Nov. 14 (Bloomberg) -- Former President Michelle Bachelet has based her campaign to recapture Chile’s top office on a program of free education for all and higher corporate taxes. Her main opponent calls that model a throwback to the era of the Berlin Wall.
Voters were trending in Bachelet’s direction ahead of the Nov. 17 election, according to a poll by Santiago-based CEP that found she was backed by 47 percent of those surveyed compared with 14 percent for Evelyn Matthei, candidate for the ruling alliance. The poll interviewed 1,437 people between Sept. 13 and Oct. 14 and had a margin of error of 3 percentage points.
Thirty years of almost uninterrupted growth since former dictator Augusto Pinochet sold off state companies, slashed corporate taxes and curtailed workers’ rights has left Chile the wealthiest country in Latin America. Yet President Sebastian Pinera’s four years in power were marked by protests over the quality and cost of education in a country with the highest income inequality in the 34-nation Organization for Economic Cooperation and Development.
“The biggest challenge Chilean society faces is education,” said Bachelet in her manifesto released on Oct. 27, which called for raising the corporate tax rate to 25 percent -- higher than the U.K. -- setting up a state-owned pension fund and expanding union rights. “Inequality and segregation still remain in alarming levels.”
Matthei said Oct. 30 that the vote is a choice between economic models: one epitomized by the free-market policies of today’s reunified Germany, and another by the statism of former East Germany, where Bachelet was exiled during part of the Pinochet regime.
“Bachelet’s program is irresponsible in the sense that it promises much more than it can deliver,” Felipe Morande, the head of Matthei’s campaign, said on Oct. 27.
A candidate must have more than 50 percent of the votes to win the presidency outright on Nov. 17; if no one does so, there will be a runoff between the top two finishers on Dec. 15. None of the other seven candidates in the election polled more than 10 percent in the CEP survey.
Both Matthei and Bachelet are daughters of air force officials. While Matthei’s father rose through the ranks after the 1973 coup that brought Pinochet to power to help lead the military junta, Bachelet’s father was imprisoned and tortured to death by the regime, according to a report by the state forensic medical service.
Voters will also elect all of Chile’s 120 deputies in the lower house of parliament on Nov. 17 and 20 of 38 senators. Bachelet’s alliance currently has 57 deputies and 20 senators.
Bachelet will need a majority in both chambers to ensure the success of her tax overhaul, including the increase in the corporate tax rate from 20 percent. Higher levies will help finance $15.1 billion in extra spending over the course of the next government, according to Bachelet’s manifesto.
The changes will bring Chile more into line with its counterparts in Latin American, where Colombia has a corporate tax rate of 25 percent, and Peru and Mexico have 30 percent. Five years ago, Chile had a tax rate of 17 percent, half Colombia’s 33 percent.
“There is no doubt that it will affect investment, growth and employment negatively,” said Finance Minister Felipe Larrain on Oct. 30, referring to Bachelet’s tax plans.
Pinochet’s tax changes in 1984 cut the corporate tax rate to as low as zero. The system, which included incentives to reinvest earnings, helped double the investment rate to 24.5 percent of GDP in 1988 from 11.9 percent in 1983, according to the International Monetary Fund.
Since 1983, Chile has averaged economic growth of 5.2 percent a year, raising income per capita to about $19,100, the highest in South America, according to the IMF.
Consumer prices rose 1.5 percent in the 12 months through October, the slowest inflation among major economies in the region. Chile’s five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, rose 11 basis points, or 0.11 percentage point in the past 12 months to 90 basis points, the cheapest in Latin America.
Bachelet, who ran Chile from March 2006 to March 2010, denies she will put Chile’s economic success in jeopardy. During her presidency, dollar-denominated bonds returned 32 percent, three times more than under the current administration and more than the 27 percent gain on similar Latin American bonds during her tenure, according to Bank of America Corp. She ran the biggest budget surpluses of any Chilean president in history.
“Bachelet is not a reincarnation of Lenin,” Sebastian Brown, an economist at Barclays Plc in New York, said in a telephone interview. “The institutional framework will remain intact.”
Bachelet has identified better access to education as the priority for her government, pledging to make all levels of schooling free to boost social mobility and improve productivity.
Chile has the most socially segregated schooling system in the OECD, with few of the poor entering the top performing schools, according to research released by the organization on Sept. 13, 2011. More than 85 percent of higher education is financed by students and their families, the OECD said.
Chile’s Gini index, a measure of the income gap in which zero represents perfect equality and 1 complete inequality, is 0.501, compared with 0.38 in the U.S. and 0.466 in Mexico, according to the OECD
“Michelle Bachelet’s tax reform is pro education, savings, investment and small companies and won’t affect growth,” her spokesman Alvaro Elizalde, said by phone on Nov. 11. “To the contrary, it will generate conditions to increase competitiveness in the Chilean economy.”
With the country already near full employment after the jobless rate fell to a 30-year low of 5.7 percent this year, Chile needs to tap the talents of people from outside the ruling elite, said Ricardo Ffrench-Davis, an economist at Universidad de Chile in Santiago.
“This is just a new phase in the Chilean economy in which productive development of the middle and low sectors weighs more, but the fundamental base of the model will not change,” Ffrench-Davis said. “Warning about tremendous disasters is a very deceiving and misinformed publicity.”
Still, Bachelet’s first term in office may be marked by slower growth. Policy makers reduced their growth forecast for this year on Sept. 4 to between 4 percent and 4.5 percent from 4 percent to 5 percent, citing weaker external conditions and a slowdown in the first half of the year.
A drop in copper prices and higher global borrowing costs could lead the economy to grow less than 4 percent in 2014, according to former central bank presidents Vittorio Corbo and Jose De Gregorio.
Bachelet’s manifesto will be implemented gradually, will be fully financed and won’t threaten Chile’s growth or its fiscal track record, Elizalde said.
“Saying that the reform will affect growth is an argument that has been used historically to scare the population, but Bachelet was already president and she has always acted with seriousness and responsibility,” Elizalde said. “Bachelet is characterized by her great fiscal prudence.”
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