Bachelet 2.0 in Chile

Last week, Chile swore in a new government, marking a shift from the centre-right government of Sebastián Pi?era to the left-wing Michelle Bachelet, who will serve her second term as President, having preceded Pi?era from 2006 to 2010.

Over the last few months, international media have focused on the social tensions and protests that marked Pi?era?s last couple of years as President and boosted Bachelet?s reformist campaign agenda. Since 2011, students and other left-wing activists, some of whose leaders have now entered Congress, have called for strong measures to tackle social inequality, widen access to public services, and improve education.

Bachelet championed their cause during her campaign and made bold promises to ?reform the whole system? and enact 50 reforms in 100 days, setting off concerns that she will steer Chile away from its course as a bastion of free market enterprise in Latin America.

Key points

1. Despite promises of bold reforms, Bachelet?s new government will not steer Chile off its current macroeconomic path. There will be policy continuity on major issues

2. Chile has enjoyed consistent growth for decades, grounded in strong institutions and pro-market policies

3. The world misjudged leftward shifts before. In Peru, Ollanta Humala?s populist rhetoric was a false alarm--he embraced free market policies

4. The Pacific Alliance has forged a cross-party and cross-border consensus that is locking member countries into free market paths, offering policy stability

5. Bachelet will face many challenges in office, including tax reform and a looming energy crisis

6. Her challenge will be to demonstrate that Chile?s current policies can deliver equitable social progress as well as growth

Unchanged investment climate

Years of being one of the friendliest business environments in the region, combined with high commodity prices, have contributed to Chile?s remarkable growth over the last two decades. Chile joined the OECD in 2010 and it is now on course to be a developed country by 2020. This success has bred both economic and political stability and created a strong investment environment.

In terms of economic policy, the new government is more likely to represent consistency than radical change. Given the focus of her agenda, Bachelet will be judged on her ability to share the proceeds of growth more equitably, but there is little risk that she will turn the tide of free market policies that have delivered such success.

Chile will remain one of the best places in the region to do business.

Peru: another false alarm

The world has misjudged leftwards shifts in the Andean region before. The election of Ollanta Humala in Peru in 2011 initially raised fears that Peru would abandon the free market policies that had delivered almost a decade of 6% growth.

A former military officer who once led an insurrection against former President Alberto Fujimori (who first set Peru on its free market path), Ollanta Humala ran on promises of new anti-poverty programmes to be funded in part by a tax on mining profits. His ascension gave rise to concerns that he would take Peru down the path of Hugo Chavez?s Bolivarian revolution in Venezuela, following similar shifts in Bolivia and Ecuador. Humala?s election resulted in a 12% plunge of the country?s stock market, prompting a temporary suspension of trading and fears of capital flight.

In fact, Humala (and his influential wife, Nadine Heredia) has been happy to let Peru ride the tidal wave of high commodity prices and a consumer and property boom that has consistently delivered higher growth levels even than those of Chile. The Economist Intelligence Unit has just predicted another 5 years of 6% growth in Peru, driven by its mining sector.

Stable trade policy

Today, it could be argued that Humala?s only economic move of real impact has been to join the Pacific Alliance, the free-market oriented regional grouping championed by his predecessor, Alan Garcia, and that also includes Chile, Colombia, and Mexico (Costa Rica will join soon and others are likely to follow).

Together, the Pacific Alliance countries represent well over 35% of total GDP and 55% of exports in Latin America and the Caribbean. All four current members display the political stability and responsible economic management that used never to be considered possible in the region. On the Pacific side of Latin America, it is becoming something of a hallmark. Chile is the poster child of this trend.

Some commentators have questioned Bachelet?s commitment to the Pacific Alliance. And while she has said little about the Alliance to date?only that it should not serve to exclude or antagonize other regional integration projects (read struggling Mercosur)?it is inconceivable that she will turn back on what has been accomplished so far.

Despite pressures in her coalition, the pragmatism of Bachelet will dictate that continued openness to foreign investment and regional cooperation is the best way of ensuring that her government can fund its social policy goals.

Limited reformist agenda

Significant internal and external challenges await Bachelet?s New Majority coalition, however. There are valid concerns that Bachelet has cover-committed herself, especially in the face of a decelerating economy and a drop in the price of copper, on which Chile is hugely dependent. She has little political maneuvering space and the scale of reform is arguably over-ambitious.

A major initial stumbling block, for instance, is likely to be the lack of political consensus over the country?s proposed new tax structure to finance Bachelet?s progressive reforms.

Some of Bachelet?s 50 reforms will include:

1. Energy policy: drafting an Energy White Paper outlining Chile?s national energy policy

2. Corporate taxes: a raise in corporate tax to 25% (up from 20%) and ending the ability to roll over earnings without paying tax on them (very likely to pass)

3. Education overhaul: to guarantee free education for all, Bachelet will need to woo independent votes in Congress for this to pass

4. Indigenous rights: creating a Ministry of Indigenous Affairs to promote and defend indigenous peoples? rights

5. Environmental protection: nominating a Presidential Delegate for Water Resources; creating a Service for Biodiversity and Protected Areas (to be part of the Ministry of Environment)

6. Healthcare: reforming health insurance (ISAPRES) and creating a State pension fund (AFP)

There are also fears that an economic slowdown could spark a rise in inflation and energy prices.

Chile is already on the brink of a major energy crisis. Spare energy capacity is very low and new large scale mining projects will soon add more pressure to the nation?s power grid. Hydroelectric dam projects have faced considerable opposition from environmental groups and indigenous communities.

Other alternatives, including fossil fuels?of which Chile is a net importer?and renewable energies, will have to be considered. Uncertainty about future energy prices is holding back vital mining investment ? some of which is heading to Peru instead.

Striking an equitable balance

These challenges will test Bachelet?s ability to balance the need for growth with the desire for social reform, all the while trying to keep a coalition together that will include a Communist government minister for the first time since Allende was toppled in 1973.

Nearly 25 years after the end of the Pinochet era, Chile is a remarkable regional success story ? a country that others are openly seeking to emulate and align with. However, democracy and growth have given rise to a new generation of citizens eager for even faster progress.

The challenge for its new President ? a challenge that is increasingly familiar to other Latin American leaders ? is to demonstrate that the current economic path, and the tough choices it involves, can deliver more equitable gains for all.

Related link: Speyside?s Chilean Political Briefing

Josh Bayly

Maria Pia Gazella

Fiona McCollum