The social touch

03/04/2006 | Raul Ferro

Michelle Bachelet, Chile’s new president, is determined to pursue a more egalitarian economic agenda

By Raul Ferro

Michelle Bachelet, Chile’s new president, is determined to pursue a more egalitarian economic agenda 
Shortly before assuming office on March 11, Michelle Bachelet presented each prospective minister in her cabinet with a thick dossier detailing the prognosis for their respective portfolios, as well as the targets for their first 100 days in government. 

The unifying theme: to wipe out the widespread inequality that still goads Chilean society, despite two decades of ostensible economic success.

Chile’s first woman president had wasted no time in stamping her mark on her new government – and in laying out its responsibilities.

Social protection

Andres Velasco, Bachelet’s new finance minister and previous campaign adviser on economic issues, was quick to reassert the urgency of his boss’s goals. “We will create a social protection network spanning from birth to old age,” he announced at his first press conference on March 13.  

The first stage of the plan, to be implemented within three months, will grant universal access pre-school education and will increase the minimum pension. The reforms will cost $6 billion over four years, and “will be financed through the country’s economic growth”, Velasco says.

The plan then envisages increasing funding for education while also improving labour market access for women and the young, although Velasco has yet to elaborate the specifics of the second stage.

The reform package in many ways sets the tenor for Bachelet’s economic policy which, according to analysts, is otherwise largely similar to that of her predecessor, Ricardo Lagos. The Chilean economy grew by around 6% in 2005 and is expected to grow by 5.5% this year.

Free but fair

“Velasco’s policies will be focused on fighting inequality,” says Patricio Navia, professor at the Center for Latin American and Caribbean Studies, New York University and member of Expansiva, the think-tank that until now Velasco headed  and that advised Bachelet on her government programme.

“I would define Velasco as pro-market more than pro-business,” said Navia. “That means that, while maintaining sound macroeconomic fundamentals, he will promote reforms to increase competition in the Chilean market.”

John Edmunds, research director at the Institute for Latin America Business Studies at Babson College in Massachusetts, agrees that Velasco will favour a more egalitarian system. “The decision to increase the minimum pension by $30 [per capita] is a clear sign of that,” Edmunds says. 

Could that be a sign of populism? “Not at all,” says Edmunds. “The current strong surplus in the fiscal accounts gives the government enough room to do this. The Chilean government coalition has a record of better fiscal management than the Bush government.” 

Velasco, an Ivy-league trained academic, is not only highly regarded in international economic circles. In recent years much of his research has focused on the economic return of social investment – a subject that fits well with the emphasis he wants to give his economic policies.

This focus on the domestic market will balance Chile’s economic strategy so far, says Navia. “Chile is like an airplane flying on only one turbine: exports,” he said. “Velasco wants to facilitate the natural development of the domestic market, not only as a matter of social justice, but also because it makes economic sense.”

Pension reform

Bachelet’s flagship economic reform, however, will be overhauling the existing pension system, which itself has inspired pension reforms in several countries. The reform, expected in the coming months, is not aimed at changing the model of individual capitalization but rather at expanding its coverage, to cut back administration costs and develop models to improve the lot of women and the poor.

Bachelet has appointed an ad hoc commission, including members of all political stripes, to look into further reforms to the system. The plan is unlikely to have any impact on capital markets and should only affect the business model of the pension funds administrators (AFPs).

“The reform will probably increase the role of the state in the system, maybe through the creation of a state-owned AFP and by allowing banks to take part in the business,” says Navia. “The current system is good for people with medium to high levels of income, but not for the people that earn low salaries,” Edmunds says.

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