Home >Opinion >Columns >The global economic system seems at the cusp of change

We know that the covid-19 pandemic has been a game-changer. But, what if some things were already changing and we missed the signs? For example, the tectonic plates of the global economic order of the past 50 years have already been shifting and the pandemic only hastened these changes. President-elect of the United States of America, Joe Biden will have to heed some of these signs as he leads America back to a moral, sane place and works out the legacy he intends leaving behind. In his acceptance speech, he has promised to “heal"; economic policy could be a starting point.

Biden may want to look south towards Chile for some early signs. This South American nation’s recent referendum saw 78% voting to change its constitution, in force for over 40 years. This referendum is important for two reasons. The first is cathartic: This constitution is a reminder of the republic’s dark days when a democratically elected president was overthrown by a US-supported dictator. Augusto Pinochet’s brutal reign exterminated thousands of political dissidents, apart from tens of thousands who were jailed, tortured and maimed. He drafted a constitution that was bereft of stakeholder inputs and was passed by a sham vote in 1980. Chileans wanted this canker removed from their public life and they were able to change only bits and pieces; they finally have an opportunity to completely overhaul it now.

It’s not been easy, though. Chileans had to struggle for it, which included prolonged street protests. But here’s the thing: Serious protests actually started about a year ago over metro fare hikes, but this issue, like the proverbial spark in a tinder box, energized the populace over a host of other combustible concerns. These included widening income inequality, poor healthcare and education infrastructure, and perennially low wages and pensions, among other things. The people saw the constitution, which also spelt out Chile’s economic policy, as the progenitor of these shortcomings. So, here’s the second reason for this referendum’s significance: An overhaul of the constitution is also a chance to remake economic policy.

Reshaping Chilean economic policy might then present the first sign of any push to overhaul the prevailing, and dominant, global economic system. Eyebrows might be raised at the geography of disruption, because Chile was perhaps Latin America’s best performing nation when viewed through the conventional lens of gross domestic product (GDP). Yet, what lit the spark in this Andean republic is the fact that its economic philosophy closely followed the Chicago School model popularized by late Nobel laureate and economist Milton Friedman, which focused on monetarism, free markets and a greater role for the private sector. This recipe was seen to favour only the elite and impoverish the masses. What further soured matters was the fact that many Chilean economists—later nicknamed Chicago Boys—were trained by Friedman at the University of Chicago, all of whom occupied critical positions in the administration. Friedman had to face continuing criticism for visiting Chile and advising dictator Pinochet. Well-known German-American sociologist and economic historian (and Friedman’s student), Andre Gunder Frank, criticized his former teacher’s economic policies in an open letter to India’s Economic and Political Weekly.

Chile’s economy initially did well, with rising per capita GDP and increasing foreign capital inflows. At the same time, inequality also widened, implying that fruits of the economic programme were not distributed evenly. Chilean industry is naturally not enthusiastic about the referendum. According to a New York Times story of 25 October, “Last year, the United Nations Economic Commission for Latin America estimated that nearly a quarter of total income goes to 1% of Chile’s population. To cover the high cost of living, Chileans are greatly indebted. The Central Bank found last year that on average nearly three-fourths of household income was used to pay debt."

While the referendum does hold out hope, the road ahead is long. Attempts are on to ensure the policy does not veer too far left. A warning shot has already been fired: Fitch Ratings recently downgraded Chile’s ratings and added a rather open-ended statement about what could trigger future downgrades: “A significant deterioration in Chile’s economic institutional strengths, for example through measures that weaken its macroeconomic policy framework." It is perhaps premature to predict the kind of Chilean economy that will eventually emerge. It is also quite likely that many key elements may remain, with policy aiming for only course correction: Preventing the concentration of wealth in a few hands in the name of laissez faire, or ensuring a larger role for government in the provision of essential social services.

It is, however, undeniable that two nations are at the cusp of significant change: Chile with a new constitutional opportunity and the US with a new leadership. These developments might just be the catalysts required to change the course of global economics that gained momentum with the elections of Margaret Thatcher and Ronald Reagan in the UK and US respectively.

As economic developments after the 2008 financial crisis have shown, these policies are well past their sell-by dates.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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