Lessons for the West from Chile´s meltdown

by Axel Kaiser*

Latin America’s freest, most stable and richest nation, Chile, is in a free fall. Public order has collapsed, violence is out of control and populism is the new creed of the political class. There is an economic crisis, characterized by capital flight and rising unemployment and there is a serious chance that three decades of progress made in the fight against economic inequality will be reversed according to a recent statement by Chile’s Central Bank.

The upheaval is all the more remarkable because of Chilean progress over the last four decades. Chile’s free market reforms knocked down the poverty rate to less than 10% of the population–from over 50% pre-reform. Over the same period per capita income quadrupled, chronic inflation disappeared, social mobility shot up and intergenerational income inequality shrank to a historic low.

It took a mere 40 days for the Latin American “oasis”—as President Sebastián Piñera called Chile not long ago—to vanish. How a stable and prosperous Chile fell so dramatically in such a short period is a lesson for every Western democracy. 

The immediate cause for the crisis was the small increase in the price of public transportation tickets in Santiago. As soon as the price hike was announced on October 4th criticism arose. Demands for a withdrawal of the increase became widespread after the new tariff was implemented three days later. 

Initially the government showed no willingness to reconsider what it called a “technical” measure. As a result, hundreds of students began to evade payment of the subway. On Oct. 18, two weeks after the price increase had been announced, the country exploded. Coordinated groups burned and destroyed almost 80 subway stations bringing Santiago’s public transportation system to a halt. Riots and massive attacks on public and private property followed unleashing chaos in the capital city.  

By the end of the day, the situation was so desperate that Mr. Piñera had no choice but to declare a state of emergency and put the military in control. Massive demonstrations followed, and violence returned as soon as the state of emergency was lifted. A few weeks later, the consequences are everywhere: more than $2 billion in losses and damages, around 1,200 looted retail stores, an estimate of 300,000 new unemployed, 25 dead, more than 2,000 injured police officers and a political and economic crisis with no end in sight.

A small hike in the price of subway tickets didn’t cause so much devastation. The economic malaise started with the anti-market reforms of the previous government under Socialist President Michelle Bachelet, from 2014-18. In her second term, Ms. Bachelet raised corporate taxes by 30%; signed a law banning the replacement of workers on strike, thereby dramatically increasing the costs of labor; increased public spending at a rate three times faster than the growth of the economy and unleashed armies of regulatory bureaucrats on the private sector. As a result, capital investment fell in each year of her four-year term. Such a consistent reduction in investment hasn’t happened since data was first collected in the early 1960s. Not surprisingly, economic growth collapsed from an average 5.3% under the previous government of Mr. Piñera (2010-14) to an average of 1.7% under Ms. Bachelet. Real wage growth took a 50% hit. 

In his campaign for president in 2017, Mr. Piñera promised to bring back better times. He failed to deliver. Hence the anger against him.
But Ms. Bachelet’s harmful policies aren’t the root of the problem. As historian Yuval Noah Harari has pointed out, humans are, above all, a story-telling species. It is the narratives, myths and stories we share what enable us to create institutions that favor personal freedom, prosperity and peace. By the same token, narratives can also lead to destruction, war and misery as the cases of communism and national socialism perfectly illustrate. In Chile the emotional power of story-telling has overthrown the sober appeal of reality. Over the past 20 years, intellectuals, media personalities, business leaders, politicians and celebrities in this Latin American nation have created the myth that Chile is an extreme case of injustice and abuse. This false narrative began at the universities, where progressive ideologues spread the idea that there was nothing to feel proud about when it came to Chile´s social and economic record.  They accused “neoliberalism” of creating a society of winners and losers, where neither group deserved the position in which they found themselves. Ms. Bachelet’s second term and her social justice-driven agenda were the inevitable result. Even Mr. Piñera, himself a billionaire, basically accepted the premises of the progressive elites’ narrative. In his first term he raised taxes, declaring that one of Chile´s main problems was inequality.
Now he is trying to re-establish order by buying off interest groups with further economic interventions. Among other measures, he has announced a substantial increase in government spending for supporting retirees, higher personal income taxes, more generous health insurance schemes and a guaranteed minimum income for all full time Chilean workers. 

Nor is the damage done by progressive narratives restricted to economics. A sustained war against law enforcement has been going on for years. As a result, many police officers don’t dare act for fear of biased media coverage and punishments by courts dominated by progressive elites. The same is true for the military. The truth is that tolerance of violence, public disorder and crime was the norm in Chile long before the recent crisis.

The free market did not fail Chile, whatever its politicians might say, and the state does not lack the means to restore the rule of law. The central problem is that a large part of the elites who run key institutions—especially the media, the National Congress and the judiciary no longer believe in the principles that made the country successful. The result is a full-blown economic and political crisis with no end in sight. To other western nations, this should offer a lesson.


*Dr. Axel Kaiser is a scholar at Adolfo Ibañez University in Santiago, and currently a Visiting Fellow at Stanford University’s Hoover Institution.