Chile’s resource economy has to reckon with inequality

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A mural in the mining town of Antofagasta, Chile (Photo by Saleem H. Ali)

The shocking violence in Santiago, Chile in recent days has alarmed analysts worldwide since this South American nation has been championed as an economic success story — even winning admission to the Organization of Economic Cooperation and Development in 2010. It is also the only Latin American country to have visa-waiver access for its citizens to the United States, which reflects the perception in the U.S. State Department that it has economic and social stability. So what has gone wrong in a country which boasts the world’s largest copper and lithium reserves, and a flourishing agricultural and fishing industry, alongside a robust service sector as well? One phrase sums up the issue: rising inequality.

I have been to Chile around 6 times over the past decade and have been impressed with the level of development and prosperity. However, below this veneer of glitz is a painful underbelly of deprivation which is so acute that even a 4% hike in public transport fares would lead to thousands of people coming out on the streets in violent protests. All those economists, going back to the late Nobel laureate Milton Friedman, who have been celebrating the country’s fiscal policies and free-market entrepreneurship have largely neglected the plight of the poorest Chileans.

If there is any core lesson in the Chilean protests it is that gross inequality cannot be ignored indefinitely. Another Nobel laureate economist Amartya Sen warned us of this reality for decades. Yet there appears to be an inexorable tendency among global leaders to believe that wealth is somehow deserved by those who have it. This perception has its roots in the world’s largest economy — the United States — whose income inequality is only two ranks behind that of Chile on the OECD! Much of the argument to justify such wealth difference is that the rich will spend and invest on the economy or be philanthropic and thereby create more wealth. Yet, when the rubber meats the road, the philanthropy of the hyper-wealthy is often elusive and deceptive. Yes, they all give some money to philanthropies but as a share of their total income the number is generally quite small. A Center for Philanthropy panel study revealed that in fact the poorest cohort gives a greater percentage of their wealth to charity than the wealthiest cohort. Furthermore, a study by Google and the Center for Philanthropy at Indiana University notes that of the $250 billion in annual donations, less than $78 billion explicitly targeted poverty-related causes.

Chile has its own class of hyper-wealthy individuals similar to the United States. Take the example of the Luksic family who own several mining enterprises as well as a wide range of other businesses in Chile. They are no doubt philanthropic with their educational investments in scholarships but the impact such efforts can have on a national level is highly limited. There is a culture of silence that has been created regarding the idiosyncrasy of how the wealthy give funds. The poor supplicating minions who seek elite funds do not want to offend them and risk losing the crumbs thrown their way. Often for the hyper-wealthy giving up millions which may seem a huge sum to us is cognitively inconsequential to their lives.

I recall being seated at dinner next to CNN Founder and philanthropist Ted Turner at the World Conservation Congress Equator Prize Ceremony in Barcelona in 2008 and he admitted that setting up the United Nations Foundation with a gift of a $1 billion in 1998 was fairly painless for him since he had just gained that amount in stock value without much effort the year before and had least expected it! While Turner or the Luksic families deserve praise for creating a transparent and professional philanthropic organizations, they cannot replace the role of government. What is being called for is not even a vast redistribution of wealth but a recognition that inflation and quality of life for the poor must be kept in mind as economies grow.

Chile’s government as well as the private sector need to rethink meritocracy, remuneration, profit margins and who bears the pain most for resource scarcity. An example in point recently brought to light by a Netflix series Rotten deserves attention. The booming avocado industry in Chile has led to massive profit margins for farmers but the water that they are using is a public good and has come at the expense of many poor peasants and small-landowners being parched without much recourse for income. Such deprivations are a corruption of meritocratic capitalism which must be addressed with more ecologically and socially appropriate policies. As Santiago prepares to host a major international summit on climate change later this year, it is high time Chile’s government and as well as global economic leaders in both the public and private sectors recognize that the social climate is also changing. No longer will people accept the trickle-down mantra of the elite economists and accept a smaller share of growing aggregate prosperity.

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