Chapter 2: Markets and Public Goods in Chile: Schools, Pensions, and Popular Capitalism

In this second chapter of her comprehensive book examining how market incentives can deliver public goods in developing countries, Carol Graham focuses on Chilean social service restructuring in social security and education during Pinochets authoritarian regime (1973-90) and through the 1990s. Based on private sector participation, market-based incentives, and on new opportunities for individual choice, Chiles public sector restructuring broadened the base of stakeholders in a new model for delivering public goods and services. Graham emphasizes the context for social policy reform in Chile before examining the politics and economics of social security and pension reform, the implementation of a voucher-based education reform, the privatization program of popular capitalism, and the effects of these reforms on equity.

Chiles extensive social welfare system, relatively efficient public sector institutions, and strong administrative capacity aided the implementation of the substantial and initially, highly controversial, social service restructuring. Adequate regulation, far-reaching dissemination of information, an extensive stakeholder constituency, and effective competition, all contributed to the success and political sustainability of the market incentive approach in the Chilean social security reforms.

While in general, Graham finds that new market incentives and increased competition improved the performance of both public and private sector institutions, she nevertheless maintains that at times it may be impossible sometimes to avoid trade-offs between efficiency and equity improvements. Graham concedes that the most disadvantaged people are more likely to lose out in a system with increasing market incentives and broadening individual choice. However, the extent to which the state should correct for inequitable market outcomes, who should be eligible for assistance, and how much assistance they should receive is highly debatable. She raises concerns related to equity about application of the Chilean reform model to nations with much higher poverty and much weaker administrative capacity than Chile. The problems with the introduction of market incentives into the public sector were especially evident in the less successful voucher-based education reform.

In the 1990s Chilean policymakers have focused on equity reforms because the 1970s macroeconomic reforms and the 1980s social policy reforms failed to incorporate the poorest sector of the population as full participants, leaving them with limited access or inferior quality public services. However, more attention can now be focused on the lower income groups because most of the middle and higher-income groups receive their social services from the private sector a result of the privatization efforts during the 1980s.

Social Security Reforms

The Chilean social security reform is internationally considered one of the most highly successful efforts in the privatization of pension programs. The reforms have five major goals: 1) Introduce uniformity into the social security program; 2) Create better incentives for the workers to contribute to the fund, such as individual retirement accounts; 3) Permit workers to choose their own fund managers; 4) Use government subsidies to help with the poorest workers; and 5) Introduce efficiency through competition between different fund managers.

The pension system reforms were largely successful and politically sustainable because of a high level of worker participation. The increased choice within the social security system heightened competition between pension funds and thus created incentives to improve performance. The reforms raised the overall level of savings, avoided taxing the young for the benefit of the old, and increased pensions for the poorest workers. However, the new systems choice-based approach introduced new equity problems. Less-educated, low-income workers are more likely to make poorly informed decisions and take riskier, high return options.

Voucher-Based Education Reform

The educational reforms gave people the right to choose public or private school education by issuing government-subsidized vouchers. Private schools could receive government subsidies in exchange for relinquishing the right to charge fees. In alignment with the reforms aim to generate competition between public and private schools, allocation of state funding was shifted to a per-pupil basis for both public and private institutions. The reforms reduced the size and power of the Education Ministry and transferred the responsibility for management of primary and secondary schools to municipalities. Two implicit objectives of the reforms were: 1) To diminish the power of the teachers union; and 2) transfer resources from higher education to basic education, thus benefiting lower-income groups.

Although private schools are still associated with a better quality of education, the introduction of competition did generally encourage the public schools to improve performance. In spite of this trend, the education reforms were largely ineffective in the effort to benefit low-income groups. Even though all the participants were offered new choices and opportunities, the participation of the poor was often precluded by the lack of adequate information, logistical access, and admissions selection processes to private or improved public schools. Since the private schools could be more selective about the students they chose to admit, they tended to accept wealthier children. Moreover, key actors such as rural communities, parents, and teachers were not properly consulted nor incorporated into the model. For instance under the reforms, almost 10,000 teachers were dismissed when they lost their status as civil servants. Indeed the teachers unions opposition considerably hindered the effectiveness of the stakeholder-based reforms, thus demonstrating how the political priorities of the government can sometimes undermine policy reforms.