Chile should give the OECD the cold shoulder

In its never-ending quest to implement a statist version of globalism, the Organisation for Economic Co-operation and Development (OECD) has recommended that Chile undertake a series of interventionist reforms to address supposed problems in its economy.

According to the 2018 Economic Survey of Chile, Chile has lingering levels of inequality that must be taken care of. Rather than focusing on reducing overall poverty – one of Chile’s success stories over the past 40 years – the OECD instead decides to obsess over Chile’s inequality “crisis” that must be addressed by “increasing social spending to reduce inequality.”
In other words, the Paris-based bureaucracy effectively wants people to believe that Chile has a problem because some people have become richer faster than others have become richer. And because of this ideological approach, the OECD is drawn to redistributionist policies. For instance, it asserts that equity “would rise with higher social spending and a reform of the pension system that currently leave many with very low entitlements.”
While Chile is not as developed as some of its OECD counterparts, Chilean policymakers should look at arguments for more interventionism in its economy with a skeptical eye.

A model of hope for Latin America

For all intents and purposes, the Chilean market model based on free trade and a light regulatory touch has worked wonders for the country over the past few decades. Averaging a mediocre real per capita GDP growth rate of 0.70 percent from 1913 to 1983, Chile was stuck in the economic doldrums for most of the 20th century.

However, thanks to the valiant efforts of the Chicago Boys and their far-reaching reforms – abolishing currency and price controls, establishing a privatized social security system, liberalizing trade, privatizing key industries, and reducing spending – Chile was able produce an impressive 4 percent real per capita GDP growth rate from 1983 to 2003.

Since then, Chile has stood out as a beacon of hope for Latin America, a region that has been plagued by interventionist policies of varying degrees, with Argentina, Cuba and Venezuela coming to mind in these comparisons.

Ranked 20th in the Heritage Foundation’s Index of Economic Freedom and 15th in the Fraser Institute Economic Freedom of the World report respectively, Chile has taken a distinct path towards economic development from its regional counterparts and the results speak for themselves.

But success has come with controversy. Chile has been the whipping boy for multilateral organizations for some time, in part because many of the far-reaching reforms in the 1980s were implemented by a non-democratic government. However, the nation successfully democratized and subsequent governments have largely maintained a market-oriented approach. The net result is that Chile has evolved into the most politically and economically stable country in Latin America.

The Scandinavian fallacy

Sadly, the OECD is still stuck on false narratives.

Many international bureaucracies like the OECD not only believe that Chile should increase its use of cash transfers to fight poverty, but that it should also implement a Nordic welfare model in the mold of countries like Sweden.

Recommendations to make Chile follow the Scandinavian model ignore the historical nuances of that region’s economic history.

Contrary to popular belief, countries like Sweden became prosperous through multiple decades of free-market capitalism. Powerhouse companies like Volvo and Ikea would have otherwise not emerged in an environment hostile to capital creation.

Unfortunately, many policy analysts put the cart before the horse and believe that Scandinavian countries became rich mostly because they created generous welfare states.
Objective economic history tells us otherwise; the welfare state established itself in Sweden in the mid-20th century, taking advantage of the capital stock already accumulated during previous decades.

Many thought that Sweden and its Nordic ilk finally defied the laws of economics by providing a “Third Way” to economic development through the development of a more “humane” form of socialism. However, welfarist interventions eventually began to take their toll in the 1970s, and by the 1990s more competitive countries started to leap-frog Sweden in per capita GDP rankings.

Thankfully, cooler heads prevailed from the 1990s and onward when Sweden implemented numerous pension and school choice reforms that lessened the government’s spending burden and introduced much needed competition into its economy.

Rest assured, as the Swedish case vividly demonstrated, these very same downturns and periods of stagnation will occur if Chile opts for the soup kitchen that is social democracy.
However, it could turn out worse since Chile has not reached the level of development where it would have wiggle room to flirt with profound redistributionist and anti-growth policies.

The OECD’s track record in Latin America

The OECD’s policy prescriptions are not part of a nefarious plot to impoverish Chile, but a reflection of the bad philosophical underpinnings that guide these proposals.

However, Chile is not the only country in Latin America that has received statist economic recommendations.

The OECD already has a proven track record of giving unsound fiscal advice to countries like Costa Rica, where bureaucrats believe that it should streamline its income tax i.e. raise it to confiscatory rates to supposedly fight inequality. Further, the OECD proposed that Costa Rica implement a modern broad-based value-added tax (VAT) system in order to get its fiscal house in line.

It is a rather sad state of affairs when the OECD‘s tunnel vision does not allow it to consider other alternatives for economic development. For globalist bureaucrats, wealth is created from the top not from the bottom where market actors produce goods and services that consumers desire.

A public sector that consumes 15 percent, let alone 10 per cent of total GDP, seems completely foreign to bureaucrats that have never seen a top-down government program they did not like.

Chile’s experience with anti-growth policies

But what the OECD does not want to admit is that Chile has already implemented several tax hikes with the aim of financing education and reducing social inequality.

This started with President Sebastián Piñera, who “broke the taboo” of raising corporate taxes in 2013 by increasing the effective rate from 17 percent to 20 percent, a shocking move by a purported free market president.

Sadly, this was not enough for the Chilean left. When Michelle Bachelet assumed office in 2014, her government pursued an unprecedented amount of anti-growth policies such as corporate tax hikes which raised the rates from 20 percent to 27 percent, passing legislation to create a “free” higher education system, and granting big labor special privileges.

Naturally, the economy did not respond well to these interventions, as the country averaged a measly 1.9 percent growth in GDP from 2014 to 2016.

Throughout her presidency, Bachelet openly questioned the validity of the Chicago Boys model and proposed doing away with the current constitutional order, the most classically liberal constitution in the region, in her final days in office.

In 2016, Chilean voters came to their senses in local elections by voting in market-oriented parties into power, laying the groundwork for Sebastián Piñera’s return to office in 2017.
Although Sebastián Piñera’s first presidency did not fully deliver in its lofty expectations to bring Chile to First World status, Piñera was still able to make several sensible reforms such as creating an online platform that reduces the time of incorporating a business.

For a country like Chile to ascend into the ranks of the first world, an environment that fosters entrepreneurship is vital.

Moving forward

In fairness, the OECD did concede in its 2018 report that “productivity and export performance would be aided by lowering high entry barriers and regulatory complexity in some sectors.” No matter how you slice it, business regulations function as barriers to entry and shackle the potential of aspiring entrepreneurs.

If Chile wants to continue its ascent into the first world it should take a page from countries like Hong Kong, Singapore and Switzerland and continue liberating its economy in order to join them as part of the top 10 freest economies in the globe.

Costly and initiative-sapping welfare programs are the last policies Chile needs to implement. These same paternalistic measures have anchored countless Latin American countries to decades of underdevelopment.

Now that Sebastián Piñera has assumed the presidency for a second term, his administration’s mission should be to reverse his predecessor’s sub-optimal economic policies and continue Chile’s successful market experiment.

Experimenting with social democratic policies make for good politics in the short-term, but yields lousy economic results in the long-term.

If it opts to flirt with welfarism, Chile could be at risk of becoming the next Venezuela, a country that initially became rich through relatively free markets, then stagnated under interventionist policies during its social democratic phase, and finally collapsed when these policies were taken to their logical conclusion in the form of tyrannical socialism.

Repeating this vicious cycle, would be a great tragedy considering that Chile is so close to reaching developed status.

Chile’s neighbor in Argentina provides another case of what happens when interventionism gets out of hand. While not as pronounced as the Venezuelan economic tragedy, Argentina’s experience with statism has yielded dismal results since the 1940s, turning a nation destined to reach the ranks of the First World to a middling country plagued by constant bouts of economic instability.

Chilean policymakers should not fall for the Siren Song of interventionism and instead concentrate its efforts on creating a genuine separation of economy and state.

With Sebastián Piñera back in office, Chile has a golden opportunity in front of her. It can re-assert and expand the very policies that have made it Latin America’s envy.

A good first step in continuing this success story would be to disregard the OECD’s redistributionist advice.