Chile: The poster boy of neoliberalism who fell from grace

It is not common for an OECD county to shoot and kill 16 people in two days of socially motivated riots. (Perhaps only Turkey, in its unending wars against the Kurdish guerilla, comes close to that level of  violence.) This is however what Chilean government, the poster child of neoliberalism and transition to democracy, did last week in the beginning of protests that do not show the signs of subsiding despite cosmetic reforms proposed by President Sebastian Piñera.

The fall from grace of Chile is symptomatic of worldwide trends that reveal the damages causes by neoliberal policies over the past thirty years, from privatizations in Eastern Europe and  Russia to the global financial crisis to the Euro-related austerity. Chile was held, not the least thanks to favorable press that it enjoyed, as an exemplar of success. Harsh policies introduced after the overthrow of Salvador Allende in 1973, and the murderous spree that ensued afterwards, have been softened by the transition to democracy but their essential features were preserved. Chile indeed had a remarkably good record of growth, and while in the 1960-70s it was in the middle of the Latin American league by GDP per capita, it is now the richest Latin American country. It was of course helped too by high prices for its main export commodity, copper, but the success in growth is incontestable. Chile was “rewarded” by the membership in the OECD, a club of the rich nations, the first South American country to accede to it.

Where the country failed is in its social policies which somewhat bizarrely were considered by many to have been successful too. In the 1980s-90s, the World Bank hailed Chilean “flexible” labor market policies which consisted of breaking up the unions and imposing a model of branch-level negotiations between employers and workers rather than allowing an overall umbrella union organization to negotiate for all workers. It was even more bizarrely used by the World Bank as a model of transparency and good governance, something that the transition countries in Eastern Europe should have presumably copied from Chile. The brother of the current Chilean president, scions of one of the richest families in Chile, became famous for introducing, as Minister of Labor and Social Security under Pinochet, a funded system of pensions where employees make compulsory contributions from their wages into one of several pension funds, and after retirement receive pensions based on investment performance of such funds. Old-age pensions thus became a part of  roulette capitalism. But In the process, the pension funds, charging often exorbitant fees, and their managers became rich. José Piñera had tried to “sell” this model to Yeltsin’s Russia and to Bill Clinton's United States, but, despite the strong (and quite understandable) support of the financial communities in both countries, he failed. Nowadays, most Chilean pensioners receive $200-$300 per month in a country whose price level (according to International Comparison Project, a worldwide UN- and World Bank-led project to compare price levels around the world) is about 80% of that of the United States.

While Chile leads Latin America in GDP per capita, it also leads it terms of inequality. In 2015, its level of income inequality was higher than in any other Latin American country except for Colombia and Honduras. It exceeded even Brazil’s proverbially high inequality. The bottom 5% of the Chilean population have an income level that is about the same as that of the bottom 5% in Mongolia. The top 2% enjoy the income level equivalent to that of the top 2% in Germany. Dortmund and poor suburbs of Ulan Bataar were thus brought together.

Chilean income distribution is extremely unequal. But even more so is its wealth distribution. There, Chile is an outlier even compared to the rest of Latin America. According to the Forbes’ 2014 data on world billionaires, the combined wealth of Chilean billionaires’ (there were twelve of them) was equal to 25% of Chilean GDP. The next Latin American countries with highest wealth concentrations are  Mexico and Peru where the wealth share of billionaires is about half (13 percent of GDP) of Chile’s. But even better: Chile is the country where billionaires’ share, in terms of GDP, is the highest in the world (if we exclude countries like Lebanon and Cyprus where many foreign billionaires simply “park” their wealth for tax reasons). The wealth of Chile’s billionaires, compared to their country’s GDP, exceeds even that of Russians.

 

Such extraordinary inequality of wealth and income, combined with full marketization of many social services (water, electricity etc.), and pensions that depend on the vagaries of the stock market have long been “hidden” from foreign observers by Chile’s success in raising its GDP per capita.  But the recent protests show that the latter is not enough. Growth is indispensable for economic success and reduction in poverty. But if there Is no social justice and minimum of social cohesion, the effects of growth will dissolve in grief, demonstrations, and yes, in the shooting of people.  

Why it is not the crisis of capitalism

There has recently been an avalanche of articles and books about the ¨crisis of capitalism” predicting its demise or depassement. For those old enough to remember the 1990s, there is a strange similarity with the then literature arguing that the Hegelian end of history has arrived. The latter literature was proven wrong. The former, I believe, is factually wrong and misdiagnoses the problem.

The facts show not the crisis, but on the contrary, the greatest strength of capitalism ever, both in terms of its geographical span and the expansion to the areas (like leisure time, or social media) where it has created entirely new markets and commodified things that historically were never objects of transaction.

Geographically, capitalism is now the dominant (or even the only) mode of production all over the world whether in Sweden where the private sector employs more than 70% the labor force, the United States where it employs 85% or in China where the (capitalistically-organized) private sector produces 80% of the value added.[1] This was obviously not the case before the fall of communism in Eastern Europe and Russia, nor before China embarked on what is euphemistically called “transformation” but was in reality replacement of socialism by capitalist relations of productions.

In addition, thanks to globalization and technological revolutions, a number od new, hitherto non-existent markets have been created: a huge market for personal data, rental markets for own cars and homes (neither of which was capital until Uber, Lyft, Airbnb etc. were created), market for housing of self-employed individuals (which did not exist before WeWork) and a number of other markets such as those for taking care of the elderly, of children, or pets, market for cooking and delivery of food, market for shopping chores etc.

The social importance of these new markets is that they create new capital, and by placing a price on things that had none before transform mere goods (use-value) into commodities (exchange value). This capitalist expansion is not fundamentally different from the expansion of capitalism in the 18th and 19th century Europe, the one discussed both by Adam Smith and Karl Marx. Once new markets are created, there is a shadow value placed on all these goods or activities. This does not mean that we would all immediately run to rent our homes or drive our cars as taxis, but it means that we are aware of the financial loss that we make by not doing so. For many of us, once the price is right (whether because our circumstances change or the relative price increases), we shall join the new markets and thus reinforce them.

These new markets are fragmented, in the sense that they seldom requite a sustained full-day of work. Thus commodification goes together with gig economy. In a gig economy we are both suppliers of services (we can deliver pizza in the afternoons), and purchasers of many services that used to be non-monetized (the already mentioned: cleaning, cooking, nursing). This in turn makes it possible for individuals to satisfy all their needs on  the market and in the longer term raises big issues such as the usefulness and survival of the family.

But if capitalism has spread so much in all directions, why do we speak of its crisis? Because the malaise which is limited to rich Western countries is supposed to afflict the entire world. But this is not the case. And the reason why this is not the case is because the Western malaise is the product of uneven distribution of the gains from globalization, an outcome not dissimilar to what happened in the 19th century globalization when the gains were however disproportionally reaped by the Europeans.

When this new bout of globalization began, it was politically “sold” in the West, especially as it came on the heels of “the end of history”, on the premise that it will benefit disproportionately rich countries and their populations. The outcome was the opposite. It benefited especially Asia, populous countries like China, India, Vietnam, Indonesia. It is the gap between the expectations entertained by the Western middle classes and their low income growth, as well as their slide in the global income position, that fuels dissatisfaction with globalization. This is wrongly diagnosed as dissatisfaction with capitalism.

There is also another issue. The expansion of market-like approach to societies in all (or almost all) of their activities, which is indeed a feature of advanced capitalism, has also transformed politics into a business activity. In principle, politics, no more than our leisure time, was not regarded as an area of market transaction. But both have become so. This has made politics more corrupt. It is now considered like any other activity, where even if one does not engage in explicit corruption during his political tenure, one uses the connections and knowledge acquired in politics to make money afterwards. That type of commodification has created widespread cynicism and disenchantment with mainstream politics and politicians.

Thus the crisis is not of capitalism per se, but is the crisis brought about by the uneven effects of globalization and by capitalist expansion to the areas that were traditionally not considered apt for commercialization. In other words, capitalism has become too powerful and has in some cases come into collision with strongly held beliefs. It will either continue with its conquest of more, yet non-commercialized, spheres, or it would have to be controlled and its ”field of action” reduced to what it used to be.   

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[1] World Bank data, quoted in Capitalism, Alone, Chapter 3.