Why Rich Cities Rebel?

Santiago, the richest city of Chile and Latin America recently erupted in protests.

Andres Velasco look at the reasons behind the protests:

Why are millions of Chileans still marching in protest, ten days after the violence erupted?

For starters, Chile is not alone. In the last decade, places as diverse as Great Britain, Brazil, France, Hong Kong, and Ecuador have experienced similar episodes. Whatever the immediate local trigger, the scope, intensity, and often the violence of the ensuing protests seemed out of proportion with the initial cause. Rapid social change fuels tensions and contradictions in modern societies – even rich and successful ones – that seem to keep them barely a step or two from mayhem.

In Chile, an obvious suspect is monopoly abuses. While general price inflation in Chile is low, some prices that matter for family budgets are high and rising. Regulatory regimes designed to ensure investment in utilities, for example, have given companies excessive leeway to keep prices high. Likewise, Chile’s pharmacy chains have been found guilty of collusion and price gouging, as have toilet paper producers, chicken farmers, and long-haul bus companies.

Here is the paradox. Collusion and price fixing did not begin yesterday in Chile. But until a decade ago, sanctions were weak and the agency in charge had little authority and few resources to investigate. When the law changed, scandals began erupting every few months, raising public awareness of, and indignation with, monopolistic behavior. Today, price fixing is a criminal offense that carries jail sentences, and it seems plausible that such behavior is receding. But that very progress may have helped plant the seeds of public anger.

Turn next to the labor market. Chile’s unemployment rate hovers around 7% and wages have been rising well ahead of inflation. The bad news comes when you look at the structure of employment. Nearly one-third of the labor force is either self-employed or works in domestic service, in many cases without a formal contract and benefits. Among those who have a formal job, most work on short-term contracts. Employment rates for women and young people are among the lowest in the OECD. Discrimination is rampant. Hundreds of thousands of women who head households do not have a job, while millions of workers who have a job today cannot be sure they will have any kind of income tomorrow.

The list of reforms that would remedy this situation – such as adaptable work schedules, modernized severance payment schemes, easier part-time work, better job training, and anti-discrimination laws with real teeth – is pretty self-evident. That is what worked in other countries in similar circumstances. But here is the next paradox: as Chile has become more democratic, the same problems that plague advanced democracies have appeared. Politically influential insiders have blocked reforms, while labor-market outsiders are not represented. Few politicians speak for the unemployed young woman with two kids and no high-school diploma, who seldom votes anyway.

Puny pensions also contribute to people’s sense of fragility. Chile’s individual capitalization system earns kudos abroad, but the reality on the ground is more complex. Precisely because the labor market functions badly, Chileans retire with fewer than 20 years of savings, on average, in their accounts. And due to sharply rising longevity (itself a tremendous developmental success), they can expect to live 20 years or more after retirement. Pensions could be adequate only if the rates of return on those savings were huge, but they are getting smaller by the day, in line with falling global real interest rates. Government-funded minimum pensions for people with no savings at all, plus a top-up for those with very low pensions, help alleviate the plight of 1.3 million people at the bottom of the income scale. But now the middle class is feeling the pinch – increasingly so as Chile’s baby-boom generation begins to retire under the private system.

And while income inequality has not been getting worse, other kinds of inequality may well have become more evident. Chile has joined the OECD club of rich countries, but in many ways it remains a traditional society riven with class privilege. Business leaders and cabinet members tend to come from a handful of private secondary schools in Santiago, especially when right-wing parties are in power, as they are today. The elite often seems to live in a world of its own. Last week, Cecilia Morel, the president’s wife, described the looting as “an alien invasion.”

None of this is new. But it may have become more painfully evident as the country develops. A generation ago, few working-class children attended university. Today, seven of ten students in higher education are the first in their families to attend college. Once they graduate, the frustration begins: to land the best jobs, academic performance matters less than having the “right” surname or connections.

Anger at elites is rampant in Chile, but scorn for the country’s political class is particularly deep. In 2018, 70% of Chileans believed that the country was governed for the benefit a handful of powerful groups. Barely 17% and 14% expressed trust in parliament and in political parties, respectively.

This is relatively new. High regard for civilian politicians during the transition to democracy nearly three decades ago gave way to a growing perception of insularity, and then a wave of campaign finance scandals. Today, the absence of term limits and parliamentarians’ outsize compensation (among the highest in Latin America) are huge magnets for public anger.

Lack of trust in politicians weakens people’s hopes for the future. And Chile’s recent economic deceleration, standing as it does in sharp contrast to Piñera’s ringing promises of economic growth, has exacerbated the problem. Perhaps it was these dashed hopes that brought the many tensions and contradictions in Chile to a boil.

There is now a unique opportunity to rewrite the social contract and deal decisively with the sources of citizen anger. But the risks are many. One is that voters will conclude that Chile’s gains were all more illusory than real, and will therefore throw the baby out with the bathwater. Another is that the current climate of fear and division will bring a populist to power, as has happened in Mexico, Brazil, and now Argentina.

In Chile, polls already show gains for populists of the extreme right and left. If that trend continues, the country’s turmoil could be far from over,

Well, well, well..

In another piece, Jeff Sachs ponders over why the rich cities have rebelled? He says most of the policies focus on growth ignoring distribution:

Three of the world’s more affluent cities have erupted in protests and unrest this year. Paris has faced waves of protests and rioting since November 2018, soon after French President Emmanuel Macron raised fuel taxes. Hong Kong has been in upheaval since March, after Chief Executive Carrie Lam proposed a law to allow extradition to the Chinese mainland. And Santiago exploded in rioting this month after President Sebastian Piñera ordered an increase in metro prices. Each protest has its distinct local factors, but, taken together, they tell a larger story of what can happen when a sense of unfairness combines with a widespread perception of low social mobility.

If we are to head off that outcome, we must draw some lessons from the three recent cases. All three governments were blindsided by the protests. Having lost touch with public sentiment, they failed to anticipate that a seemingly modest policy action (Hong Kong’s extradition bill, France’s fuel-tax increase, and higher metro prices in Chile) would trigger a massive social explosion.

Perhaps most important, and least surprising, traditional economic measures of wellbeing are wholly insufficient to gauge the public’s real sentiments. GDP per capita measures an economy’s average income, but says nothing about its distribution, people’s perceptions of fairness or injustice, the public’s sense of financial vulnerability, or other conditions (such as trust in the government) that weigh heavily on the overall quality of life. And rankings like the World Economic Forum’s Global Competitive Index, the Heritage Foundation’s Index of Economic Freedom, and Simon Fraser University’s measure of Economic Freedom of the World also capture far too little about the public’s subjective sense of fairness, freedom to make life choices, the government’s honesty, and the perceived trustworthiness of fellow citizens.

To learn about such sentiments, it is necessary to ask the public directly about their life satisfaction, sense of personal freedom, trust in government and compatriots, and about other dimensions of social life that bear heavily on life quality and therefore on the prospects of social upheaval. That’s the approach taken by Gallup’s annual surveys on wellbeing, which my colleagues and I report on each year in the World Happiness Report.

The idea of sustainable development, reflected in the 17 Sustainable Development Goals (SDGs) adopted by the world’s governments in 2015, is to move beyond traditional indicators such as GDP growth and per capita income, to a much richer set of objectives, including social fairness, trust, and environmental sustainability. The SDGs, for example, draw specific attention not only to income inequality (SDG 10), but also to broader measures of wellbeing (SDG 3).

It behooves every society to take the pulse of its population and heed well the sources of social unhappiness and distrust. Economic growth without fairness and environmental sustainability is a recipe for disorder, not for wellbeing. We will need far greater provision of public services, more redistribution of income from rich to poor, and more public investment to achieve environmental sustainability. Even apparently sensible policies such as ending fuel subsidies or raising metro prices to cover costs will lead to massive upheavals if carried out under conditions of low social trust, high inequality, and a widely shared sense of unfairness.

We keep going in circles….

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