Chile's Success Proves Neo-Liberalism Works

(International Relations and Security Network, 16/01/2006)


Michelle Bachelet, a former Chilean defense minister, torture victim, and divorced mother of three, won the Chilean presidency with over 53 per cent of the vote, official results revealed on 15 January.


Bachelet is closely aligned with Chile's ruling Concertacion party, which has dictated Chilean politics since 1990. Its adherence to neo-liberal economics, its respect for free trade, and its impatience with corruption has kept it in power for 15 years. Bachelet's administration will do little to break the continuity that proves that neo-liberal politics, in an environment of little to no corruption, actually works.


Concertacion now holds a slim majority in both houses of Congress and, while loyal to Chile's president-elect, will not allow her to make any major policy shifts. "We must remember that Michelle Bachelet came to power supported by the Concertacion party, which has been in power from 1990 until today," Chilean political scientist and Central University professor Patricio Gajardo told ISN Security Watch on Monday.


"One can evaluate [her] presidential campaign with two stages. At the beginning of last year [we saw] Bachelet distancing herself from the government, but in the second round of the elections, she clearly was more close to the government, identifying herself with the work of Concertacion," Gajardo pointed out.


He argues that apart from her charisma and political savvy, Bachelet cannot forget her close alliance with Chile's ruling political party. It is an alliance that will, more than anything, temper her administration, which begins on 11 March.


Her strong mandate will be challenged by a number of hurdles that remain in Chile's path to continued economic stability and regional leadership. Exports, economy, and energy top the list. She must also prove that Chile will not take a turn to the left, as her socialist politics - and past experiences in alliance with Chile's first socialist president Salvador Allende - may indicate.


To the right of the region's left


Reactionary observers have indicated that Bachelet has cemented the region's slide to the political left. Chile remains on the list of countries governed by self-proclaimed socialists. Two of Chile's three neighbors, Argentina and Bolivia, have embarked on a decidedly leftist agenda. And the future of Peru, while uncertain, seems likely to lean farther to the left in the name of nationalism espoused by presidential candidate Ollanta Humala.


Bachelet's administration, however, will not join the ranks of Venezuelan President Hugo Chavez and his hopes for a strictly socialist agenda in South America. She is more likely to align herself with Brazil and remain careful not to distance Chile from the US or the EU.


Natural resources and exports


Perhaps the only characteristic Chile and Venezuela have in common is over-dependence on state-run exports in natural resources. Venezuela's economic weakness sits squarely on the price of oil. Similarly, Chile's economic prowess relies in large part on the price of copper. Bachelet's first priority is to diversify her country's export portfolio.


In the heat of campaigning and promise making, Bachelet made pledges that spoke strongly to policies of social inclusion. Her vows to better meet the needs of women and the poor will not be forgotten, but before she can begin spending money on her political base, she must focus on Chile's export portfolio, which is dangerously reliant on copper.


The price of copper plummeted in 2001 to 15-year lows, greatly affecting the Chilean economy and forcing many there to wonder if Chile would ever reduce its reliance on the red metal. Since then, copper prices have rebounded, due largely to increased demand out of China. Recent agreements between Chile's state-run copper company, Codelco, and Chinese mining company, Minmetals, will supply China with copper for the next 20 years.


So far so good, but the Chilean economy relied on some 45 per cent of its export revenue from the sale of copper last year, according to the Economist weekly magazine. Chile's outgoing Finance Minister, Nicolas Eyzaguirre, predicted that the Chilean economy would grow at a rate of 5.5 per cent a year, given no major world economy shocks. This growth relies on consistent high demand for copper.


Given copper's current record prices, it is likely the price will fall at some point during Bachelet's administration, which may hurt growth. Bachelet's challenge is to make sure that the Chilean economy has the export diversification to withstand this possibility.


Natural gas still a concern


When it gets too hot in Buenos Aires, Argentina cuts off gas to Chile. The same happens when it gets too cold. Argentine gas exports to Chile are tightly controlled. Argentine President Nestor Kirchner has publicly stated that he would not export gas to Chile unless the needs of Argentines were met first. So far, he has kept that promise, contributing to what has become a simmering energy crisis in Chile.


Until the late 1990s, Santiago's power plants were run on diesel gas generators, whose output of pollutants contributed significantly to winter-time smog. Once natural gas replaced diesel as the fuel of choice for these generators, smog levels noticeably decreased. The absence of natural gas has led to an increase in smog in Santiago, a considerable public health concern, considering most of Chile's 16 million inhabitants live in the capital city. The lack of natural gas in Chile has also contributed to an electricity crunch, felt each time Argentina closes the natural gas spigot.


A liquid natural gas port currently on the table for financing makes up part of the promise for more increased energy security in Chile. Another project also on the drawing board would link Chile's northern natural gas lines with piping entering Chile from southern Peru before making a junction with Argentina. Presumably this link would benefit Chile by reducing the strain on Argentina's natural gas supply.


So far these plans are on hold because political instability in Bolivia - part of the planned energy ring - gave investors cause to wait. Competing gas pipeline projects in Peru, which would pipe gas slated for Argentina to Peruvian liquefied natural gas ports for export, have also stalled plans for the multi-billion dollar energy ring.


Observers are still waiting to see what importance Bachelet places on Chile's energy situation. Most agree that it will be a challenge for her administration, and if it is hot in Buenos Aires this austral summer, Chileans may feel an energy crunch even before Bachelet assumes her post in mid-March.

"We are still waiting on who is going to form the energy team in the [Bachelet] government," Cambridge Energy Research Associates' Southern Cone Assistant Director Sophie Aldebert told ISN Security Watch on Monday. "But during the campaign, Bachelet commented on the importance of energy security so I would expect a focus to remain on those issues," she added.


Chile's regional role


Bachelet is decidedly the most conservative of her socialist comrades in South America. Bachelet will likely not depart from the path set by her predecessor and friend, outgoing Chilean President Ricardo Lagos. Her administration likely will be marked by decisions that lead the Chilean government to more transparency, and perhaps more socialist programs to help assuage poverty and improve education - but she is no Chavez.


Chile's regional role is to maintain solid economic growth, proving that less corruption and more sound fiscal policy does lead to prosperity. Ironically, this is the very message given by the much-hated "Washington Consensus", whose failure in countries such as Argentina, Bolivia, Venezuela, and Ecuador has, in part, put these countries' current leadership in power.


Chile has managed to follow the rule of neo-liberal economics and prosper at the same time. Such success is in stark contrast to other countries, such as Argentina, where studious stewardship of neo-liberal policies seems to have led to disparity and ruin. Chile's success and reputation of a serious country where corruption is not tolerated paints the picture that economic ruin is consistent with high levels of corruption, not neo-liberal economics.


Strong economics, coupled with a successful democratic mechanism, makes Chile the beacon of hope and a regional success story for government officials in the US and Europe. Chile's pursuit of free trade agreements with South Korea, China, and now Japan, prove to increase this small nation's popularity in Asia - increasingly a region of global demand for imports.


As a leader of South America's success story, Bachelet would do well to project her country's leadership to those pockets of South America where desperate hope has fed populist leaders who have not proven yet that their model is better than neo-liberalism. Chile is proof that without rampant corruption, market-driven economic policies do work. Bachelet's election will not change that fact.