In the mid-1970's Chile began an extended and profound process of transformation and modernization of its economy. The changes touched not only on macro-economic aspects, but also on the productive sector, social relations, infrastructure and the role of the State in general. An effort was made to implement a new model for development in the country, whose pillars were the market as the primary allocator of resources; private enterprise as the principal motor for growth; and the State -- in a subsidiary role, that is to say, engaging in the activities in which the private sector cannot participate -- which sought to achieve macro-economic equilibrium, ensure the supply of public goods, correct distortions and foster equal opportunity.
It is important to recall that at the point of departure for this process there was a high incidence of State participation in the economy. In 1973 in fact, the role of the public sector, including government and state-owned enterprises, accounted for 63% of GNP.1 In addition, the economy was shut off from international trade, and regulations imposed by the State in a wide variety of sectors impeded efficiency and the proper allocation of resources. In this regard, it is worth noting that in the early 1970's, there were over 3,000 prices fixed by the Chilean State; for 60% of imports, prohibitive deposits were required (10,000%); tax legislation had such a high number of exceptions that the general norm applied to a very limited number of taxpayers, etc.
Clearly, Chileans are worthy of special merit for having made an extraordinary effort to move toward a more productive economy, starting from particularly adverse conditions at a time when the so-called "real socialisms" had not yet collapsed, nor had Margaret Thatcher or Ronald Reagan yet taken steps toward more open market economies. It this sense, Chile was a pioneer in the world trend toward forms of government based on a free social order.
One of the most interesting, though little known, aspects of the process of modernization can be called "private solutions to public problems." That is to say, a set of micro-economic policies which include the privatization of companies or areas of activity, the introduction of incentives into the market, an environment which fosters participation and promotes private investment in these services and, in those cases where the State continues to play a role as a supplier or producer, the search for competitive conditions, decentralization and other elements which foster efficiency in the delivery of goods and services.
This publication provides in-depth information on the private solutions Chile devised in the areas of retirement, health care, eduction, local government, transportation, telecommunications and energy beginning in the 1970's. Thus, the Institute for Liberty and Democracy (ILD), as a research center dedicated to the promotion of the role of the private sector, analyzes public policies which, through the use of the free market and individual initiative, enabled Chile to solve problems which had traditionally formed part of the exclusive domain of the State.
The experiences gathered together and presented in this publication are, on the whole, favorable and serve to confirm the value and advantages that the market system and private property have over State intervention in production, financing and excessive regulation.
The first four chapters of the book are dedicated to policies implemented in social sectors and their respective results. The first, written by former Planning Minister, Luis Larra’n, analyzes the most profound and momentous transformations implemented by the Chilean government between 1973 and 1990 in an effort to create a market economy.
As is in many other countries, Chile's retirement system was in dire financial straights and required the allocation of vast quantities of State resources and an inefficient mechanism of taxation (through high payroll deductions) to stay afloat. For example, in 1937, worker's deductions totaled 5% of earnings, while by 1975 that figure had reached an all-time high of 51.4% There was a complete lack of justice in the distribution of the benefits the system offered. The new pension system implemented as of 1981 is described in this publication, along with a discussion of the objectives the program sought to achieve, the techniques used during the transition between the two systems, the regulations that were established, as well as results and perspectives for the future. The new system called for a program of privately administered individual savings plans with legislation to ensure a minimum pension by the State.
As Larra’n's article shows, the 10 years under the new system have demonstrated its advantages, including the fact that retirement pensions now pay 1.4 times what they would have under the old system. A second advantage of the new formula is the contribution it makes to fiscal policy and to the strengthening of capital markets.
The second chapter, dealing with the reforms to the health care system, was written by Mercedes Cifuentes, a specialist in the field. Here, the author discusses the need to introduce the private sector into the field of health care, as well the way the new system improves efficiency, increases resources, and improves working conditions and general well-being. The article describes the transformations in the health sector, that occured as a result of policies which placed primary importance on first-aid care, coverage of mothers and children, those in high risk groups and the handicapped.
In order to achieve these goals, a variety of instruments, including decentralization and the creation of incentives for efficiency were introduced into the state health care system. Proportional subsidies were established, a private system was created and people were given the freedom to choose between a State-run health care system and private doctors. This formula led to the creation of 35 Private Health Care Institutions (ISAPRES) which now compete to cover over 16% of the population. The new system has also permitted increased private investment in health care and, as the book indicates, between 1982 and 1989 hospital infrastructure investment increased by 50%, of which 27% was dedicated to private hospitals, 22% to medical centers and 16% to laboratories. Clearly, private action coupled with the introduction of efficiency criteria into the public sector have given way to markedly improved conditions in public health. For example, in global terms, Chile has seen its infant mortality rate drop from 79.3 children per live birth in 1970 to 17.1 in 1989.
Lastly, the research emanating from this publication has led to a proposal to incorporate more decidedly additional incentives for the private sector into the field of resource administration. As a result, a subsidy based on demand is under consideration, along with the transformation of incentives and properties owned by the State hospital system.
The third chapter focuses on the modernization of elementary and high school education. Patricia Matte and Antonio Sancho, Director and researcher, respectively, of the ILD's Social Program, describe how the policies implemented in Chile in preceding decades produced a remarkable increase in educational coverage. Nonetheless, the stimuli were not sufficient to increase quality nor provide equal educational opportunities. Thus, as of 1980, a series of modifications were introduced into the public and private school systems in an effort to improve quality, expand coverage, promote equal opportunity and freedom to teach. In order to achieve these goals, a demand-based subsidy was created, the administrative system was decentralized and freedom of choice between public and private educational institutions was introduced.
As the authors note, the new policies led to an increase in private, subsidized elementary schools from 14% in 1980 to 30.4% in 1988. As for secondary school education, coverage in private institutions rose by 249% during the same time period. This increase has been accompanied by expanding attendance among children from extremely poor families and by greater contributions by the private educational institutions to the quality of education.
Reforms at the university level are discussed in the fourth chapter of the book, written by Gerardo JofrŽ and Antonio Sancho. The chapter analyzes the role of the State and the private sector in this area and reviews the reforms that were introduced into the financial systems used by institutions of higher learning in order to: make them more equitable and promote efficiency; decentralize State universities, and; promote scientific and technological research. Overall, these reforms have provided a significant stimulus to the efficiency of the system and have increased the supply of private educational services, despite a variety of obstacles which arose during their implementation. The results of these policies have encouraged an increase in the registration rates of institutions of higher learning, from 116,962 students in 1980 to 248,354 in 1990.
The fifth chapter focuses on the modifications introduced at the local or Municipal level. The author, former mayor Manuel Cereceda, discusses the problems of inefficiency, under utilization and excessive political polarization which this crucial part of the State structure faced in the mid 1970's. Moreover, he notes that the policies which were implemented as of that date in an effort to transform the role of the municipalities, and to grant them increased responsibility for solving public problems at the local level. This process of decentralization meant modifications in the financing of municipalities, empowering them to retain an important part of the resources collected in the community; modernizing municipal administration; taking responsibility for new services, including elementary and secondary school education and primary health care. In all of these cases, market incentives such as competition, freedom of prices, etc., were utilized. In addition, services were sub-contracted directly with the private sector, particularly in the areas of waste management, street cleaning and park maintenance. The results have been a marked improvement in general community services and their more effective control by taxpayers.
The remaining chapters discuss a variety of service areas of tremendous importance to productive sectors and to consumers. Specifically, these are: electricity, telecommunications and transportation. In all of these areas, in the past, the State had played a direct and active role through the regulation and ownership of the companies operating in these sectors.
In the sixth chapter, Sebasti‡n Bernstein, former Executive Secretary of the National Energy Commission, analyzes the distribution of electricity. He begins by providing an historic overview of the sector and its problems. Subsequently, he describes the new legislation, which sought to: decentralize the decision-making process whenever technical conditions permitted; stimulate private participation in the field; promote direct competition between companies when possible, or simulate those conditions through "model" companies when price regulations were imposed; establish tariff mechanisms which promoted efficiency; and privatize companies. The results of the modernization described by Bernstein reveal an economically stable electrical sector, with low rates (as compared to other countries) -- in turn an indication of efficiency -- covering approximately 95% of Chile's fragmented territory. The fact that Chile's electrical network is today overwhelmingly private bears witness to the feasibility of private and market solutions to this problem and indicates that continuing to privatize remaining state-owned electrical supply companies is to be recommended.
The seventh chapter reveals the results of a study conducted by Renato Agurto into the transformation of the telecommunications sector. Prior to the application of new norms regulating telecommunications, this field was characterized by a tariff schedule which did not promote efficiency and was under the complete control of the State. The availability of telephones per resident was comparatively inadequate by international standards. Beginning in the late 1970's and continuing through the 1980's, a series of modifications were introduced to promote competition, establish rates which encouraged efficiency, and create regulations which would encourage investment and improve service. In addition, as of 1982, privatizations began with the sale of the Telex company and continued in 1987 with the sales of the Chilean Telephone Company and ENTEL (a long distance carrier). The results of Agurto's study are favorable, particularly in terms of growth in investment and technology. In fact, while the annual growth rate for telephone lines increased by 6.4% in the period 1960-1967, in 1989 -- once the privatization and the new rate schedule had been completed -- it reached 9.2% and in 1990 leapt to 25.7%. In the future, efforts will continue to expand opportunities for increased competition and market participation in this area.
The final chapter presents the research of ILD Associate Researcher Jorge Asecio concerning four aspects of transportation: shipping, ports, air and railroads. The results for these four sectors indicate that prior to the reforms, they were all State enterprises governed by monopoly-creating legislation which in turn resulted in inefficiency. Suffice it to say that in 1973 Chilean ports were so clogged that payments for over-extended stays averaged US$70,000. In practice, twenty years later -- thanks to the privatization policies which led to increased efficiency -- Chile's two principle ports (Valpara’so and San Antonio) handled more cargo between them than the entire country had handled in 1973 -- without the need for physical expansion!
The policies implemented consisted of rationalizing public investment: opening the market to domestic and foreign competition; promoting private investment and establishing rules for state-owned companies which eliminated privileges, required that they show a profit and made their management more transparent. In the most successful cases, this also meant the privatization of some state-owned companies including air and maritime transport (although in these two areas a state maritime transport company continues to exist, as does mixed a transport firm.) Neither the railroads nor the port system themselves were privatized, although parallel and complementary activities were shifted into private hands. Thus, in the Chilean port system, private companies currently provide longshoremen services and supply certain services to the railroads. The results indicate that the process was particularly successful in reducing the cost of international transportation -- a tremendously important factor for a country such as Chile which is located so far from the world's key markets. Nonetheless, it is also clear that much remains to be done to intensify the private solutions in each of the fields presented in this publication.
From this presentation and each of the chapters contained herein, the reader will come to appreciate the benefits of private solutions to public problems over traditional statist policies in highly complex areas. Moreover, the reader will become familiar with the difficulties which arose in Chile as a result of the implementation of the new policies, many of which have yet to be resolved.
In essence,
both in the fields described in the coming chapters as in other areas of the
Chilean economy, there remains much to be done in terms of deregulation and
privatization to incorporate the private sector into the public sector's problem-solving
process. Such measures are crucially important if increased economic and social
development are to be secured for all Chileans.