|A WAR ON POVERTY?|
May 26, 1998
Chile's free market economic system has brought enormous wealth to many in the country. But will the country be able to close the gap between rich and poor and therefore maintain stability? Charles Krause reports.
CHARLES KRAUSE: For well over a decade, Chile's free market economic model has produced the equivalent of an economic miracle: 7 percent growth rates, low inflation, low unemployment, and growing exports. Wedged between the Andes and the Pacific Ocean, Chile is far from its principal markets.
Yet, foreign investment is pouring in, while Chile's fruit, wine and other high quality export products are being shipped, and sold, around the world. New buildings, new cars and new shopping centers provide ample evidence that, for the wealthy at least, Chile's new economic system is a resounding success. There's also evidence of a new middle class. Central planning and government-owned industries are out. Instead, it's privatization that's brought prosperity, and, as a result, virtually every developing country in the world, except North Korea and Cuba, has adopted at least some variation of Chile's free market economic model.
|Has Chile found the answer?|
Last month, the leaders of all 34 Western Hemisphere nations, except Cuba, met in Santiago to pay tribute to the Chilean model and to reaffirm their commitment to free trade and free markets throughout the hemisphere. But as President Clinton reminded the assembled heads of government, there's still one dark cloud on the horizon.
PRESIDENT CLINTON: Poverty throughout the hemisphere is still too high; income disparity is too great; civil society too fragile; justice systems too weak; too many people still lack the education and skills necessary to succeed in the new economy. In short, too few feel change working for them.
CHARLES KRAUSE: The president's message was clear: the U.S. supports the free market system but fears it won't be sustainable over the long term unless there's clear evidence that capitalism and free markets reduce poverty. In Chile, there's no question that the rich have gotten richer and are better off than ever before since the free market system took effect. But for years, there was little evidence that the new wealth was trickling down to the poor. That began to change in 1990, when 17 years of military dictatorship came to end.
The new democratic government, now led by President Eduardo Frei, began tweaking the free market model it inherited from the military. The goal was to reduce poverty without reducing the incentives that helped produce Chile's high 7 percent growth rate. Among other things, the new government increased the minimum wage and raised pension payments. Today, there are still terrible slums in Chile. But according to the most reliable statistics, since 1990, the number of Chileans living below the poverty line has been cut nearly in half. Guillermo Perry is the World Bank's chief economist for Latin America.
GUILLERMO PERRY, World Bank: There is no doubt that there has been an impressive improvement. 20 per cent of the population that was poor has gotten out of the poverty level, so that's a very impressive achievement. And, in general terms, real wages have been improving very substantially in the last years.
|A slowly-improving situation|
CHARLES KRAUSE: Those facts are now evident even in some of Chile's poorest slums, places like La Victoria in Santiago. At first glance, it's hard to imagine the situation here has improved. But, in fact, La Victoria is far more prosperous today than it was just a few years ago. Food is more affordable and more plentiful. There's electricity, running water, and the dirt streets are now paved. Perhaps even more important, an old classroom in the neighborhood school has been fitted with new computers. They're a priority because education is viewed as the key to eradicating poverty--here in La Victoria, elsewhere in Chile, and increasingly throughout the hemisphere.
Maria Clara Aramburu is the school's principal. We asked her what changes she's seen in La Victoria since she came to work here 34 years ago. "Many changes," she told us. "The houses are much better. The children have better clothes, and their health is better, too." La Victoria was founded more than 40 years ago, in 1957, when several hundred homeless families invaded what was then a rural estate and seized land to build their homes.
Among those original settlers were Heriberto Lagos and his wife, Sonia. Today, they're still in La Victoria--having raised five children here, two of them still at home. The others visit often; bringing their children to play on the concrete floor of the house the Lagos' rebuilt just five years ago. Late at night or early in the morning, Heriberto Lagos leaves his family to work a ten-hour shift in a steel mill, where he earns about $3 an hour. It's hard work and each week, the shifts change. One week, Heriberto works all day--the next week, all night. Still, he says he's lucky to have his job because to remain competitive, the owners of the steel mill have invested heavily in new machinery--laying off half their work force over the past few years. For the workers who remain, however, real wages have increased along with their productivity.
As a result, Heriberto takes home about $170 a week with overtime--a good wage in Chile and enough to begin to lift the Lagos family out of poverty. Back in La Victoria, the family now has own computer, a telephone, and three television sets. A meal in a restaurant is still out of the question, as is a night at the movies. But the family was able to take a vacation this year to the South of Chile.
SONIA LAGOS: (speaking through interpreter) We took the two unmarried kids, just the four of us. It was wonderful. We truly deserved it; it had been so long since we'd gone anywhere.
HERIBERTO LAGOS: (speaking through interpreter)You see, I would always tell my kids about how lucky I was, many years ago, when I was still single, to travel around quite a bit. I would often tell my kids about how beautiful it was, but I'd never been able to show them myself. This time I was able to do that. And I took them in my own car, too. Our dream now is to see our children get a degree and become professionals. The whole point is for them to have a better life than we did, and that they, in turn, be able to give their own children a better life-a life without the deprivation all of us have known.
CHARLES KRAUSE: A generation ago, it would have been unthinkable for a child from La Victoria to aspire to study much beyond grade school. But for the Lagos family, and many others in La Victoria, the dream of an education for their children is now coming true. Patricio Lagos, 14, is in high school, while his older brother, David, 19, attends a private university. He's studying to become an industrial engineer. Every month, fully one third of the family's income goes to pay for David's tuition. It's an enormous financial sacrifice--one which Heriberto and Sonia are willing to make-but which they say believe demonstrates that Chile's new economic system is unfair.
HERIBERTO LAGOS: (speaking through interpreter) I think there are many benefits, and much has been accomplished. But the most serious problem is that too few rake in too much of the national income. Too few have too much, and too many have too little. We have to start reducing inequality, and when that's done, then we might say that the pie-that's a saying we have here--is being split fairly.
|The "equity debate"|
CHARLES KRAUSE: Heriberto Lagos is by no means alone. Many of La Victoria's walls are covered with murals attacking the perceived inequities of Chile's free market system. The left calls it "injusticia"--injustice. Economists and politicians call it the "equity debate." Here in La Victoria-and throughout Latin America-the left remains strong, so the debate over equity has an important corollary: Will the free market model be sustainable politically if it appears to favor the rich, to be exploitative and unfair? So far, in La Victoria, there's been enough economic progress so that resentment toward the new system has not yet translated into protests or political demonstrations. That's significant because La Victoria has long been a stronghold of Chile's Socialist and Communist parties. Today there's a monument to those from La Victoria who were either executed, or who simply disappeared, after Chile's 1973 military coup. That coup was led by Gen. Augusto Pinochet, a fervent anti-Communist who introduced the new free market system. He also wiped out a generation of Chilean leftists, including those from La Victoria and others, including Orlando Letelier.
A socialist and former Chilean foreign minister, in 1976, Letelier was assassinated when his car was blown up in Washington. Today, his son, Juan Pablo Letelier, is a socialist member of Chile's Chamber of Deputies. His district includes many poor people like those in La Victoria. A critic of the current economic model, Letelier says that many of the tax and labor laws inherited from the military are so pro-business that they're undermining support for the free market system among the working class and the poor.
JUAN PABLO LETELIER: As long as there's one person who doesn't have a stake in the growth, there's something that's wrong. That has to do with values and principles, not with economic numbers. The model in Chile, or better yet the economy, grows because the Chilean people are a very special type of people, a working people, with great effort, but they have the right to participate in the fruits that they produce. Or otherwise we end up with great frustrations which accumulate and which I think ethically are not acceptable.
CHARLES KRAUSE: Jose Pinera was one of the economists who helped Pinochet design and implement the current system. Today, he says the fairness issue is nothing more than a political tactic invented by the left.
JOSE PINERA: You must accept in a free society that someone with exceptional talents like Bill Gates or Michael Bell can have more income and can get rich, as long as you also know that the working people are going up. And that's happening also in Chile. Of course, those very talented entrepreneurs that are finding new opportunities in the export sector, are creating a new software, have discovered a new way to produce at a given factor, of course their income goes up. That is life. But the important thing, again, is that their income doesn't go up because a minister gives them a privilege or because of corruption and they get demanding to the public treasury. But they are getting rich because they are creating wealth for everyone. Chile is a very stable political society. So of course there may always be some people somewhere saying that this will be, it will create a problem. That has not been the case. Look at Chile. Where is the instability?
|Closing the gap between rich and poor|
CHARLES KRAUSE: But Letelier says that in a democracy, labor laws that limit the rights of unions and tax laws that favor the rich are going to create real problems.
JUAN PABLO LETELIER: I would tell people like Pinera that the time will come that changes will take place. And if one wants to have a future of stability, it's better to come up quicker with the changes than to postpone them.
CHARLES KRAUSE: Letelier's view that if the free market system is to continue, the gap between rich and poor must be narrowed is generally shared by most development economists and by most elected politicians throughout the hemisphere. Jose Antonio O'Campo is executive secretary of the U.N. Economic Commission for Latin America and the Caribbean headquartered in Santiago.
JOSE ANTONIO O'CAMPO: We are a very inequitable society. And, second, the forces which lie behind a wrong distribution of income a wrong distribution of assets in society have, if anything, increased or become stronger in recent decades. If those forces, which are tending to generate a bad distribution of income in society, are not addressed, we'll be back into significant social conflicts, which were an unfortunate fissure of this society's not long ago.
CHARLES KRAUSE: So far, Chile has avoided a return to conflict because even though the rich are doing extraordinarily well, there's also evidence of economic and social mobility.
Formerly working class areas like La Florida are now booming. Vast new
subdivisions house a new generation of secretaries, computer technicians,
and middle managers. There are also new shopping centers and new supermarkets.
And it's this new middle class that many economists and politicians
believe holds the key to the future of the free market system, not only
here in Chile but throughout the developing world. It's thought that
if there's enough social and economic mobility for at least some of
the poor to become middle class, then there's less danger of a political
backlash, and it's more likely that support for the free market system