The Institutional Quality Index (ICI) prepared by the Friedrich Naumann Foundation for 2023 showed a dramatic panorama for Chile.
Since the reforms promoted by President Gabriel Boric, the country fell six places to the 30th place out of 183 countries in the sample.
Chile continues to be the best-positioned country in this ranking in the Latin American region but fell to the lowest position in history according to the series that reconstructs the indicator since 1997.
Since then, no government has contributed as much to deteriorating the country’s institutional quality as Boric, even compared with other leftist administrations such as Michelle Bachelet’s.
The indicator is subdivided into two large groups:
- “Market Institutions”, which includes economic activity indicators from other foundations,
- and “Policy Institutions”, including indicators from the World Bank and the perception of corruption.
There were two main causes for Chile’s dismal performance: the expansion of public spending and the deterioration of property rights guarantees.
According to the first point, the budget presented by Boric for the fiscal year 2023 foresees that expenditures will increase by 4.2 points of GDP.
Still, after the rejection of his tax reform, there will be no compensation for these additional expenses.
The International Monetary Fund (IMF) estimates that Chile’s primary deficit will increase to 1.5% of GDP by 2023 (starting from a surplus of almost 1 point in 2022), while the Government’s total financial deficit will escalate to 1.84% of GDP in the same period.
On the other hand, the loss of guarantees for property rights materialized in the uncertainty around the New Constitution and the changes in the rules of the game for the private sector in the Chilean economy when the extreme left-wing constituents wanted to promote the collective property, legalize land seizures and give land to the indigenous people.
The recent right-wing victory in the constituent elections set a positive precedent to clear doubts in this aspect.
Still, the actions of the Government are moving in the opposite direction, and it will take time to be reflected in this index.
In addition, President Boric announced the nationalization of lithium mining in the country, following a pattern very similar to that applied by Mexico with López Obrador and representing a complete turnaround concerning the position adopted by the country since the 1980s (in favor of privatization of production and the displacement of the “entrepreneurial State”).
The same applies to the failed tax reform the ruling party intended to pass, with heavy taxes on traditional exports.
If Chile still occupies the highest position in South America in terms of institutional quality, it is undoubtedly despite the constant attacks by the ruling party.
The National Congress, in the hands of the opposition, has managed to bury many socialist initiatives.
The Central Bank of Chile (which firmly maintains its independence) is the line that prevents the country from returning to the economic collapse of the 1970s.
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