A new social contract and constitution should still be Chilean…
A modern conversation on socialism in the United States usually dies with the verbal sword: “Do we want to become Cuba, Venezuela, or the Soviet Union?” In Latin America, socialism finds life support with a few simple words: “Look at the Nordic countries.” The comparison unfortunately is laden with misconceptions about policies in the countries and falsehoods on democratic socialism.
Far from being socialist, the Nordic countries are quite laissez-faire with market-driven policies. Where Cuba, Venezuela, and the Soviet Union models aggressively confiscate means of production and resources for the state, the Nordic countries provide opportunity for capital and wealth generation albeit mixed with high taxes and high social spending. That said, corporate taxes are relatively low, private property is protected, free trade is sacrosanct, and market institutions are respected by the state.
Thus, as the assembly to write a new Chilean constitution is elected and Chileans ponder the new social contract for the country, many in the socialist camp should be more honest with their followers: Chile cannot be a Latin American version of a Nordic country, but it can be a better version of itself. To suggest otherwise is to both downplay the realities of the Nordic economies and the challenges of Chile and the greater Latin America.
The Nordic Countries: Perspective and Narrative
Extractive Resources and Wealth
First, Extractive industries help pay for the high social costs of the Nordic countries. Norway has built significant wealth through the export of oil, especially through the Government Pension Fund of Norway (more commonly known as the Oil Fund) which was established in 1990 to invest surplus revenues on behalf of the country. Sweden and Finland equally have built state treasure chests through the export of iron and forestation, respectively.
Denmark may be the possible exception in the group only because the country, which has been extracting oil and gas from the North Sea since 1972, is vowing to end oil & gas extraction by 2050. Many observers are in wait-and-see mode on that pledge as it is likely Denmark will work very hard before then to find alternative methods to cut greenhouse gas emissions (plus, a pledge for something in 2050 is likely to be changed in some manner before then…).
Chilean policymakers can find commonality with the Chile having an abundance of copper. The country also has the Economic and Social Stabilization Fund (ESSF) which takes surplus revenues from Chile’s copper exports and invests it to cover fiscal revenues when copper prices decline. This fund, alongside the Pension Reserve Fund, have helped to smooth revenue and spending over time by the government but are no match for the $1.2 trillion being managed by the Norway Oil Fund. Simply put, the Nordic countries are playing with bigger buckets of cash, particularly when compared to population size. Chile’s population is roughly equal to the combined populations of Denmark, Finland, and Norway. It is little less than 2x the size of Sweden. More cash and less people make for easier decisions.
Homogeneity in Ancestry and Opportunity
Not only does population size favor the Nordic countries when distributing financial resources, they equally benefit from the homogenous nature of their populations which has only recently changed. There is something to be said for having a population that looks alike and sound alike…that said, Norway’s and Sweden’s immigrant population today hovers around 15% and 25% respectively which has created some uncomfortable moments.
Chile, however, is a state that struggles with an indigenous population, such as the Mapuche, who have long been at odds with some state policies, and a growing number of immigrants from other countries, such as Venezuela. The indigenous and immigrant population account for roughly 20% of the population with the immigrant population rising from 1.8% in 2010 to 7.8% in 2019, according to an estimate by the Jesuit Migrant Service. Venezuelans account for 31% of that immigrant population and continue to grow with the Venezuelan state crashing ironically under its aggressively socialist policies.
The politics of diversity is further complicated by the conspicuous differences in work. The unionized nature of work — salaried and with vast worker’s benefits — in the Nordic countries is distinctly different from the Chilean (and greater Latin American) economy which includes smallholder agriculture and a sizeable informal economy, both of which are most at risk of a health pandemic (i.e., covid-19), climate change, or a slowing global economy. Those working in agriculture and the informal economy are generally paid less, require more social benefits from the state, and are disproportionately immigrant or indigenous — the combination of which is a political minefield even for the most astute politicians.
The Nordics Countries in the 1970s and 1980s
The 1970s and 1980s version of the Nordic countries struggled until implementing some market reforms. The countries were rightfully forced to abandon failing sectors and aggressive labor practices to escape inflation and currency issues. Sweden had to employ a series of currency devaluations from 1976 to 1982 to stay competitive. Norway followed suit with a couple currency devaluations and only evaded greater fiscal problems because the oil price shock in 1979 benefited the country’s topline revenue.
The Nordic countries were also forced to accept the reality of pension reform and tax cuts. It is these changes plus the introduction of school choice and strengthening of private property rights that dramatically transformed socialist Nordic countries into market-friendly countries and ultimately extricated these countries from the orbit of the socialist examples in Cuba, Venezuela, and the Soviet Union.
The Chilean Challenge
Hundreds of thousands of protestors poured into the streets in Chile last year with calls for higher wages, strengthened pensions, improved health care and better education. The vote to change the Constitution followed from that as Chileans focused on the history of the current constitution and its limitations.
Drafted during the military dictatorship of General Augusto Pinochet and ratified in 1980, the Chilean constitution is largely considered an impossible document to change as the current structure requires any new proposal for change to be subjected to the strict scrutiny of a constitutional tribunal. Laws that address the military, the electoral system and political parties, and education among other topics require a supermajority for approval. The Constitution ultimately enshrined the neoliberal and free market nature of the current Chilean state, as was intended by the group of prominent Chilean economists — otherwise known as the Chicago Boys — who studied at the University of Chicago under economists Milton Friedman and Arnold Harberger and advised General Pinochet.
Today, while the proposal to draft a new constitution enjoys widespread support, critics of this exercise argue that it would be a mistake to scrap the document (and policies) that have been instrumental in Chile’s economic success. Critics appreciate the concerns surrounding inequality in the country but also argue that income inequality sadly has been a growing trend across many economies inside and outside Latin America and requires creating more economic opportunity rather than creating a socialist state. The nuances of that effort inherently require parsing the threads of differences in policies between such states as the Nordic countries, the United States, and possibly Western Europe. There exist no clean, quick package of policies that can fix inequality.
The truth of the matter is all economic successes, in most instances, have created great wealth for many individuals regardless of economic system but also left many behind economically. Democratic socialists would have to concede nevertheless that free market economies have ensured that people are more incentivized to be entrepreneurial, create new ideas, and strive for greater wealth generation and capital appreciation. Free marketers would have to concede that there needs to be a social safety net that ensures the basics for all citizens in the country (let us avoid the discussion of who is a citizen for now). That social safety net includes basic education, public transport, and basic health care (i.e., a covid-19 vaccination program).
Furthermore, there will be policy questions that a new constitution cannot solve. Most notably, Chile (and its Latin American counterparts) struggle with a sovereign payment plan for social programs. The upper end of the Chilean personal income tax rate is 35% with President Sebastián Piñera suggesting the country can increase the tax rates on the rich. But those tax hike advocates should take note how high taxes in Argentina, including the wealth tax, did not cover for exorbitant spending and borrowing. Downward spirals of borrowing and spending have also plagued Ecuador, which is another country in an election year who also had to restructure its debt last year. Talks of closing tax loopholes make logical sense and play well in political theatre but will never cover for excessive spending.
At the end of the day, as the proponents and skeptics alike work to rewrite the Chilean Constitution — or more appropriately underwrite a new “social contract” — copying and pasting the Nordic model would not provide the appropriate appreciation for the history of the Nordic countries and Chile. Winston Churchill once wrote, “Those that fail to learn from history are doomed to repeat it.” Lessons from the past may not ward off mistakes and failures, but they surely can provide insights into the present and possibly the future. In other words, the impulsive desire to scrap all that has been instrumental to Chile’s economic (and social) successes (in an economically complicated region) should succumb to the more rational approach to examine, evaluate, and then change where appropriate and necessary. There is a reason most great artists or athletes have reporters asking if they are a replica of the last great artist or athlete only to have that great talent remind such reporter that he or she studied previous greats and adopted certain skills and habits where appropriate. Chile should take the same approach on its way to its own version of greatness.
The article was originally published in “The Musings Of A Politics Junkie & Closet Economist.” To read more, please visit the website.