Friday, August 26, 2011

Chilean Economic model: The social cost of oligopoly (I)
In recent months, Chilean society has been stressed with street demonstration . Why?. Lets try some explanation.When the “Chilean Model” started out 36 year ago, it was based upon a free market economy, with the private sector on the lead to support economic growth and wealth creation, and the state playing a complementary role with the private sector and focusing on public policies related to poverty reduction . The results are impressive. In 2010, Chile became an OECD member. It has reduced poverty from 40% in 1990 to 14 % (roughly)in the year 2009, income per capita has grown in the same period from USS 4000 up to USS16000(ppp),and the current expectation is to reach a developed country status in the year 2018.On the other side ,it is the inequality issue with the Gini coefficient(GC) in 55, which of course is far from the OECD level, which has an average of 32 (GC). Besides, beyond statistics outcomes, there are clear signals of oligopoly in Economic, Political and social areas. The first implications is that those results(poverty , income per capita and inequality index) could have been much better, whether a real free market economics would have prevailed all along.
Economics analyzes oligopoly as a market failure, because it means competition among the few, which imply welfare losses due to higher prices ,lower employment and productivity than other market arrangement. Oligopoly might lead to collusive action to maximize the outcome of those within the oligopoly area, given that it is easier to coordinate a few. Thus, the “Chilean model” has become a structural oligopoly far from the desired competitive market model set in the seventies. Let get to the specific:
The areas of insurance, banking, retirement fund, retail , private health, beverages, air and load transportation are all oligopoly, although there has been a steady improvement in the institutional framework to deal with its consequences. The social oligopoly arises due to the high level of social segmentation (according to PISA index of Social segmentation(2006), Chile has an index of 52 , while Argentina has 39).This social oligopoly implies that the best of any opportunities, goes to just a few .Thus, the gap between the lowest income and the highest 10% income level in Chile is 46 to1!.(more so if we compare the 5% range ). In the banking industry for instance, the wage gap between the top and the bottom managers has reached 43 to 1 . A recent OECD research, has found that Chilean education is among the more expensive of the world, while its quality levels goes below international standard.( PISA achievement has not been on the top 30%).
The political oligopoly arises, from the fact that democratic elections with the exception of presidential one, do not represent the voters preferences, but the ones of those who designed the process specially aimed to protect the election of those supposedly to be icons of stability and governance. As a result, on any side of political spectrum, just a select group can have the access of being part of democratic game, because as long as they become a “brand”, the electoral system assure them what it is left to be elected.