Chile: A Lopsided Miracle

Growth is strong, but inequality and joblessness remain high in Chile

For visitors who arrive at Santiago's world-class international airport and speed along a new toll highway to reach the city center's glittering office towers and hotels, the city stands out as one of Latin America's more impressive capitals. But Ana Lamilla, a 53-year-old housewife who lives on the impoverished outskirts of Santiago, has a different view. Her husband brings home less than $200 a month selling fruit from a pushcart. And home is a small wooden shanty with plastic sheeting for windows. Two of their sons finished high school and landed minimum-wage jobs -- one as a computer technician and the other in a printing shop. The third, though, sells metal scraps he finds at trash dumps, and the family still can't afford to move into a real house. "The world thinks we Chileans are the 'jaguars,' like the Asian tigers," she says. "But I don't feel like a jaguar."

Neither do a lot of other Chileans. It has been 30 years since the launch of the so-called Chilean economic miracle, when the government of General Augusto Pinochet, on the advice of Milton Friedman's disciples from the University of Chicago, toppled the country's high barriers to trade and investment and privatized vital services, including telecommunications, electricity, and eventually the pension system. The resulting growth spurt made Chile a hot emerging market -- and ushered in the era of the "Washington consensus," the doctrine that free trade and free markets could work their magic anywhere.

But now, as voters in this nation of 16 million gear up for a presidential election in December, some, like Lamilla, complain they've missed out on the miracle. Consensus is building among politicians here that while the free-market formula has served Chile well over a quarter century, the model needs work. Foreign investment has leveled off. The poverty rate has been halved since 1990, but it stands at 18%. "Chileans realize they are much better off than neighboring countries," says Roberto Méndez, who heads Adimark, a Santiago market research firm. "But they feel that now it's time all Chileans benefit."

By most measures, Chile remains Latin America's star performer. Per capita income has increased at an annual rate of 4.1% over the past 15 years, compared with just 1.1% a year in the rest of Latin America. Yet class divisions remain stark. Having the "right" surname, light skin, and diplomas from a small cluster of prep schools and from two top universities is still key to landing a top-level job, says Marta Lagos, managing director of the MORI polling institute in Santiago. "Chileans feel that a powerful minority still dominates the country, and that while people may have more access to material goods than they did in the past, they don't enjoy the kind of social mobility and opportunities that make them feel part of the Chilean success story," she says. That's partly why Chilean voters are gravitating to presidential candidate Michele Bachelet, a down-to-earth 53-year-old pediatrician turned politician who preaches a message of social inclusion. Bachelet, the candidate for the ruling Concertación coalition, is tipped to win in December's election.


For all its achievements, Chile is still a small, faraway economy dependent on natural resources. With import tariffs averaging just 2%, it makes more sense to import manufactured goods than to make them here. And while Chilean cabernet and salmon have achieved international success, copper alone still accounts for 46% of all exports. But commodities have never been able to absorb the entire workforce, and service industries have not developed sufficiently to make up the gap.

That's why, even with growth of 6% to 6.5% this year -- thanks to huge demand from China for Chilean copper -- unemployment is lodged at 8.6%. Among people under the age of 24, the rate is nearly three times higher, in part because of rigid labor laws that make part-time jobs scarce. But employers also cite a skills deficit. Spending on education, at 4.2% of gross domestic product, lags behind the 8.1% Malaysia spends, for example, or the 6.4% Finland budgets.

The curriculum also must be modernized to include more math, science, and reasoning skills needed in the workplace, says Education Minister Sergio Bitar. In the latest World Competitiveness Yearbook, compiled by the International Institute for Management Development, Chile ranked a lowly 41st among 60 nations on the quality of its science education. "Our politicians want Chile to be a trade and services platform, but how can we be that with our poor schooling system and without good English skills?" asks Ricardo Claro, chairman of Compañía Sudamericana de Vapores, a $2.7 billion shipping conglomerate.

Chile must also redouble efforts to drum up foreign investment, which of late has been hovering around $3 billion a year. The current government's efforts to lure cutting-edge industries, such as biotechnology and software, have floundered, in part because the government refuses to offer the types of generous tax incentives that lured Intel Corp. (INTC ) to Costa Rica and now Argentina. Chile has had more success with companies such as Delta Air Lines (DAL ), Eastman Kodak (EK ), and Unilever, which have set up regional back-office operations and call centers in Santiago, tapping its modern, low-cost telecommunications infrastructure. "We're at the end of the world and our market is minuscule, so we have to be very creative," says Michael Grasty, president of Oracle Corp.'s (ORCL ) Chile operations. "The only way to get out of this commodities rut is to attract investment in biotechnology or software. If Costa Rica can attract companies like Intel, we should be able to."

For inspiration and ideas, Chile is looking to the brisk economies of Ireland, Finland, Malaysia, and New Zealand. Chile's Congress recently approved a special surtax on mining revenues earned as a result of current record-high prices and will channel the proceeds -- expected to be some $175 million next year -- to researchers and companies developing technologies or processes that will diversify exports and boost productivity. A public-private committee will select only projects that could be commercially viable. Chile spends just 0.6% of GDP on research and development, vs. South Korea's 2.5% and Sweden's 4.3%.

Chile is even preparing to tinker with what until recently was viewed as its biggest innovation: the individual private retirement accounts that replaced the government's pay-as-you-go system in 1981. The accounts have boasted average annual returns of 11.3%, and pension assets have grown to $67 billion. But too little competition and high administrative costs have handed the private pension fund administrators fat 53% annual profits. And many low-wage and part-time workers fail to save enough, so the government will still have to make up the difference for many retirees. Other Latin American countries would love to have Chile's problems. Nevertheless, they're problems Chile needs to tackle if it is to remain a model.

By Geri Smith in Santiago

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