The Inequality Behind Chile’s Prosperity

Foreigners on business trips usually travel from Chile’s Santiago International Airport to the city’s financial center in the El Golf neighborhood via the Costanera Norte or Vespucio Norte highways. But hidden underneath these highways are the majority of Chileans from lower-class neighborhoods who are living a harsh reality far from the prosperity that the El Golf and its high-rise buildings exude. Although Chile boasts one of Latin America’s most stable economies, the economic inequality amidst Chile’s growing affluence has been a significant challenge for the well-reputed Andean nation.

Last year when Chile held its bicentennial celebration, President Sebastián Piñera introduced his plan to implement approximately fifty initiatives that would transform Chile into a “developed” country by 2018. Piñera referred to the plan as, “Chile: A Developed Country: More Opportunities and Better Jobs.” Piñera stated [1]:

I want to invite every Chilean, those who voted for the Government and those who voted for other candidates, to make this mission our own: that our generation, the generation of the bicentennial, meets its task and historic responsibility, and makes Chile the first Latin American country that can proudly say that we have defeated underdevelopment, overcome poverty and created a society where each and every Chilean has opportunities to progress.

Considering Chile’s progressive growth in terms of gross domestic product (GDP), it could very well become a “developed” country by the deadline called for by President Piñera. According to Chile’s Central Bank, during the first half of 2011, its GDP increased by 8.4 percent. Moreover, the International Monetary Fund (IMF) estimates that in 2011, Chile’s GDP in terms of purchasing-power-parity (PPP) will exceed USD 250 million while its GDP (PPP) per capita for the same year will be USD 15,900.[2]

On November 2, 2011 the United Nations (UN) released its Human Development Report, giving Chilean newspapers a reason to boost their readers’ morale by highlighting that Chile had ranked as the forty-fourth country with the highest human development rate, as well as the highest in Latin America in an assessment that looks beyond GDP. However, an economist and University of Wisconsin-Madison sociology PhD student Matías Cociña outlines that this ranking is reached by collecting national averages, which oftentimes can conceal significant economic inequalities within a country. When Chile is analyzed using the Inequality-adjusted Human Development Index (IHDI), “Chile loses almost 20% of the value of its indicator, decreasing by 11 points in the overall ranking (of countries where there is an indicator set), and falls to third place in the region, behind the Bahamas and Uruguay,” Cociña explains.[3] Clearly, behind GDP and other average indicators lies a reality that shows that the majority of Chileans live far from the “almost developed” lives that politicians and the media have been ascribing to them in recent years.

Income Inequality
In Chile “está mal repartida la torta”[4] (the pie is poorly distributed), says Gonzalo Durán, an economist and researcher at Fundación Sol, a non-profit organization that focuses on labor issues. Regarding Chile’s 8.4 percent growth in the first half of 2011, Durán explains, “75% of that went to the richest 10%. That growth is much lower for the average Chilean.”[5] When the media and politicians report on Chile’s growth they tend to omit where that growth is taking place and who reaps its benefits; the statistics are without a doubt positive, but the majority of Chileans are not represented by that growth.

Andrés Zahler, a scholar at Harvard’s Center for International Development and professor at the Diego Portales University in Chile, has echoed similar concerns about income inequality in Chile.  Zahler recently wrote a column for the Center for Investigative Reporting (CIPER) website where he explains that the “average income is an indicator that does not reflect what Chile really is.” To demonstrate this, Zahler divides Chile’s population into ten equal groups and compares each group’s GDP with a country that shares a similar income. [6] He concludes that barely 20 percent of Chileans have incomes on par with those of a developed country; the rest live with incomes of a middle or low-income country. Although Zahler reaches this conclusion using a method he himself criticizes –looking at averages—his analysis powerfully illustrates that there are two very different Chiles, and that looking at overall GDP does not provide an accurate representation of the whole country.

Zahler explained that his two motivations for writing the column derived from observing these “two Chiles;” the Chile of the minority that live with incomes of a developed country, and the Chile of the majority that earn significantly less. The second observation is that when income disparity is so stark, a high GDP can lead to false conclusions about the economic reality for most Chileans. Therefore, if Chile does reach a GDP per capita similar to that of a developed country, it could be said that a majority of Chileans would not directly reap the benefits to which developed countries usually can look forward. [7]

The uneven distribution of wealth in Chile is the highest of the Organization for Economic Co-operation and Development (OECD) countries. The World Bank’s Gini index rates countries on equality; zero representing perfect equality and one hundred measuring perfect inequality. The latest statistics for Chile show a Gini index of 52.[8] Furthermore, the OECD reports that, “38% of Chileans find it difficult or very difficult to live on their current income, well above the OECD average [of] 24%.”[9] As Felipe Kast, former minister of planning and cooperation under President Piñera, said, these levels of inequality in a country with Chile’s growth are a “social embarrassment.”[10]

Despite these unfortunate high rates of inequality, Chile’s GDP keeps growing, and it is likely to continue this upward trend due to several factors. One of these factors is the omnipresent factor of copper. As the leading producer of the metal in the world, the Chilean economy is heavily reliant on copper prices; when the price of the commodity go up, so does Chile’s GDP. But in 2008 the Chilean Copper Commission (COCHILCO) reported “the participation of mining does not exceed 2% of national employment”[11] High profits in the mining sector help Chile’s overall GDP, but the industry does not generate enough jobs to translate that wealth into prosperity at the individual level. Once again, growth in GDP does not necessarily benefit the majority.

Chile’s impressive growth is not a new phenomenon. An increase in productivity in the 1990s also helped increase Chile’s GDP. “The assumption is that [productivity and wages] are growing at the same rate, but this is a fallacy: when you review the data you realize there is a gap,” Durán explains.[12] Fundación Sol illustrates this gap with a graph that shows a growth in productivity against a much slower growth in wages.[13] Even though GDP levels confirm an increase in productivity, these levels do not show how the value created by this increased productivity has been allocated. It is clear that only a minor sector of society benefited from that productivity growth, thus contributing to inequality.

Furthermore, Zahler argues that levels of inequality have stayed the same since the beginning of the 1990s. Zahler, who worked under former President Ricardo Lagos with Minister of Finance Nicolás Eyzaguirre, states, “The Concertación [the center-left coalition that governed Chile between 1990 and 2010] was successful in achieving growth [and] reducing poverty[,] but not in changing the power structure in the country. I think that didn’t change at all.”[14]

Fundación Sol portrays the skewed power structure by looking at the results of the 2009 National Socio-Economic Characterization Survey (CASEN) and concluding that 4,459 families in Chile have an autonomous average monthly income of 18.951.931 pesos, almost USD 38,000. These incomes make up 0.1 percent of the richest households and “generally tend to underreport their income in such surveys,” Durán explains.[15] The owners of banks, supermarkets, and insurance, forestry, media, and mining companies– among other important industries—are part of the economic base of this select group. “In short, they are the owners of Chile, the elite that configure and decide day to day the nation’s economy,” says Durán. [16]

The wealth of these few families is in stark contrast with what the majority of Chileans earn. While observing the results from a 2009-2010 ‘National Survey on Work Conditions, Equality, Jobs, Health and Quality of Life of Chileans Workers’, Durán analyzed that 76 percent of Chileans make less than 350,000 pesos per month, which equates to USD 700; 90 percent of working Chileans make less than 650,000 pesos per month, totaling USD 1,300. In other words, “Nine out of ten workers in Chile make less than the average minimum salary in developed countries.”[17]

Journalist Fernando Paulsen recently raised eyebrows when he declared during a radio show that Chile is “hijacked by 3,000 or 4,000 people,”[18] the same select group Durán exposes in his analysis. Paulsen says these are Chileans who are against a tax reform that would adjust their taxes according to their income. They promote the idea that free higher education would mean subsidizing the rich, when in reality, they do not want their taxes to increase simply because they would have to pay more in taxes than what it costs to pay for university. Paulsen was touching upon one of the most heated topics in Chile today by discussing a tax reform that could increase education funding and tackle the problem of a lack of access to high-quality education at an affordable price.

In addition to a tax reform, the stride towards a long-term solution to inequality has led to massive student protests over the past six months. According to Noam Titelman, president-elect of the Catholic University Student Federation (FEUC), the fuel that sparked Chile’s student movement was “the accumulation of inequality, injustice and hopelessness.”[19]

Education
Year after year, the Sistema de Medición de Calidad de la Educación (SIMCE), the Ministry of Education’s evaluation system that assesses primary and secondary students, has revealed this deep inequality, particularly among high school students in Santiago who are preparing to enter higher education institutions. For example, students in the second year of secondary school living in the richest comunas (neighborhoods)score significantly higher than do students from other parts of Santiago, as a study by the Center for Research in Social Structure of the University of Chile (CIES) points out.[20] Students attending schools in the best neighborhoods are getting a better education, regardless of whether they go to a public or private school. This allows affluent students to get into the most prestigious universities, while lower-income students are often forced to opt for lower quality and often more expensive private universities and professional institutes.

Some argue that, thanks to an increased number of private higher education institutions, more Chileans can attend university and subsequently increase their income level. In his book Chile: ¿Más Equitativo? (Chile: More Equal?), Chilean economist Claudio Sapelli discusses that inequality levels are lower in younger generations. The key to Sapelli’s data analysis is looking at Chile through cohorts, a group made up of people with similar characteristics; when Sapelli analyzes Chile’s Gini index across decades by cohort there is a visible decrease in inequality for younger cohorts, thus arguing that social mobility is more important than income distribution when assessing inequality.[21] This decrease in inequality may be attributed to higher access to education, but access cannot exclusively solve the issue of inequality when quality of education is so dissonant between specific educational institutions.

National and international advocates for education reform agree that Chile must significantly increase its expenditures on education to provide quality institutions and reduce inequality. Using information from the United Nations Educational, Scientific, and Cultural Organization’s (UNESCO) Institute for Statistics, the World Bank shows that the percentage of Chile’s GDP that goes to public spending on education has gradually increased. In 2008, 4.0 percent of the nation’s GDP went to public spending on education, compared to 3.4 percent in 2007 and 3.2 percent in 2006. [22] However, critics say this is not nearly enough. Educación 2020, a citizen movement that seeks to promote public policies that would improve access to and quality of education, has criticized the government’s education budget for 2012, stating that it is insufficient for financing quality education for all students.[23]

Furthermore, the national coordinator of Educación 2020, Mario Waissbluth, stated that reducing Chile’s “immoral inequality” while maintaining current tax levels is simply not feasible.[24] He quotes economist Kenzo Asahi who argues that low tax rates are one of the main reasons why Chile has not reduced its inequality. Asahi explains

While, on average, the OECD has a 35% tax rate for businesses, in Chile this is just 17%. Moreover, while the average tax rate for individuals in the OECD is 45%, in Chile, this doesn’t exceed 5%. Moreover, World Bank experts point out that tax evasion in Chile is high: 50% of taxes on individuals and 40% of taxes on businesses. Thus, they estimate that 30% reduction in tax evasion in our country would increase tax revenues by 12%.[25]

The increased revenue from higher taxes can effectively target aspects of Chilean society that are impediments to solving the problem of inequality; the budget for education, for example, could be increased significantly. That said, a tax reform in Chile has to go beyond just raising taxes. In the same column, Asahi dissects Chile’s tax structure, explaining that the poor pay more taxes proportional to their income: “While 20% of Chileans with lower incomes pay 15% of their income in taxes, 20% of citizens with higher incomes pay only 12%.”[26] Overhauling Chile’s regressive tax structure into a more progressive one would provide the government with the resources it must implement to improve access to quality education for the majority of Chileans, while simultaneously decreasing inequality.

As Asahi explains, inequality perpetuates poverty when it is a result of a structurally unequal system, like Chile’s education and tax structure reveal; “inequality can also prevent low-income citizens’ greater access to human capital and thus [prevent them from] contributing to the country’s economic growth.”[27] In the long run, when growth is concentrated within an elite and average citizens are unable to consume the goods and services that the rich provide, the economy stagnates, affecting all sectors of the population.

Despite these dire statistics on Chile’s inequality, the country’s prosperity cannot be denied and its steady economic growth is looked upon with admiration during the current financial crisis. Nevertheless, unless it effectively targets high rates of inequality, the majority of Chileans will not take notice when the country reaches a “developed country’s” GDP. Chileans have taken notice, as demonstrated by the student protests that have now lasted over six months. They want to see that the growth that is advertised by the government and media headlines is turned into tangible solutions to their economic problems. Economic growth must be partnered with policies that expand opportunities, specifically in areas like education, while at the same time reducing unrealistic burdens for Chile’s poor and middle class.