July 9, 2015
Chile’s Socialist president, Michelle Bachelet, was once one of the most popular leaders in Latin America, but a year into her second term in office her popularity has plummeted. One cannot engage in political discussion anywhere in Chile without hearing strong criticism of her government. According to the Santiago-based Center for Public Studies (CEP), by late April just 29% of respondents approved of her leadership, while 56% disapproved. More recent polling has her disapproval rating up to 65%. These levels of disapproval are almost as high as those obtained by her predecessor, the conservative Sebastian Piñera.
Bachelet was elected with 62% of the vote, so what explains the current downturn? The strongest public disapproval—much of it predictable and ideological—has come from right-wing and middle-class business owners, and has been directed at recent tax and education reforms. Indeed, bills introduced during her new term focusing on education, tax reform, labor, and the decriminalization of abortion, have all proven unpopular. But the wave of political scandals that has made headlines in recent months may be more telling as they have alienated her from much of her center-left base.
The tax reform approved in September of 2014 is intended to increase tax revenue in order to finance education, health and other public services. While it reduces the highest tax rate from 40% to 35%, it aims to significantly increase the taxes paid by businesses. Beginning in 2018, business owners will be taxed on total profits, as tax exemptions on reinvested profits, via the Taxable Profits Fund (FUT), will cease. While the FUT has been used to defer paying taxes, sometimes indefinitely, pro market critics say it has served as an important tool for spurring investment.
These conservatives say this reform will cause instability, leading foreign investment to decline. However, an Economic Commission for Latin America and the Caribbean (ECLAC) study notes that despite Chile’s recent economic slowdown, foreign direct investment rose by 14% in 2014, while it dropped by 16% in the rest of Latin America. ECLAC’s Alicia Bárcena noted in an interview: “Chile is not the only country in Latin America that has enacted tax reforms.… Foreign investors come from countries that have adopted similar reforms…”
The situation became complicated for Bachelet in 2014 when tax reform and fraud converged in what became known as the Penta case. Internal Revenue System officials were accused of colluding to help 122 taxpayers obtain fraudulent tax refunds from the FUT. In return, the officials received kickbacks from the individuals who benefited. One of these was Hugo Bravo, director of Penta Bank. Prosecutors discovered that controlling partners of the Penta Group, Alberto Délano and Carlos Eugenio Lavín, claimed greater expenses than they actually had. When Hugo Bravo was dismissed from his post, he revealed to prosecutors that payoffs had been made to political campaigns—mainly those of the right-wing party, the Independent Democratic Union (UDI).
Even though in Chile it is legal for companies to donate money to political campaigns, this is supposed to be done anonymously in order to avoid influencing a candidate’s future decisions. During the Penta investigation, prosecutors discovered fraudulent receipts belonging to Sebastian Pinera’s undersecretary of mining, Pablo Wagner. This led to a case against a mining company called Soquimich, whose main shareholder is Julio Ponce Lerou, former son-in-law of Augusto Pinochet. Ponce Lerou stands accused of issuing illegal false receipts to finance political campaigns on both the right (UDI) and the left (the governing New Majority).
Another scandal involves President Bachelet´s son, Sebastián Dávalos, who is married to the owner of the real estate company Caval. As project manager, Dávalos planned the purchase of three plots in Machalí in southern Chile, with full knowledge that the land’s value would multiply after rezoning and new urban development. Caval needed $6,500 million pesos upfront, which they used their political connections to obtain through Andrónico Luksic, vice president of Banco de Chile and one of the richest people in the country. Later, Dávalos and Compagnon sold the land for $9,500 million pesos, pocketing a windfall of $2,500 million pesos.
The case went public when a consultant sued Dávalos for non-payment, provoking an investigation. Dávalos subsequently resigned as director of the Social-Cultural Area of the Presidency and from his membership in the Socialist Party.
In response to these scandals, President Bachelet commissioned a report from a Presidential Advisory Commission, “Comisión Engel”, which proposed guidelines to regulate the financing of political campaigns, links between business and politics, conflicts of interest, and influence peddling and corruption. While the commission’s guidelines are merely considered recommendations, the public expects to see these reforms implemented.
Michelle Bachelet’s education reforms, for different reasons, have provoked ire from both the right and the left. The right has objected to reforms that involve banning profits, tuition fees, and selective admissions in privately owned primary and secondary schools which receive state subsidies. But the proposed reforms have also provoked discontent among university students and led to widespread protests, resulting in serious injury to Pontifice Universidad Católica student Rodrigo Áviles, who is currently in critical condition as a result of police violence. Teaching accreditation will be changed and a controller’s office will be created to oversee universities.
On May 21, President Bachelet guaranteed free, complete and effective higher education, without grants or loans, to many of the most vulnerable students enrolled in public universities. However, leftist students complain that this reform will benefit only a minority of the approximately 720,000 students currently enrolled in the country’s university system. According to the NGO Educación 2020, students who attend private and autonomous universities (an estimated 340,000) will remain excluded, which means just over 386,000 students will benefit.
However, another requirement has been added: students must be from the 60% of the most economically vulnerable sectors of the population. Only families with a maximum of $200,000 pesos per capita qualify, meaning that the total number of students who will now have access to free education will be just over 232,000. These changes were strongly criticized by students because they do nothing to end the profit motive in the education system, nor do they fully satisfy the demand for free education.
Disappointment in Bachelet’s second government is widespread and growing. Small entrepreneurs believe that they will not benefit from tax reforms. Recent political scandals only contribute to a general mistrust of the government. Education reforms are promoted under the banner of “free education for all,” but in fact serve only a minority of the most marginalized students. It remains to be seen how Bachelet will weather this discontent, and whether or not she can effectively deal with the corruption that threatens to undermine her ability to govern.
Consuelo Cortés Abad is a law school graduate in Santiago, Chile. Her writings on gender topics have been published by the newspaper El Mostrador.
