Axel Kaiser at Mises Brasil has penned a helpful update on the situation in Chile where socialist president Michelle Bachelet was elected to a second non-consecutive term in Chile. Bechelet’s second term appears to be far more ambitious in its efforts to introduce a series of socialist programs and reforms, and it certainly looks to be far more damaging than the administration of Ricardo Lagos, who seemed largely concerned with promoting relatively-free trade in spite of his own status as a member of the Socialist Party.
Below is the Google Translate version of Kaiser’s article (edited down a little and corrected by me):
Michelle Bachelet Intends to Destroy the Institutional Foundations of Chile’s Economy
by Axel Kaiser
Only five months have passed since the socialist government of Michelle Bachelet took power in Chile, but it has been enough to make economic growth in the country collapse. The main cause of this sudden and dramatic decline in economic activity is the increased uncertainty generated by the new Chilean government, which aims to take a tabula rasa approach to to the institutions of the free market that allowed Chile to become the most prosperous country in Latin America.
One of the most harmful proposals is a massive tax reform, which has already been approved, which will dramatically increase the corporate income tax in Chile, leaving it above the average for OECD countries. Moreover, this tax reform – which was strongly opposed by associations of Chilean entrepreneurs, and is losing popular support – grants the national tax agency arbitrary powers over taxpayers.
Another target of the radical socialist Bachelet program is the flagship pension system in Chile. As is widely known, Chile was the first country to introduce a social security system that is managed by private companies and is based on individual capitalization accounts. Under this scheme, each month, the Chilean workers deposit a percentage of their income in an account under your name, which is administered by private companies called AFP (Pension Fund Administration). The arrangement works just like a funded system.
Thus, when the Chilean workers retire, they – unlike all other current worldwide pension systems – do not depend on other workers to continue contributing to the system to receive their retirement; they just get back all the money applied adjusted for inflation plus interest.
Unlike the state pension system created by Bismarck and copied all over the world – technically called pay-as-you-go – the Chilean system is fully solvent, because it does not depend on demographics or fertility rates to remain so.
Moreover, this system, by encouraging savings, has led to an intense process of capital accumulation in the country. The savings of workers was invested in the Chilean economy itself, something that was essential to the remarkable economic growth that the country experienced in the 1990s and 2000.
In many ways, this arrangement has transformed Chilean workers into capitalists. In Chile, all follow the evolution of their Cuenta AFP (account) as they might follow the national football league, or even more closely: Chileans receive a monthly statement detailing how much has been added to one’s account detailing what he would receive monthly if he retired today, and how much he will receive if he continues contributing to the account until reaching 65 years of age…So it has become anathema in Chile for any union or political group to want to disrupt the system to their advantage. Such groups simply do not have the support of the population.
All of this, recognized by the economic literature, is disdained by the current socialist government.
Determined to bring the state back to pension management, Mrs. Bachelet and her ministers have already submitted a plan to create a state company for the pension sector. As is easy to predict, it is likely to create unfair competition for existing private companies, which would no longer be able to cope with the administration fees for a company that is subsidized with tax money. Moreover, if the state agency has a bad run, it will immediately be bailed out with more taxpayer money.
In other words, there is a real danger that the new state will become an existential threat to the most important of all the free-market reforms made in Chile in the 1980s.
Other reforms of the socialist program Bachelet include ending the format of the current private health care system, which would now be managed in socialized form. The policies and premiums that Chilean workers pay individually for their health plans would be socialized and transferred directly into the coffers of the state. The goal would be to create a universal health care system, so fashionable in the global vocabulary…
But there’s more.
Among other reforms, the current socialist government plans to make a substantial change in the labor laws of the country, which would grant unprecedented and dramatic powers to the unions (which are the electoral base of the current government) and greatly affect productivity. The administration also intends to enact educational reform that will end the current system and create an educational voucher system completely managed by the state, including a “free” university education system identical to what exists in Brazil and Argentina (with unenviable results).
To topi toff, the Left parties are planning to create an entirely new constitution, which was written – in the words of former Socialist President Ricardo Lagos – “on a blank page.” As the same Lagos recently stated, the new constitution must abolish the principle of subsidiarity in the current constitution, which says that the state can only intervene when private agents failed to solve urgent social problems. In the new socialist constitution, the government would be the main driver of economic and social progress, a model that Chile has tried since the 1930s and which ended disastrously in 1973.
As if to make clear the full extent of the party’s intentions, Bachelet declared recently that she shares the same goals of former Marxist President Salvador Allende, who managed the country from 1971 to 1973.
Unlike Allende, Ms. Bachelet does not want to turn Chile into a Communist regime. However, it’s no secret that she endorses, in large part, an old-fashioned statist philosophy. And there is no doubt that if his administration can implement these projects, Chile will no longer be a model for Latin America. The question is whether those who want to preserve the way of progress trodden by Chile in the last decades will be able to prevent the country from adopting an Argentinean model of institutional destruction. Meanwhile, Chile’s future is less auspicious.
Axel Kaiser is Chilean columnist for Forbes.