Pinera’s First Developed Country Promise Undermined by Chileans in Poverty

Milva Guerra’s retail clothing business in north-central Chile has more than tripled in floor space during the past decade, propelling the 41-year-old store owner into the country’s growing middle class. After expanding her sales from a stand in an open-air market to three small shops in two cities, Guerra now has enough income to help her family pay bills and start saving for retirement.

No longer living paycheck to paycheck, Guerra can afford to take the four-hour trip to Santiago for health care at the country’s top hospitals. She smiles when she thinks that, with her assistance, her nephew is going to college -- the first in the family to do so, Bloomberg Markets magazine reports in its February issue.

Guerra’s success mirrors the economic surge Chile has enjoyed since its return to democracy in 1990. Gross domestic product has grown at an average annual rate of 5 percent during the period, helping to reduce the poverty level to 15.1 percent in 2009 from 38.6 percent.

The world’s top copper producer has the second-highest per capita GDP in Latin America, behind Argentina. Uptown Santiago is a symbol of Chile’s growing economic clout, with its modern high-rises that have spawned the nickname Sanhattan for the neighborhood’s similarities to Manhattan.

Photographer: Cristobal Palma/Bloomberg Markets via Bloomberg

Retail shop owner Milva Guerra stands for a photograph on calle Alameda in Santiago, Chile, Nov. 26, 2011. Close

Retail shop owner Milva Guerra stands for a photograph on calle Alameda in Santiago,... Read More

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Photographer: Cristobal Palma/Bloomberg Markets via Bloomberg

Retail shop owner Milva Guerra stands for a photograph on calle Alameda in Santiago, Chile, Nov. 26, 2011.

The area is home to the tallest building in South America, the 984-foot-high (300-meter-high) Costanera Center shopping and office complex.

Thin Barrier

Sanhattan is far removed from Illapel, the town of 32,000 in the Coquimbo region where Guerra lives. Here in Coquimbo, she’s apprehensive as she looks around her lingerie shop. In Chile, the barrier between middle-class status and poverty is thin.

Just one major hospital procedure or the cost of education -- Chile doesn’t have free public universities -- could impoverish a newly made middle-class Chilean.

Guerra says she fears she may lose all that she has attained.

“The economic system is tremendously unfair,” she says. Chile has a free-market economy in which salaried workers, not employers, pay almost all expenses for health insurance. The average annual cost of health care and education per person in Chile is $3,469 -- more than 40 percent of the average yearly income of $8,310, according to government data.

The nation has a 19 percent sales tax on all purchases, higher than the 18 percent in Peru and 16 percent in Mexico.

No Benefits

“You pay for everything here -- everything -- and you don’t receive the benefits,” she says.

Guerra’s complaints are typical in Chile. Stepping up to the middle class, which in Chile means earning more than $1,500 a year, according to government data, doesn’t provide the comforts or financial security shared by members of the same social group in the U.S. or most of Europe -- where the poverty line is on average more than four times higher.

That frustration led, during most of 2011, to street marches by workers and students protesting the economic policies of President Sebastian Pinera, the billionaire businessman who was elected on a pledge of doubling economic growth and creating a million new jobs.

The demonstrations have often been violent, as activists push for tax and education reforms and wealth re-distribution in what the World Bank calls one of the globe’s most-stratified economies. Guerra is among the 71 percent of Chileans who say they support the demands of the protesters, according to a November poll by Santiago-based Adimark GfK.

Wealth Distribution Complaints

Police had made more than 13,500 arrests during 5,400 demonstrations in 2011 as of Dec. 1. The most common complaint is that the distribution of wealth in Chile is unfair; just 6 percent of Chileans polled say they believe it’s fair.

That’s the highest level of public dissatisfaction among all major Latin American nations, according to Santiago-based research group Latinobarometro. Thirty percent of Chileans in the poll are optimistic about their personal economic future -- 12 percentage points below the Latin American average.

The Chilean rallies may sound the same as those of the Occupy Wall Street movement; they’re not.

Occupy Wall Street protesters are clamoring to restore what many Americans once had and gain back jobs they lost because of the global economic crisis that started in late 2007. Chileans, many of whom have lived in poverty most of their lives, are demanding benefits they’ve never enjoyed, such as free public universities and low-cost student loans.

‘Breaking Point’

“We’ve grown a lot of late but are at a breaking point,” says Alejandro Micco, chief economist at the Finance Ministry under former President Michelle Bachelet. “If we want to con- tinue advancing, we have to make some difficult changes.”

Improving wealth distribution would be a prerequisite for Chile to achieve developed-nation status, he says.

Pinera, who took office in March 2010, pledges to make Chile the first Latin American developed country by raising per capita GDP.

“Our goal is to become a developed country and defeat poverty before the end of this decade,” he says in an interview. “For that, we need to grow by at least 6 percent a year to achieve a per capita income of $25,000 by 2020.”

Pinera says that before his term is completed in two years, he’ll eliminate extreme poverty in his country, which in this case means earning income of less than $750 a year. Per capita annual GDP in Brazil is about $11,000 annually and about $14,600 in Mexico.

Economic Growth

The administration is moving toward its target. Economic growth averaged 6.1 percent in Pinera’s first 20 months in office, and unemployment declined to 7.2 percent in October from 9 percent in March 2010. Almost 600,000 jobs have been created since Pinera entered office, he says.

And even as he says protests are hurting Chile’s image as a stable country, investors are still flocking to the $203 billion economy. Net capital inflows reached $5.3 billion in the first 10 months of 2011 compared with a net outflow for all of 2010.

“If we can continue at the speed that we’re moving now, we will be able to achieve our goals,” Pinera says.

Most Chileans say Pinera’s optimistic numbers belie the nation’s struggling middle class. In the November Adimark poll, Pinera’s approval rating plummeted to 35 percent from a peak of 63 percent in October 2010.

No Debt

As the only net creditor in the Americas, Chile can stimulate employment and investment if a global economic slowdown in 2012 knocks the country off its path, Pinera says.

The ministry can tap into a $13.6 billion sovereign-wealth fund, he says. Chile saved that money because of its vast copper reserves and exports by state-owned mining company Codelco.

Micco says Chile should address social demands by raising tax rates for corporations and cracking down on tax evaders. Pinera says his administration will consider reforming taxes in the first half of 2012 to help the middle class.

The business community’s response has been mixed. Felipe Lamarca, chairman of Ripley Corp SA, Chile’s fourth-largest retailer, said in October that he favors tax reform to aid the middle class. Andres Concha, president of manufacturing association Sofofa, said in a November speech that higher taxes would deter investment and slow growth.

Chile’s economic expansion, which was expected to be 6.3 percent in 2011, will slow to 4 percent in 2012 as the global outlook cools, according to the median estimate of seven analysts surveyed by Bloomberg.

Stuck in Place

That would still be the fourth-highest rate among major economies in the Americas, behind Argentina, Colombia and Peru, according to the Bloomberg poll.

Rather than making Chileans feel confident, the country’s gains tend to fuel sentiments that the wealthy are growing richer while the middle class is stuck in place or falling behind, says Ramon Lopez, an economist at the University of Maryland who graduated from the University of Chile in Santiago.

“We have an economy that has been successful in terms of growth and average GDP per capita but has not been successful in distributing the benefits of this,” he says.

Guerra, whose clothing shops in Illapel are about 300 kilometers (190 miles) north of Santiago, says she sees evidence of inequality in Chile’s economy on a daily basis as her customers take on growing amounts of debt to pay for necessities.

The blame lies with an economic model in which corporations -- not the government -- sell many of the country’s services, including education and pensions, Guerra says.

‘System is Brutal’

“The economic system is brutal,” she says. “We don’t have anything to act as a safety net.”

Pinera says he’s working to help Chileans pay for education.

“We will have to do a major education reform,” he says. The government will guarantee scholarships to those families most in need, about 60 percent of the population, Pinera says. The president says he hears his constituents.

“Defeating poverty and improving the equality of our income distribution are absolutely necessary,” he says.

Guerra considers herself fortunate. With no children, she kept profit margins low and still succeeded when starting out because she didn’t have education and child-care costs. She says she fears her luck may run out.

‘I Feel Insecure’

Chile has had a retail boom for the past two years, allowing department store companies such as Ripley and SACI Falabella to open shops in smaller cities. That could cause her to lose sales, making her increasingly vulnerable to falling back into poverty.

“If you ask me how I feel about my business now, rather than saying ‘happy,’ I’d have to say I feel insecure,” she says. “My fear is that I won’t be able to survive when the big chain stores arrive. I may simply not be able to hang on.”

Micco says that if the government helps the new middle class with improved services -- financed by higher corporate taxes and levies on the wealthy -- Chile can become a developed nation.

“We’re seeing consensus that Chile is extremely unequal and something has to be done,” Micco says. “There is a tremendous opportunity to change the inequalities we see without damaging the country’s growth.”

Editors: Jonathan Neumann, Gail Roche

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net

To contact the editor responsible for this story: Jonathan Neumann at jneumann2@bloomberg.net

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