Economic and Social Reform in Chile Is Lifting All Boats

Much has been written in recent years about the success of Chile's trade-liberalization and financial-reform policies, which have resulted in Latin America's highest rate of sustained economic growth.

But are the benefits of that growth being shared by rich and poor alike? Or, more to the point, have Chile's market-oriented policies helped to reduce poverty?

Recent research shows that in fact Chile is reducing poverty while growing at a healthy average of more than 7 percent a year since 1990.

Fewer living in poverty

This is no mean feat. We need not look beyond the shores of the United States to see why. Real incomes of the poorest 60 percent of United States families fell from 1979 to 1992, despite positive overall growth in the economy.

Yet in contrast to the United States, economic growth in Chile is lifting all boats. Between 1987 and 1994 the percentage of Chilean households living below the poverty line dropped from close to 40 percent to 24 percent.

What happened?

An early convert to sound economic adjustment policies, Chile has experienced a solid record of sustained growth, beginning in the 1980s and continuing today. It is the only Latin American country on a growth track approximating that of the East Asian tigers. We can attribute the drop in poverty to a great extent to this sustained growth.

But there is more to it than that.

Recent democratic governments in Chile, aware that economic growth alone will not necessarily reduce poverty, have skillfully combined a market orientation with a strong commitment to social justice.

For example, fiscal policy - through efficient expenditures on social services such as health and education - has compensated for the country's uneven distribution of income.

A recent study on income distribution in Chile shows that while the cash income of the highest 20 percent of the population is 13 times that of the lowest 20 percent, this ratio dips below 9 when adjusted for social expenditures.

Improved delivery of social services in Chile and the declines in poverty are the results of better, not just more, government spending. Reforms in health care, education, and social security have emphasized greater choice for consumers and citizens, including the use of public subsidies for the purchase of private services, while maintaining competitive public programs.

The privatized but tightly regulated pension system gives workers the responsibility of saving through individual accounts, but it also guarantees a minimum, publicly financed pension for retirees whose accumulated savings are below an acceptable level.

A candidate for entry into the North American Free Trade Association, Chile has managed equitable growth while simultaneously lifting trade barriers, partly because it has increased export-related jobs.

Reduction of inequality has accompanied high and sustained growth in several economies of East Asia over the last three decades. In Korea, Taiwan, and Thailand, growth has been fueled by raising the productivity and wages of those who were once poor.

Chile is making a similar case in Latin America. By ensuring that growth is generated from below via higher productivity among working men and women, Chile is pursuing a policy based not on altruism but on enlightened self-interest.

The key to success

Rather than growth-inhibiting transfers and regulations, the key to success has been investments, both public and private, that improve the opportunities and productivity of low-income workers. The poor need not be merely beneficiaries of the growth process; they can be engines of growth as well.

Market-friendly social policies can make economies more efficient and simultaneously reduce inequality - as long as they are geared to enhancing the productivity of those who need the benefits the most.

This is a win-win recipe. The United States - where two-thirds of the increase in national income during the 1980s accrued to the top 1 percent of the population - might well learn some lessons from south of the border.

*Nancy Birdsall is executive vice president of the Inter-American Development Bank, a Washington-based multilateral financial institution. The views expressed here are her own and do not necessarily reflect the position of the IDB or its member countries.