Jan. 14, 2009 - Issue #691: The Great Indoors
Issues
The fictional middle class
Lessons for Alberta from Chile
Sometimes, taking a close look at things happening elsewhere can provide you with a significant amount of information about how things are playing out at home.
Recently I had the opportunity to escape part of winter and spend three weeks visiting family and friends in Chile—the country of my birth, and a place whose politics and economy I have followed closely my entire life.
These days, Chile is often held up around the world as a neoliberal success stories. Virtually all aspects of Chile’s economy were privatized during the Pinochet dictatorship that lasted from 1973 to 1990, and subsequent governments have continued the capitalist trend by signing free trade deals and keeping the country’s borders wide open to virtually unregulated foreign investment.
As of 2006 Chile boasted the highest nominal GDP per capita in Latin America as well as some of the world’s highest project growth rates.
The problem, of course, is that Chile’s neoliberal economic system has also resulted in one of the world’s worst income distribution rates—the poorest 20 per cent of Chile’s population earn only about 3.3 per cent of the country’s GDP.
It was quite surprising, therefore, to arrive in Chile and discover what appears to be a thriving middle class: many late model cars on the road, nice televisions, stereo systems and computers in every house, and many families with a second home on or near the beach.
This was not the Chile I remember from previous visits, and certainly not the Chile I expected to discover based on my understanding of the country’s income distribution.
If you dig a little deeper, though, you quickly discover the reality: Chile’s middle class is largely an illusion.
Chile’s rapidly increasing GDP and recent copper boom have provided Chileans with a sense that economically they are doing better than they actually are. The result has been people accumulating massive levels of personal and household debt to pay for the lifestyle they are convinced they should be living.
As is currently the case around the world, cars, houses and electronics are largely paid for through consumer loans or credit cards. In Chile, however, this trend has now also extended to clothing, groceries and utilities.
This has become so commonplace in Chile, that when you present your credit card at the grocery store to purchase your food for the week, you are met with the question of whether you would like the purchase to appear on your card all at once or in installments. Purchase gas at the local Esso and you are asked the same question—all at once, or in installments.
Of course, banks and credit companies are going out of their ways to encourage this lifestyle. Chile’s two biggest department stores, Falabella and Ripley’s, offer small discounts on any purchase made with the store credit card.
The reality is that the incomes of most Chileans have not kept pace with either the rate of inflation or the growth in the economy. This is aggravated by the fact that wholesale privatization has meant that most Chileans must pay for private schools for their kids (the cost of tuition in a mediocre private school is equivalent to a starting teacher’s salary), private health insurance and private pension plans, and the fact that you can’t drive anywhere in the country without paying outrageous tolls for private roads and highways.
If you were to eliminate credit overnight in Chile, you would end up with 80 per cent of the population in poverty and only 20 per cent enjoying the fruits of the “economic miracle.”
Alberta, like Chile, is a jurisdiction that has experienced tremendous growth in GDP over the last 20 years thanks largely to a boom in its main natural resource. Also like Chile, Alberta is a place where people’s incomes have not kept pace with either the rate of inflation or economic growth.
Albertans are carrying more personal and household debt today than ever before, and the support package that the federal government recently approved for banks is designed to ensure that they can keep lending money to consumers at the same pace.
As the provincial government continues to ponder further privatization of health care, education, and infrastructure, it is important that we keep examples like Chile in mind. In Chile these policies have resulted in a very wealthy elite and 60 per cent of the population (the supposed middle class) on the verge of bankruptcy. Yes, Alberta started from a better place in terms of income distribution, but if we are not careful, we will end up in the same place as Chile—with no middle class and a population entirely dependent on credit.
All it would take to keep us from this eventuality is some thoughtful and visionary policies: a living wage, income keeping up with the rate of inflation, a tax structure that will actually achieve fair income distribution, strict regulations on lending practices by banks and no privatization of public services. With the looming economic and credit crisis, the window of opportunity for Albertans to turn things around is rapidly closing—let’s change things while we can. V
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