Santiago Under Siege

How could the most prosperous city of what is, by all accounts, Latin America’s most prosperous and law-abiding country explode in protests marred by riots and looting? And what do recent events teach us about citizen dissatisfaction and the potential for violence in modern societies?

Andrés Velasco

velasco98_CLAUDIO REYESAFP via Getty Images_santiagoprotestmaskfire

SANTIAGO – At least 19 dead and untold wounded. A half-dozen subway stations attacked with firebombs. Hundreds of supermarkets vandalized and looted. The downtown headquarters of the country’s largest power distributor in flames. A city of nearly seven million people paralyzed. After a state of emergency is declared, army units patrol the streets and enforce a curfew.

How could Santiago, Chile – the most prosperous city in what is, by all accounts, Latin America’s most prosperous and law-abiding country – come to this? And what do recent events teach us about citizen dissatisfaction and the potential for violence in modern societies?

In fact, we cannot be certain. It all happened with dizzying speed. And a few days after the violence came the peaceful protests. Last Friday, 1.2 million people marched in downtown Santiago, in the largest street protest since those that helped remove General Augusto Pinochet from office 30 years ago.

The most common explanation is that a 3% increase in metro fares caused public indignation at rising prices and high inequality to boil over. That must be true: people with sufficient income who feel they are treated fairly do not loot and riot. But as an explanation on which to base policy changes, the standard account risks being simplistic.

Take price increases. Yes, Chile has a history of inflation. And, yes, because it is more prosperous, Santiago is more expensive than most Latin American cities. Yet Chilean inflation in the 12 months to September was barely 2.1%, and the central bank has been cutting interest rates because inflation is below its target.

Or take income inequality. Yes, for an upper-middle-income country, Chile is very unequal, with a Gini coefficient (most economists’ preferred measure of income disparity) at a high level of 46.6 in 2017 (100 represents absolute inequality). Yet according to the World Bank, the coefficient has fallen from an eye-popping 57.2 when Chile returned to democracy in 1990. The notion that rising income inequality is behind citizen discontent does not fit reality.

To understand the causes of a social phenomenon, one always must ask: Why here? Why now? Neither inflation nor rising income inequality provides a satisfactory answer.

Others claim that Chileans are simply fed up with the intrusion of markets and profit-seeking into every corner of daily life. Again, this hypothesis has an air of plausibility. Polls show widespread dissatisfaction with private companies that provide public services ranging from water and electricity to health insurance and pension-fund administration.

Yet those same surveys also show anger at the quality of state-provided services, whether in hospitals, clinics, or foster-care facilities. Over half of parents choose to send their children to privately-run voucher schools, even when it involves paying a fee, despite the availability of free state schools of comparable quality. And in 2017 a substantial plurality of Chileans voted for President Sebastián Piñera, a billionaire businessman and unabashed apologist for capitalism who ran on a platform of reigniting growth.

So, what is it, then? Why are millions of Chileans still marching in protest, ten days after the violence erupted?

For starters, Chile is not alone. In the last decade, places as diverse as Great Britain, Brazil, France, Hong Kong, and Ecuador have experienced similar episodes. Whatever the immediate local trigger, the scope, intensity, and often the violence of the ensuing protests seemed out of proportion with the initial cause. Rapid social change fuels tensions and contradictions in modern societies – even rich and successful ones – that seem to keep them barely a step or two from mayhem.

In Chile, an obvious suspect is monopoly abuses. While general price inflation in Chile is low, some prices that matter for family budgets are high and rising. Regulatory regimes designed to ensure investment in utilities, for example, have given companies excessive leeway to keep prices high. Likewise, Chile’s pharmacy chains have been found guilty of collusion and price gouging, as have toilet paper producers, chicken farmers, and long-haul bus companies.

Here is the paradox. Collusion and price fixing did not begin yesterday in Chile. But until a decade ago, sanctions were weak and the agency in charge had little authority and few resources to investigate. When the law changed, scandals began erupting every few months, raising public awareness of, and indignation with, monopolistic behavior. Today, price fixing is a criminal offense that carries jail sentences, and it seems plausible that such behavior is receding. But that very progress may have helped plant the seeds of public anger.

Turn next to the labor market. Chile’s unemployment rate hovers around 7% and wages have been rising well ahead of inflation. The bad news comes when you look at the structure of employment. Nearly one-third of the labor force is either self-employed or works in domestic service, in many cases without a formal contract and benefits.

Among those who have a formal job, most work on short-term contracts. Employment rates for women and young people are among the lowest in the OECD. Discrimination is rampant. Hundreds of thousands of women who head households do not have a job, while millions of workers who have a job today cannot be sure they will have any kind of income tomorrow.

The list of reforms that would remedy this situation – such as adaptable work schedules, modernized severance payment schemes, easier part-time work, better job training, and anti-discrimination laws with real teeth – is pretty self-evident. That is what worked in other countries in similar circumstances.

But here is the next paradox: as Chile has become more democratic, the same problems that plague advanced democracies have appeared. Politically influential insiders have blocked reforms, while labor-market outsiders are not represented. Few politicians speak for the unemployed young woman with two kids and no high-school diploma, who seldom votes anyway.

Puny pensions also contribute to people’s sense of fragility. Chile’s individual capitalization system earns kudos abroad, but the reality on the ground is more complex. Precisely because the labor market functions badly, Chileans retire with fewer than 20 years of savings, on average, in their accounts. And due to sharply rising longevity (itself a tremendous developmental success), they can expect to live 20 years or more after retirement.

Pensions could be adequate only if the rates of return on those savings were huge, but they are getting smaller by the day, in line with falling global real interest rates. Government-funded minimum pensions for people with no savings at all, plus a top-up for those with very low pensions, help alleviate the plight of 1.3 million people at the bottom of the income scale. But now the middle class is feeling the pinch – increasingly so as Chile’s baby-boom generation begins to retire under the private system.

And while income inequality has not been getting worse, other kinds of inequality may well have become more evident. Chile has joined the OECD club of rich countries, but in many ways it remains a traditional society riven with class privilege. Business leaders and cabinet members tend to come from a handful of private secondary schools in Santiago, especially when right-wing parties are in power, as they are today. The elite often seems to live in a world of its own. Last week, Cecilia Morel, the president’s wife, described the looting as “an alien invasion.”

None of this is new. But it may have become more painfully evident as the country develops. A generation ago, few working-class children attended university. Today, seven of ten students in higher education are the first in their families to attend college. Once they graduate, the frustration begins: to land the best jobs, academic performance matters less than having the “right” surname or connections.

Anger at elites is rampant in Chile, but scorn for the country’s political class is particularly deep. In 2018, 70% of Chileans believed that the country was governed for the benefit a handful of powerful groups. Barely 17% and 14% expressed trust in parliament and in political parties, respectively.

This is relatively new. High regard for civilian politicians during the transition to democracy nearly three decades ago gave way to a growing perception of insularity, and then a wave of campaign finance scandals. Today, the absence of term limits and parliamentarians’ outsize compensation (among the highest in Latin America) are huge magnets for public anger.

Lack of trust in politicians weakens people’s hopes for the future. And Chile’s recent economic deceleration, standing as it does in sharp contrast to Piñera’s ringing promises of economic growth, has exacerbated the problem. Perhaps it was these dashed hopes that brought the many tensions and contradictions in Chile to a boil.

There is now a unique opportunity to rewrite the social contract and deal decisively with the sources of citizen anger. But the risks are many. One is that voters will conclude that Chile’s gains were all more illusory than real, and will therefore throw the baby out with the bathwater. Another is that the current climate of fear and division will bring a populist to power, as has happened in Mexico, Brazil, and now Argentina.

In Chile, polls already show gains for populists of the extreme right and left. If that trend continues, the country’s turmoil could be far from over.

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.

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