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OPINION AND ANALYSIS | 16-05-2023 10:55

Eduardo Porter: Chile wants to know what comes after neoliberalism

The poster child of the so-called 'Washington Consensus' is navigating its economic future without a compass. The path it chooses will shape debates over the role of the markets across Latin America and beyond.

What’s happening with neoliberalism?

Its erstwhile champion, the United States, seems to be distancing itself from its free-market mantra, larding its climate policy with protectionist goodies while dismantling the WTO in favour of what national security advisor Jake Sullivan calls a “new consensus” over a “modern industrial and innovation strategy.”

But the fiercest battle over the ideological framework that took over in the 1980s as the world’s ruling paradigm — the so-called 'Washington Consensus' — is being fought thousands of miles south of Washington, in Chile.

During the 1970s, Chilean economists trained by Milton Friedman and co-religionaries at the University of Chicago launched perhaps the most radical experiment known to modern economics, ceding vast expanses of economic and social policy to the markets as a matter of programmatic principle. Now, Chile is being consumed by a profound, often violent conflict over those policies, which despite producing a  long run of relative prosperity left much of its people to languish behind.

For many developing countries, Chile’s internal battles may matter more than the pussyfooting in Washington, shaping debates over the role of the markets across Latin America and beyond. The battle’s gone on for four years now. Its outcome is is still hard to predict.

In 2019, weeks after its billionaire president Sebastián Piñera ran a victory lap calling Chile a “true oasis” amidst Latin America’s turmoil, the country exploded. Chileans took to the streets clamouring against corporate greed. Two years later they elected a 35-year-old left-wing firebrand, Gabriel Boric, to replace Piñera at the top.

An elected council heavily tilted to the left drew up a new constitution creating hundreds of state-guaranteed rights (to housing, education, healthcare, free time, sexual education, free legal advice, culturally relevant food…) Boric had vowed that “if Chile was the cradle of neoliberalism, it will also be its grave.”

And yet, it seems, Chileans changed their minds. Last year, they rejected the utopian proposals crafted by the rebels. Last week, they voted for another council to give constitutional reform another shot. This time they handed it to the right. On May 7, José Antonio Kast, the right-wing candidate  whom Boric had defeated for the presidency two years before, celebrated his party’s majority declaring victory over “that left that threatened to relaunch everything.” 

It would be wrong, however, to give the win to market fundamentalism. What’s going on in Chile is more than a pendular swing from pro-market right to collectivist left and back. It is the expression of the inchoate yet powerful discontent of citizens who feel disregarded, disrespected, marginalised by the status quo and yet have no clear idea of how to change it, or sometimes even whom to blame. Governments from Mexico City to Brasilia, Buenos Aires to Lima and Bogotá should take note.

In the 1970s Cuba was Chilean president Salvador Allende’s North Star. His economic advisors drew on “dependency theory” and “structuralism” to break from market economics and take “the Chilean road to socialism.” When General Augusto Pinochet deposed him in a bloody coup in 1973, he called on the “Chicago Boys” — products of a US State Department effort to draw Chilean economists onto the US side of the Cold War — to build a new era of market supremacy.

Chileans have now rejected both. That doesn’t mean, though, that they know where they want to go. They are navigating without a compass.

Similar mood swings are taking place across Latin America. In Brazil, politics have alternated from left to right and back over the last 10 years. Argentina looks likely to swing in the opposite direction. Mexico’s old-school leftist president, Andrés Manuel López Obrador, hopes to straddle both sides, shrouding Wall Street-friendly economic policies with vintage 1970s rhetoric against the “petite bourgeoisie.”

The Chilean economist Sebastián Edwards has a valuable vantage point on this conflict. As a college student he worked for the Allende government, in the department managing its byzantine price controls. And he left Chile after General Pinochet’s forces seized power. But, though not a Chicago Boy, he is a graduate of the University of Chicago. And in the 1990s he was chief economist for Latin America at the World Bank.

Edwards’ new book, The Chile Project chronicles the construction of Chile’s neoliberal economic model — under which prices were freed, companies were privatized, taxes lowered and markets drawn in to deliver an increasing range of services — from education and health to clean water and old-age pensions. Despite the missteps by the left since Boric came to power in 2021, he concludes, “the neoliberal era will not be revived.”

The question is, then, what will take its place?

What’s most interesting, perhaps, is that despite a bloody history nested in the power politics of the Cold War, Chile’s neoliberalism is not just a right-wing construct. As Edwards points out, the left-of-center governments of the “Concertación” that took power after Pinochet stepped down in 1990 even expanded the market’s role, all while social spending remained near the bottom of the range of countries in the OECD.

It was not irrational: Chile had been growing fast since 1986. In 1985 its gross domestic product per person amounted to only about 75 percent of the Latin American average, after accounting for differences in purchasing power. By 2019, when Chileans took to the streets of Santiago, it was over 50 percent greater. The Concertación wanted to protect the goose of the golden eggs.

But in so doing, it failed to address the model’s weaknesses. These included insufficient pensions, bulging student debt, and the big one: inequality in Chile remains among the highest in the OECD. When students rushed onto the streets of Santiago in 2019, ostensibly protesting a 30-peso raise in subway fares, they chanted “it’s not about 30 pesos; it’s about 30 years,” a reference to the Concertacion’s 30-year rule.

One might conclude that the zigs and zags of the Chilean electorate will ultimately land on some politically viable platform of reform, perhaps one halfway from the extremes, that pushes markets back somewhat, expands social spending and grants the state a larger role in critical services like health, education and retirement.

Writing in September of last year, Edwards suggested that “most of the economic system built by the Chicago Boys will be replaced by a social democratic system like the one that prevails in the European and, especially, the Nordic nations.”  This is plausible. After all, there are powerful political incentives for Chile’s right and left to compromise and produce a moderate constitutional reform that voters will accept. 

It would not be a bad outcome. And maybe if Chile finds its way to build this social democratic equilibrium, it could again offer itself as a model of social and economic governance, as it did when it was the poster child of neoliberalism. The challenge this time is to understand the inchoate frustration that has taken hold in Argentina and Brazil, Mexico, Colombia and Peru, and help deliver the people from the volatile politics that neoliberalism helped to unleash.

 

* Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration.

 

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