Chile, Is Income Inequality a Problem?

Income inequality has been a hot topic for some time and it is a driving factor in the desire for economic policy reform across the globe. An uneven distribution of income seems to justify a top down solution if it redistributes unfair allocations of wealth. This, however, is not a clever strategy as the focus should instead be on what type of economic policies increase the well-being and individual freedoms of all, not just the elite. Increasing economic freedom and encouraging laissez-faire market policies are the only ways to lift the poorest among us from abject poverty and enjoy a significantly better quality of life relative to those who suffer from the plagues of planned economies.

Economic Freedom

Economic freedom, which is measured globally by both the Fraser Institute and Heritage Foundation, shows how free private individuals and businesses are in a country's economy. The Fraser Institute determines economic freedom based on 5 factors; size of government, legal systems and property rights, sound money, freedom to trade internationally, and regulation. To put things into context, Hong Kong is 1st, the United States is 5th, and Venezuela is the least free country measured. While this data is important, what actually matters is how economic freedom translates to a better life for those who enjoy it.

First and foremost, unhampered markets allow for resources to meet the needs of consumers in a very personal way. The Fraser Institute describes the cornerstones of economic freedom as

“...personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. Individuals are economically free when they are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others. When economic freedom is present, the choices of individuals will decide what and how goods and services are produced.”

Imagining an economic system in which the consumer is king should entice and excite us. You and I decide which producers will flourish and which entrepreneurs will become household names based on their merits, not their noble lineage or some other arbitrary designation of power. With our consumption preferences everybody has the freedom to pursue their own ends by whatever purposive action they see most fit.

Economic Freedom and Income Inequality

Economic freedom and income inequality do not have a clear relationship. Research by Bergh and Nilsson (2010) found that 80 countries from 1970-2005 who experienced increasing economic freedom also realized a higher level of income inequality. Is this an unfair byproduct of capitalism or is it an illustration of consumers rewarding producers who meet their needs the best? While it appears to be the latter, many are still blind to this fact and ultimately disregard that each consumer was made better off through voluntary transactions. Wealth is not a zero-sum game and the rich don’t get rich by taking from the poor, instead they create more wealth and value for society as a whole.

Chilean Social Unrest

One important consequence of income inequality is the social unrest it has been known to cause, particularly of late in South America. Chile offers an opportunity to examine the impact of economic freedom on income inequality. The country has been devastated by riots and protests that have been occurring since October 18, 2019 in response to a multitude of social injustices. While Chileans may have every right to be upset, demanding immature economic policy is sure to exacerbate the problems. Political scandal and corruption is rampant all throughout South America indicating many of these problems are not unique to Chile, but what was special about Chile is the last four decades of pro market policy.

Allowing the market to operate with minimal government intervention has helped them become one of the freest and wealthiest countries in South America, especially when compared to their direct neighbors. Chile has significantly higher average wages measured in $USD (adjusted for Purchasing Power Parity). Chile's closest neighbor's wages are almost 44% lower than domestic levels, and Chilean wages will only continue to grow if capital continues to accumulate and human capital is allowed to develop further.

Another phenomenon that both protesters and media appear to ignore is the historic decrease in income inequality that has occurred in the same time frame discussed above. This is illustrated by the country’s GINI coefficient, a statistical measure of the distribution of wealth in a country, where a 0 is completely equal distribution and 1 (100) would be all the wealth residing with one person. In 1990 Chile’s GINI was 57.20 compared to 46.6 in 2017.

 

Whether this reduction in income inequality was the direct result of economic freedom is difficult to determine. More equal distribution can also occur through coercive policies such as high marginal tax rates, yet this damages the country’s overall long-term wealth. Instead, if that money were to be reinvested or saved, capital accumulation would generate positive spillovers for the poorest of citizens. Over time this creates downward pressure on prices as businesses are able to operate with more efficient tools and the population increasingly develops human capital, creating a more productive workforce. While in some cases economic freedom may lower income inequality, in others it may increase it, but that is acceptable as long as everybody (including the bottom 10%) can enjoy the benefits of a wealthier society.

While the GINI coefficient and average wages may indicate that the median conditions are better than neighboring countries, these measurements tell us nothing about those who are worse off. World Bank estimates that Chile’s poorest 10% of the population has 1.9% share of the country's income, higher than all border countries. Even though Chile does not have the largest GDP in the region, the poorest Chileans still have higher incomes than their immediate counterparts.

Country	Total GDP in $USD	Bottom 10% Share of GDP	Bottom 10% Share of GDP  in $USD	10% Of Total Population	Average Individual Share of Income For Poorest 10% Of Country
Chile	$277,746,000,000.00	1.90%	$5,277,174,000.00	1,847,043.90	$2,857.09
Argentina	$624,696,000,000.00	1.80%	$11,244,528,000.00	4,404,481.10	$2,552.97
Peru	$211,007,000,000.00	1.20%	$3,587,119,000.00	3,144,429.70	$1,140.79
Bolivia	$37,509,000,000.00	1.7%	$450,108,000.00	1,119,285.40	$402.14

*All Figures from 2017

https://data.worldbank.org/indicator/SI.DST.FRST.10?locations=CL-AR-PE-BO&name_desc=false

https://data.worldbank.org/?locations=CL-AR-PE-BO

In short, protesters have every right to bring to light atrocities committed by their government. It is wrong, however, to assume that the same government, or any other mix of bureaucrats, can deliver financial freedom through interventionist policy and coercive action. Instead, the focus should be on empowering individuals to pursue their own ends through free exercise in the market. Admittedly this could distort the distribution of income but at the expense of no individual --voluntary exchange is not a zero-sum game. Granting consumers the power to reward the producers who best serve their interests allows for concentration of income, but everybody, regardless of their share of that income, is made better off.

"Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.”- Ludwig von Mises, Liberalism, 1927.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Bergh, Andreas, and Therese Nilsson. 2010. “Do Liberations and Globalization Increase Income Inequality?” European Journal of Political Economy, 26(4):488-505.