Counting the Cost

Counting the cost of neoliberalism in Chile

How the doctrine of neoliberalism has undermined democracy in Chile. Plus, a look at the effects of phantom investments.

Chile‘s neoliberal doctrine may have ended up undermining its democracy over the past four decades. The country has been hit by protests for weeks.

It all began with Chilean students protesting against a recent hike in train fares, but the demonstrations have mushroomed into a movement against inequality and unrest over an economy that is on the slide after years of doing comparatively well against its neighbours.

“There has been a pervasive sense of discontent [in Chile] that has manifested itself from time to time in demonstrations and protests over the last dozen years or so, and on this occasion it exploded into something much bigger. There is serious arson and damage to the metro system, firstly, and then there are big peaceful protests about many issues facing Chile,” Michael Reid, senior editor for The Economist, tells Al Jazeera.

Under the military dictatorship of Augusto Pinochet, Chile became a testbed for unfettered free market economics also known today as neoliberalism. The experiment in the 1970s was continued by democratic governments from 1990 to the present day. While under Pinochet, neoliberal policies largely failed, Chile’s economy performed better than the economies of other Latin American countries.

Reid says that Chile’s economy has grown faster than average for the last three decades and there has been a sharp decrease in poverty levels, but rampant inequality led to a divide between the business and political elite and the people of Chile.

“In general there is a sense of unease in the world at the direction that capitalism has taken since the financial crisis and that has a lot to do with technological change, the digital revolution and the rise of China and the concentration within business, within markets, and the sense that capitalism is less inclusive and less democratic than it was,” Reid says. 

“Where Chile needs to look more carefully is that it did adopt a model under which market mechanisms were going to be the main source of social provisions, of education, healthcare, pensions and people would have to pay a lot of the costs of those themselves. I think that hasn’t worked so well. It has been gradually and incrementally changed over the last 20 to 25 years, I think it needs more change, with more public provision, and that means a tax system that does tax the better off more than they have been taxed in Chile so far.”

The rise of phantom investments

A corporate tax dodge called “phantom investments” is gaining ground and is depriving the developing world of much-needed money.

Forty trillion dollars in foreign direct investment (FDI) is being channelled around the world as phantom investments to minimise tax costs. In 2015, the UN calculated that developing countries lost $100bn every year because multinational companies shift their profits to countries where they pay little or no tax. This money could provide safe drinking water or sanitary facilities for two billion people every year.

Petr Jansky of Charles University tells Al Jazeera that FDI by multinational companies has been increasing over time and is as large as half of the world’s total GDP.

“We know that it is large but we also know that much of it is not driven by real investment, but by tax avoidance by these multinational corporations,” Jansky explains.

“I’m also careful to use the word tax avoidance by multinational corporations. So tax avoidance implies that it is not necessarily illegal; tax evasion is the other term which would imply that it is illegal. What is clear is that this has a harmful effect on other taxpayers in other countries.”