The two faces of Chile's economic success: keys to the plebiscite for a new constitution

One year after social protests broke out across Chile, citizens will face a decisive date at the polls on Sunday 25 October: Yes or No to a new Constitution
Atalayar_Fotografia de archivo del 25 de octubre de 2019, los manifestantes antigubernamentales llenan la Plaza Italia en Santiago de Chile

AP/RODRIGO ABD  -   Archive photograph of 25 October 2019, anti-government protesters fill Plaza Italia in Santiago de Chile

After eleven o'clock this Sunday morning, Santiago welcomed the first demonstrators who approached the nerve centre of the city's protests: Plaza Italia or Plaza Dignidad, renamed by the demonstrators months ago. Their objective was to celebrate the first anniversary of the protests which started on October 18, 2019 and which have meant a change without return for the South American country. All this led to the plebiscite to be held next Sunday regarding a new Constitution.

A year ago, the price of the Santiago metro was raised by some CLP$30 (3-euro cents at the time), causing indignation among secondary school students after several consecutive increases in the price of tickets in recent times. In protest, they began to evade the metro massively and unknowingly turned their struggle into the spark of a bigger fire. In addition to supporting the secondary school students, a series of additional demands made it possible for more than 1.2 million people to meet in Santiago on October 25, 2019, according to official figures. And the outbreak was not limited to Santiago; it travelled the entire country from Arica to Punta Arenas. 

Atalayar_Vista aérea de una manifestación en la conmemoración del primer aniversario del levantamiento social en Chile, en Santiago, el 18 de octubre de 2020
AFP/ MARTIN BERNETTI - Aerial view of a demonstration at the commemoration of the first anniversary of the social uprising in Chile, in Santiago, 18 October 2020

A year later, Chileans are facing a referendum on whether or not to change the constitution. Scheduled for 26 April this year, but postponed until this Sunday owing to the global pandemic of the COVID-19, the so-called "Oasis of Latin America" is facing all those reforms it demanded in the streets until the arrival of the coronavirus. Such levels of social discontent make it necessary to analyse how much of an oasis the Andean country was called as such. 

Chile has emerged as one of the most solid economies in Latin America. It is currently the fourth largest economy in the region in terms of gross domestic product (GDP). Apart from the crisis suffered in the 1980s, GDP growth has been constant. Together with Colombia and Peru, it forms a group of countries in the region which, starting from similar levels to countries such as Paraguay or Bolivia, has managed to leave behind these last two countries which have experienced a far lower growth in these terms for the period under study (1960-2018). Brazil and Argentina stand out as the powers in terms of GDP volume in the region.

Atalayar_Vagones del metro quemados por los manifestantes están estacionados en la estación de Elisa Correa en Santiago de Chile
AP/ESTEBAN FELIX - Underground cars burned by protesters are parked at Elisa Correa station in Santiago, Chile, on Sunday, October 20, 2019.

However, if we look at the data in more detail, we can appreciate the relevance of Chile in the region and why it is one of the great economies of Latin America. If we focus on GDP per capita (GDP divided by the number of inhabitants in the country), Chile leads the ranking in the region. This statistic implies that with a smaller number of inhabitants, Chile produces a higher amount per citizen than its neighbours. Thus, surpassing Brazil with 200 million inhabitants or Argentina with 44 million compared to its nearly 19 million citizens. As a result, a large part of the total value of their respective GDPs is due in part to the large mass of citizens who live within their borders.  

All this puts the total value of GDP in relation to the population of each country into perspective. Thus, we can see which economies contribute most to the Gross Domestic Product per inhabitant. This is relevant since Chile goes from fourth to first place in a measurement of the country's GDP level in relation to its population.  

This measure is also often used to measure a country's welfare. It is necessary to specify here that GDP is equivalent to the income produced in a country. Therefore, divided among its inhabitants it results in the average distribution of national income. Being an average, it does not account for the true distribution of a country's income. However, this will be discussed a few paragraphs below. 

Atalayar_ Los chilenos hacen cola para entrar en una sucursal de la oficina de las Administradoras de Fondos de Pensiones (AFP)
PHOTO/AFP - Chileans queue up to enter a branch of the Pension Fund Administrators (AFP)

Thus, if we want to complete the data which have allowed Chile to be called the "Latin American Oasis", we cannot leave behind the poverty rates which have been eradicated in the Andean country. According to data from the World Bank, in the first twenty years of the 21st century Chile has gone from 36% to 8.6% of the population living below so-called national poverty lines. This sharp decline is equivalent to a drop in poverty levels of around 4 million people. 

Together with Uruguay, which has 8.1% of the total population living under the ravages of poverty, they are the two countries in the region with the lowest percentage. At regional level, poverty has been reduced from 15.2% in 1990 to 3.8%. This is a significant change that could be jeopardised by the impact of COVID-19 on health and economies, as the Economic Commission for Latin America and the Caribbean (ECLAC) recently warned.

However, Chilean citizens' discontent shown on the streets forces an attempt to capture a broader picture and thus to understand a large part of the demands made for decades and which all converged in the social upsurge of October 2019.  

Atalayar_ El presidente chileno Sebastián Piñera
PHOTO/AP - Chilean presidente Sebastián Piñera.

As mentioned above, per capita GDP is used to assess the level of well-being of a society. However, the analysis should not be limited to that data, since it is an average, it is assumed that all inhabitants participate in the economy with the same income. And we know that this is not the case.  

In this sense, the Gini index provides more information on the distribution of income in a given country. If a country has an index of 0, it means that there is a completely equal distribution of income: all inhabitants have the same income. If it is 1, it means that the distribution is completely unequal and only one person concentrates all the income in the economy. In the case of Chile, the value of the index for 2015 was 0.45. This means that there is 45% inequality in the distribution of wealth. 

Along these lines, ECLAC estimated that the richest 1% of Chile's population owns 22% of the country's income and wealth. This makes it the second richest 1% in the region to share a greater amount of the country's total income and resources, surpassed only by Brazil. 

Atalayar_ Un manifestante ondea una bandera chilena frente a la iglesia en llamas de Asunción, en el primer aniversario del levantamiento social
AFP/ MARTIN BERNETTI - A protester waves a Chilean flag in front of Asunción's burning church on the first anniversary of the social uprising

This is because the little capacity the state has to redistribute the income and revenue created in the country is revealed in its own tax system. Value added tax (VAT) accounted for 55.8% of the country's tax revenue last year. The disadvantage of this structure is that VAT is regressive. This is because, since the same tax rate is applied to both lower and higher incomes, the burden on lower incomes is greater since they consume a greater percentage of their total income.

The counterpart of limited (and poorly redistributed) income is limited public expenditure. Although spending on education and health has increased as a percentage of GDP in recent years, other data show the predominance of the private sector in both areas. 

Thus, public education has been declining in terms of enrolment over the years. Enrolment in the public system has decreased from 1,713,487 in 2002 to 1,142,672 in 2017. The private education system has increased students from 1,537,402 to 1,892,813 for the same period.  

Atalayar_Mapa de Chile que muestra la tasa de pobreza por municipio en la región de Santiago
AFP/AFP - Map of Chile showing the poverty rate by municipality in the Santiago region

On the other hand, health care spending has been higher over the past 20 years in the private sector than in the public sector. However, for the first time in that period of time, public spending on health care increased in 2019 and only slightly exceeded private spending: 0.11 percentage points. Even so, private expenditure (49.94% of total health expenditure) includes a large 33% that comes directly from the pockets of Chileans. Data shows that by 2016, 14.6% of the population was spending more than 10% of its income on health-related expenses. In addition, Chile is the country in the region with the highest per capita private expenditure on health. 

In short, on the one hand, Chile has known how to manage its large economic indices and values, but it seems to have forgotten the inequality inherent in its own organisation. The tax system and the strong participation of the private sector in basic sectors such as health and education further widen this gap. Certain aspects are limited by the current Constitution, which was drafted and approved during Pinochet's dictatorship. The possibility of further progress in equity will be discussed next October 25.