Archive for October 24th, 2019

By every possible measure, Chile is the most successful country in Latin America.

Income has soared and poverty has plummeted thanks to market-based reforms.

It’s not perfect, of course. The nation’s economic freedom score – 7.89 on a 0-10 scale – is good enough for a #13 ranking, but there’s still room for improvement.

But there’s also plenty of room for economic decline, and that might be the unfortunate outcome if politicians respond in a misguided way to recent protests.

Especially if they take advice from the wrong sources. For instance, the New York Times opined yesterday about the supposed shortcomings of the Chilean model.

Chile is often praised as a capitalist oasis, a prospering and stable nation on a continent where both prosperity and stability have been in short supply. But that prosperity has accumulated mostly in the hands of a lucky few. As a result, Chile has one of the highest levels of economic inequality in the developed world. …Chileans live in a society of extraordinary economic disparities. …What makes Chile an outlier among those 36 nations is that the government does less than nearly any other developed nation to reduce economic inequality through taxes and transfers. As a result, Chile has the highest level of post-tax income inequality among O.E.C.D. members. …Even after increases in recent years, the Chilean government still spends a smaller share of total economic output than every other nation in the O.E.C.D. The obvious path for Chile is for the government to spend more money.

As is sometimes the case with the New York Times, parts of the editorial are downright false. Income in Chile has jumped significantly for all quintiles, not just a “lucky few.”

And even the parts that are technically accurate are very misleading.

Notice, for instance, what the NYT is doing with inequality numbers. It is comparing Chile with rich nations, mostly from Europe.

But what happens if Chile is compared to other countries from Latin America.

That tells an entirely different story, as you can see from this poverty map (dark red is bad, light yellow is good) produced by the Center for Distributive, Labor, and Social Studies in Argentina.

All of a sudden, Chile looks very good.

Even if you use U.N. numbers that rely on the left’s misleading definition of poverty (i.e., based on relative income), Chile is a success story compared to other nations in the region.

It’s especially important to understand that Chile is getting good results for the right reason.

Poverty is falling because of the private economy rather than coercive redistribution. Here are some excerpts from a recent U.N. release.

In an analysis of the countries with the greatest reductions in poverty in the 2012-2017 period, in Chile, El Salvador and the Dominican Republic, the increase in income from wages in lower-income households was the source that contributed the most to that reduction, while in Costa Rica, Panama and Uruguay, the main factor was pensions and transfers received by lower-income households.

Sadly, some people in Chile don’t have the fortitude to build on the market reforms that have boosted national prosperity.

Indeed, it appears there will be backsliding according to the aforementioned New York Times editorial

Sebastián Piñera, the billionaire elected president in 2017, …proposed a slate of reforms, including an increase in the top income tax rate, an increase in retirement benefits, and a guaranteed minimum monthly income. …Andrónico Luksic Craig, chairman of Quiñenco, a financial and industrial conglomerate, wrote on Saturday on Twitter that he was ready to pay higher taxes.

I’m disappointed but never surprised when politicians unravel progress.

But it’s always discouraging when guilt-ridden rich people embrace statist policies (sounds familiar, huh?).

For the sake of the Chilean people, let’s hope this is empty rhetoric.

P.S. Since we’re on the topic of Chile, here are some excerpts from the abstract of a study in the Journal of Development Economics that estimated the heavy economic cost of the nation’s detour to socialism in the 1970s.

…we look at share prices in the Santiago exchange during the tumultuous political events that characterized Chile in the early 1970s. …deploying previously unused daily data and exploiting two largely unexpected shocks which involved substantial variation in policies and institutions, providing a rare natural experiment. Allende’s election and subsequent socialist experiment decreased share values, while the military coup and dictatorship that replaced him boosted them, in both cases by magnitudes unprecedented in the literature. The most parsimonious interpretation of these share price changes is that they reflected, respectively, the perceived threat to private ownership of the means of production under a socialist government, and its subsequent reversal.

By the way, this in no way should be interpreted as support for the Pinochet dictatorship.

But what it does say is that dictatorships that allow economic freedom produce much better results than dictatorships impose totalitarian economic policies in addition to totalitarian political policies.

Which is basically the point Milton Friedman made when asked about his connection to Chile.

For what it’s worth, Pinochet eventually allowed a transition to democracy, which somewhat atones for his sins.

P.S. To be fair, the NYT editorial was merely misguided, which is better than the wild inaccuracy that has characterized some analyses.

P.P.S. If you want to learn about Chile’s reforms, here are columns about the private social security system and the national school choice system. And this World Bank comparison of Chile and Venezuela is very instructive as well.

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