When we think of South America, we usually don’t really look into the actual lives citizens have there and more about what is exported from their culture. When we look into the lives, it isn’t very pleasant compared to say North America or Europe. Using my country Colombia as an example, you can see why. Corruption, crime, and poverty aren’t that uncommon. If we have military soldiers with tanks and assault rifles patrolling the streets to replace the police, you know something isn’t right.
One country has managed to really pull itself out of the ground and up in the developed country category: Chile. What has helped Chile become this successful, some of you may be wondering. The answer can be summed up with this:
- Chile manages to beat the corrupt cliche by having low degrees of corruption and a high degree of bureaucratic transparency.
- Chile continues to record solid economic growth despite the collapse of commodity prices (like copper).
- Once commodity prices recover, its economy will resume growing rapidly with recent weakness offering a handy entry point for Chilean ETFs or ADRs.
- It offers investors considerable investment opportunities without taking on the risk inherent in investing in other emerging South American economies (like my country Colombia).
Of course, this is only the results. What matters is how it was achieved. The way it was achieved is simple: economic freedom. The story of Chile’s success starts in the mid-1970s when Chile’s military government abandoned socialism and started to implement economic reforms. In 2013, Chile was the world’s 10th freest economy. Let’s compare Chile’s stats to Venezuela’s, who sacrificed their libertarian market economy for social democracy and mass nationalization with it now being the world’s 2nd least free economy in 2013, only being beaten out by North Korea.
1. As economic freedom increased, so did income per capita (adjusted for inflation and purchasing power parity), which rose from being 31 percent of that in Venezuela to be 138 percent of that in Venezuela. Between 1975 and 2015, the Chilean economy grew by 287 percent. Venezuela’s shrunk by 12 percent.
2. As its economy expanded, so did Chile’s ability to provide good health care for its people. In 1975, Chile’s infant mortality rate was 33 percent higher than Venezuela’s. In 2015, almost twice as many infants died in Venezuela as those who died in Chile.
3. With declining infant mortality and improving the standard of living came a steady increase in life expectancy. In 1975, Venezuelans lived longer than Chileans. In 2014, a typical Chilean lived over 7 years longer than the average citizen of the Bolivarian Republic.
4. Last, but not least, as the people of Chile grew richer, they started demanding more say in the running of their country. Starting in the late 1980s, the military gradually and peacefully handed power over to democratically-elected representatives. In Venezuela, the opposite has happened. As failure became more apparent, the government had to resort to ever more repressive measures in order to keep itself in power—just as Friedrich Hayek predicted.
Now let’s take a look at the economy and how it is structured.
- Rule of Law: Property rights and contracts are strongly respected, and expropriation is rare. The judiciary is independent, and the courts are generally competent and free from political interference. Although Chile remains one of South America’s least corrupt countries, several scandals (including one involving the president’s son) continue to shake public confidence. Corruption was the top political concern of more than one-third of Chileans in 2016.
- Government Size: The top individual income tax rate has been cut to 35 percent, but the top corporate tax rate has increased to 25 percent. Other taxes include a value-added tax. The overall tax burden equals 19.8 percent of total domestic income. Government spending has amounted to 24.3 percent of total output (GDP) over the past three years, and budget deficits have averaged 1.4 percent of GDP. Public debt is equivalent to 17.1 percent of GDP.
- Regulatory Efficiency: The overall regulatory framework facilitates entrepreneurial activity and productivity growth. However, barriers to market entry remain, and bankruptcy procedures are cumbersome and costly. Increases in the minimum wage have exceeded overall productivity growth in recent years. The rapid expansion of the privately owned power generation sector without government subsidies has included the development of renewable energy sources.
- Open Markets: Trade is important to Chile’s economy; the value of exports and imports taken together equals 60 percent of GDP. The average applied tariff rate is 1.8 percent. The investment climate is generally open, but numerous state-owned enterprises distort the economy. The financial system remains one of the region’s most stable and developed, and foreign and domestic banks compete on an equal footing.
In a nutshell, Chile’s openness to global trade and investment provides a solid basis for economic dynamism. A transparent regulatory environment buttressed by well-secured property rights provides commercial security for the resilient private sector. The independent judicial system continues to sustain the rule of law.
However, several recent policy shifts have put Chile’s economic freedom on a downward trend. The size and scope of government have expanded, substantially undercutting adherence to the principle of limited government. Along with the introduction of redistributive tax measures, the corporate tax rate has been raised and is slated to rise further. Labor reforms have focused on increasing the minimum wage and strengthening union bargaining.
Socialist President Michelle Bachelet, who began her second nonconsecutive four-year term in 2014, has strayed from the policies of her first term, which largely supported Chile’s successful free-market institutions. She has pushed through major and sometimes flawed tax, labor, education, and other constitutional reforms, and the public perception that she turned a blind eye to her son’s alleged wrongdoing in an ongoing corruption case has undermined her reputation for trustworthiness and moral probity. Nonetheless, Chile retains the region’s best investment profile and benefits from its membership in the Pacific Alliance and a vast network of free-trade agreements. Chile is the world’s leading producer of copper.