Tables turned: Latin America’s lesson for west

By Philip Stephens

Here is a parlour game of political identification.

Start with country A. It boasts a free-trade policy to make it one of the world’s most open economies. A run of budget surpluses has wiped out its national debt. It has a privatised pensions system and education vouchers that allow the affluent to top up state provision. Fiscal responsibility is enshrined in law.

Now consider country B, a similar-sized emerging economy. It takes pride in an aggressive anti-poverty campaign. The proportion of young people attending university has quadrupled. Public health provision has brought strong gains in life expectancy. The state guarantees a minimum income for the elderly. A publicly owned bank is mitigating the effects of the credit crunch.

For those steeped in the familiar reference points of western politics, the ideological divides are obvious. Country A is governed from the right or centre-right: fiscal conservatism, free trade and private pensions give the game away. As for country B, the emphasis on education, poverty reduction and welfare provision speak to the progressive politics of the left.

Those who have noticed Chile’s remarkable political and economic progress since the restoration of democracy nearly 20 years ago will know otherwise. Country A and country B are one and the same – a Latin American success story.

I was reminded of this when Andres Velasco, the Chilean finance minister, visited Europe the other day. Mr Velasco is a member of what might be called the progressive jet set, the network of centre-left politicians that emerged from the “third way” mapped out by Bill Clinton and Tony Blair. Last year Mr Velasco gave an arresting speech at a conference of progressive leaders organised by Policy Network and hosted by Britain’s Gordon Brown. Next month the event travels to Chile.

On leave from an economics professorship at Harvard, Mr Velasco is every bit the progressive politician. What marks him out is that he is also as fervent an apostle for supposedly “rightwing” economic policies as he is for the social values of the left. His polished prospectus reminds me of the New Labour mantra that brought Mr Blair to power in Britain in 1997. Lest anyone has forgotten, Messrs Blair and Brown campaigned then on a pledge to marry economic efficiency with social justice.

Unnoticed by much of the world, Chile has done just that. Mr Velasco has a statistic to prove every point. Thus Chile’s economic growth rate has averaged more than 5 per cent since the country rid itself of Augusto Pinochet’s dictatorship in 1990. The country has established two sovereign wealth funds to invest some of its revenues from copper. It has dismantled tariff barriers. Its banks – the nationalised bank is only the fourth largest – are sound.

When Pinochet finally left office, some 40 per cent of Chileans lived below the poverty line; the proportion now is 12 or 13 per cent. The number of young people at university has risen from 10 per cent to 40 per cent.

If it can be called such, one of the benign legacies of the Pinochet years has been a succession of stable centre-left governments. The politicians have had the space to think beyond the next electoral test. They have been smart enough to modify and improve rather than scrap some of the free-market policies of the previous regime. Thus most people still have private pensions, but the government has added a safety net.

Twenty years ago some two-fifths of Chile’s public spending went on debt servicing. The figure now is zero. Instead 70 per cent of all public spending is on social programmes.

Chile, of course, has natural advantages, notably abundant reserves of copper. It sells a surprising amount of good wine. It also has its problems. Inequality has fallen only slowly as the poor struggle to catch up with the professional classes. Chile is not immune from the global crisis – the economy has already slowed.

The less attractive side of the longevity of the ruling Concertacion coalition is that it has been dogged by infighting and corruption allegations. The centre-right Alliance thinks it has a good chance of winning the next presidential election. Some say that such an electoral transfer of power would be a useful testament to Chile’s democratic maturity.

There are broader lessons here for the richer nations of the west. Most obviously, politicians should practise what they preach. Not that long ago, the US and Europe were lecturing Latin American countries about their fiscal profligacy, unregulated banks and opaque financial markets. In Chile’s case, the tables have been turned. It will not escape unscathed from the global shock, but its fiscal position and financial system are robust – and transparently so.

Mr Brown might feel particularly shamefaced. Had he stuck, as chancellor and prime minister, to the prudence promised in 1997, Britain would not be facing such a dreadful economic bust – nor an annual budget deficit that looks set to tip over 10 per cent of national income.

The broader message, though, lies in the way Chile has separated political ends from means. There is nothing wrong with ideology, whether it is the conservative belief in individual freedom or the progressive view that the state must spread opportunity. Where the tired left-right debates become pointless is in confusing the preferred route with the desired destination.

Chile has avoided the trap by mixing and matching government and market, economic orthodoxy and social intervention. This was the insight that Mr Blair was supposed to have brought to British politics during the 1990s. Now, New Labour looks a tarnished brand. The economy is sinking but Mr Brown is casting the next election in Britain as a tired ideological fight between his pledges to “invest” in public services and Conservative plans to cut taxes.

In truth, once the recession is over, the organising fact of British, and most European politics, will be the huge deficits that governments are now accumulating in the effort to stave off slump. There will be room neither for tax cuts nor spending increases. There will instead be a demand that governments, left or right, spend money more effectively.

Economic recovery will bring in its wake a profound debate about how governments should seek to shape post-financial capitalism. The danger will be of a rush to the old ideological barricades of right and left – the one promoting resurgent nationalism, the other big government.

In Chile, the politicians have preferred progressive politics shorn of the shibboleths. There is indeed a lesson there for the rest of us.