Tue | Dec 6, 2016

Chile: Socialism 2.0

Published:Sunday | December 28, 2014 | 12:00 AM
In this March 10, 2014 file photo, President Michelle Bachelet greets supporters after a meeting in Santiago, Chile. - File

Walter Molano, Guest Columnist

A cloud of pessimism hangs thick over Santiago, despite the gathering spring. The IPSA equity index is down more than 20 per cent from its highs, and trading volume is off by a comparable amount. The city's top hotels are choked with private bankers assisting wealthy families move their money abroad.

It has been more than a decade since such pessimism was registered. A large part of the sombre mood is reflected in the country's macroeconomic indicators. The level of economic activity during the fourth quarter is expected to be flat. The inflation rate has almost doubled to 5.7 per cent. The peso has lost almost 25 per cent of its value during the last 18 months. Foreign direct investment has stalled, mainly due to the decline in copper prices and the rise in environmental activism. However, the primary reason behind the economic malaise has been President Michelle Bachelet's sharp move to the left.

While her first term was marked by pragmatism and a business-friendly environment, her second time in office is a showcase of socialism and arrogance. Like her two presidential peers in the southern cone of Latin America, President Bachelet has become more radical and red. Locally referred to as Socialism 2.0, her policies are a scary throwback to the late 1960s and early 1970s. However, this time, it is being done under a cloak of legitimacy, since the measures are being passed by the legislature.

However, they may as well have been done by decree because there has been very little debate and negotiation. Given that the president's coalition controls both chambers of congress, the packages are passed as soon as they are introduced. The president is determined to expand the role of the state in providing basic services, while reducing the opportunities for the private sector to profit in these areas.

There are at least six major initiatives on the table: tax, education, health, pension, labour and constitutional reforms. The first reform has been passed and the second one is well on its way. Many of them involve some form of expropriation and all of them will roll back the dynamism that made Chile the most resilient economy of Latin America.

Economy at standstill

However, the measures are taking their toll. The rise in pessimism has killed investment and trimmed consumption, thus stalling the economy. The private sector has also passed most of the effects of the tax increases on to the consumer, resulting in the recent inflationary spike. The education reform will eliminate the subsidised private school system, without improving the quality of the programmes. The labour reforms will make the workforce much more inflexible, which will lead to a rise in the unemployment rate. The health reforms mirrors Obama-care, expanding the role of the state in order to provide universal coverage. The pension reforms mark the first step in allowing the state to tap into the mass of savings that has been accumulated. Last of all, the constitutional reforms will make the changes permanent.

It is little wonder why the mood in Chile is sour. So far, the sentiment has not dented its ability to tap the international capital markets. Chilean blue chips were able to raise billions of dollars during the latter part of the year. However, the recent scandals in corporate governance, the government's shift to the left and the erosion of the country's economic model will eventually dampen the appetite for Chilean paper.

Of course, this is not the first time that Chile has swung to the left. A hundred years ago, Chile was the darling of Latin America and a paradigm of capitalism. It had an enormous concentration of wealth, with some of the richest families on the planet. Vestiges of those glorious days still dot the Victorian neighbourhoods of Santiago, Valparaiso, and Punta Arenas.

Nitrates, which were mined in the Atacama Desert, were one of the most valuable commodities during the Industrial Revolution. They were used as fertilisers and oxidising agents in the production of gunpowder and explosives.

With the industrialisation of farming and the mechanisation of war, it was in hot demand. However, German chemists Fritz Haber and Carl Bosch invented a process to synthetically produce nitrates in 1909. By the late 1920s, the demand for Chilean nitrates was in free fall.

Coupled with the onset of the Great Depression, Chile was one of the countries that suffered the most during the global downturn. For the next three decades, the country began a march to the left, culminating in the socialist reforms of the 1960s and the election of Salvador Allende in 1970. Chile could be at the start of a similar process. The enormous concentration of wealth has fuelled social unrest and marked the return of socialism. This time, it will be known as version 2.0.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. wmolano@bcpsecurities.com