Chile’s Rise and Fall


June 19, 2015 10:25AM

The country of Chile has been a recent success story when it comes to embracing free markets. Over the past several years, Chile has bucked the socialistic status quo plaguing much of South America, and has thrived in doing so. Last year, the Wall Street Journal noted the “two Latin Americas” that were forming down south, one with a shuddering economy made up of mostly Atlantic coast states, and the other made up of Pacific-facing countries like Chile that are booming.

Sadly for Chileans, that bright future is dimming, and it’s in part due to a topic that is hotly debated right here at home: income inequality. Candidates for Nashville mayor all the way up to presidential contenders are crowing about income inequality in America. Most of the time the “solution” is for the government to take over and solve the disparity between rich and poor by giving to the latter what it takes from the former.

As this recent article notes, we can look to our southern neighbors for guidance on what to do, and what not to do. While countries like Greece blazed a path to the bottom with massive tax increases and debt, successfully addressing income inequality but only by making the rich poorer, Chile originally did the opposite.

Among other things, during this boom, Chile:

  • Became a world leader in protecting property rights.
  • Showed budget discipline, ensuring that private sector growth outpaced government spending.
  • Reined in its debt.
  • Kept taxes relatively low, with a corporate tax rate well below the global average.
  • Expanded its commitment to free and open trade.

As Greece’s economy tanked, Chile prospered. The poor got wealthier, but not at the expense of the rich. Everyone was better off.

But last year, Chile took a turn for the worse, with government raising taxes substantially. And to the shock of no one who understands the power of free markets to make everyone more prosperous, its economy sputtered.

Studies confirm “economic freedom reduces income inequality both in the short and long run.” Despite proving this to be true, Chile failed to stick to its guns. Instead, the nation’s new leaders jacked up taxes on businesses and individuals, introduced a new carbon tax, and significantly increased government spending.

Chile’s recent decline is instructive for politicians here at home who wish to narrow our own income gaps. We can go the way of old Chile, or we can go the way of Greece. With Chile’s recent history as our guide, it should be clear with path to take.