Healing Chile's Malaise

Santiago - Valeria Garcia has come a long way in the past two decades. As a high school dropout, she lived in a wooden shack with a dirt-floor kitchen and a tin roof in San Ramón, one of the Chilean capital's roughest neighborhoods. But at age 33 she went back to high school and then earned a degree in psychology from a local university. For seven years she commuted an hour each day by bus to classes, all the while taking in washing to make ends meet.

Now 52, Garcia is a psychologist at a center for battered women and is sending her children to college with no government aid. Her $1,200 monthly income disqualifies her for financial assistance, although she still lives in San Ramón, a desolate expanse of makeshift houses and vacant lots. "If I'm now considered middle-class, why do I feel so poor?" she says, looking around the four-room cinderblock house she shares with her three daughters. "The world thinks Chile is successful, but many Chileans can't do much more than work, sleep, and eat. People aren't satisfied."

Chile has come a long way since 1990, when democracy was restored after 17 years of military rule. The economy has been one of the world's fastest-growing, inflation is a distant memory, the poverty level has fallen to 13% from 45%, and per capita gross domestic product has quadrupled, to $10,100.

Yet like Garcia, many Chileans feel a certain malaise. They know their country is one of the most prosperous in Latin America due to fiscal discipline and the profound free-market reforms of the past 30 years. But Chile's explosive, Asian-style growth of the 1990s has given way to expansion averaging just 3.5% annually this decade. And despite efforts to diversify, volatile copper earnings continue to account for more than half of total exports. So Chile's leaders are seeking to reduce that dependence and nurture a knowledge-based economy via better schooling and more innovation.

For the well-to-do, it's business—and pleasure—as usual. Glittering new office towers and luxury apartment complexes abound in Santiago's wealthy neighborhoods, and on Sundays well-heeled families flock to the Club de Polo San Cristóbal for a sumptuous buffet of prime rib and king crab. They dine overlooking immaculate fields where thoroughbreds are groomed for afternoon races. But in the sprawling, dusty communities where Chile's nascent middle class lives, health clinics, parks, and public transportation are in short supply. In spite of its progress, Chile remains a class-bound society of haves and have-nots. "Chileans have advanced, but not as much as they'd like, and those who feel left behind are bitter," says Marta Lagos, an economist who heads Latinobarómetro, an opinion research firm.

MORE DYNAMICThat's translating into trouble for the Concertación, the center-left coalition that has governed Chile since General Augusto Pinochet's military junta stepped down. The coalition of Socialists, Christian Democrats, and Radicals risks losing the Dec. 13 presidential election. Leading the polls is Sebastián Piñera, a conservative billionaire who controls LAN Airlines, the flagship carrier. The 59-year-old Piñera doesn't plan to radically change the successful mix of fiscal and monetary policies or poverty-zapping cash handouts that the Concertación has championed. But voters seem to feel he is more dynamic than the Concertación's candidate, 67-year-old former President Eduardo Frei, and more mature than Marco Enríquez-Ominami, a 36-year-old Socialist who broke ranks with the coalition when it rejected his candidacy. President Michelle Bachelet, a Socialist who can't run for reelection, is wildly popular. But her 78% approval rating hasn't rubbed off on Frei.

On Bachelet's watch, Chile enjoyed windfall profits from record-high copper prices. But instead of spending that money, as other commodity-rich countries did, the government put $20 billion into sovereign wealth funds and invested it, earning average annual returns of 7.2%. That let Bachelet unleash a $4 billion fiscal stimulus, equal to 2.8% of GDP, after the global financial crisis hit. The money was spent on loans to small businesses, subsidies for companies employing young people, financing for low-income housing, and more. "We were willing to take the heat and make an important savings effort when it was not popular to do so," says Finance Minister Andrés Velasco. While the economy is set to shrink by as much as 2% this year, economists expect growth of 3.5% to 5% in 2010 as the world economy revives and copper prices recover.

A big worry for many Chileans is education. Although 90% of students finish high school, many feel public schools are subpar. Some 40% of high school and university graduates score dismally on reading comprehension tests. And schools are plagued by frequent teacher strikes, including a walkout that kept classes idle for most of November. So low-income and middle-class parents often scrimp or take on debt to send their children to private schools. "Until Chile reforms education, nothing will change," says Manuel José Ossandón, mayor of Puente Alto, a working-class district of 700,000 on the outskirts of Santiago.

He ought to know. Even Puente Alto's top public school suffers from poorly trained teachers and classrooms crammed with as many as 45 students. "The best teachers want to work in private schools, which pay better," says Sandra Urrutia, principal of the sprawling brick complex with 2,400 students from kindergarten to high school.

TAX BREAKS FOR STARTUPSLast year, 60,000 Chileans joined a new nonprofit group called Education 2020 that is lobbying for better schools. Among the group's goals are higher spending on education, mandatory teacher testing, and tighter accreditation standards. "How do people expect Chile's economy to grow 7% a year if nearly half of its population is functionally illiterate?" asks Mario Waissbluth, an engineering professor at the University of Chile and founder of Education 2020. "Chile has reached a glass ceiling, a limit to its future growth unless it does something quickly to improve its human capital."

A second big worry is a lack of innovation. While Chile ranks well on innovation vs. its Latin American peers, the government knows it must do more to attract higher-end foreign investment. The National Innovation Council for Competitiveness, a public-private partnership, is trying to increase ties between universities and businesses to promote biotech, green energy, and technology startups. And the government has introduced generous tax breaks and subsidies to help build such businesses.

Those incentives helped lure U.S. tech firm Synopsys (SNPS) to Chile. The company, which designs software for chipmakers such as Intel (INTC), opened a research center in Santiago three years ago. Chile's economic development agency, Corfo, pays up to $25,000 for training each new employee, money Synopsys uses to send hires to its Mountain View (Calif.) headquarters for orientation. The newcomers seem to like the culture. Synopsys' 28 engineers, who earn about half what their U.S. counterparts do, come to the office in T-shirts and shorts. "We wanted to create an atmosphere of creativity and innovation," says General Manager Victor Grimblatt. Last year, Synopsys Chile exported $1.2 million in services, and three of its engineers applied for a U.S. patent.

Drive 75 miles west toward the port city of Valparaiso, and you'll find another leg of Chile's efforts to build a knowledge economy. There, Evalueserve, a New Delhi outsourcing firm, employs 160 Chileans who provide business analysis for companies worldwide. "I feel like I'm exposed to the heart of the international financial system," says Santiago Tapia, a 32-year-old who analyzes beverage and food companies for a global investment bank. Tapia says he's "living the American Dream," with a modern apartment two blocks from the ocean, a late-model Hyundai, and his fast-paced job with co-workers from India, Japan, China, and a half-dozen other countries.

Thanks to government-subsidized training and free rent for five years, Evalueserve says its costs in Chile are half what they would be in the U.S. and just 50% more than in India. The company plans to triple its workforce in Chile in four years. Corfo, the economic development agency, says outsourcers in Chile will export some $950 million in services in 2009. Within five years the agency aims to boost that to nearly $3 billion.

If successful, the effort will bring jobs needed to sustain growth as the country moves away from its dependence on copper exports. Until investments in education and innovation pay off, though, many Chileans plan to send their political leaders a message this election: There's no time to waste making sure average citizens enjoy real opportunities. Marta Cecilia Carvacho, a 42-year-old single mother who earns $585 a month as a maid, sells ice cream on weekends at a street market so she can send her 13-year-old son to a private school. "I know we're all better off now than we were 20 years ago," she says. "I can more or less feed and clothe my son and give him shelter. But there is more to life than simply surviving. I want my son to develop as a human being, to participate fully in Chile's promise, and I don't see that happening now."

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