How Inequality Tore Chile’s Free Market Success Story Apart

Chile was the poster child for economic growth and poverty eradication — until the yawning inequality created by its market-friendly policies sparked an intense backlash

Riot police fire tear gas at demonstrators during a protest against the Chilean government in Santiago, on January 10, 2020. Photo: Claudio Reyes/Getty Images

If you want a glimpse of the future, head to Santiago. Until recently, the Chilean capital was the beating heart of an economy lauded for its rapid growth rate and the speedy eradication of poverty, a place so successful it was called an “economic miracle” and made a poster child for development by economists who urged others countries to replicate “the Chile model.” Yet the city welcomed the new decade with intense protests, as millions marched in its streets to protest rising inequality and the unaffordability of daily life. This ongoing tumult represents a fall from grace that we need to understand, since many other emerging economies are heading down the path first beaten by Chile.

Santiago is by far the biggest economic hub in Chile: With a population of 5.2 million it is home to a third of the Chilean population, is 10 times the size of the next largest city (Antofagasta), and is the source of almost half of the country’s economic output. A poor country in the 1970s, Chile had a national income per person half of that in Argentina. Today, national income is almost $14,000 per person, the highest in Latin America, and not far behind Greece or Portugal. Reflecting its exceptional performance, Chile was accepted into the Organization for Economic Cooperation and Development (OECD) in 2010, becoming the first South American country officially to graduate from “emerging” to “developed” status.

The wrinkle in the success story was the fact that with Chile’s miraculous growth came extreme inequality. As well as being the OECD’s newest and best-performing member, Chile was also the most unequal economy in the rich-world club, with huge disparities. One popular measure of inequality, the share of income going to the best-paid tenth of workers, rose from 30% in the early 1970s to almost 50% by the late 1990s. It has since edged higher, meaning that everyone outside the top tenth — nine out of 10 people in Chile — now share less than half of the national income among them. On the face of it, the…