Chile’s Existential Crisis

October 26, 2019

It’s a false narrative to state that the crisis in Chile is endemic of a larger societal problem in Latin America, the reality is that its problems are more similar to France and even the United States.

 

 

Since the country started to take steps towards modernization 30 years ago, Chile’s economic policies have been a model in Latin America and emerging markets all over the world. These policies, along with a rise in the price of global commodities, helped sustain growth at an unprecedented level throughout Latin America, including: a GDP growth of $50B to $300B since 1992, the highest GDP per capita in the region (recently replaced by Panama), an infrastructure envied by its neighbors, a robust telecommunications network, emerging technology sector, strong financial institutions, and an ease of doing business not found in other parts of the region.

 

By 2019, the economic situation has resulted in large protests around a number of issues: cost of the metro, cost of education, cost of healthcare, cost of utilities, and income inequality in a prosperous country. While protests happen in other parts of Latin America around costs and access to services, the same type of infrastructure may not be available to a large percentage of the population: roads, schools, hospitals and telecommunications.  What is happening in Chile is more indicative of the types of protests that are happening in the developed world.

 

 

A parallel can be drawn between the current Chilean protests and the yellow vest protests that started in France in 2018, the global Occupy movement in 2011, and even the Sanders political movement, which is demanding a reconfiguration of the U.S. economy to provide a larger strata of citizens better access to affordable healthcare, education and higher wages.

In many ways, the situation in Chile is additional evidence that it is no longer an emerging economy, but rather one that is on-par with a country like Poland that has infrastructure and a modern economy, but is also struggling with income inequality. The similarities are strong between the two countries: a recent history of authoritarian rule followed by strong economic growth, a GDP per capita around $15,000 USD, wages that rose steadily over 25 years, and angst amongst those who feel they have been left out of this growth cycle.

 

A Brookings Institute article summarized this discontent in Poland, which is similar to the current economic state in Chile:

 

“Polish people’s aspirations and perceptions grow as welfare improves: catching up with high-income economies in the EU, and in particular with Germany, is perceived by many to be frustratingly slow. This includes catching up on governance in the public sector, particularly in government effectiveness and accountability to citizens with the delivery of public services.”

 

While the need to reinvest domestically in countries like Poland and Chile may be necessary to develop a strong middle class, there is a fine line between investment into social programs and infrastructure, and the perceived need to restructure an entire working economy to accommodate such changes. One only needs to look at Chile’s South American neighbor, Argentina, to see the impact of dramatic policy changes for the redistribution of wealth, which has led to calamity, large amounts of debt to cover social programs, and a recurring cycle of recession.

 

All of this begs the question, where has this reinvestment worked to help develop a stronger middle class without creating disastrous results? Belgium has taken significant strides towards income equality and has achieved one of the lowest income inequality scores in the world due to cooperation between the public and private sectors in the form of incentives, tax redistribution, and social spending.

 

 

If this type of cooperation were to take place in Chile, it will encourage foreign direct investment and help develop real middle-market growth that is mostly non-existent in Latin America. The Chileans, who can also attribute their success to a certain pragmatism found in its people, can find a way to succeed if they can do away with sensationalism and focus on the core issues.

 

Chile needs to do some soul searching to figure out what type of country it wants to be: a country that will continue to have a large income disparity, or one that can create a balance between collective prosperity, while continuing to be a regional model for growth. If Chile can strike this balance, maybe it can create a model for the rest of the developed world.

 

Stephen D. Marks is the Managing Director of Emmersion, a cross-border Latin American investment advisory firm with operations in 8 countries, Stephen is considered a leading voice on socio-economic and investment related issues between the Americas. He consults and converses daily with trade, business, investment and governmental leaders in Central and South America, while working with private equity, corporate and family office investors in the United States to help them scale abroad.

 

For more information on current middle market, private equity, co-investment, venture capital or corporate investment opportunities in Chile, Brasil, Peru, Colombia or other parts of Latin America, please contact Emmersion for a consultation.

 

 

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