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Chile's Free-Market Approach to Economic Development

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 4 Mar 2023

Chile is often cited as an example of a country that has embraced a relatively free-market approach to economic development, particularly since the 1970s. After a period of economic crisis and political instability, Chile began implementing market-oriented reforms under the military dictatorship of Augusto Pinochet, and these policies were continued by subsequent democratic governments.

Some of the key features of Chile's free-market approach include:

  1. Trade liberalization: Chile has pursued a policy of trade liberalization, signing free trade agreements with a number of countries and reducing import tariffs and other trade barriers. This has helped to open up the Chilean economy to international competition and promote exports of goods and services.
  2. Privatization: The Chilean government has privatized many state-owned enterprises, including the national airline, the telephone company, and the pension system. This has led to increased efficiency and productivity in these sectors.
  3. Deregulation: Chile has deregulated many industries, including banking, telecommunications, and transportation. This has encouraged competition and innovation in these sectors.
  4. Fiscal responsibility: Chile has maintained a strict fiscal policy, with low levels of government debt and a commitment to balanced budgets. This has helped to maintain macroeconomic stability and attract foreign investment.
  5. Social safety net: Despite its free-market policies, Chile has also implemented a social safety net to protect the most vulnerable members of society. This includes a system of means-tested cash transfers, a public health system, and a public education system.

Critics of Chile's free-market approach argue that it has led to increased inequality and social exclusion, particularly in the areas of health and education. However, supporters point to the country's impressive economic growth and stability, and its transition to a high-income economy over the past few decades.

Why is income inequality so high in Chile?

According to data from the World Bank, Chile has one of the highest levels of income inequality in the world, with a Gini coefficient of 0.47 in 2020. This is higher than the average for Latin America and the Caribbean (0.429) and the world as a whole (0.385).

While the country has made progress in reducing poverty over the past few decades, inequality remains a major challenge.

There are several factors that contribute to high levels of inequality in Chile:

  1. Historical factors: Chile has a long history of social and economic inequality, dating back to the colonial period. This has been reinforced by the country's political and economic elites, who have tended to protect their own interests at the expense of the wider population.
  2. Neoliberal economic policies: While Chile's free-market policies have been successful in promoting economic growth, they have also contributed to inequality. For example, the privatization of state-owned enterprises has led to the concentration of wealth in the hands of a few powerful companies and individuals.
  3. Weak labour protections: Chile has relatively weak labor protections compared to other countries, which has led to low wages and poor working conditions for many workers. This has made it difficult for workers to improve their economic situation and has contributed to inequality.
  4. Education and health disparities: Chile's public education and health systems are underfunded and underdeveloped, which has led to disparities in access to these essential services. Wealthy Chileans are able to access high-quality private education and health care, while poorer Chileans must rely on underfunded public services.
  5. Geographic disparities: There are significant disparities in economic development and opportunity between different regions of Chile. The country's capital, Santiago, is much wealthier and more developed than other regions, such as the north and south of the country.

To address these challenges, the Chilean government has implemented a number of policies aimed at reducing inequality, such as social spending programmes, progressive taxation, and labor protections. However, these policies have faced opposition from powerful business interests, and progress on reducing inequality has been slow.

Chile transitions to high-income status

Chile is now classified as a high-income country by the World Bank. In 2020, Chile had a gross national income (GNI) per capita of $14,880, which is above the threshold for high-income status (which is currently set at $12,696). Chile's transition to a high-income economy has been driven by a combination of factors, including its free-market policies, trade liberalization, and investment in education and infrastructure. However, as I mentioned earlier, high levels of inequality remain a major challenge in Chile, with significant disparities in income, access to education and health care, and economic opportunity between different segments of the population.

Economic reforms in Chile

Chile has implemented a number of economic reforms in recent years aimed at promoting growth, competitiveness, and social inclusion. Some examples include:

  1. Tax reform: In 2014, Chile introduced a tax reform package that included measures such as an increase in corporate income tax rates and a new tax on carbon emissions. The reforms were aimed at increasing tax revenue to fund social spending programs and reducing income inequality.
  2. Pension reform: In 2018, Chile implemented a major reform of its pension system, which had been criticized for providing inadequate retirement benefits. The reform introduced a minimum pension guarantee, increased employer contributions to the system, and allowed workers to choose between public and private pension funds.
  3. Labour reform: In 2016, Chile passed a labor reform bill that included measures such as strengthening collective bargaining rights for workers and introducing a system of temporary work contracts. The reforms were aimed at improving working conditions and reducing labor market informality.
  4. Infrastructure investment: Chile has made significant investments in infrastructure in recent years, particularly in transportation and energy. For example, the country is currently constructing a major new airport in Santiago and is investing in renewable energy projects such as wind and solar power.
  5. Digital transformation: Chile has launched a number of initiatives aimed at promoting the digital economy and improving access to digital services. For example, the government has launched a national fiber optic network to improve internet connectivity and has implemented a digital platform for accessing public services. These reforms are aimed at promoting innovation, competitiveness, and economic growth in the digital age.

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