Don’t blame market-friendly policies for Latin America’s discontent

For defenders of free markets in Latin America, October was a dismal month. In Chile, free-marketeers’ favourite economy in the region, protests against a rise in fares on the Santiago metro descended into rioting and then became a 1.2m-person march against inequality and inadequate public services. Sebastián Piñera, the centre-right president, sacked some officials and promised reforms. In Argentina voters booted out the pro-business president, Mauricio Macri, after one term. Instead, they elected Alberto Fernández, whose Peronist movement prefers a muscular state to vigorous markets (see article).

Both countries are rising up against “neoliberal” governments, claimed politicians and pundits. Nicolás Maduro, Venezuela’s socialist dictator, tweeted praise for Argentina’s “heroic” people and for Chile’s “noble” ones. In this, he speaks for much of the left.

His glee is misplaced—because the assumptions behind it are wrong. Despite its flaws, Chile is a success story. Its income per person is the second-highest in Latin America and close to that of Portugal and Greece. Since the end of a brutal dictatorship in 1990 Chile’s poverty rate has dropped from 40% to less than 10%. Inflation is consistently low and public finances are well managed.

Argentina is a failure, but not for the reasons Mr Maduro imagines. Its economy is in recession, inflation is over 50% and the poverty rate is over 35%. This was not caused by Mr Macri’s “neoliberalism”. Inheriting an economic mess in 2015, he made mistakes of tactics and timing, among them hesitation in cutting the fiscal deficit. But the underlying problems stem from decades of mismanagement, largely by Peronist governments, which have led to repeated defaults, currency crises and high inflation. Almost twice as rich as Chile in the 1970s, Argentina is now poorer. It would benefit from becoming more like its liberal neighbour.

This is no argument for complacency in Chile. The Chilean model, drawn up in the 1970s by economists trained at the University of Chicago, called for a small state and a big role for citizens in providing for their own education and welfare. It has evolved—there is, say, more money for poor pupils; but Chileans still feel underserved by the state. They save for their own pensions, but many have not contributed long enough to provide for a tolerable retirement. Waiting times in the public health service are long. So people pay extra for care. Access to university has expanded, but students graduate with high debts, only to discover that the best jobs go to people with family connections.

Chile undertaxes the rich. Oligopolies have colluded to fix prices in industries from drugs to poultry. Income inequality is lower than the regional average, but it is high by rich-country standards. More than a quarter of workers are in informal jobs. Even middle-class Chileans live in cramped housing. Behind the fare-rise rebellion lies a pervasive sense of unfairness.

With healthy public finances, Chile can afford to deal with these grievances. Mr Piñera plans to spend more on pensions. He seeks to speed up the passage of a scheme to cover catastrophic illness. He will create a new top income-tax bracket of 40%, five points higher than the current rate. Reform needs to go further. Trust-busters need to crack down on oligopolies. Chileans need cheaper, swifter health care and better schools. The tax system relies on vat for nearly half of revenues—and vat, though efficient, is regressive, so the state should take less or redistribute more.

Mr Fernández, facing an economic crisis in Argentina, has a tougher task. He will have to renegotiate debt (yet again), maintain a tight fiscal policy and restore confidence in the peso. He cannot ease the pain by ramping up public spending. It is already more than 40% of gdp, compared with 25% in Chile. In the long run, Argentina will need a smaller state and a more competitive private sector. While Mr Piñera fixes the Chilean model, Mr Fernández would do well to emulate it.