Chile: Sharing the Pie

A wind of prosperity blows through the congested streets of Vitacura. Luxury cars vie for position, against the backdrop of rising shopping centers. Conspicuous consumption is the name of the game in Chile, with middle and upper class consumers rushing to grab the newest electronic gadgets or clothing fashions. However, not everyone is sharing the bonanza. Like much of Latin America, the effects of globalization failed to trickle down to the lower income strata, and this is generating discontent. Unfortunately, elections are looming on the horizon, and Chile is bracing for a wave of political and social instability.

Despite soaring copper prices, Chile’s economic activity is tapering off. Industrial production fell 2.4% y/y in March, bringing the accumulated increase to 1.3% y/y during the first quarter of the year. The appreciating peso, rising labor costs and soaring energy prices are taking their toll on Chile’s industrial sector. The inflation rate (IPC) is approaching 5%, reducing the competitiveness of exporters. Traditional sectors, such as salmon and lumber are falling victim to the over-valued currency. There were already a number of important bankruptcies. The retail sector is not taking chances, and it is taking preemptive measures for what could be a sharp slowdown. Retailers, such as Falabella, Paris and Ripley, recently increased their loan-loss provisions for consumer credit and credit cards. Most economists are trimming their growth expectations for 2008, reducing the average GDP growth forecast to 5%. We believe that Chile’s GDP growth could be as low as 3.6% y/y. Moreover, a major decline in copper prices could put the country in a perilous position.

Higher labor and input costs raised Codelco’s copper production budget to $2/lb. With copper prices close to $4/lb, there is little reason for concern. Indeed, the high copper prices are the reasons why Chile’s fiscal surplus is 3% of GDP. The mining sector contributed $3.7 billion to the government’s coffers. However, the average copper price during the last decade was 0.87/lb, and a significant pullback could put Codelco under water. Given the ferocity of the financial storm that is brewing abroad, there is a good chance that most commodity prices will retreat. Unfortunately, the international situation is not on the radar scope for labor leaders, and Chilean workers are demanding higher pay. Rising energy and food costs are weighing heavily on the working poor, pushing hundreds of families into poverty. Natural gas prices rose 30% this winter, electricity costs increased 37% and some food items doubled. In an effort to get better pay conditions, Codelco’s subcontractors recently walked off the job demanding similar wages and benefits as state workers. The labor dispute shuttered several mines, resulting in millions of dollars in lost revenue. Militancy is one of the issues worrying Chile’s business leaders, and it could move to the forefront as the presidential elections loom near.

With 18 months to go until the national elections, the political system is in flux. The low popularity of the Bachelet Administration has the ruling Concertacion party in turmoil. The center-left coalition is in danger of splitting in two. Elder statesmen, such as Ricardo Lagos and Jose Insulza, are throwing their hats into the ring in an effort to unify the factions. However, their support is less than 20%. All signs point towards business leader Sebastian Pinera. He has 45% of the vote. Although Pinera belongs to Renovacion Nacional (RN), one of the two right wing parties, he would probably run on a more independent platform. This would mark an important shift in Chilean politics, since it could be the start of a populist phase. Chile was noted for its strong political party system, but like many of the other Latin American countries, the unwillingness of party elites to adapt to domestic changes or incorporate new factions eventually led to their demise. All of this suggests that important challenges lie on the horizon. Like many post-modern societies, Chile is learning that money can’t buy peace, harmony or happiness.

2 Responses to "Chile: Sharing the Pie"

  1. Guest   May 13, 2008 at 5:25 pm

    It is very unfortunate that the gains from Chilean economic growth are not being spread more evenly among economic classes. However, to the point about how this might be an important cause or at least exacerbate the breakdown of the Chilean party system and the rise of populism within Chile: As long as a significant majority of the people are committed to the democratic and the free market models, I don’t think that a new party/populist in power is that damaging. It would be a typical example of throwing the rascals out and normal party turnover common in consolidated democracies. Since it’s unlikely that the latter would do better than Concertacion, the Chilean people would re-elect Concertacion or a traditional party/leader in a following election. If this is the case, then having a new party/populist in power throughout one election cycle is not only a common democratic occurrence, but in the case of Chile, help strengthen or consolidate Chilean democracy.