It is difficult to sift through the noise in the current Chilean political climate. The strong polarization and the retreat of the Chilean political centre are making agreement less likely and conflict an almost certainty. I realize that constructive critiques are often harder to undertake in such an environment, where extremes just lob insults at each other, but they are important because the value of common ground is high at this point. In the spirit of my newfound desire for a positive contribution, I took a longer look at an essay by Noam Titelman entitled: “It’s not always the economy, stupid”. I have a strong prior to liking this article, because I also think that a lot of what happened in Chile during the estallido is more than just economics. I tried my hand at giving a non-economic based explanation in January. To quickly summarize, views of the Chilean historical context are a strong predictor of how people sift into left and right in Chile. Both sides have a very different narrative as to what happened in the last 30 years. So when I started reading Titelman’s piece, I was already in agreement with the general sentiment.
Titelman tells us that Chilean elites placed a lot of emphasis in following the right economic “recipe”. This, in my interpretation, implied following the correct macroeconomic policy so as to optimize growth above all else. All other political questions that did not fall under the rubric of growth were secondary. Furthermore, as is common with economists, questions that conflicted with the primacy of growth were either delayed or muted. Titelman emphasizes the political as well as the economic inequality of the Chilean equilibrium, and he claims, correctly, that as Chileans became wealthier, they found this less tolerable. I am with him here, this is important to reiterate. The extreme segregation of Chilean society along income levels is a plague that became more visible and less acceptable during the last 30 years. Although income inequality fell and Chileans of all income groups grew wealthier, the fundamental classism of Chile became less bearable.
He affirms that the great symbol of the status quo is the constitution. In his view any deviations from what he calls “neoliberal orthodoxy” were deemed unconstitutional. I defer judgment on the Chilean constitution to constitutional scholars, I am neither qualified nor knowledgeable about this to make a definitive judgement. My suspicion is that the establishment uses the constitution as a blunt force instrument to shut down projects it does not like. The sheer number of cases in front of the constitutional court is suspicious. However I am not sure whether the constitution itself or the politicized interpretation of it is the problem. I really don’t know. What I do know however, is that there is this great expectation that a new constitution will solve all of these problems by making it broader. Two wrongs don’t make a right as the cliché goes. By overusing the constitution as an instrument for muting reforms, the right made it a target of scorn. By overestimating its reach, the left has made the constitution the panacea of all that ails Chile. Both positions are untenable.
Titelman often returns to the idea of the “economic recipe” and its supremacy in Chilean public policy as the main cause of the estallido. It seems reasonable; if you put all of your eggs into one particular basket, the other baskets might start rebelling. The singular obsession with what he calls the “economic recipe” and what I would simply refer to as the obsession with growth, has not been particularly healthy. But, given the history of Chile and LATAM, I do understand it. Although he confuses me a bit by lumping all economic questions into things that have to do with growth, he has a point. However, economists, or at least reasonable ones, are also concerned with welfare, at least the kind of welfare that can be measured. The interplay between welfare and growth, or, in the parlance of Titleman; between the “economic recipe” and everything else, is something that economists are aware of. In fact, this is the subject of a well-known paper by a couple of very good economists. I am referring to “Beyond GDP? Welfare across countries and time.” by Jones and Klenow, AER 2016. In the paper they consider a broad measure of welfare including mortality and inequality and find that it is highly correlated with income.
So, in this particular interplay, growth is important. One can say that growth is a necessary condition for the improvement of welfare. But is it sufficient? They find that it is not. The following graph measures the ratio of welfare to income:
Chile does much worse than other countries in its income group, and it is probably due to the inequality portion of the welfare measure, it is just too high. (Side note; just look at Qatar and think about it for a second. It is pretty much a medieval kingdom). So obsession with growth is understandable since growth is necessary, but it is also wrong, because it is not sufficient.
Bachelet understood this, but did not get to actually implement a lot of the measures that would have been necessary. This may have been where the obsession with growth could have played a role to prevent her from doing so. Again, growth is necessary but not sufficient. So to Titelman’s point, the obsession with growth has been damaging to some extent because it has put other and very important issues at the back of the list of priorities. However, it must also be reiterated that this obsession also came out of an experience that saw Chile stagnate for years. Economists at the beginning of the democracy period were terrified of this and so their obsession is not that odd if you consider the context.
Some wounds of the old system survived and festered, especially the education system. I have tried to understand this and my attempt can be read here. I am sure that the inability of the political system to solve this issue is more complicated than just claiming “neoliberalism”, but this would be a long post that would require a lot more resources that I don’t have.
Titelman then brings in a quote from Thatcher in a letter to Hayek as the latter pushes for Chile style reforms in the UK. Thatcher, in great British style, refutes Hayek’s prodding by reminding him that the UK is a democracy, and these types of reforms would be infeasible if you need consent. It is a not-so-subtle reminder to Hayek that the consent of the governed is important, just in case he had forgotten. Nonetheless, this same reason cuts through Titelman’s own argument. For the past thirty years Chile has been a democracy, governed by the consent of its people. The reforms of the constitution and the inability/unwillingness of the elites to pay attention to “non-growth related things” is to some extent a reflection of the democratic will of the Chilean people. I say to some extent because there are structural impediments to change in Chile, as Titelman asserts. However, those impediments have survived for a reason. I’d hate to make the conservative/Burkean argument here, but the world is the way it is for a reason. Some of it may be inertia, sure, but some may be the way democracies defend themselves from projects that are too ambitious and risky. Fully functional democracies improve gradually.
In the end, economists do well to remember that growth is not everything, and non-economists do well to remember that without growth there really is nothing. It seems that the Latin American cycle is the fairly predictable oscillation between these two points of view. The lesson learned is that neither view is sustainable in the long run, some middle ground has to be found. I think the success of some left wing governments in LATAM such as Mujica and the first term of Lula understood this. Others, like the Argentinians and Venezuelans, overcorrected and find themselves in dire straits. It seems slogans are not a good replacement for public policy.
