Bloomberg News

Protesters Push Chile to End 30 Years of Fiscal Austerity

September 16, 2011

(Updates with finance minister’s comment in eighth paragraph.)

Sept. 16 (Bloomberg) -- Katherine Barrios’ five years at a Chilean university left her with debts of about $26,000, more than twice her annual salary as a teacher. It also ensured her support for protests that have shuttered many schools for three months and threaten to undermine 30 years of fiscal austerity.

“It’s like paying a mortgage,” Barrios, 31, said in a phone interview. “That is why we are protesting. I want things to change for coming generations.”

Chile, the model of economic and political stability in Latin America for the past 20 years, has in recent months been rocked by protests after a quarter of a million pupils occupied classrooms in June to demand more state investment in education. On Aug. 25, the weekly protests degenerated into pitched battles with police, who drenched the center of Santiago in tear gas.

Meeting students’ demands may cost 2.2 percent of gross domestic product, the Santiago-based Universidad de Chile estimates, denting the spending restraint that has eliminated the country’s debt. Failure to improve education may prevent Chile from making the leap to become the region’s first advanced nation this decade, as pledged by President Sebastian Pinera.

“Chile will never, ever become a developed country without an improved education system,” Cesar Perez-Novoa, a managing director of Santiago-based brokerage Celfin Capital SA, said in an interview by phone. “This is a wealthy country where there has been economic stability that hasn’t come with education.”

Bearing the Cost

Households bear the cost of 39 percent of all education spending in Chile, higher than the other 33 members of the Organization for Economic Cooperation and Development and almost double the U.S. rate, according to the Paris-based group. Yet, education levels are worse than all other OECD members except Mexico, according to an OECD survey.

Chile ranked 31st in the World Economic Forum’s latest Global Competitiveness Index. To become an innovation-driven economy, Chile needs to improve education, where it ranks 87th, said the Geneva-based organization that hosts the annual meeting of business and political leaders in Davos, Switzerland.

Education “is our Achilles heel,” Finance Minister Felipe Larrain told reporters Sept. 6 after unveiling results of the index.

A lack of qualified professionals is a “threat” to the development of the mining industry in Chile, Diego Hernandez, chief executive officer of Codelco, the world’s largest copper producer, told the annual gathering of the copper industry in April. State-owned Codelco will spend almost $20 billion on revamping its mines this decade.

Austerity

While limiting outlays on education, Chile’s austerity helped it emerge from a financial crisis in the early 1980s to become the only Latin American country with net savings, equivalent to 7.6 percent of GDP as of March.

That austerity has helped control inflation, attract foreign investors and keep interest rates low, fueling economic growth that averaged 3.7 percent from 2005 to 2010. The government is targeting a fiscal surplus of 1.3 percent of GDP this year.

Investors have shrugged off the stalemate between students and the government. The yield on government 10-year dollar bonds fell to a record 2.98 percent on Sept. 2 from 3.56 percent a year earlier as soaring copper prices offset concern that the protests will force Pinera to boost spending.

Chile’s peso strengthened 3.9 percent in the past year, the biggest gainer among major Latin American currencies tracked by Bloomberg, as the price of copper climbed 15 percent.

As the government pledges more money for education, it may have to permanently raise corporate income taxes to 20 percent from 17 percent, Economy Minister Pablo Longueira said in an interview published by Santiago-based El Mercurio on Sept. 10.

‘Shameful’

After paying one year of her course herself, Barrios in 2006 resorted to taking out a student loan that the government said had to be with Banco Falabella. The Santiago-based bank charged more than 5 percent above inflation, which was 2.6 percent at the time, even though the credit was guaranteed by the state, she said. After borrowing about 4.4 million pesos ($9,200), she will pay back about 12.4 million.

“That was the only credit available to me, and the interest is shameful,” she said.

The government has offered to cut the interest rate on loans to 2 percent above inflation and to provide more scholarships. It’s not enough, say the students.

“This is of course a crisis,” Jorge Sequeira, director of the United Nations Educational, Scientific and Cultural Organization’s Latin America bureau for education, said in an interview. “It all started with the level of indebtedness and the impact that has on household income, especially the poor and middle class.”

Profit Driven

Chile’s profit-driven education model took shape during the dictatorship of Augusto Pinochet, who turned higher learning into a “pay-as-you-go” system, Martin Carnoy, an education professor at Stanford University near Palo Alto, California, said by phone. As part of a plan to privatize everything from utilities to the country’s pension system, Pinochet cut funding for state-run universities that were a hotbed of opposition to his 1973-1990 military rule.

Pinera, whose brother oversaw Pinochet’s introduction of the private pension system, has pledged to improve education, while maintaining tight control over spending. The crisis has helped make the billionaire the least popular president since the end of Pinochet’s rule and already forced the exit of one education minister.

Fiscal Discipline

“Some say you have to forget about fiscal discipline in the face of social demands,” Minister Larrain said on Sept. 13. “We won’t change our commitment by one millimeter and won’t abandon fiscal responsibility.”

Student leaders say it is time for the poor and middle classes to receive more of the benefits from three decades of growth. Households pay 21 percent of primary, secondary and post-secondary schooling in Chile, the highest level in the OECD, according to the organization.

Demonstrations often resemble a carnival as protesters stage dances and dress like characters from Hollywood films “Pirates of the Caribbean” and “V for Vendetta.” Drawing comparisons with the so-called Arab Spring protests in the Middle East, the media has taken to calling the youth-led movement the “Chilean Winter.” Other protests have involved a kiss-in and a 1,800-hour relay run around the presidential palace.

Garnering Support

“We’re seeking a complete restructuring of education,” said Esteban Gutierrez, a 24-year-old university student, during a break from playing drums at this week’s protest. “We are going to keep protesting.”

The party atmosphere has helped garner support from about three-quarters of Chileans, Santiago-based pollster Adimark GfK said in a Sept. 5 survey of 1,112 people. The poll from Aug. 3 to 31 has a three percentage point margin of error.

Still, the marches often turn violent, with riots erupting in major cities around the country. A 16-year-old-boy died Aug. 26 during clashes with police in Santiago at the end of a two- day protest.

Unless students begin to give way on some of their demands, the marches may continue until the government agrees to dig deeper. Students have scheduled demonstrations for Sept. 22 and Sept. 29 after the government rejected their conditions for restarting talks that stalled earlier this week.

“These kids have been very, very brave,” Barrios said. “It’s hard to understand how the authorities can be so deaf. They don’t listen to peoples’ demands.”

--With assistance from Matt Craze, Sebastian Boyd and James Attwood in Santiago. Editors: Philip Sanders, Joshua Goodman

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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