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Welfare Doesn't Have To Be Habit Forming Just Look At Chile


Economic Viewpoint

WELFARE DOESN'T HAVE TO BE HABIT-FORMING--JUST LOOK AT CHILE

Welfare systems have failed everywhere--except in Chile, a Second World country that has only recently emerged from Third World status. Why can Chile make welfare work, but not the U.S., France, or Germany?

The answer is that in Chile, welfare is neither an entitlement nor an open-ended expenditure, and the system is carefully crafted so that it does not result in dependency. Welfare goes to those who help themselves, and it cannot become a lifelong crutch.

Consider the housing subsidy. There are a reasonable but limited number of these each year. The subsidy takes the form of a grant toward the purchase of a house. The grants are open to competition. To enter the competition, a person must have accumulated private savings. There is a point system, and those who accumulate the most points have the best chance of receiving the subsidy.

Ernesto, a cab driver, described to me how he had become a homeowner. In 1990, he opened a special savings account in a private bank for the purchase of a house. For the next five years, while driving a cab, he managed to save slightly more than the agreed monthly amount, thereby demonstrating determination, discipline, and commitment. By 1995, his savings gave him a good standing in the point system, and he succeeded in his application for the subsidy.

The combination of his savings and the subsidy allowed him to obtain a mortgage for which he could afford the monthly payments. Because the housing subsidy rests on personal sacrifice and private ownership, low-income housing in Chile is not in the run-down condition of public housing in the U.S.

LUNCH SUBSIDIES. Chilean unemployment policy also places primary responsibility on the individual. There are no unemployment payments as such. Instead, there are training programs financed by the Labor Ministry and tax incentives for private companies. The beneficiary receives a three-month course during which he or she receives a subsidy to cover lunch (the main meal of the day) and transportation. Women who can read and write and are heads of households are provided with child care and with a monetary payment while undergoing on-the-job training. The training programs are designed to help dislocated workers and those people seeking jobs for the first time.

At the municipal level, there is a subsidy available for low-income, unemployed residents. According to a Planning & Cooperation Ministry official, the amounts are kept very low so as not to foster dependency. The number of recipients of the subsidy is declining. In short, Chileans are expected to work and look after themselves and their families.

A compassionate North American might dismiss Chile's welfare system as the penury of a Latin American country and fail to appreciate its advantages in preventing the formation of welfare dependencies. The Chilean system is the craft of the military government, which had no need to buy votes with handouts. With its flock of University of Chicago-trained economists--the "Chicago Boys"--Chile's military government was the best-advised government in the world. The economists understood the blind alleys of compassion and the benefit of incentives that prod people to success.

FRUSTRATED. After putting in place a constitutional order and a privatized economic system, the military government stepped down. Since 1990, the country has been under democratic rule, and its politicians are finding that the way Chile is constructed, they have little to sell to the electorate for votes. Frustrated, the politicians are expanding welfare programs, and there is legislation before congress that proposes to establish unemployment insurance.

Chile's unprecedented prosperity and employment make these programs unnecessary, and the introduction of social welfare programs that have failed even in the most economically advanced countries will harm the long-term prospects of Chile and its citizens. However, the programs do serve the interests of politicians, who feign compassion while they carve out welfare dependencies to ensure their political futures.

In the 1970s, New York City argued for federal subsidies for its welfare system on the grounds that the city attracted a disproportionate share of poor people. The city did not understand that its system of welfare benefits, generous relative to other places, both attracted and created poor people. Compassion and politics made the city blind to economic incentives. With any luck, Chileans will perceive the self-interested nature of the politicians' offerings and continue on their course of success.BY PAUL CRAIG ROBERTS


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