Chile's Bachelet Must Balance Growth and Spending

Chile's Bachelet Must Balance Growth and Spending
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Michelle Bachelet will soon return to Chile's government house. Chileans like her, and she probably deserves to return. She went through La Moneda once and left it with a very high approval rate.

However, this time she has been voted in so she can govern differently, and she has so promised. Healthcare and education will be gratis. She's going to lay the foundations for a welfare state. Public expenditure will increase substantially, of course, and with it the merry legion of functionaries.

No doubt about it. There is discontent with the Chilean model, despite its huge successes and the undeniable fact that it is the leading economy in Latin America today. Why? According to Mauricio Rojas, "We're looking at a long process that had a spectacular hatching in 2011, with major social upheavals that installed an anti-system discourse that questioned the pillars of the Chilean model."

Later, he says: "The Chilean center-right thought that the system's efficiency would automatically grant it legitimacy and support, and ignored the area where the course of societies is decided - the field of ideas." He wrote this with much concern in an article titled Chile, Headed for the Welfare State and Chavist Democracy.

Mauricio Rojas knows whereof he speaks. In his youth, he was a fiery Marxist, a member of the MIR [Revolutionary Left Movement], and fled into exile after Augusto Pinochet's coup to avoid being killed. He moved to Sweden. Happily, he regained sanity there. He got a doctorate in economics at Lund University and abandoned his foolish Marxist superstitions. Later he understood the errors and excesses of the welfare state. He became a Liberal Party deputy and lived intensely the rectification of the excesses committed by the Social Democrats, especially after the crisis of the 1990s.

Sweden was one of the world's most habitable countries, but its excessive public expenditure - which reached 67 percent of GNP - and state meddling ended up throttling the initiative of civil society and ruining the nation's finances.

After the debacle, the successive Swedish governments, in addition to cutting spending, learned to depend more on the private sector and turned to the market through systems of vouchers that gave back to society its power (and right) to choose. The public and private sectors harmonized.

The discussion, then, should not be over whether or not it's convenient to build a welfare state. The core issue is different: Does society produce enough wealth to sustain a model of existence where people have comfortable homes, varied meals, adequate clothing, quality education and sanitation, transportation, communications, entertainment and efficient infrastructures? All that is very nice but also very costly.

The Scandinavian nations are not at the top of world comfort because they decided to create welfare states, but because they generated a productive fabric in the private sector that allowed them to segregate societies like the ones we see in Sweden, Norway, Denmark and Finland.

Switzerland is Switzerland and Austria is Austria not because the kindly politicians and functionaries in those countries decided to give those societies a high standard of living and distribute the wealth, but because each country has a highly competitive private-enterprise apparatus that creates well-paid jobs and pays taxes. There is no question here of who comes first, the chicken or the egg.

That's Chile's pending task. The country is doing well, yes, but not as well as others, and only thanks to its exports of copper, salmon, wine, vegetables and a few other products.

As Harvard professor Ricardo Hausmann says: "The only new things that Chile has developed are the AFPs [Pension Fund Administrators], the wonderful private retirement system created by economist José Piñera, and the Falabella and Cencosud department stores and supermarkets. The country has surprisingly few world-competitive businesses, and that shows a lack of diversification that should cause concern."

The governments that Chile and all other countries need are not those that primarily aim to distribute wealth but those that decide to foster the creation of vigorous, competitive and diversified private enterprises that nourish and sustain the emergence of educated middle classes and, in so doing, fund an efficient state.

How is that done? Let's hope that Bachelet finds out before she causes a disaster.

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