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Online Extra: Chileans Sense Trouble Coming Their Way


Victor Espina was euphoric last year when newly inaugurated Chilean President Ricardo Lagos opened the doors of La Moneda, the fortress-like presidential palace, to the public. "I almost cried," says the 50-year-old convenience-store owner, recalling his initial anxiety at ushering his granddaughter past the stern-looking police guards into the bomb-scarred building that is a perennial reminder of Chile's violent clash between military rule and democracy.

Many Chileans were moved by their new leader's gesture. As the country's first socialist President since Salvador Allende's tragic death in the 1973 military coup, Lagos was widely viewed as a living symbol of Chile's democratic flowering after 17 years of military rule. But one year into Lagos' term, widespread optimism has given way to a sense of malaise.

Although economic growth was a respectable 5.4% in 2000 and is expected to top 5% this year despite an adverse global climate, Chileans are gripped by a feeling that the best years are now behind them. Unemployment remains high, business confidence is low, and consumers are reluctant to spend. Few analysts doubt that Lagos, 63, has the leadership skills needed to trigger another mood shift for the better. But he will have to move quickly and decisively if he's to prevent what some have dubbed a "psychological recession" from overshadowing his six-year mandate.

FAULTY COMPASS? When he took office on March 11, 2000, after narrowly defeating a right-wing candidate, Lagos inherited an economy that was on the mend. The Asian crisis pushed Chile into recession in 1999, causing the economy to shrink 1%. Lagos set out to prove that his "third-way" brand of socialism could restore Chile's lost luster, while making better progress in the fight against poverty. So far, that hasn't happened.

Chile's open economy and sound macroeconomic fundamentals remain the country's most important selling point for foreign investors. "We learned that it is just as dangerous for democracy to have a [military] general stage a coup as it is to have a populist Finance Minister," says Lagos. "You have to have healthy macroeconomic policies, period."

Yet many Chileans feel that their country's much-vaunted economic model, with its emphasis on export-led growth, has run out of steam. "Being on automatic pilot is no longer enough," says Hernan Somerville, president of the Chilean Banking Assn. "We need a change of course," he says -- using the catch-phrase of the day. However, few in Chile can agree on what exactly that course should be. "Our compass isn't pointing clearly the direction in which we should move. It's jumping all over the place, which means we're taking one step forward and then another step backward, and that creates uncertainty," says Guillermo Patillo, a economist at the University of Santiago.

Politics is partly to blame. With midterm congressional elections approaching, the Lagos Administration doesn't want to rock the boat. The December balloting will determine whether the center-left alliance that has ruled Chile for the past 11 years retains its majority in both the Senate and the Chamber of Deputies. Lagos is caught in a difficult game of juggling conflicting interests within the coalition, known as Concertación.

SOME SUCCESSES. Privatization is a case in point. After selling three state-owned water utilities, the government was poised to move ahead on selling the remaining 10. But the program was scuttled, apparently due to opposition from leftist congressmen who are loath to relinquish state control. Now, Lagos has latched onto a new idea: He wants to bid out management concessions on the existing sewer and water systems to private companies. The policy flip-flop has rattled investors. "The doubt people have is, which is the real Lagos?" says Aldo Lema, an economist at the Andres Bello University in Santiago. "We don't know what cards he is going to play next."

Other government proposals are downright scary to business. Particularly controversial is a bill, submitted to Congress last year, that would undo changes to the labor code introduced under the dictatorship of General Augusto Pinochet. The contents of the legislation have changed several times, swinging between "soft" reforms that are backed by both business and the unions (such as permitting work contracts, and thereby legal protections, for part-time workers) to so-called "hard" reforms (such as a prohibition on the hiring of replacement workers during strikes). Companies complain that some of these measures would make Chile's labor market more rigid, thereby raising their operating costs.

To be fair, Lagos' first year in office has also been marked by some successes. Who could have imagined a year ago that Chile's increasingly independent courts would order the arrest and trial of the once-untouchable Pinochet and key members of his security apparatus on human-rights charges? On the international front, Lagos has shown a clear commitment to globalization by pressing the U.S. to launch negotiations for a bilateral free-trade accord. He has also stuck with a program of unilateral tariff reductions that will cut import duties down to 6% by 2003, from 8% last year.

VALLEY OUTPOST. Last, but not least, the President has led a bold marketing campaign pitching Chile as a haven for high-tech companies. In November of last year, Lagos traveled to the U.S. to meet with industry leaders, including Bill Gates of Microsoft, and in March, he inaugurated an investment-promotion office in Silicon Valley. "Globalization means more than just selling wine and salmon to the world," Lagos argues.

Then there's the public-relations blitz at home, where Lagos makes daily television appearances in the company of some of his key ministers. The President undoubtedly scored points with citizens by opening up the presidential palace. But increasingly fewer passersby these days are tossing coins into the fountain that adorns La Moneda's courtyard. Maybe Chileans know it'll take more than good luck to pull the country out its current rut. By Louise Egan in Santiago


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