By Tarun George
Few presidents have an inaugural ceremony with a natural disaster as the final act. On March 11th, Sebastian Pinera was sworn in as president of Chile in Valparaiso while just 90 miles south, the country was hit by the largest aftershock since the devastating 27th February earthquake. It seems ominous, but it is representative of the kind of storm that Pinera may be in for.
The first right-wing president in twenty years, Pinera has a lot on his plate as he completes his first month in office, least of which is reconstruction after the earthquake. According to the Treasury Minister Felipe Larrain, the cost of damage is approximately $30 billion (almost 20% of Chile's GDP), and the country could take up to four years to recover. In spite of its wealthy copper industry, which was luckily spared, Chile may have to borrow from the World Bank and other aid organizations for reconstruction. Add that to the several inquiries being conducted about how the disaster was handled, and the sacking of the head of the national oceanographic service, and it becomes clear that Chile's new leader has his work cut out for him.
A hard act to follow
Pinera's center-right National Renewal party won the election with 52% of the vote – an interesting result given the near-celebrity status of his socialist predecessor Michelle Bachelet. With an 84% approval rating as she left office, she was the most popular president in Chilean history. Pinera by contrast, is not nearly as strong a national personality, and is largely untested on the political scene. His election victory was by quite a narrow margin; the fact that he doesn't have a majority in Congress means he will need to work efficiently with the opposition, and sometimes compromise on his agenda.
It's also important to understand Pinera's support base, and how shaky it is. In spite of outgoing president Bachelet's popularity, many Chileans felt that her government was unresponsive to their needs. Her party's candidate Eduardo Frei was seen as an extension of that. As a result, Pinera's Alliance for Change campaign attracted many voters that weren't necessarily pro-right wing or pro-Pinera, but pro-change. If he doesn't begin delivering on his campaign promises soon, he may find that fragile support base eroding.
Chile has one of the wealthiest and best performing economies in Latin America. The only country in the region to be a full member of the OECD, Chile has low national debt, low foreign currency risk, and an inflation rate of 1.5%. This is largely a result of the Bachelet regime cutting public spending and building up monetary reserves, so that even through 2009's recession Chile was able to finance a strong fiscal stimulus package. The country's economic development agency, CORFO, has aggressively encouraged foreign investment through incentives and support for international companies looking to set up in Chile. Especially in the field of IT, Chile is quickly becoming an outsourcing and software development powerhouse. With this sound economic base already laid for him, Pinera's best bet may be to simply build on Bachelet's policies rather than invent new ones.
In spite of its sturdy economy however, Chile has deeper issues that must be addressed. One of them is income inequality. According to a recent Gallup report, the gap between Chile's rich and poor is among the widest in the world, and getting wider. In the same poll, Chileans were asked about their standard of living, and the country's economic status. The poor and middle classes were much more dissatisfied with their conditions than people in the higher income brackets. That may seem obvious, but it highlights the fact that Chile's robust economic progress has not been evenly spread out – 14% of the population lives below the poverty line. Public health and education are also hot topics. If Chile is to maintain its growing reputation as a business hub in Latin America, the government must invest more in university-level education and especially English language training.
Pinera's election campaign centered on two main promises: to accelerate economic growth to 6% annually over four years; and to create one million new jobs. Since GDP growth was negative in 2009, and unemployment is hovering at around 9.7% currently, these will be welcome changes if he can make them happen. According to the OECD's Economic Survey of Chile 2010 report, the best way to tackle unemployment may be to increase unemployment benefits and lower severance pay. The government recently granted unemployment benefits to workers on short term contracts (they account for the largest part of job turnover), to ease some of the pressure. Lowering severance pay would also encourage employers to hire on more indefinite contracts, instead of short term ones on which severance pay is not an obligation.
In terms of kick-starting GDP growth, Chile's Central Bank is on the right track. It slashed the monetary policy interest rate to 0.5% and is trying to hold it there as long as possible. The economic stimulus package is still in place, and that support should be phased out only when the economy starts visibly recovering. To boost government revenue, Pinera also has plans to reform state-owned firm Codelco, the world's largest copper producing company. Copper exports are a huge part of Chile's wealth, but Pinera is considering privatizing 20% of Codelco to make it more competitive against smaller copper companies that have been gaining an increasing market share. This will be a hugely contentious issue in Chile when it goes on the table.
Pinera is the first billionaire to become president of Chile. During his campaign he promised to sell his shares and largely remove himself from private corporations, to avoid a conflict of interest. Controversy arose when almost two weeks after his inauguration, he still held 11.3% of the shares in LAN, a Chilean airline. Although he has now complied with many of his promises to liquidate assets, and has transferred them to blind trusts and non-profit organizations, Pinera must tread very carefully. His investments and executive positions in various private institutions will be hot button topics for the media as well as the left-wing opposition, who will be quick to criticize anything they see as an undue use of power. Pinera's best bet is to make his every move regarding personal finances and assets as transparent as possible.
Sebastian Pinera has given himself the title "the reconstruction president", and he definitely needs to live up to it. He has taken on a country with strong fundamentals in terms of economy, society and politics, nevertheless with glaring problems that need to be fixed. Many of his plans for the country have undoubtedly been sidelined in the face of the recent earthquake and ongoing recovery efforts. But his handling of the disaster relief, and his leadership in the first month have been impressive. There is a very patriotic feeling in Chile now as the country tries to rebuild, and if Pinera plays his cards right, he could use that to his advantage and gain a lot of momentum in his presidency.
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| Interesting article, and acute appraisal of the coming years. Would be good to know what Pinera's government has actually been doing in response to the earthquake.