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Despite difficult situation in Chile, the country will overcome the crisis...

23 Oct 2019 17:36|Marcin Lipka

“It only took a few days for the most stable and best-governed Latin American country to plunge into chaos. What happened in Chile and why is it likely that the country will quickly overcome the current drama?”, writes Marcin Lipka, Conotoxia Senior Analyst.

"Look at Latin America. Argentina and Paraguay are in recession, Mexico and Brazil in stagnation, Peru and Ecuador in a deep political crisis. In this context, Chile looks like an oasis, because we have a stable democracy, the economy is developing, we create more payrolls, salaries are rising, and the macroeconomic situation is well-balanced”. Only a week ago, when such statements were made in an interview for the Financial Times by Chilean President Sebastian Pinera, one could not agree more.

Unfortunately, in this Andean country, which is rich in raw materials, those words were spoken at a terrible time. Literally two days after the publication of the interview in "FT", on October 19, Pinera had to declare a state of emergency in the country due to massive social protests, the devastation of public facilities or arson and looting of shops.

In the following days, we have learnt of several fatalities in the protests. The images presented by foreign media showed such a large scale of destruction that they were instantly compared to the events in Venezuela or Argentina at the turn of the century. So what caused such a sudden change in the situation of this well-ordered and allegedly stable country?

It wasn't the 30 CLP increase in underground ticket prices that caused the riots

The brief media report revealed that underground ticket price rises triggered the Chileans' protests. However, is it possible that the cost increase of public transport by about 30 CLP could cause such enormous concerns and damages in the underground of 300 million USD? Of course not.

The public transport issues were not even a trigger for the riot, and the capital's youth jumped over the underground ticket gates for fun rather than because of expensive tickets.

The idea that dissatisfaction has been growing in society for months or even years is closer to the truth. A few weeks ago, according to Bloomberg agency, electricity prices rose (by about 10%). President Pinera pursued a policy of reforms and stressed that Chile is exceptional because it will not fall into the clutches of populism. Changes in the pension system (through an increase in contributions) or the labour market (more flexible for employers) combined with rising prices began to negatively affect the moods of the less wealthy citizens.

On the one hand, social inequalities and expensive education...

The sudden growth of social unhappiness combined with the image failures of the billionaire president (he celebrated his son's birthday in a luxury restaurant when the riots began) led to a massive crisis. Noteworthy, the dissatisfaction of some is also economically justified.

In Chile, as in many Latin American countries, there are substantial social inequalities. According to the OECD (Organisation for Economic Co-operation and Development), the GNI index in Chile is at the level of 0.45 and is one of the highest in the group of countries belonging to the Organisation. The income of 20% of the best-paid Chilean citizens is ten times higher than those of 20% with the lowest salaries. In Europe, these differences are about half as big (4.4 for Poland and 4.6 for Germany).

Dissatisfaction among young people is also due to the fact that the direct costs of university studies are high. According to OECD data for 2015, they amount to about 10,000 USD in Purchasing Power Parity (PPP). A Pole, a German or a Czech, has to spend about 3,000-4,000 USD of PPP, i.e. about one-third of this amount. In the following years, the Chilean education clearly pays off (the highest percentage among all OECD countries except the USA), which further intensifies social inequalities between the wealthy and low-paid citizens.

...and on the other hand, a well-managed economy

However, it is worth noticing that despite the widening gap in income, Chile has many successes as well. The country's credit rating is a strong "A" and, according to the three major rating agencies, it is at least at a level higher than for Poland. The low risk of insolvency is a result of the public debt, which for years has remained at a level below 30% of GDP.

Although the economy is heavily dependent on industrial metal prices and the external economic situation (half of the exports are copper or copper products, only three countries - China, USA, Japan - generate half of the foreign demand for Chilean goods), the country is relatively stable when there is a fluctuation in the raw materials market. Chile also has no problems with inflation, and in the opinion of S&P Global Ratings, it is a country of "strong democracy and the rule of law".

An interesting fact may be that the GDP per capita in nominal terms is precisely the same as in Poland - according to Fitch Ratings, about 15,500 USD. In the purchasing power parity, it is much less. Fitch estimates that in Poland, it is at almost 28,000 USD, while in Chile, about 4,000 USD less. The possibility for Poles to buy more goods and services for the same money and much smaller social inequalities make the standard of living in the country higher than in Latin America.

Chile will overcome the problems

Chile will probably manage the current crisis. On Tuesday, President Pinera asked the public to forgive him, according to Reuters' reports. He promised to freeze electricity prices, increase pensions, free medicines for the poor, and a guaranteed minimum wage of 480 USD.

Nevertheless, it is not the compromises of the government that will lead to stability. Chile, despite its social inequalities, is a well-governed country in the unfavourable economic situation in Latin America. Better targeting of social programs and greater access to education can only strengthen this position, and then the current crisis will soon be forgotten.

23 Oct 2019 17:36|Marcin Lipka

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