Home' Trinidad and Tobago Guardian : May 29th 2014 Contents MAY 2014 • WEEK FIVE www.guardian.co.tt BUSINESS GUARDIAN
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Her right-wing opponents have accused
President Michelle Bachelet of Chile of a
multitude of sins in recent weeks, but sloth
is not among them. Even her critics accept
that the Chilean president began her term,
on March 11, at breakneck speed.
Since then hardly a day passes without
a new initiative. When she took office
Bachelet announced 56 measures lined up
for her first 100 days in power. She reckons
that she already has checked 41 off the
The policies are ambitious. Bachelet, a
Socialist at the head of a broad center-
left coalition, has asked the legislature to
approve the biggest shake-up of the tax
system since the early 1990s. Another bill
has been sent to Congress to scrap Chile s
stifling "binomial" electoral system, a lega-
cy of the Pinochet dictatorship. On May
15 she outlined energy policies designed
to tackle Chile s chronic shortage of cheap
fuel, and this week Bachelet announced
changes to the way the country s schools
are funded and run.
"The speed with which we re working
reflects our conviction that keeping your
promises is one of the best ways of enhanc-
ing the view that the public has of politics,"
the president said on May 21 in her annual
Some describe the pace of change as
reckless, especially at a time when the
Chilean economy is slowing. Only eight
months ago the government was forecast-
ing growth of 4.9 per cent for this year,
but now the figure has shrunk to 3.4 per cent.
"Driving a steamroller through Congress" is how
one conservative congressman described the gov-
ernment s agenda.
One of Bachelet s senators responded that what
the government needed was "a bulldozer, to destroy
the antiquated foundations of the dictatorship s
Talk of that sort has set alarm bells ringing among
business types. For a quarter of a century, the
neoliberal model has served Chile s economy rather
well. It has grown by around 5.0 per cent a year
since the late 1980s. The poverty rate has dropped
sharply, foreign investment has poured in, inflation
is under control and Chile s sovereign-wealth funds
are flush. If the system works, why overhaul it?
The president is keen to allay fears.
"We re not about to undo all the good work that s
gone before," she says. "We re still committed to
public-private partnerships and the free market,
we re still open to foreign investment and free-
trade agreements. None of that is going to change."
All the same, she insists, something needs to be
done. The student protests of 2011 laid bare dis-
content with a model that has brought prosperity
but done little for inequality.
The most contentious of Bachelet s proposals to
date is the tax reform, which would increase Chile s
tax burden by about three percentage points. Exclud-
ing social-security contributions, it would stand
at around 23 percent of GDP, not too far off the
Organisation for Economic Cooperation and Devel-
opment average of 25 per cent. Eduardo Engel, a
professor of economics at the University of Chile,
describes the tax hike as "significant but reasonable
... It puts Chile s tax burden at the average level
of countries at a similar stage of development."
Others are unconvinced, in particular about the
government s plan to abolish the Taxable Profits
Fund, or FUT, a mechanism set up by the military
government in 1984 to encourage investment. It
allows companies to defer payment of some tax on
their retained profits indefinitely. Since its inception,
Bachelet says, it has deprived the state of around
US$50 billion in tax. Her opponents, however, say
that the FUT has been a vital component of Chile s
It is hard to believe that a reform of this magnitude
will have no impact on investment and growth, as
the government claims. The real question is not
whether the economy will suffer for a bit, but
whether the long-term rewards justify it. Engel
says that the tax-reform plans will probably lower
the level of savings in Chile by around 1.0 per cent.
"But that money won t be thrown into the sea,"
he says. "If it is spent correctly, the gains will out-
weigh the negative impact on savings."
That "if" will determine how Bachelet s second
term is judged. She plans to spend most of the
US$8.2 billion proceeds of the tax hike on education.
In her May 21 speech she confirmed that state-
subsidised, for-profit secondary schools will be
obliged to turn themselves into not-for-profit foun-
dations. The co-financing of voucher schools will
be phased out, and parents no longer will be expect-
ed to pay tuition fees to supplement state funding.
Only 17 per cent of toddlers attend nurseries, but
Bachelet said that she will raise that figure to 30
percent by the end of her term. More reforms are
due later this year, so that college is free at the
point of use.
Making education more affordable is undoubtedly
popular. The more pressing issue, however, is the
poor quality of teaching. A 2013 study suggested
that half the teachers in Chile lack an adequate
grasp of the material they are supposed to teach.
Shake up the teaching profession, and Bachelet
will have earned the affection she widely inspires.
@2014 The Economist Newspaper Ltd. Dis-
tributed by the New York Times Syndicate
Bachelet's tricky course to reform in Chile
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