Financial crisis:

Importance of State, social protection

Siddharth VARADARAJAN

As an open economy highly dependent on trade, Chile was especially vulnerable to the world financial crisis. But two decades of prudent macroeconomic policies built around the twin objectives of growth and social protection have provided its people a measure of protection.

On a state visit to India, Chile’s socialist President Michelle Bachelet spoke to The Hindu about the crisis and its impact, the reason for her country’s interest in expanding relations with India, and the prospects for progressive integration in South America.

When you look back at the growth in trade with India since the Preferential Trade Agreement (PTA) was signed in 2006, you must have a tremendous sense of satisfaction.

A: The trade growth has really been spectacular. We have gone from $600 million to $2.2-2.5 billion in less than four years. And Indian companies are investing in Chile. But we could do much more.

And that’s the sense of my visit here. In 1947, when the British flag came down and the Indian flag came up, the only Latin American country present here was Chile, accompanying you in that historical moment. Since then, our relations have been very good.

Of course, this was mainly from the political point of view because of nonalignment. But the last decade is when Chile identified the Pacific Rim and then Asia as the most dynamic region of the world, a natural place to find new markets. We came to APEC, to the heart of Asia, and then we said this is not possible if we do not include India.

So we started working, we developed the PTA and right now, in our joint declaration, we intend to examine a free trade agreement. Chile has 19 different agreements with 56 countries like Canada, the EU, the U.S. and Latin American countries.

In Asia, we have the PTA with India and FTAs with China, Japan, Korea. As a first step, Prime Minister Singh said we should have the goal of doubling our trade, and I think that’s perfectly possible.

But if we are able to sign an agreement that could allow Indian products to come to Latin American markets through Chile, they could also - if they set up companies in our country - benefit from all the other FTAs. So it’s a win-win situation. And we hope we can advance in that direction.

Q: You are also pushing for cooperation in new areas education, space, energy. What does Chile hope to gain from India?

A: Chile has advanced on a lot of fronts and we are on track to become a developed country by 2020. But to get there, we need to improve our capabilities. And we see India as a huge economic leader, but also an important leader in the political arena. That is why Chile has always supported India as a permanent member of the Security Council in a reformed U.N.

We also see India as an example of how one could develop. Life expectancy when the British regime ended was pretty low and now it is more than 60 years. Of course, you have great challenges but you are great leaders in technology, information systems, services, and innovation. Chile has good people and land but we could do more for example taking steps regarding quality of education.

We have high levels of access: 98 percent of the population has basic studies, 92 percent with 12 years of school, and out of every 10 students at the tertiary level, seven are first generation students, so we are producing social mobility. And we are starting a huge program for kindergarten, free of charge for people who have no money.

But we need to improve the quality of education, because otherwise, they will have access but not equity. And we have a deficit in engineering, innovation, biotechnology. Second, we need to improve our English skills. We believe sending students abroad could also help. We are sending them to Canada, the U.S. and Australia but India is an important place to come.

Q: Chile has been relatively insulated from the financial crisis but now the first signs of recession are appearing there too. How do you intend to weather this storm?

A: We are still not in recession, though the last trimester was not good. We are well protected but are feeling the crisis for two reasons. Part of our economic growth was due to high copper prices and copper demand. Because of the recession elsewhere, copper demand has slowed.

And prices that were at $4 a pound are now around $1.6. Second, we already had the direct impact of the U.S. sub-prime crisis in those regions in Chile which exported 80 percent of their timber for housing.

But right now, we are sound in the sense that in the 1980s, during the military regime, we had a huge bank crisis and introduced reforms and regulations. So this time, the impact on our banks was very little. Second, we have a sound macroeconomy, and we have reserves. When copper prices were high, we created a counter-cyclical fund.

We have two funds, for pension and social benefits. So when copper prices fall, we don’t want to deal with it as in the past, by cutting benefits or pensions. So even though the crisis has impacted us, we have a fiscal budget that is counter-cyclical aimed at public investment in infrastructure and housing and social protection.

Q: In many ways, the financial crisis is also a crisis of economic theory and free market ideology.

A: I have to say this crisis was no surprise for us at all! Of course, our thought was not the perspective that was winning in the world we always thought the market is no good. You need markets, but healthy, sound, strong markets and you always need States to regulate. Markets won’t produce equity because it’s not their job to produce it, that’s the role of the State.

So the crisis has highlighted the role of the State and the importance of public policies and the urgent need for restructuring the Bretton Woods institutions. They were probably adequate post WWII. Right now, they do not represent the real world.

Important countries Brazil, India do not have the representation they should in the IMF and World Bank. We need to reform both the architecture and representation. We need to develop new strategies and policies and see how these financial institutions could respond to the actual needs of the countries.

Q: You followed a different economic model in Chile but is there scope for rethinking some of things you did in the past, like privatisation?

A: In Latin America the Washington Consensus was followed because they said, if you follow these policies, you will have happy populations, you will live better. But that was not exactly the truth.

May be the reforms were necessary but not sufficient. In Chile, when we recovered democracy we also inherited a very neoliberal economic model. Since then, we have been introducing many reforms, so today you have a model which brings together economic growth with social justice.

We believe we do not have to make a trade off. And even though Chile will feel some impact of the crisis, we’ll be able to respond to the crisis and protect our population and demonstrate that growth can go hand in hand with social protection. Of course, there are some changes you will have to make even in this path, and this is natural.

Q: A final question, you were yourself a political prisoner during the Pinochet dictatorship. Do you think enough has been done to bring the perpetrators of human rights violations during those years to justice?

A: I would say we have done a lot. Most of [those] people are facing justice. But we have to do more. We have a bill in Parliament that is still there, creating an institute for human rights. But what we have to do is go one step further in learning to respect each one’s diversity. Let me explain.

Everyone will tell you they respect each other but we need to do more in terms of understanding that diversity enriches us. And I am talking not only politically but in terms of gender issues, [the rights of] aboriginal groups, that old and young can be as much a part of society.

To understand that diversity - and also political diversity - enriches us is to be able to consolidate democracy and we continue to do that. When he was President, Ricardo Lagos set this new policy that there is no future if you do not take into consideration the past and solve it correctly. And to do that, you have to advance in truth, justice and reconciliation.

We are today looking in a much better position as a community of Chileans. Of course we still have to deal with problems of the past. We still have to deal with passions, feelings that are there, tragedies that are there. But I think we are advancing in the right direction.

Courtesy: The Hindu