence of poverty

calculated in Larrain (2008) and official poverty for the selected years 2000,

2003 and 2006. The differences in poverty levels are significant: the

recalculated poverty levels yield between 15 to 18 percentage points above

the official rate for the three years. In particular, the study arrives to a poverty

rate of 29 percent in 2006 which is more than double the official rate of 13.7

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percent! In turn, critical (acute) poverty is also higher 6.2 percent (versus 3.2 as

reported by official poverty).

Methodologically, Larraín (2008) updates the poverty line and generates a new consumption basket using a household’s consumption study of 1996-1997, based on previous technical work conducted by Fundación para la Superación de la Pobreza.3

The official poverty line is based on the consumption patterns of the 1980s that certainly do not reflect demographic changes (fertility, family size, urbanization) and economic changes (lower import duty taxes, broader credit access, new goods, more public services and other factors), occurred in the last decades.

. The cost of the newly computed basket is 51 percent higher than the cost of the basket used in the official poverty line for 2006.

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3 The Larraín study makes various adjustments to the composition of the basket using updated nutritional patterns and other adjustments arriving to a new Engel coefficient (2.26 for urban, 1.75 for rural). The new basket only considers Santiago due to lack of good data for the rest of the country.

4 Further, there was a change in nutritional recommendations for Chile by the FAO/WHO/UN, hence changing minimum food requirements. All these would mean new consumption habits and changes in the proportion of food expenditures to total expenditures (the Engel coefficient).

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Table 3

Chile: Official and recalculated poverty for 2000, 2003, 2006 (% of total)

2000 2003 2006

Critical Poverty

Official 5.6 4.7 3.2

Larraín (2008) 10.4 9.6 6.2

Difference 4.8 4.9 3.0

Total Poverty

Official 20.2 18.7 13.7

Larraín (2008) 36.6 36.4 29.0

Difference 16.4 17.7 15.3

II.3, Inequality

In Chile, income inequality levels have not declined along with the

acceleration in the mean rate of economic growth of the last quarter century.

In contrast with the evolution in poverty, (albeit the controversy on levels), the

Gini coefficient (above 55 percent for most of the time), shows little variation

in the last 20 years or so. In fact, the Gini coefficient for autonomous income

(that is, income earned in the market before subsidies and transfers from the

government) remained virtually flat over the period with a minor decline in

2006 and then a small increase in 2009. In turn, the Gini coefficient for total

income—the concept that includes the transfers and subsidies of the state—is

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slightly below the Gini for autonomous income. These Gini values are at the

high-end even for Latin America, a region already characterized by high

inequality.

Table 4

Chile: Various Indicators of Persistent Inequality

(1987–2009)

Year Gini for

Autonomous Income (%)

Gini for Monetary

Income (%)

Income Share of Top

10%

Income Share for Bottom

20%

Ratio of 10th to 1st Income Deciles

1987 58 58 47.4 3.2 37.6

1990 57 56 42.2 4.1 30.5

1992 56 56 41.8 4.3 28.1

1994 57 55 41.8 4.1 30.9

1996 57 56 41.8 3.9 33.0

1998 58 57 41.4 3.7 34.7

2000 58 58 42.7 4.0 34.2

2003 57 56 41.5 3.9 34.4

2006 54 53 38.6 4.1 31.3

2009 55 53 40.2 3.6 46.2

SOURCE: Solimano (2012, forthcoming). Data is from CASEN surveys (1987-2009).

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But the Gini coefficient is not the only evidence of income disparity. In

2006, the top 10 percent of the population in Chile captured nearly 39 percent

of income; in 2009, the disparity increased slightly to 40 percent. In contrast,

the bottom 20 percent “captured” only 3.6 percent of income in 2009. These

income inequality gaps cannot be overstated (figure 2, panels A and B). In

fact, it is apparent that income inequality in Chile is due primarily to the

concentration of income at the top (that is, the richest 10 and 5 percent),

rather than due to acute poverty (very low incomes) at the bottom of the

distribution. And from the 1st to 9th deciles, income distribution is relatively

even, meaning that the disparity of income is much narrower. A main factor,

thus, for income disparity is the very high income share of the top decile or

ventile relative to the rest of the population. In fact, the values of the Gini

coefficients for the complete distribution (from deciles 1 to 10) are significantly

higher than the Gini for the deciles 1 to 9. Indeed, if the top decile were

excluded from the overall distribution, the resulting inequality levels would not

be too different from the levels found in more egalitarian countries (a Gini

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below 0.4).5

Chile: A Steep Slope Down from the Highest Income Groups

This data points-out to the importance of the economic elites in

Chile that we have stressed in this paper.

Figure 2

Panel A: Deciles

Panel B: Ventiles

Source: Solimano (2012, forthcoming) . Elaboration based on Ministry of Planning (CASEN Survey

2006).

5 See Solimano and Torche, (2007). A mathematical note is relevant here: due to the formula of the Gini that includes several interaction terms, the total (or average) Gini coefficient for the whole distribution is not the average of the Gini for the individual sub-components.

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II. 4 Wealth Distribution.

Regarding wealth distribution, a UNU-WIDER cross country study (Davis,

2008) shows that the Gini coefficients for wealth are significantly higher than

the Gini coefficients for income in most countries (see Solimano 2008).

One indication of how concentrated wealth is in Chile can be obtained from

Forbes Magazine, which has collected information since 1982 on the wealth

levels of the “super-rich”. The 2011 ranking of the super-rich (individuals with

net wealth over one billion dollars) of Forbes Magazine identifies four Chilean

individuals (families) among the group: Ms. Luksic and family with net wealth

of U$ 19.2 billion (with interests in mining, the financial sector and industry),

Mr. Horst Paulmann (retail) with U$ 10.5 billion; Mr. Eliodoro Matte and

family with U$ 10.4 billion (forestry, and energy) and Mr. Sebastian Piñera

(blind fund) with U$ 2.4 billion. The combined wealth of these four individuals/

families (in a country with a total population of near 17 million) is over U$ 40

billion (around 25 percent of GDP).6

Chile has its share of super-rich at global

level.

6 As a reference point, in 2007, the United States had 406 billionaires in a population of 300 million, whose combined wealth amounted to around 10 percent of U.S. GDP. Wealth is much more concentrated in Chile than in the United States.

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II. 5 Growth, Poverty and Inequality

The relationship between three critical variables that are key components

of the development pattern of any economy: growth, poverty and inequality in

Chile for the period 1987-2009 are displayed in figure 3. This chart shows a

clear inverse relationship between poverty and GDP (growth leads to a decline

in poverty) but the chart shows no discernable relationship between growth and

income inequality proxy by the Gini coefficient. In short, economic growth, per

se, seems not leading to a decline in inequality albeit economic growth in

general do reduce poverty (the extent of poverty reduction of a given rate of

growth of GDP will depend on inequality levels, among other factors).

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Figure 3

Growth and Poverty Have Moved in the Right Direction

While Income Inequality Stagnates 1987–2009

SOURCE: Solimano (2012, forthcoming). Data is from CASEN surveys (1987-2009) and Central Bank of Chile.

The Chilean experience of the past two decades illustrates the

complexities and nuances of two critical relations: (a) the relationship between

economic growth and social inequality and (b) the relationship between

democracy and inequality (not shown in the graph).

II. 6, The resilience of inequality to growth

The Chilean experience of the last two decades seems to run counter to

modern political- economy theories (as developed by Alesina, Rodrik, and

others authors) that predict a negative relationship between inequality and

growth with causality running from inequality to growth (i.e. a negative

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coefficient of the inequality variable in growth equations).7 In the past two

decades or so in Chile, persistent inequality apparently did not harm growth in

a significant way (and, in turn, it was largely unaffected by growth itself as

shown in figure 3 above). However, this is not the only sign of the relationship

between growth and inequality that is possible: older theories of savings-

driven growth (for example, the Kaldor model in which workers have lower

propensities to save than capitalists) predicted that a certain concentration of

income distribution was necessary for boosting national savings needed to

finance capital accumulation and spur growth. This theory suggested a positive

relationship between inequality and growth (which was part of Kaldor’s

critique that capitalist growth and income concentration went hand in hand).

The empirical puzzle is thus that high and stable Gini coefficients coexist with

relatively rapid growth, suggesting that both variables (inequality and growth)

may behave independently from each other.8

II. 7, The resilience of inequality to democracy

In turn, the Chilean experience

suggests that the threshold of income per head at which inequality would start

to decline, as predicted by the Kuznets curve, can be fairly high.

Why the return to democracy in Chile did not lead to a decline in

inequality, which was already high during the Pinochet regime (and before)? As

in the relationship between growth and inequality, there are various possible

theories on the relation between democracy and inequality. One theory

7 See Solimano (1998) for a review and critical evaluation of various theories of growth and inequality.

8 Solimano and Torche (2007) investigate this issue for Chile and note the degree of independence between both variables. See also Solimano (2009).

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associated with the median-voters political economy theories, is that in Chile

voters had a stronger preference for pro-growth policies than for pro-

redistribution policies and accepted inequality as the price for enjoying more

rapid growth. The fact was that the four (concertacion) governments were all

pro- growth in their policies (the official mantra was for a while “growth with

equity”). Although these governments cared about poverty and social

protection they never really attempted a progressive shift in income

distribution away from rich economic elites. However, still they were

supported in these policies by the electorate (the coalition governed for 20

consecutive years and won four consecutive elections after eventually losing

the presidency in 2010 against a center-right coalition headed by Sebastian

Piñera) a fact that would give empirical backing to this interpretation.

However, this may be a post-fact rationalization by a theory that assumes an

unrealistic capacity of common people (voters) to understand a very complex

relation among variables such as inequality, democracy and growth – a relation

that even sophisticated economists do not agree on -- in forming their political

preferences. The theory also assumes candidates and governments

accommodate their electoral platforms to these sophisticated voters

preferences.

An alternative interpretation, probably more realistic, is that the return

to democracy in Chile did not lead to a decline in the power of capital,

historically strong but boosted further during the Pinochet period and

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functional to the prevailing free market model. 9

9 Authors such as Kaletsky (2010), Marglin (1985) and Harvey (2010) elaborate on the power of capital in the neoliberal era prevailing since the 1980s.

In fact, it is apparent the

control of economic resources by powerful industrial, mining, banking and

other consortium in Chile allows them to exert much more influence on public

policy (through lobby activities, influence in the media and other mechanisms)

than other groups in society such as labor unions, environmental groups,

student organizations based on the working and middle class. In particular, the

labor movement has remained largely marginalized since the return of

democracy and their capacity to push for a shift in income distribution away

from capital and profits towards labor and wage earners has been very weak.

In addition, the dominating economic ideas of the left-wing coalition in power

between 1990 and 2009 were influenced by the Washington Consensus in

fundamental policy issues. The coalition leaders probably had still fresh

memoires of the political turbulence and social conflict of the early 1970s in

Chile when redistributive policies were tried by President Salvador Allende

(1970-73) and were fiercely opposed by the domestic economic elites (and

annoyed by the US government and multinationals). This time the center-left

in power were more moderated and avoided policies of redistribution,

focusing on the less politically contentious goal of reducing poverty.

Reinforcing the point made earlier, this was possible also because of the

reduced capacity of the traditional constituencies in favor of redistribution

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such as grass-roots social organization and the labor movement that were

politically weak and fragmented.

II.8 , The various factors explaining persistent inequality in Chile

Besides the relative invariance of inequality to the acceleration in

economic growth and the advent of democracy, several explanations can

account for the level and persistence of inequality. These explanations

combine the effects of globalization, concentration of productive wealth,

quality segmentation between public and private education, weak bargaining

power of organized labour and the low priority attached to effectively reducing

inequality in public policy. A summary listing of these factors and influence is

the following (see Solimano, 2011):

• Uneven access to the opportunities opened by globalization and

liberalization policies. The Chilean model is based on the

integration of the national economy to external markets and

using the potential provided by globalization for wealth creation.

However in a country with a differentiated social structure in

terms of education levels, skills, and social connections these

opportunities tend to be captured by individuals with tertiary

education levels, entrepreneurial drive, risk-taking attitudes,

social connections, and access to credit. Because income levels

are highly correlated with access to quality education, credit and

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connections these gains tend to accrue disproportionately to

high-income, educated, socially-connected individuals.10

• Ownership in key sectors of the Chilean economy is highly

concentrated—as mentioned before the Chilean economy

exhibits significant degrees of concentration in the ownership

of productive capital and assets in banking, mining,

manufacturing, retail trade, private pension management

companies (AFP), private health-care providers (ISAPRES),

pharmacies, and other sectors with high rates of return per

unit of invested capital. The super-normal profits generated in

these sectors contribute to overall income inequality.

• Significant differences in the quality of private and public school

systems and thus unequal mechanisms for human capital

accumulation and upward mobility. In Chile the access to

education is such that the children of the poor and middle class

tend to attend (underfunded) public education and the

children of the upper middle class and the rich go to private

10 A growing body of economic literature indicates that income and wealth inequality is closely related to the inequality of opportunity. This literature also highlights that inequality can harm growth by creating social polarization and political instability, or, alternatively, by inviting higher taxation that is detrimental to investment. In addition, unequal societies suffer hidden economic losses because, given such constraints as a paucity of credit, limited information on opportunities, lack of social contacts, and restricted access to political power, many talented individuals belonging to less favoured or marginalized social groups are unable to realize their productive potential. See Solimano, Aninat and Birdsall (2000).

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education. In fact, the availability of human and financial

resources per student in the public school system is much

lower than in private schools (a ratio of approximately one to

four); this is indicative that education is far from being an

equalizing mechanism. On the contrary the education system

tends to replicate and reinforce other inequalities, in particular

of income and wealth in Chilean society.

• The lack of more progressive tax system. Another cause for the

high levels of inequality in Chile is the low level of personal

income taxation as share of total tax revenues of the state: 4.5

percent compared with an average of 25.2 percent on average

in the OECD. Near half of total tax collection (48 percent) in

Chile comes from the Value Added Tax indirect taxation. In

turn, corporate tax rates, set transitorily in 19 percent for large

corporations in 2010 after the earthquake are low by Latin

American standards but similar to countries such Czech

Republic, Poland, Hungary and Slovak Republic.

• A low level of worker unionization and the limited bargaining

power of the working classes. Organized labour was almost

decimated during the military regime and never regained its

pre 1973 strength and influence after the return to democracy

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in 1990 (currently, unionization levels are around 12 percent of

the labour force). The free-market model along with the high

power of capital and the competitive environment of

globalization need flexible labour markets with low costs of

hiring and, above all, firing workers. A weakened labour

movement – continuously threatened by the fear of

unemployment, outsourcing of tasks and production and the

competition of immigrant labour -- is unable to capture a

higher share of the productivity gains (and national income)

generated by a growing economy, therefore affecting the

functional distribution of income between capital and labour.

This point was underscored by the classical economists David

Ricardo and Karl Marx when discussing the determinants of

functional income distribution in a capitalist economy.

• An inclination by the successive post-Pinochet governments to

disregard the reduction in income inequality as part of their

overall social agenda, which was largely dominated by poverty

reduction. The Pinochet regime neglected the rise of income

inequality (which would be expected); this neglect continued

to some extent during the democratic government since 1990.

Social policies in the 1990s and 2000s focused more on

reducing poverty (by providing targeted social benefits) and

lately on managing social risk through policies of social

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protection (see next section) rather than on narrowing income

gaps and reduces overall inequality.

III. The social policies of the 1990s and 2000s

After the return to democracy in 1990 the center-left coalition that governed

Chile in the last two decades sought to redress the difficult social situation

inherited from the Pinochet regime characterized by poverty levels above 40

percent of the population, depressed real wages, and persistent

unemployment and reduced social benefits. The new governments while

maintaining the basic pillars of the economic model (external opening,

privatization, open capital mobility, flexible labour markets) wanted to share

more evenly across different groups the benefits of accelerated growth and

prosperity. However this strategy did not really considered tackling the root

causes of high inequality.

During the 1990s under Christian democrat Presidents Patricio Aylwin and

Eduardo Frei, policies were oriented to redress the urgent social deficits

inherited from the military period. Resource constraints in social sectors were

eased and public spending in social areas increased. The real value of the

minimum wage was restored and increased. There were also important

increases in monetary subsidies to the poor, together with providing more

funds to chronically under-funded public health, educational systems, housing

and pensions. To finance the social program, the Aylwin government rose, in

agreement with the opposition, corporate income tax from 10 percent (set in

1988), to 15 percent in 1990. An effort was made to avoid curbing social

33

expenditure at times of fiscal imbalances (an expedient used at several times

during the military regime and previous governments).

During the Aylwin administration a ministry of social planning was created

(MIDEPLAN)11

President Frei Ruiz-Tagle continued the policies of the Aylwin administration in

several fields but emphasized further integration to the world economy and

signed free trade agreements with several countries like Canada, Mexico, and

became a member of the APEC, WTO and MERCOSUR. This trend was later

continued by President Ricardo Lagos with the Free Trade Agreement, FTA,

with USA, EU, and China. The Frei administration tried to improve the level

and quality of education through the improvement of the physical

infrastructure of the schools system, introduced changes in the school

curriculum and extended the length of the day that students spend at school.

Moreover, an effort was made to improve the depressed levels of salaries of

school teachers, raise their benefits and enhance job protection under the

although this ministry gradually lost influence in the design and

management of social policy in subsequent governments. In turn, there was a

revamping of public infrastructure like roads, highways, and ports, which had

deteriorated after years of public investment neglect. Further an

environmental regulatory entity was created in order to promote sustainable

development and assess environmental issues (CONAMA).

11 This corresponded to a status elevation of the existent ODEPLAN (Oficina de Planificacion Nacional National Planning Office) created in the late 1960s. ODEPLAN played, later, an important role in devising free market reforms in education, health, besides anti-poverty programs, during the Pinochet regime.

34

Teachers Statute (Estatuto Docente) approved in the early 1990s. Other

actions taken by the new democratic governments were directed to reduce the

housing deficit. During the 1990s around 800,000 new houses were built, twice

as much as in the 1980s.

The 2000s encompassed two socialist presidents: Mr. Ricardo Lagos and Ms.

Michelle Bachelet. Although the overall spirit of economic and social policies of

these two Presidents was one of continuity with the policies of the 1990s there

was a change in emphasis towards policies of social protection-- pensions,

unemployment benefits, pre-schooling, health, and others. In turn, the Lagos

and then Bachelet administration started talking in terms of social rights in

which social benefits to the population were to be guaranteed by law. This

would shield these benefits from the vagaries of the political and economic

cycles. The main policies of social protection of the 2000s were: (a) the AUGE

Plan oriented to expand eligibility to the public tier of the health system for

treatment of several illness, (b) the Pension Reform of 2008, (c) the creation of

unemployment insurance in 2002 and (d) the preferential schooling transfers

and the program Chile Crece Contigo oriented to pre-school children. 12

12 A good reference of the social reforms and policies of the 2000s in Chile is Larrañaga and Contreras (2010).

A reformed anti-poverty program launched in the Lagos administration is

“Chile Solidario”. This program was oriented to very poor households through

the improvement of targeting and performance of already existent social

35

benefits to poorer families following a more comprehensive approach to

poverty, going beyond the income dimension. 13 The total transfers embodied

in Chile-Solidario amounted to U$ 100 per month per participating family in

2005, or close to one-third of the average income of poor households

according to CASEN 2006. As of mid 2008, close to 310,000 households had

enrolled in the program and near 40 percent of beneficiary households

corresponded to families in which the head of household is women. The

program was strongly targeted to the very poor (99 percent of the

beneficiaries were from the lowest ventil in 2008). According to some

evaluations, the Chilean programs entailed a higher degree of targeting than

similar programs in other Latin American countries such as “Oportunidades” in

Mexico and “Bolsa Familia” in Brazil.14

A summary of policies and outcomes in the social area under the four

concertacion governments is presented in table 6.

13 “Chile Solidario” operated on the basis of a direct link between the beneficiary family and a professional of the program who works personally with one family for about two years, strengthening the relation of the beneficiaries with the program. In principle the program staff works with beneficiary the family until its “graduation”. Existing assessments indicate clear improvements in social conditions from participants once they exit the program, measured by 53 minimum conditions that should be ideally fulfilled to declare a family graduated from the program. From the income perspective, two out of three beneficiary families go out of extreme poverty (Larrañaga and Contreras, 2010).

14 The Lagos administration raised the VAT (Value Added tax) from 18% to 19% in 2003. He also increased corporate income tax from 15% to 17%, a tax rate well below corporate tax rates in other Latin American Countries. Incidentally the Piñera administration in 2010 increased corporate income taxes to 19 percent in 2010 for large firms to help finance reconstruction of the earthquake of February 27, 2010.

36

Table 6. Social Matrix, by Government Administration, 1990–2009:

Aylwin Administratio

n (1990 - 1994)

Frei Administratio

n (1994 - 1999)

Lagos Administration (2000 - 2005)

Bachelet Administratio

n (2006 - 2009)

Official Poverty Decreases Decreases Decreases Decreases

Inequality (Gini Coefficient*)

High High High Small variations

Increase and Focalization of Subsidies

Yes Yes Yes Yes

Minimum Wage Real Increase Real Increase Real Increase Real Increase

Education

- Expenditures Increase Increase Increase Increase

Program P-900 (poor schools), Program

MECE (quality of education)

School day extension, Teachers

evaluation

Compulsory 12 years of

education, Digital

alphabetization

Educational reform (LEGE), subsidies for preferential education

Health

- Expenditures Increase Increase Increase Increase

Strengthening of public hospitals, coverage extension

Strengthening of public hospitals, coverage extension

Plan Auge, Modification in

Law about Isapres

Crece contigo program (child

protection policies)

- Reforms

37

Social Security Reforms

No No No Pension reform, universal basic

pensiona

Explicit goals of Lower income Inequality

No No No Unclear

Limits to concentration of property

No No No Partial

Strengthening of Trade Unions and Social Organizations

Light Light Light Light

Consumer Protection

Light Light

Creation of a board of free competition,

modification of Consumer Law

More active

Democratization in the Access to Credit

Partial Partial Partial/Increase

s Partial/Increase

s

Other reforms/institutions

Launching MIDEPLAN,

CONADI, CONAMA

Chile Solidario, Unemployment

insurance

Chile Crece contigo,

preferential education

subsidy

38

Source: Solimano, (2012, forthcoming), Solimano and Pollack 2006. Dipres, Central Bank of Chile,

In the educational area, the Lagos administration extended mandatory

education to 12 years in order to get a job, hence fostering education

completion among students. Nevertheless, these reforms fell short of

reforming the system by which municipalities manage schools and appoint

school directors in the public and subsidized system (introduced by the

Pinochet regime in 1980). In addition, no attempt in the Lagos government was

devoted to change the LOCE education law (Ley Organica General de

Educacion) granting very liberal conditions to set up private universities with

minimal regulation and constraining public funding for state universities,

shifting the costs of education to the students and their families as pointed out

by the OECD in its reports on Chile. The LOGE was approved at the end of the

military regime.15

15 This law was modified in 2007 after an outburst of student protests demanding a change in education laws.

Coverage of primary education is almost universal and

secondary education is also high. While educational attainment as measured

by the PISA test improved between 2000 and 2009, 15-years old school

attainment in science, mathematics and reading is still well below OECD levels

(OECD, 2011).

The legal framework ruling labour-capital relations was not subject to any

significant reforms under the socialist Presidents Lagos and Bachelet that

governed during the 2000s. These reforms are a long-dated aspiration of the

39

labour movement and a condition to start rebalancing the skewed power

relations between capital and labour. The labour code of the military period

underwent some changes in the early 1990s (labour activity was

decriminalized, and labour union leaders stopped being routinely incarcerated

for labour activism) however wage negotiation remained at the firm level and

not by branches of industry.

To reduce the social impact of labour lay-offs an unemployment insurance

mechanism was introduced in 2002 and modified again in 2009 to extend its

coverage (see Ramos and Acero, 2010). The new mechanism only was directed

to cover workers employed with contracts in the private sector. The new

insurance was not eligible for self-employed workers, people in the informal

sector and the employees in the public sector (the latter has over half of its

employees with temporary-one year contracts). The unemployment insurance

was intended to complement severance payments and its financial operation

entails a (mandatory) personal saving account and a smaller “Solidarity

Unemployment Fund” that enables the worker to receive a payment

independent of his or her contribution. The first fund is financed by the

employer and in case of undefined length contract by the worker too. From

2003 to 2008, around 75 percent of beneficiaries have been workers with fixed

term contracts that have received an average benefit of 41 percent of their

wages. In the economic crisis of 2009, when unemployment in Chile reached

near one million people, insurance benefits reached almost 180,000

40

beneficiaries (June 2009). This showed the limited coverage of the

unemployment insurance scheme. 16

A main reform of the 2000s in the health sector is the AUGE plan, (the Spanish

acronym standing for Universal Access with Explicit Guarantees law). The AUGE

plan was launched by the Lagos government. This reform tries to address some

of the most visible problems affecting the Chilean health system of ISAPRES

(private providers of health services) and FONASA (National Health Fund, the

public tier of the system). Serious shortcomings of the prevailing system were:

high inequality in access to health services and segmentation according to the

income levels of the beneficiary, long waiting lists, lack of focus on prevention,

and high costs and financial uncertainties in covering very high-cost diseases.

The AUGE Plan sought assuring the basic right of access to health services for

any Chilean (the explicit guarantee component). By law, (although not

necessarily in practice, given waiting period and hospital availability) the most

relevant and recurrent diseases are to be attended on time, either by the

public or the private system (in case the service could not be provided in the

public sector), under specific quality standards (only by accredited institutions

16 The unemployment insurance was reformed in 2009, mainly introducing more protection, higher benefits but also adding flexibility to funds administration in order to promote profitability. A pending issue is protecting around 40% of workers who are in the informal sector besides the lack of coverage in the public sector.

41

and certified doctors), with a pre-fixed monetary charge according to income

that must not exceed 20 per cent of total costs. The coverage includes

individuals enrolled in the public and private systems or not enrolled at all in

any health system. Guarantees are assured for a number of over 50 specified

diseases that account for near two-thirds of recorded population diseases.17

An evaluation of the full benefits and impact of the Auge Plan is reform is still

pending.

The Auge Plan fell short also of reforming the private health system of

ISAPRES. Fees paid by the beneficiaries are high and coverage to lower income

individuals is low in the ISAPRES system motivated by profitability

considerations. In turn, the costs of the creation and operation of the AUGE

are not borne by wealthier people through higher personal income or higher

corporate taxation. The funding of the plan relied on a rise in VAT (not a

progressive tax).

18

17 A key element on this reform is that when public supply is not enough to provide access on time to the beneficiary, the private sector will take care of that patient whose cost will be borne by the public sector. This implies incentives for the public sector to improve efficiency and allocation in order to avoiding high costs of the private sector.

18 A useful description of the AUGE plan in terms of design, application, results and pending problems is Infante and Paraje (2010).

On the positive side, there is some evidence that access to

evaluation and treatment of diseases such as cancer and cardiac afflictions has

increased with improvements in early detection of diseases and lower

mortality. In addition, the costs of treatment have declined (lower co-payment

42

and financial protection in case of high-cost diseases). However, the system

operates by implicit rationing with somewhat significant waiting time for

patient seeking attention in public hospitals. Moreover, the costs of

prescriptions and drugs remain high.

Another policy of social protection was the Pension Reform undertook by

President Bachelet. After 25 years of operation, it became apparent that the

private capitalization pension AFP system was only able to deliver acceptable

pensions for workers with stable jobs, high wages, and a culture of continuous

contributions to the system. Until the last reform, in the privatized pension

system, a worker needed 20 years of continuous contributions to be eligible to

receive a minimum pension. As many people often changed jobs during their

working life and sometimes could not afford (or just neglect) making

contributions between jobs, a comparatively low share of workers was eligible

for receiving a minimum pension. In March 2008, the Bachelet government

enacted a law to ensure a “system of solidarity pensions” entailing a basic

solidarity pension and an additional pension contribution. The basic solidarity

pension is eligible for every Chilean above 65 years, among the poorer 60

percent of population, not receiving a pension through the private system and

who has resided in Chile for at least 20 years. The basic pension was set at

$75,000 (over US$ 150 per month); a considerable increase over previous

43

pension payments for low income people. 19

The new law introduced elements of gender equality among the beneficiaries

and encouraged the participation of independents workers, self-employed

individuals and small entrepreneurs in the AFP system. This brought new

contingents that started to be covered by the private capitalization system,

that contribute to the AFP. For the pension fund managing companies this

enlarged the number of clients, increasing the range of profitable operations.

Summing up, after the reform the new system is based on three pillars,—(1) a

solidarity pillar (pilar solidario), whereby workers are entitled to two benefits:

a basic pension (pensión básica solidaria) and a contributory pension (aporte

solidario)

The additional pension

contribution, in turn, is a monetary transfer to beneficiaries belonging to

targeted socio-economic groups that satisfy residence criteria.

20

19 Previous to the reform there was already a basic pension for retired and disable people and the benefits were increased to an equivalent of 40-50 percent and extended to segments of the population that were previously not eligible.

20 This latter consisting of a bonus contribution to supplement the lowest-accumulating pensions (above a certain threshold, the individual may make only a minimum bonus contribution).

; (2) a voluntary pillar (pilar voluntario), whose purpose is to

facilitate and encourage non-obligatory savings for old age, in people with

savings capacities ; and (3) a sole contributory pillar (pilar contributivo),

consisting of individual capitalization contributions. The reform also aimed at

improving the degree of competition among AFPs and the transparency of the

system.

44

The Pension reform was clearly pro-private sector besides its general

aim of protecting the elderly and redress gender inequalities. The suggestion of

creating a public pension management company that could compete with the

private AFPs was discarded; thus, consolidating the virtual monopoly on the

management of the pension system by the AFPs, that earn considerable profits

in the management of the pension funds of more than 4 million people in

Chile. In turn, the sector has been concentrating over time. As of 2010 only 6

private AFPs were operating in the market, down from 22 AFPs in 1996 (and up

from 5 in 2008). It is apparent that the AFP consortium is an active lobby with

strong political power in Chile wielding a remarkable capacity for blocking any

substantial reform that could threaten their protected niche in the pension

business.

The AFP enjoy the privilege of managing the savings of several million of

Chilean workers and citizens, who have no real voice and participation on the

investments of their own savings for old age; it is a secure business niche at

bay of any potential competition from the state in the management of pension

funds. The AFP system entails redistribution from contributors to the AFP

companies through the fees they pay for the administration of their pension

funds. In turn, over time these fees are translated in lower pension than the

pensions that would accrue in a system that charges lower fees. OECD (2011)

also has called for enhanced supervision and improved governance of the AFP

system.

On the educational front, President Bachelet was compelled to start a

process to change of the LOCE law governing education as a response to

45

increasing activism, in the winter of 2006, by the secondary school student

movement. Students demanded radical reform to the prevailing school system

in a more egalitarian direction and requesting the ending of the dominant role

of the profit-motive in the education system in Chile. The so called “Penguin

Revolution” (the term penguin is because of the clothing uniform used by the

students resembles an actual penguin) triggered a process of partial revision of

the way the education system was operating. After proper dilution,

neutralization and delaying of the main democratic demands of the

spontaneous student movement, the Bachelet government crafted a political

consensus with the establishment and, in haste, proposed legislation to

replace the LOCE law prevailing since the years of Pinochet by a new General

Law of Education (Ley General de Educacion, LEGE). The formal aim of the law

–that avoided a fundamental change in the prevailing education system as it

would affect vested interests -- was to redefine the balance between school

and teacher autonomy, promote higher quality education and increase

regulation over the public and private voucher school system, reducing

discrimination and selection biases in private voucher schools, a widespread

practice. The LEGE proposed create a new education quality assurance system,

with two agencies responsible for school supervision and accountability: the

Education Quality Agency (Agencia de Calidad) and the Superintendency of

Education. In addition, the Bachelet administration also introduced a separate

bill to modify the institutional framework of publicly managed education and

provide additional funding and pedagogical support to public schools. Again as

with the Auge plan and the pension reform, it was apparent that the reforms

46

did not address some critical demands of civil society in this case the students,

teachers and the education community such as a thorough reviewing and

reform of the system by which municipalities -- with often weak administrative

and financial capacities -- have the main responsibility to manage the school

system. Also the new reform did little to reduce the big gap in resources per

students between the private and public school system in Chile that tends to

perpetuate the already unequal income and wealth distribution. To

compensate for these shortcomings, a “preferential subsidy” was introduced in

2008 that provide public schools with an extra subsidy per student belonging

to the 40 per cent poorer families of the country. This subsidy covers (at

regime) the whole primary years and also pre-schooling and amounts to a near

50 percent increase in actual benefits. 21

Chile underwent an economic revolution in the last three decades that led to a

substantial increase in per capita income locating the country at a top level in

the Latin American and Caribbean region in this dimension. The economic

model has displayed an enormous capacity to create wealth but the bulk of the

IV. The need for authentic social reforms for making Chile a less unequal and more socially cohesive society

21 Another program oriented to the education sector is the “Chile Crece Contigo”. Psychosocial development gaps already exist at the beginning of formal education and tend to be reproduced later in the rest of the formation cycle. This program seeks equalization of “starting conditions” for children 0 to 4 (pre-school years). The initiative was then to foster care and development of children in poorer families, on the basis of a comprehensive incorporation into the health system, the educational system and other social programs.

47

newly created wealth goes to the hands of economic elites due to the

structural inequality in income and asset distribution that characterizes the

Chilean economy. The middle class and the poor have improved their lot but

more as a trickle rather than as a redistributive shift. The democratic

administrations that governed Chile after the military regime in spite of their

significant achievements in steering a peaceful return to democracy and

maintaining prosperity ultimately lacked capacity to turn a model that was

yielding good results in the growth and macroeconomic fronts into a more

balanced and socially equitable strategy of economic development, even

considering their efforts to improve social conditions of the poor and to some

extent the middle class through the programs documented in this report. The

democratic governments focused initially in redressing the social situation

inherited from the Pinochet regime. The tools were increased social

expenditure, higher minimum wages, the gradual strengthening of institutions

managing social policy and expanded physical infrastructure. In the 2000s

there was a shift to policies of social protection and social rights. Partial

reforms to the health and pension system were introduced to increase the

coverage of social services but those reforms did not pose any serious threat to

the privileges and dominant positions of the ISAPRES and AFPs. The emphasis

in social rights of the policies of the 2000s is welcome over an approach of

social benefits as a residual priority enabled by aggregate economic growth.

However, the merits and good intentions of the social reforms of the 2000s,

these attempts were in the end constrained by the economic power of interest

groups oriented to defend their profitable niches should genuinely equitable

48

and democratic social reforms gain currency in Chilean society. The profit-

motive that dominates without real counterweight the provision of education,

health and pensions to the population was never questioned by the reforms of

the 2000s in spite of the demands of the mass of beneficiaries for the

introduction of new systems of delivery of social services oriented to public

good rather than private profit. The high concentration in the management of

the pension funds of the population and the private provision of health

services were left virtually unchallenged. As mentioned before the pension

reform of 2008 fell short of allowing the Chilean state to open its own AFP and

competing with the private AFP system. Boosting effective competition and

starting some social control of the management of the savings of the working

and the middle class for the old age was delayed for an unspecified future. The

creation of unemployment insurance was advancement but the new system

excluded by design employees in the public sector, a sector of increased job

insecurity and excluded also workers in the informal sector. In turn, near

obsession with eventual “cheating” by workers and firms of the newly created

unemployment insurance mechanism led to overburdening the scheme with

multiple previous conditions to access to the insurance benefits, badly needed

at times of economic and nature hardships.

Chile needs a new social contract to marry dynamism in wealth creation with

social equity, effective economic security and a degree of social participation in

public policy making sorely lacking in the current culture of technocratic

decision-making and excessive influence by the profit-oriented elites. These

49

economic elites not only control the bulk of productive assets but also

promote a conformist culture through their overwhelming control of the mass

media and the expanding private university system that socializes new cohorts

of the youth in the lure of a highly individualistic and profit-oriented society. A

new social contract should reduce the large gaps in income, wealth,

opportunities, access to social services and political participation that

characterizes the current social contract. This requires shifting economic

power away from the dominant elites to the middle class and the working poor

through effective regulatory policies, a revision of the tax structure and the

empowering of the new social actors that offer a counterbalance to the

influence and power of the elites. Assets, credit and critical markets are

concentrated. To counteract these trends effective competition policies are

needed. The positive behaviour of the macro-economy, the accumulated

savings in the public sector and the enormous economic surpluses capacity

(profits) generated in mining at time of record copper prices, in banking, retail,

utilities; almost entirely internalized by a small group of private owners

provide a significant material base for effective social reforms and

improvement of the middle class and the poor. The priorities of the Chilean

development model must undergo a substantial renewal, moving away from

the unwarranted faith in that only unregulated markets and unrelenting

economic growth will provide the magic cure for all the social and

environmental challenges of Chilean society. The winds of change in ideas on

economics and new policy approaches in public policy that the financial and

economic crises of the advanced economies are triggering need to reach Chile.

50

The current polarization of economic well-being is incompatible with the goal

of social cohesion.

V. Areas of intervention

To make effective these goals and aspirations, interventions in the following

areas are needed:

• Setting as a priority for society, with the state as an agent, the

goal of reduction of income and wealth inequality in a

reasonable time framework. Redefinition of the goals of the

development strategy to include broader equity, social

cohesion and environmental objectives and not only

maximizing GDP per capita as the overriding criteria for

defining economic and social development.

• Policies oriented to incorporate the middle class as a valid

beneficiary of social policy in housing, education, health,

pensions and other relevant dimensions. Progress in some of

these areas was accomplished in the last two decades but

social policy was largely guided by targeting to low income

groups excluding the middle class. So far, economic elites have

been relieved (through low taxation) from a substantial

contribution to these efforts of social progress and inclusion.

51

• An effective and participatory education reform oriented to

foster social mobility, knowledge acquisition and the reduction

of inequalities. This reform must promote a recovery of public

education to redress the significant imbalances of resources

between public and private schools. For education reform to

be perceived as legitimate it needs to engage students,

teachers and the community at large and not only the political

establishment.

• Policies to “de-stratify” access to health care. Albeit some of

the progress associated with the Auge plan in access to a

wider variety of services the system remains strongly

segmented. Only the upper-middle classes and the rich can

afford the health services provided by private hospitals and

clinics, whereas the bulk of the middle class and the poor must

receive health services in short provision by the public system.

• Policies to bring true and full equity to the social security

(pension) system. Although the reforms of President Bachelet

adopted changes to lower the floor of pension contributions

to increase affordability, to make coverage “universal,” and to

correct discrimination against women, the high-fee private,

52

capitalization pension system in which for-profit private

companies administer the pensions of millions of people

remains intact. The vulnerability of the system became

apparent when the financial crisis of 2008 reduced the value

of pensions in higher-risk financial portfolios. The AFP system

is alien to participation and voice by the millions of

contributors. In the meantime the state is prevented to enter

as a competitor in the management of pension funds.

• Policies to redress the imbalances in bargaining power

between capital and labour are needed for a more socially

cohesive society to emerge in Chile. Need to urgently tackle

the problem of massive youth unemployment that breeds

crime, drugs, urban violence and social discontent.

• Anti-trust policies and more progressive taxation to reduce

income inequality and the concentration of ownership and

wealth in critical sectors of the economy, which effectively

squeezes small and medium-size business out of the domestic

and export market and privatize record profits for large firms,

banks and conglomerates in a society with many unmet social

needs.

53

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