Chile sitting at a crossroads: Institutional Risk Analysis
The political cycle (25-30 years) that saw Chile lead Latin America in figures on growth, infrastructure, competitiveness, and macroeconomics is giving way to a new political landscape where new social actors have come into scene pressing the state with social demands. For 25 years Chile made a smooth transition to democracy with exceptional pragmatism. The harmonious alignment around development targets between the entrepreneurial elite and the new political class produced top-down policies that gave the country governance and stability. The super commodity cycle sent copper export sales soaring and sound fiscal policies allowed for growth and development, a vibrant democracy emerged and progress provided for the explosive “cognitive leap” whereby middle classes empowered and a new generation of young Chileans took to the streets to voice inequalities. They protested relentlessly for free and quality education and against privilege. In a new electoral cycle, the “street” demands advanced to the top of the Government Agenda, social actors became party leaders and second-generation policies were in the making from the bottom-up. The following is an institutional risk analysis to bring insight on what is at stake in governance issues and demands from non-elite classes and the signs of attrition that both the entrepreneurial elite and the political class have begun to show at the end of 25 years to transition to democratic rule.
Key Words: political cycle, cognitive leap, democratic consolidation
By Soledad Soza
(Any copying or distribution of Country Risk Chile material is prohibited)
25 years of transition to democracy:
For 25 years Chile made an exceptional transition to democracy. When the democratic rule was restored in 1990 the local entrepreneurial elite that firmly supported the structural reforms implemented in dictatorship found common ground with the new political class around growth targets. They saw a unique opportunity to lead the country into full development. In a new dawn, the world opened its doors to welcome new democratically-elected leaders and they, in turn, vowed to uphold the neoliberal reforms under Pinochet rule. By 1990, the center-left coalition, the Concertación de Partidos Por la Democracia, - a political umbrella which included Christian Democracy, Socialists, and the extreme left wing, rose to the power following the demise of Pinochet in the 1989 referendum and kept the neoliberal infrastructure intact. In no way were Chilean leaders sitting on crossroads; the path was certain. The alignment of politicians with the local elite was produced in harmony. The latter were eager to continue modernizing the country by using the benefits of democracy. Those benefits materialized in funds, promotion of comparative advantages, and the possibility to deepen commercial transactions with partners worldwide in an increasingly globalized market. One primary target in early democracy was to restore freedoms of expression and speech and prosecute those responsible for repression and crimes against humanity in authoritarian rule. There was widespread consensus – however - that national pragmatism had to prevail over the rift of grievances or revisionism. This political pragmatism led Chile to make a smooth transition which paid the country well in terms of governance, stability, and reputation.
Democratic game strengthened during the transition to democracy and allowed for steady Foreign Direct Investment (FDI) due to well-implemented regulations to respect the terms of the international contract, warrant capital returns and tax exemption and other foreign incentives to promote a high level of FDI and capital flow. By 2004, Chile became firmly embedded in the global market – pragmatism was charged with ideological affinity to neoliberal values such as capitalism and property rights. When US-led NAFTA failed to include South American countries over contestation from Brazil and Argentina, Chile rushed to sign a bilateral FTA with the United States which signaled how open the local economy would go. Not only had Chile begun singing FTA’s with major partners such as Canada, the EU, Japan, South Korea, among others, but also pioneered the regional mega-bloc in the Trans-Pacific Partnership (TTP) with the early signature of the P4 Agreement (Chile, Singapore, New Zealand and Brunei). Such a frantic spree of FTA’s[i] incremented the governmental revenues and gave impetus to presidents like socialist Lagos to take local businessmen and entrepreneurs on board to visit dignitaries and promote Chilean products abroad. This helped diversify the export matrix and fulfill the entrepreneurial elite’s goals to reach development targets.
In 25 years, poverty dramatically diminished and access to education and health increased. Coverage in public goods was one big target that Chile successfully attained in 25 years. An increase of middle classes with access to credit, health and education allowed for robust and sustained internal growth. The new democratic era saw the continuation of private health, pensions, and education. The retreat of the state and the advancement of a deregulated market was a big social concern for the new center-left leaders. They reached a political consensus with the right wing in 1990 for a tax reform that shifted the model from neoliberal to market society. Deregulation continued –however- and disparities in the Chilean economic model both on skills and income began to increment along the 25-year road.
First symptoms of attrition, electoral promises, and reactions
The level of pragmatism shown by democratic leaders to combine open economy, growth targets and FDI also began showing symptoms of attrition in the face of a new generation of Chilean citizens who increasingly demanded to narrow the gaps in salaries and skills and who just could not wait and did not wish to wait any longer.
By 2007 and 2011, Chile witnessed the mobilization of civil society to press the state to narrow those gaps. The public sphere brought new actors to the political scene. Their relentless mobilization saw a window of opportunity for new actors to advance demands to the top of the Government’s Agenda in a new electoral cycle [ii]. That way Chile is one of the last countries to “turn left” [iii] in Latin America in a post-cold war era. The students’ protests reached a peak in 2007 and again in 2011 in terms of lack of governance, polarization, and political divide as a result of new social actors influencing the public sphere, shaping priorities, shifting the focus on microeconomics rather than macro concerns. The role of the media was key to voice the anger and discontent. Civil society, the entrepreneurial elite, and the political class clashed over the convergence or divergence of ideas on how to deal with social demands prior to a new presidential cycle. Electoral promises to tackle disparities as well as improve equal opportunity were made. They helped bring back to power the traditional center-left coalition that had been ruling since the 90’s. With the only exception of Piñera’s 2010-2013 center-right administration, the Concertación came back with Ms Michelle Bachelet’s second office, who was at that time leading the UN Women affairs after her first term. By then and in the wake of bitter recrimination from losing power during Piñera’s center-right electoral campaign, the Concertación changed names. Now, Bachelet’s center-left “Nueva Mayoría” (NM) coalition called for second-generation reforms on education, tax evasion, labor and even a new Constitution.
These announcements were deemed as “woeful” by investors and global contestation to keep the economic model was waged in the international media (The Economist, Wall Street Journal). A new formulation for a second tax reform was conceived to pay for education, which was deemed as the key driver in equal opportunity, ignited a hot debate amidst ideological controversy, vilification and passionate discourse testing the level of institutional resilience to live up to democratic expectations. As social change moves faster than the institutional capacity to respond in time and well, the complexity that the NM government was facing was dangerously deep. Since any normal political cycle is usually smooth for 30 years, the NM’s second-generation reforms were in line with political change.
The end of the super commodity cycle
Setting aside the institutional challenge which meant the formulation of policies in the form of a welfare state, an open economy like Chile faced an additional challenge. External shocks and its heavy dependence on copper sales to sustain social reforms saw the curve of revenues go down the slope: the super commodity cycle that produced 25 years of growth and fiscal revenues was slowly coming to an end. After two years of debating tax reform and educational reform, the international economic environment was beginning to hit macroeconomics figures. Bachelet’s NM government in a bold move that disappointed radical social actors acknowledged the end of the commodities boom and the necessity to readapt the government’s priorities.
The state had become additionally pressed to sit on crossroads over economic concerns and Bachelet was increasingly facing pragmatic decision-making in that regard. Pressure came from the center-right and local entrepreneurs. Crossroads this time appeared as the bifurcation of the programmatic NM itinerary: either maintain the path of progress seen in Chile for the last 25 years or “go south” by falling into the trap of populist decisions. The former materialized in the appointment of a moderate new Finance Minister from the center of the political spectrum of the NM coalition. Bachelet’s new announcement “Pragmatism without renouncement” on reforms was well received by local and international investors. However, the hastiness with which members of parliament and governmental ministers and party advisors were promoting and devising reform-policies entering the chamber did not show the necessary accuracy and care for detail to become a sound piece of legislation. Criticism and controversy provided a lack of consensus within NM coalition on how bills were being drafted. The bitter criticism continued to emerge from the opposition but it was also apparent from within the NM coalition. These voices came from the center parties of the NM coalition demanding for more serious deliberation and an end to sloppiness.
Corruption cases: Chile shows its “Latin American face” but the Judiciary gives a powerful blow
Besides signs of attrition of an economic model which came under severe scrutiny for its income and skills disparities (OCDE Country Report 2013, 2014, 2015), there was still another rotten “apple” for national despair. A probe into tax evasion by the SII – National Revenues Service – uncovered a trail of phony invoices used for tax evasion by national holding PENTA that were illegally used to finance right-wing UDI’s political campaigns. “Pentagate” was only the tip of the iceberg. The judiciary followed the footprints of Pentagate and uncovered the same “modus operandi” in Soquimich (SQM) – a mining company in the hands of Pinochet’s son-in-law, Ponce Lerou – which had been financing the whole of the political spectrum from center to left wing parties, including Coalición MP’s and NM coalition’s prominent political figures. It was an astounding political earthquake, a sudden wave of tectonic movements that shook the ethical fabric of the establishment. The Judiciary continued to work with independence and within months of exhaustive investigation, the prosecutors collected overwhelming evidence to compel SII to sue Penta and SQM. UDI’s political operator was later convicted. Penta’s high-profile owners are today under house arrest awaiting trial. SQM case has involved millionaire figures in financing MP's and political figures whose testimony is still being heard at court and indictments will be soon issued.
In this wave of political scandals, a third high-profile case piled up. The Judiciary found evidence to prosecute CAVAL, a company in the hands of the son of President Michele Bachelet and his wife, currently under investigation for trafficking influence to get a loan from Banco de Chile’s owner and CEO which was used in a lucrative business operation to buy and sell land for residential use. CAVAL case was the last of a series of political scandals, however, CAVAL has been a permanent damage to Bachelet’s reputation capital which has translated on a low-record-approval to her government, around 25% according to the latest opinion polls in December 2015 (Adimark)
However, one direct benefit that the political world saw in the light of ferocious scandals at a time of attrition of the political class and entrepreneurial elite, was the establishment of an Ethical Commission by experts and leaders from the academic world to set high standards and design new legislation to rule party elections, campaign financing, new “comers” (new parties from the public sphere) and a limit to re-election of MP’s. These leaders submitted a brief to Bachelet on their recommendations and a a t as public ombudsman to oversee their transformation into law (Espacio Publico think tank).
End of transition and democratic consolidation
The politics of transition on the premises of pragmatic consensus has given way to a period of democratic consolidation. Such process is complex. It requires robust institutions to face the mammoth challenge of fulfilling interests groups and the public good where a multiplicity of actors come to play in an environment charged with ideological views and passions.
Chile sits at a crossroads. The elite classes versus non-elite classes need to converge. Institutions are on crossroads over the design, formulation and negotiations they reach over efficient policies; national entrepreneurial elite sits on crossroads over their commitment for “fair play” in the economic game and avoid further corruption cases in duopolies, irregular financing of political campaigns and tax evasion. Political parties sit on crossroads over the renovation of leaders and partisan bylaws. Local political class is on crossroads over ethical standards and “intelligence-gathering” that is desperately needed to compromise and pass regulations based on the public good. Civil society is on crossroads to moderate expectations or vote populist leaders. Democratic consolidation success will greatly depend on how well-equipped local institutions are and the capacity of institutions to respond well and efficiently to pressures as they have been doing in the last decades.
Chilean institutional architecture has proved to have some important level of resilience in the face of social demands. Despite the fact that social changes is produced at a faster pace than the capacity of institutions to respond well and efficiently, institutions are moving towards that direction. The leverage of center parties within NM coalition is proving to be a moderator of excess of ideology in the drafting of second-generation reforms. In the light of slowdown and a fall of copper prices and exports around the globe, the new appointed Finance Minister is driving expectations into moderation and prioritizing prudence and macro-economic concerns.
The Judiciary is acting with independence and pressing hard on SII to file for suit on cases of tax evasion and irregular financing involving NM politicians
The press has played a key role in denouncing, monitoring and exposing corruption cases
Espacio Publico think tank has had a fundamental role in monitoring and pressing on the media for renovation of party leaders, regulation on the financing of political campaigns and party elections supervision
However, there is need for efficiency in the elaboration of public policy. The high level of politicization of non-elite classes is a risk for stability and governance. Chilean institutions have a unique opportunity to converge elite and non-elite groups for the necessary cohesion of the population.
Civil protests seem to be subsiding but they can surface again if efficiency is not achieved
Therefore, 2016 will still see hot debate on second-generation policies but center-parties will do the driving for moderation
The concern over macroeconomics gives the global market a sign of confidence and sends the right signal for greater investment. The newly created CIE commission for foreign investment is working on new incentives to attract investors. The new tax reform is being reviewed by Congress to avoid the risk of decreased investment.
WEF country report 2014-2015 places Chile in the 35th position among 140 countries on competitiveness. Though it is 2 places below compared to last year’s ranking, Chile still leads in Latin America. WEF country report gives special emphasis on negative variables in Chile: the low level of education of the workforce and low productivity. Therefore, second-generation policies have strategic importance due to the high impact on productivity and the competitive edge Chile needs to pull to jump into development.
[i] Wehner, L (2011): “Chile’s rush to free trade agreements”, Revista de Ciencia Política, Vol 31, Nr 2 pp 207-226
[ii] Moravcsik, Andrew (2010) The New Liberalism, The Oxford Handbook of International Relations, Snidal, Duncan y Reus-Smit, Christian (eds).Oxford: Oxford
[iii] Baker, A and Greene, K (2011 ): “The Latin America Left’s Mandate: Free-Market Policies and Issue Voting in New Democracies” , World Politics, Vol 63, Number 1, pp. 43-77