Public protests around the world in recent years—led mostly by middle class citizens—have highlighted concerns about inequality as a potential source of political instability in today’s global economy. The blitzkrieg of public attention being paid to economist Thomas Piketty’s critique of the capitalist model, for example, would have been inconceivable years ago, when the magic of the market was delivering record rates of growth in countries around the world. And then the bubble burst in 2009. The middle class proved to be particularly vulnerable and particularly frustrated.
In countries as diverse as Russia, Chile, Thailand, and Brazil (all countries with relatively strong rates of economic growth), protests have been led by middle class individuals frustrated with a system that they have invested in but which gives them limited rewards—particularly compared to those rewards going to the very wealthy. Middle class citizens in most countries are more integrated into the global economy and vulnerable to its swings than are the very poor, yet they lack the means and assets that the wealthy have to protect themselves. While the protests have focused on different specifics—education in Chile, health in Brazil, and corruption in Russia, for example—the underlying theme is the same: expectations are not being met by public systems. At the same time, these middle cohorts are much more aware of how well the very wealthy are faring than are the poor.
This phenomenon is not new—and indeed one of us has written extensively about the “frustrated achievers” around the world. Yet inequality—and frustration about it—is an increasingly visible feature of the global economy, with the potential to derail politics even in countries that are performing well. Solutions to inequality, meanwhile, which is driven in large part by structural economic trends, are few and far between. A small skinny country far away in South America is testing one out.
Chile is well known around the world for its experiments with free market capitalism, including an unprecedented privatization of the social security system. The resulting policies were subsequently implemented to varying degrees by most of the successful Latin American economies. While most public attention focuses on the influence of the Chicago school of economics on Chile’s policies, an equally important part of Chile’s success was its innovative approach to social policy, which resulted in unprecedented drops in the poverty rate in the 1980s and 1990s. Theoretically a poster child for free market capitalism, Chile’s reality is quite different, and a range of integral policies—from an innovative copper reserve fund to extensive labor market regulations to efficient and well-focused anti-poverty programs—hinge on an active and effective role for public institutions.
Yet Chile’s inequality is still among the highest in the world (its Gini coefficient is 52.1), and non-income dimensions of well-being, such as health and education, are also skewed in favor of the rich. Inequality has historically been a feature of public debate in Chile (well before there was broader global public interest). President Michele Bachelet is beginning her second term by tackling public frustration with inequality head on, and using fiscal policy reforms to level the playing field in education.
Chile’s education system—and particularly its higher education system—is notoriously unequal. It has high quality private universities, but they are accessible to a privileged few, while the public system languishes. Though access to tertiary education has expanded rapidly in the last two decades (33 percent in 2011), the gap in enrollment between students in the top and bottom income quintiles remains considerable: 62 percent of students from the wealthiest quintile attend tertiary institutions compared to 21 percent from the poorest. Public resources account for just 22 percent of university funding in Chile, compared to the OECD average of nearly 70 percent. Not surprisingly, access to higher education was front and center in the widespread public protests in 2010 and 2011.
President Bachelet’s $8 billion reforms will be financed by raising corporate tax rates from 20 to 25 percent and by reducing tax deductions and privileges for the very wealthy, as well as by some more broadly shared value added taxes. While the details are yet to be worked out, Bachelet has committed to eliminating all fees and providing free university education to all.
Surely broad-based access to high quality education is an effective equalizer. Yet what are the ingredients of a successful reform package that can deliver on that promise?
Chile already spends at the level of the average OECD country on education (6.4 percent of GDP); there is no obvious rationale for increasing total resources. The issue is the balance between private and public spending, with the former making up 42 percent of the total. While a shift towards public funding would likely reduce inequality in access, it is less clear that it should be directed to universities. There are significant differences across income groups in access to pre-primary and secondary education and, more importantly, large gaps in learning outcomes among upper secondary school students. Only 68 percent of students from the poorest families met the basic proficiency mark in math on the international PISA exam in 2012, compared to 97 percent of students from the richest families, and the relationship between socioeconomic status and PISA performance is higher in Chile than any other OECD country. Chile ranks last in the OECD for the number of “resilient students”—those who come from their country’s poorest 25 percent but still manage to score in the top quarter internationally (only 1.7 percent of Chile’s poorest students).
Attacking inequalities and improving performance in the education system in Chile will require improving quality at the pre-primary, primary, and secondary levels of the system, and especially at the municipal schools that poor students attend. In the absence of this equalization from the bottom, the subsidies for universities will be captured by the rich, who can already afford to pay for their education.
The devil still remains in the details, on both tax and education reforms. Some observers warn of the drags on investment and growth from higher taxes. Our take is that using additional public resources to invest in education and to equalize opportunities from the start will go a long way toward addressing widespread disgruntlement in the country while fostering a more productive and equitable society in the future. Chile may, once again, provide positive lessons for other countries at a time when inequality has entered front and center as a challenge to the global economy.