In Pursuit of "Growth with Equity": The Limits of Chile's Free-Market Social Reforms

September 25, 2007

Because Chile's
social policy remains
subordinate to
the logic of the
marketplace, the
The 1990 inauguration of cdaIIfI.L
President Patricio Aylwin,
the wi
head of the Concertaci6n
of Parties for Democracy, a chasm
coalition of center and left-wing
political parties, marked the end rich ar
of 17 years of harsh military rule
and the beginning of Chile's transition to democracy.
The principal motto of the Aylwin administration was
"growth with equity"-a notable counterpoint to the
neoliberal model implemented by the previous military
regime, which maintained that income redistribution
could only come from economic growth. While'the dic-
tatorship had succeeded in achieving high economic-
growth rates-8% annually by the end of the 1980s--
income inequalities actually worsened. The number of
poor Chileans doubled during the Pinochet regime. By
1989, 44% of Chileans lived in poverty. The Aylwin
government argued that economic growth was a neces-
sary-but not sufficient-condition for achieving
greater equality in Chile. This emphasis on equity was
not based only on an ethical concern for social justice,
however. The Aylwin administration also sensed that
the equity issue was key to the consolidation of Chile's
newborn democracy.
Pilar Vergara is senior researcher at the Latin American Faculty of Social Sciences (FLACSO) in Santiago, Chile. She is the author of numerous books and articles on Chilean social policy including Politicas hacia la extrema pobreza en Chile, 1973-1988 (FLACSO, 1990). Translated from the Spanish by NACLA.
.UUII Ler The government did not pro-
Sening pose either a return to the pop-
ulist practices of the past-a
etween strategy that other Latin
American governments presid-
d poor. ing over new democratic
regimes had tried, with disas-
trous results-or a continuation of the dominant
neoliberal ideology of the military government. Its
proposal was based on the premise that policies pro-
moting economic growth and stability must continue,
but that they should be complemented with social
policies designed to promote greater equality. The
Aylwin administration's approach to equity diverged
from the neoliberal model in its emphasis on promot-
ing greater equality among Chileans through social
and labor policies directed at the poorest sectors of
Chilean society. Nevertheless, it remained firmly
within the framework of the free-market model inher-
ited from the military. President Eduardo Frei, also
from the Concertacidn, was elected to office in 1993.
His administration continued the previous govern-
ment's efforts to make economic growth compatible
with achieving greater equity.
Over the past decade, the social reforms carried out by
the Chilean military regime have been celebrated as a
model for other Latin American countries anxious to
overcome the endemic crises of their social-security sys-
tems. The policies introduced by the Aylwin and Frei
governments to reduce poverty levels within the free-
market system, and the initial success of those efforts,
Vol XXIX, No 6 MAY/JUNE 1996
reinforced the belief that Chile was a viable model for
other countries engaging in social reform. Little attention
has been paid, however, to the way the Concertacidn
governments' redistributive efforts have been hampered
by the new social institutions established during the
Pinochet regime. An examination of the successes and
limitations of Chile's social policy reveals how neoliber-
al social reforms have fundamentally restricted the scope
and impact of the Concertacidn's at-
tempts to achieve "growth with equity."
ocial inequalities had reached
unprecedented heights during the
17 years of military rule. The
deterioration of basic public services
due to constant cuts in social spending
under Pinochet affected not only the
poorest sectors of society, but also
large segments of the middle class.
Pent-up social problems had given rise
to great expectations of reforms under
a democratic government, raising the
specter of an explosion of demands
that could destabilize Chile's new
The Aylwin government's ability to
implement redistributive policies,
however, was seriously limited by
other legacies of authoritarian rule. The military's
neoliberal economic policies-including the steady
lowering of tax rates and hence government revenue
since 1984, the public debt contracted to rescue the
financial system after the 1982-1983 crisis, and the
end of revenue from the privatization of public enter-
prises, which were all sold off by 1989-imposed
serious budget constraints on the new democratic
regime. This impeded the Aylwin administration's
ability to increase social spending without creating
fiscal problems.
Within this context of sharp social tensions and bud-
getary constraints, the government devised an over-
arching plan to carry out its redistributive tasks. The
plan consisted of three basic elements. First, the gov-
ernment implemented a tax reform to generate more
funds to underwrite the state's social-policy programs.
Together with international grants and loans, this tax
reform permitted the government in its first year to
increase social spending by 17% without provoking
macroeconomic imbalances. Resources devoted to
social spending increased from year to year. By 1993,
social spending had returned to its historic level of 15%
of the gross domestic product (GDP), although it
remained below 1970 values in per capita terms.
The second element of the Aylwin government's pro-
gram was the targeting of social spending to reach the
poorest sectors of the population. This strategy, the
government believed, would help avoid the market dis-
tortions that other redistributive mechanisms, such as
price controls, caused. New and innovative social pro-
grams were designed that focused on social groups
such as female heads of household, youth, and indige-
nous communities. The government increased subsi-
dies to low-income groups, and raised the minimum
A public hospital in Santiago.
wage. Primary health care was expanded, and the gov-
ernment invested in new hospital equipment. A pro-
gram was launched to improve the quality of basic
education and to expand the school nutrition program.
These programs were implemented in a decentralized
manner, and emphasized the participation of the bene-
ficiaries and the promotion of local self-help efforts.
Overall, the government gave priority to social pro-
grams that represented an investment in human capital,
which would promote long-term growth, as opposed to
aid programs.
As part of this effort, the government established the
Solidarity and Social Investment Fund (FOSIS), whose
principal objective is to finance projects that promote
productive employment for the poorest sectors. The
FOSIS does not directly implement projects. Rather, it
finances projects designed and administered directly
by the social organizations of the poorest communities
within each region, often in coordination with local
non-governmental organizations (NGOs). The FOSIS
has funded 52,000 projects in its four years of opera-
tion. These projects tend to be small and short-term.
They are focused on marginalized sectors of society
such as unemployed youth, campesinos, and small-
enterprise workers. The FOSIS initially promised to
work closely with existing government ministries, but
in practice it often operated independently of them.
While this permitted the FOSIS greater flexibility and
helped avoid bureaucratic tangles, it also undermined
the continuity of the projects.
Finally, the government proposed a labor-reform
law, which, after some modification, was accepted by
labor, business and the opposition parties, and
approved by parliament in 1990. The new law reestab-
lished a series of rights and guarantees that had been
A private hospital in Santiago.
denied to workers under the military regime-includ-
ing the rights to strike, to form a union, to collective
bargaining within productive sectors, and to protection
against arbitrary firings or lay-offs. Workers were
thereby given the chance to negotiate how the benefits
of growth were distributed. Chilean businesses are,
however, still allowed to adjust salaries in times of
economic downturns or macroeconomic changes in
order to protect their ability to remain competitive with
foreign companies.
his new set of policies registered quick and pos-
itive results in the context of strong economic
growth. In the three years of Aylwin's adminis-
tration, the minimum wage increased 24% in real
terms, the purchasing power of Chilean families
increased 70%, and average incomes grew almost
18%. These upward trends, coupled with the hundreds
of new jobs that were created, led to a significant
increase in the portion that household income repre-
sented within the GDP. Since 1993, these indicators
have continued to improve, though at a slower rate than
before. The crowning achievement of the Aylwin
administration's new social policy was the reduction of
poverty: the percentage of Chileans living in poverty
declined from 44.6% in 1989, to 33% in 1992 and 28%
in 1994.
Not all of the Aylwin government's redistributive ini-
tiatives, however, enjoyed the same level of success.
The limitations of these efforts became increasingly
evident during the Frei administration. While the huge
inequalities of income distribution that had congealed
under the military regime were reduced (though only
slightly) during the Aylwin administration, by 1995
they appeared to be increasing again. For example,
while the average Chilean family aug-
mented its per capita income by 5%
between 1994 and 1995, the poorest
10% saw their income fall by 4.3%.
The same concentration of wealth can
be seen from a different angle. For the
first time since the return to democra-
cy, the annual growth of real incomes
fell from 5% in 1994 to 4% in 1995,
dropping below the increase of average
economic productivity (7.1%). As a
result, the income share of GDP fell
(34.8% to 33.4%), while the share of
capital profit increased (from 38% to
Although Frei has a more openly pro-
business bent than his predecessor, he
has also encountered a less auspicious
environment for his redistributive poli-
cies. For example, the government's
attempt to extend the 1990 tax reform, which was ini-
tially approved for a period of only four years, ran up
against implacable resistance from the business own-
ers' association as well as right-wing opposition parties.
Consequently, the Frei administration was stripped of
an essential tool to reduce social inequalities. The gov-
ernment's attempt to expand the labor reforms to
include non-unionized workers, who represent nearly
three-quarters of the labor force, has also run up against
a brick wall. After nearly two years, the government has
still not obtained parliament's approval for these modi-
fications. As a result, the Frei government's social poli-
cy has been unable to go beyond Aylwin's initial
achievements or to reverse the country's widening
income gap.
State social spending has historically been the princi-
pal mechanism in Chile by which social inequalities
were reduced and channels of social mobility opened.
Despite the best intentions of the Aylwin and Frei admin-
istrations to overcome fiscal constraints on social spend-
ing, however, insufficient resources have been directed to
social programs over the past few years, given the mag-
nitude of the accumulated social needs. In 1990, for
example, the government-mandated increase of family
allowances and workers' minimum pension payments
alone ate up half the total funds generated by the new tax
Vol XXIX, No 6 MAY/JUNE 1996
o o
An analysis of the overall impact on living standards
of the government's economic and social policies high-
lights how ineffectual social policy has become as an
instrument of redistribution. The reduction of poverty
in the first years of the Aylwin administration can be
largely attributed to economic growth, rather than the
new social policy. It's important to remember that the
expansion of employment, which began after 1989,
took place as Chile was recovering
from a severe economic recession.
Growth in real wages during this peri-
od was facilitated by the 1990 labor
reforms and government-mandated
increases in the minimum wage as well
as by the elimination of restrictions on
union activity. Furthermore, the drop
in inflation improved the overall pur-
chasing power of the population. Once
growth rates begin to stabilize and are
sustained by increases in productivity
rather than the use of idle labor capac-
ity, the benefits to the poor will begin
to taper off.
In addition, significant segments of
society have been systematically mar-
ginalized from the benefits of econom-
ic growth, at least in part because they Youth
lack the skills and training to join the
workforce. This "hard core of poverty"-subsistence
farmers, rural migrants to the cities, the elderly, and
women and youth who lack vocational training-will
only be reduced with the help of specific social policies
and programs. While the government has developed
social programs directed at the poorest, the amount of
resources directed to this sector remains meager. The
FOSIS, for example, represents less than 1% of the gov-
ernment's social budget-far too small to have any
enduring impact.
An important segment of Chile's middle class, which
fell into poverty during the military regime, has also not
benefited from economic growth or the government's
new social policy. The impoverished middle class lacks
the personal resources to pay for private services, but
has also remained largely ineligible for state benefits.
The hopes that this group in particular placed in Chile's
new democratic governments have been dashed, giving
rise to social protests, especially among teachers and
health-care professionals who work in the increasingly
beleaguered public sector.
More fundamental problem with Chile's social
policy is rooted in the model of social welfare
inherited from the dictatorship. Under the mili-
tary, the state reduced social spending and retreated
from the social sector by privatizing social services and
creating new institutions guided by the laws of the mar-
ket. A broad program of reforms, referred to as social
"modernization," transferred to the market and the pri-
vate sector the task of providing goods and social ser-
vices previously offered by the state. As a result, the
state's capacity to influence the living conditions of the
population through traditional social-policy measures
was significantly reduced.
s sell windshield wipers on a street corner in Santiago.
A brief look at the reforms of the social-security sys-
tem and the health-care sector reveals the underlying
principles that guided social reform under the military
regime. As these social sectors were privatized, new
institutions emerged that have fundamentally reshaped
the provision of social welfare in Chile. While the state
continued to provide limited benefits to the poorest, the
social sector soon became dominated by powerful pri-
vate institutions guided by the profit motive.
The old public social-security system in Chile was
based on combined contributions from workers, their
employers and the state that were distributed by the
government once the worker retired. Reforms initiated
in 1981 replaced the old system with a new one based
solely on workers' individual contributions, which are
administered by private, profit-making entities known
as the Administrators of Pension Funds (AFPs).
Workers who chose the new system were given "bonds
of recognition," which permitted them to transfer their
contributions to the old system into the AFPs. While
the traditional social-security system continued to be
administered and guaranteed by the state, strong incen-
tives-including a reduction of the payment rates from
23% to 13.5%-convinced most workers to switch to
the new system. The state had to pay out the accumu-
lated contributions of all those workers who switched
to the new AFPs, resulting in the systematic transfer of
state resources to the private sector. Every year, a quar-
ter of the state's social budget goes toward these pay-
outs. The impact on the old social-security system was
devastating: this crucial loss of resources generated a
deficit of nearly 5% of GDP within the traditional
social-security system, which will last at least until the
end of the decade.
Private medicine was also given a boost when the gov-
ernment authorized the
establishment of Insti-
tutions of Provisional
Privatization Health (ISAPRES). These
profit-making enterprises, has created a dual which resemble Health
welfare system. Maintenance Organi- zations (HMOs) in the
A private system United States, offer med-
ical services in exchange
with high-quality for an obligatory con-
services coexists tribution of 7% of affil-
iated workers' salaries.
with an Huge resources that once
sustained the state-run underf inanced clinics and hospitals were
public system. then transferred to the
ISAPRES, resulting in a
serious deterioration of
the public health system
and, consequently, of the health of the poorest who
depend on that system. By the end of the 1980s, about
half of the health-care contributions of workers, as well
as nearly 30% of state expenditures for the health sector, went to the ISAPRES, even though they provided
health-care services to only 12% of the population.
Because the ISAPRES are profit-making enterprises,
they have excluded elderly people, the chronically
infirm, those who suffer from preexisting maladies, and individuals with large families. These groups have
been pushed into a public health sector that is increas-
ingly underfinanced, understaffed and underequipped.
The majority of the ISAPRES affiliates cannot afford
plans that include coverage for costly diseases or
health problems. As a result, people suffering from ill-
nesses that demand expensive treatments have little
alternative but to turn to the public health system--
even though many of them have paid into the
ISAPRES system. The already inadequate public
health system is thus further overloaded. In addition, the ISAPRES do not engage in educational activities to
promote preventive health care, nor do they cover
maternity care or workers' compensation.
The privatization of social services has had important
implications for the process of capital accumulation.
Coupled with neoliberal economic reforms, including
the privatization of public enterprises, tax reductions,
and lower overall state spending, this type of social-sec-
tor reform has resulted in a transferal of most of the
country's internal savings to the private sector. The
AFPs alone have accumulated funds totaling nearly
25% of the GDP. By the end of the 1980s, they had
become one of the principal investment institutions in
the country.
The privatization of the social-welfare system has been
good for business, but it has seriously undermined the
efficacy and scope of state social policy as a redistribu-
tive tool. In effect, privatization has created a dual wel-
fare system, in which a private system with high-quality
services for high-income groups coexists with an
increasingly underfinanced state system for those who
cannot afford private services.
As a consequence of privatization, overall state social
spending has actually benefited the poorest the least. In
1993, for example, the wealthiest fifth of the population
received nearly double the amount of social spending
that the poorest fifth of the population received. This
distribution of resources is due less to the inefficiencies
of targeting strategies than to the high percentage of the
government's social budget that is transferred directly
or indirectly to the privatized social-service sector.
nefficiencies rooted in the persistence of centraliza-
tion, bureaucratic inertia, and institutional fragmen-
tation within state institutions present further barri-
ers to an effective social policy. In fact, despite all the
neoliberal hype, the archaic and inefficient state struc-
tures of the past have survived both the anti-statist rev-
olution of the military government and the modernizing
efforts of the post-dictatorship governments.
Decentralization, which was initiated during the
authoritarian regime and pushed vigorously by the
Concertacidn governments, has moved forward, as re-
flected in the new targeted social programs. In practice,
however, social policy continues to be designed at the
level of the central government. Moreover, the heavy
centralist legacy seems to reproduce itself at the local
level. The absence of well-trained functionaries in local
communities has conspired against effective decentral-
ization, and has reduced the efficacy of local initiatives.
The task of restructuring the state social apparatus is
admittedly formidable, given its complexity as well as
the existence of entrenched interests that continue to
resist change.
Despite these fiscal and institutional constraints, the
state does retain some leverage. Pinochet's social
reforms reduced the state's role in social policy, but
they did not wipe it out completely. While the private
sector is now largely responsible for financing and
directly administering social programs, the state is still
responsible for regulating private-sector activities and
setting standards. The state also retains the capacity to
determine which elements of social
policy should remain part of the
public sphere and which should
operate in conjunction with the
Yet, the Concertacidn govern-
ments have made little use of these
powers. If the government had
established stronger regulations
governing private social-service
enterprises, many of their most
egregious discriminatory and abu-
sive practices might have been
eliminated. For example, the high
operating costs of the AFPs, which
cut into the benefits paid to affili-
ates, could have been reduced by
effective regulation. The state could
Inefficient state
structures have
survived the
military's anti-statist
revolution and
the modernizing
efforts of the
have also imposed rules prohibiting the ISAPRES from
refusing to treat high-risk patients and costly illnesses.
Stricter controls over the transferal of state resources to
social-service enterprises in the private sector would
have mitigated the imbalance that now exists in Chile
between a well-funded private social-service sector and
a seriously deteriorated public one. Rules governing
mergers and takeovers might have thwarted social-
service enterprises becoming virtual oligopolies. These
harmful practices are extremely difficult to modify now
that they have become entrenched-and more impor-
tantly, legally sanctioned.
The critical defect of the Concertacidn
governments' social policy has been
their reluctance to revamp the social-
sector reforms implemented under
Pinochet. Neither the Aylwin nor the Frei
administration proposed modifications
in the newly privatized system of social
services and the dualism that underlies it.
This partly reflects the widespread belief
that privatization helped resolve the fis-
cal crisis that had characterized the state
social-welfare system for decades. At the
same time, the Concertacidn govern-
ments feared that given the social cost of
these reforms, Chilean society would
have bristled at the prospect of undergo-
ing new structural changes.
This continuity with the social-reform
model inherited from the military regime undercuts the
viability of government efforts to obtain real social
equality. By subordinating social programs to the logic
of the marketplace, the Concertacidn governments-
despite their best intentions-are incapable of countering
the widening chasm between rich and poor that the
neoliberal economic model itself generates. In this
model, the state assumes responsibility for ensuring the
subsistence of the poorest by providing them with direct
subsidies, but it renounces one of the principal social
functions it once fulfilled-promoting a genuine redistri-
bution of income.

Tags: World Bank, neoliberalism, Chile, inequality, social policy

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