Chile's new President 2018 - 2021
As a result of the 2nd round of presidential elections held on December 17, center-right Chile Vamos Coalition candidate & ex-President Sebastián Piñera has been elected the new Head of State to rule the country from March 2018 to 2021. Country Risk Chile assesses the reasons behind his successful campaign, the macro-level opportunities, and the micro-level pressures the new Government will have to confront. At the same time, and in line with change and transformation processes in the nation, Country Risk Chile analyses the peculiarities of a conservative coalition with a strong focus on growth and a reform legacy to administer. Country Risk Chile will attempt to highlight a popular mandate to turn right after pledges on enhanced growth and job creation and the electoral promise to maintain the 50% / 60% gratuity banner in higher education.
What are the constraints and opportunities for Chile to advance to greater prosperity?
A retrospective analysis of what has happened and what will it be like in March 2018:
Country Risk Chile understands the country is moving to post-transition times. The electoral cycle of 2013, which brought Michelle Bachelet back to a second term, triggered a new set of state economic and political preferences, which replicated in the Government Agenda. Education took priority due to the "window of opportunity" brought about by students' marches and protests reaching a peak under the first center-right government led by Sebastian Piñera (2010 - 2013). The 25-year political cycle of transition to democracy (including Piñera's first term) has featured stability and growth, numerous FTAs, placing Chile as one of the most prosperous countries in the region (Chile boasts a per capita GDP of USD 23,969 in 2016 compared to USD 5,846 in 1990). Transition times were fruitful in growth levels. Naturally, they paved the way for the “institutional challenges” we have witnessed in post-transition (under Bachelet’s reform agenda in 2014-2017) and the need to upgrade institutions. It has been down to the exhaustion of GSIs or Governance Standard Institutions (property rights and freedom to secure governance) that the need arose for new accords to narrow the existing gaps and promote social rights. As expected, it has been growth itself, which has produced the population’s "cognitive leap" (Naim, 2010), whereby students marched on the street to demand reforms and voice their discontent over ruinous loans to pay for university fees. Growth enabled agents of change (students' leaders) and the Government's preference for bottom-up policies.
In 25 years, extreme poverty shrank from 47% in 1990 to 21% in 1998 (Ffrench-Davies 2016) and 7,9 in 2016. GDP growth was 5% on average during the four Concertación coalition administrations of 1990 to 2009, “or 5,3% if the 2009 recession is excluded” (p 2). GDP per capita expanded at an annual average of 3.6% compared to 1.6% under the 1974-1989 Pinochet era. However, GINI was around 0.528 in 1990-2009, and it only slightly improved to 0,48 in 2016. Data points to the consolidation of an unequal distribution of wealth in Chile. Despite solid macroeconomics figures and responsible management of the economy, the Concertación missed “a great opportunity to correct the economic model inherited from Pinochet" (French-Davies 2016, p 2).
But could they have done more?
Efforts to implement policies to foster industrial development and innovation, especially to aid SMEs and strengthen the bond between the capital market and productive sectors, found limitations in the political architecture due to the excessively high quorums: “2/3 for significant changes and 3/5 for minor legislative pieces” (Garretón, 2010, p 118). The Binomial Law (scrapped in 2016) involved a high quorum requirement and powerful veto players.
Pragmatism in the Concertacion forces prevented bolder measures to correct the model for fear of having the same uncontrolled hyperinflation seen in Peru, Argentina, and Brazil on their path to democracy (p 5).
Nonetheless, consensus-oriented policy-making allowed the passing of legislation to secure growth and control macroeconomics. A strong emphasis on GSIs-dominated policy-making and macroeconomic fundamentals received great attention to minimize Chilean exposure to market volatility and contagion. Under the socialist Ricardo Lagos administration, the “fiscal rule” initiative meant a level of expenditure concomitant with the country's income level.
The end of the boom of commodities and social demands (2013-2016):
Under Bachelet’s Governmental agenda, Chile embarked on reforms. In the 2013 electoral cycle, the state's new social and economic preferences in tune with social demands to narrow disparities entered the government agenda. They have included a controversial tax reform to fund gratuity in higher education and a difficult-to-pull educational reform to align quality control and regulation on educational bodies. Nonetheless, coalitions for reform have diffused the risks of a populist threat from social discontent. Despite the heated debate on reforms and the ensuing ideological battle, the consensus-oriented policy-making in Chile (the political capital of transition times) enabled to pass legislation during the economic slowdown, against the backdrop of record-low copper prices, the end of the boom of commodities, a diminished Chinese appetite for raw material and the transactional cost of tax reforms by way of diminished FDI.
Two shocks were tackled under Bachelet's administration:
a) endogenous shocks (mobilizations affecting governance, elite attrition with the cases of irregular campaign financing, and tax evasion and frauds) opened up a window of opportunity to carry out reforms on education and for stringent legislation on political parties, donations, and a code of ethical conduct. The end of the Binomial Law is the result of the crisis.
b) exogenous shocks (the end of the supercycle prompted initiatives for new pools of investment in renewable energies, such as solar power in the north and lithium exploitation tied to value-added investment).
This combination of shocks at micro and macro levels has enabled the country to start moving away from the copper-related paradigm, fostering the new paradigm of sustainable growth; then, the new electoral reform to enhance the political representation has resulted in a new Parliament with 3 forces and no majority, a reality to confront and which will oblige the new President Sebastian Piñera, to carry out broad coalitions to move the country to greater prosperity.
How did Sebastian Piñera pull the successful electoral win?
Centre-right Chile Vamos Coalition read the electoral response correctly in the 1st round. They understood the population is keen on a focus on growth, but citizens feel gaps must be closed. In that line, the rhetoric of a safety net, embracing the banner of gratuity under Bachelet’s reform agenda, which was no longer criticized but began to be accepted and embraced for political ends, gave center-right parties the edge to win the Presidential seat. The strategy, i.e., to move to the center of the political spectrum, gained the votes of an electorate in Chile that favors social protection in a market-friendly environment and needs certainty. Despite the differences in the CV coalition, certainty was given through a partisan discipline.
Going back to the question above:
What are the constraints and opportunities to advance to greater prosperity? Chile's new President, Sebastián Piñera, will need to form broad coalitions through the political capital gained in experience and the rule of "consensus" understood as a long-term strategy, eliciting talented solutions to Chile's problems. Chile’s new President must deliver clever strategies to succeed in these broad coalitions. As pointed out by Country Risk Chile before the 2nd round, the end of the Binomial law and the new Parliament will add strain to policy-making, but the "learning process" that the young and new leaders (in the newly created Frente Amplio political force) will have to undergo, once immersed in the mainstream political architecture, will slowly but surely help move Chile away from over-reliance of raw materials for revenues and break new avenues for growth. Chile certainly needs to grow more to distribute its gains to society, in line with the all-Chileans-on-board initiative by OECD, and thus escape from the inequalities of limited competition. Inclusive growth, equity, and better quality in education at all levels are key. The pension reform now and the political decision to invest more in R&D and continue working for equity in education are unequivocal upgrades to strengthen social cohesion, minimize populism, and jump into the innovative phase Chile requires to hit full development. In other words, upgrading coalitions (Ben Ross Schneider, 2016) is needed to solve the new challenges: the urgently needed immigration law in line with human rights precepts, strict border control, and the protection of vulnerable children are just a few examples. Not to mention the "scientific" drive.
Soledad Soza, December 28, 2017
