Reform in Chile
The lady’s for turning
Is Michelle Bachelet putting her country’s growth model at risk?
May 24th 2014
Santiago.
.
Dash in a sash
HER right-wing opponents have accused Michelle Bachelet of a multitude of sins in recent weeks, but sloth is not among them. Even her critics accept that the Chilean president began her term, on March 11th, at breakneck speed. Since then, hardly a day passes without a new initiative. When she took office Ms Bachelet announced 56 measures lined up for her first 100 days in power. She reckons she has already ticked 41 off the list.
The policies are ambitious, too. Ms Bachelet, a Socialist at the head of a broad centre-left coalition, has asked the legislature to approve the biggest shake-up of the tax system since the early 1990s. Another bill has been sent to Congress to scrap Chile’s stifling “binomial” electoral system, a legacy of the Pinochet dictatorship. On May 15th she outlined energy policies designed to tackle Chile’s chronic shortage of cheap fuel. And this week Ms Bachelet announced changes to the way the country’s schools are funded and run.
“The speed with which we’re working reflects our conviction that keeping your promises is one of the best ways of enhancing the view that the public has of politics,” the president said on May 21st in her annual state-of-the-nation address.
Some describe the pace of change as reckless, especially at a time when the Chilean economy is slowing. Just eight months ago, the government was forecasting growth of 4.9% for this year, but now the figure has shrunk to 3.4%. “Driving a steamroller through Congress” is how one conservative congressman described the government’s agenda. One of Ms Bachelet’s senators responded that what the government needed was “a bulldozer, to destroy the antiquated foundations of the dictatorship’s neoliberal model.”
Talk of that sort has set alarm bells ringing among business types. For a quarter of a century, the neoliberal model has served Chile’s economy rather well. It has grown by around 5% a year since the late 1980s. The poverty rate has dropped sharply, foreign investment has poured in, inflation is under control and Chile’s sovereign-wealth funds are flush. If the system works, why overhaul it?
The president is keen to allay fears. “We’re not about to undo all the good work that’s gone before,” she says. “We’re still committed to public-private partnerships and the free market, we’re still open to foreign investment and free-trade agreements. None of that is going to change.” But something needs to be done, she insists. The student protests of 2011 laid bare discontent with a model that has brought prosperity but done little for inequality.
The most contentious of Ms Bachelet’s proposals to date is the tax reform, which would increase Chile’s tax burden by about three percentage points. Excluding social-security contributions, it would stand at around 23% of GDP, not too far off the OECD average of 25%. Eduardo Engel, a professor of economics at the University of Chile, describes the tax rise as “significant but reasonable...It puts Chile’s tax burden at the average level of countries at a similar stage of development.”
Others are unconvinced, in particular about the government’s plan to abolish the Taxable Profits Fund, or FUT, a mechanism set up by the military government in 1984 to encourage investment. It allows companies indefinitely to defer payment of some tax on their retained profits. Since its inception, says Ms Bachelet, it has deprived the state of around $50 billion in tax. But her opponents say the FUT has been a vital component of Chile’s success.
It is hard to believe that a reform of this magnitude will have no impact on investment and growth, as the government claims. The real question is not whether the economy will suffer for a bit, but whether the long-term rewards justify it. Mr Engel says the tax-reform plans will probably lower the level of savings in Chile by around 1%. “But that money won’t be thrown into the sea,” he says. “If it is spent correctly, the gains will outweigh the negative impact on savings.”
That “if” will determine how Ms Bachelet’s second term is judged. She plans to spend most of the $8.2 billion proceeds of the tax rise on education. In her May 21st speech she confirmed that state-subsidised for-profit secondary schools will be obliged to turn themselves into not-for-profit foundations. The co-financing of voucher schools will be phased out: parents will no longer be expected to pay tuition fees to top up state funding. Only 17% of toddlers attend nurseries; Ms Bachelet said she will raise that figure to 30% by the end of her term. More reforms are due later this year so that university is free at the point of use.
Making education more affordable is undoubtedly popular. But the more pressing issue is the poor quality of tuition. A study carried out last year found that half the teachers in Chile lacked an adequate grasp of the material they were supposed to teach. Shake up the teaching profession and Ms Bachelet will have earned the affection she widely inspires.
Dash in a sash HER right-wing opponents have accused Michelle Bachelet of a multitude of sins in recent weeks, but sloth is not among them. Even her critics accept that the Chilean president began her term, on March 11th, at breakneck speed. Since then, hardly a day passes without a new initiative. When she took office Ms Bachelet announced 56 measures lined up for her first 100 days in power. She reckons she has already ticked 41 off the list.
The policies are ambitious, too. Ms Bachelet, a Socialist at the head of a broad centre-left coalition, has asked the legislature to approve the biggest shake-up of the tax system since the early 1990s. Another bill has been sent to Congress to scrap Chile’s stifling “binomial” electoral system, a legacy of the Pinochet dictatorship. On May 15th she outlined energy policies designed to tackle Chile’s chronic shortage of cheap fuel. And this week Ms Bachelet announced changes to the way the country’s schools are funded and run.
“The speed with which we’re working reflects our conviction that keeping your promises is one of the best ways of enhancing the view that the public has of politics,” the president said on May 21st in her annual state-of-the-nation address.
Some describe the pace of change as reckless, especially at a time when the Chilean economy is slowing. Just eight months ago, the government was forecasting growth of 4.9% for this year, but now the figure has shrunk to 3.4%. “Driving a steamroller through Congress” is how one conservative congressman described the government’s agenda. One of Ms Bachelet’s senators responded that what the government needed was “a bulldozer, to destroy the antiquated foundations of the dictatorship’s neoliberal model.”
Talk of that sort has set alarm bells ringing among business types. For a quarter of a century, the neoliberal model has served Chile’s economy rather well. It has grown by around 5% a year since the late 1980s. The poverty rate has dropped sharply, foreign investment has poured in, inflation is under control and Chile’s sovereign-wealth funds are flush. If the system works, why overhaul it?
The president is keen to allay fears. “We’re not about to undo all the good work that’s gone before,” she says. “We’re still committed to public-private partnerships and the free market, we’re still open to foreign investment and free-trade agreements. None of that is going to change.” But something needs to be done, she insists. The student protests of 2011 laid bare discontent with a model that has brought prosperity but done little for inequality.
The most contentious of Ms Bachelet’s proposals to date is the tax reform, which would increase Chile’s tax burden by about three percentage points. Excluding social-security contributions, it would stand at around 23% of GDP, not too far off the OECD average of 25%. Eduardo Engel, a professor of economics at the University of Chile, describes the tax rise as “significant but reasonable...It puts Chile’s tax burden at the average level of countries at a similar stage of development.”
Others are unconvinced, in particular about the government’s plan to abolish the Taxable Profits Fund, or FUT, a mechanism set up by the military government in 1984 to encourage investment. It allows companies indefinitely to defer payment of some tax on their retained profits. Since its inception, says Ms Bachelet, it has deprived the state of around $50 billion in tax. But her opponents say the FUT has been a vital component of Chile’s success.
It is hard to believe that a reform of this magnitude will have no impact on investment and growth, as the government claims. The real question is not whether the economy will suffer for a bit, but whether the long-term rewards justify it. Mr Engel says the tax-reform plans will probably lower the level of savings in Chile by around 1%. “But that money won’t be thrown into the sea,” he says. “If it is spent correctly, the gains will outweigh the negative impact on savings.”
That “if” will determine how Ms Bachelet’s second term is judged. She plans to spend most of the $8.2 billion proceeds of the tax rise on education. In her May 21st speech she confirmed that state-subsidised for-profit secondary schools will be obliged to turn themselves into not-for-profit foundations. The co-financing of voucher schools will be phased out: parents will no longer be expected to pay tuition fees to top up state funding. Only 17% of toddlers attend nurseries; Ms Bachelet said she will raise that figure to 30% by the end of her term. More reforms are due later this year so that university is free at the point of use.
Making education more affordable is undoubtedly popular. But the more pressing issue is the poor quality of tuition. A study carried out last year found that half the teachers in Chile lacked an adequate grasp of the material they were supposed to teach. Shake up the teaching profession and Ms Bachelet will have earned the affection she widely inspires.
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