Chilean President Ricardo Lagos talks to Karina Robinson about reform and the challenges ahead of next year’s election.
Interviewing a politician in the middle of the bombshell of an unexpected cabinet reshuffle could have resulted in a lack of concentration or, heaven forbid, a cancellation. But over a protracted private lunch, President Ricardo Lagos of Chile tucked into his seafood salad followed by sea bass, spoke passionately about the many challenges facing his country and ignored the clamouring press troops packed into the courtyard of the Palacio de la Moneda in the capital of Santiago.
The change of cabinet, said the 66-year-old, was expressly aimed at guaranteeing a team that would ensure there was no drift in his last 18 months in office, but rather one that would deal with the main issues he wants to address, including pensions and health.
“It is not a team to manage the present. It is one to change the future,” he said, creating a new, resounding slogan that Chileans will no doubt hear often in the run-up to the December 2005 election. Two of his former cabinet members are presidential candidates. By dropping out of government, they can concentrate on the elections and avoid accusations of conflicts of interest.
Mr Lagos is barred from standing for a consecutive term, something his four-party Concertación coalition must regret, as his popularity ratings are over 57%. The left-of-centre group has ruled Chile since General Augusto Pinochet lost a plebiscite and stepped down in 1990.
The dictator is still in the news due to a recent court case but Mr Lagos dismisses him, saying he is “a historic figure with no influence” and berates me for not being aware that South Africa’s Truth and Reconciliation Commission was based on Chile’s.
Historical legacy
However, he is still dealing with Mr Pinochet’s constitutional legacy. Mr Lagos’ aims for his last months in office include getting rid of some of these remnants, such as the excessive power of the armed forces in the National Security Council and the designation of the heads of the armed forces and ex-presidents as senators for life. But he admits a parliamentary majority to change an electoral system that almost always ensures the right-of-centre opposition wins seats disproportionate to its votes is not available.
Academic roots
In 2000, when Mr Lagos scraped into office in the presidential election run-off, with 51.3% of the vote compared with right-of-centre candidate Joaquín Lavín’s 48.7%, few could have predicted his popularity.
As a former academic who acquired a law degree at the University of Chile and a PhD in economics at Duke University in the US, his manner remains professorial. His lecture-like answers to questions are, however, enlivened by the politician’s technique of raising his voice to a near-shout and lowering it to a whisper.
Allied to a host of rhetorical questions, it is doubtful that his students – now the Chilean population – could fail to pay attention. In fact, his advisers – and even his detractors – argue this is the bedrock of his popularity. He is intent on explaining the most complicated issues to all and sundry and does not pass up an opportunity to get his message across.
The day before our lunch, Mr Lagos was inspecting the Costanera Norte, a concessionary toll road in Santiago begun during his time as minister of public works in an earlier government. Like many of the state projects, it is a 30-year BOT (build, operate and transfer) concession.
“One of the workers said: ‘We want stability; here they hire and fire us.’ I said to him that in the modern world there is no stability. That is why I gave you unemployment insurance. I said to the worker: ‘If you lose your job you will get it [unemployment insurance] for six months.’ I said to him: ‘Do you have unemployment insurance?’ ‘Yes, sir,’ [he said]. ‘Did you before?’ ‘No, sir,’ [he said]. He understood. When I explained the story to him, the workers applauded. If I had said I would dictate a
law for him not to be fired, that would have been demagoguery,” said Mr Lagos, with the satisfied air of having accomplished his educational mission.
“Can you believe this country did not have it [unemployment insurance] before I came in?” he adds, with a rhetorical flourish.
What Mr Lagos refers to as social cohesion is an important element in his beliefs. He maintains that without it, Chile will not maintain its international competitiveness. “It is said we are a good pupil of the Washington Consensus. The second part is never mentioned, that we are a bad pupil because we have too many social policies,” he jokes. “But thanks to those, we have lowered poverty from 40% [of the population] in 1990 when democracy arrived, to 18% in 2004.”
Stability and growth
Mr Lagos has hammered home this message – that social cohesion is crucial – to Chilean employers and industrialists (many of whom are supporters of the centre-right opposition) and has won them over on the back of macro economic stability, growth and free trade agreements. The economy is expected to grow 5% this year and 4.5% in 2005.
Real wages have risen every year for the past 10 years without a single year of slippage, even when Chile was growing at lower rates because of the Asian crisis. The budget surplus is estimated at 1% of GDP this year. The president instituted a policy of running a structural budget surplus equal to 1% of GDP over the course of the business cycle, which has had a counter-cyclical effect in difficult times. Inflation was 1.1% last year and 2.2% in the period January-August this year.
Mr Lagos enjoys telling local businessmen that the lowering of country risk on the back of a healthy economy is effectively a subsidy for them to the tune of $1.4bn a year through the differential between the average interest rate in Latin America and that of Chile.
“They don’t like to be reminded of that. But when they say to me: ‘President, we need conditions one, two, three,’ I say to them: ‘Don’t joke, you are getting a $1.4bn subsidy due to a serious fiscal policy’,” he says, taking a bite of his mixed fresh fruit dessert.
“That is why companies come here and use Chile as a platform. Chile is going to produce jamón Serrano [Serrano ham]. Yes sir, jamón Serrano. They [the company] have the right to because they produce it in Spain. Because from here they will export to the US, Canada, Korea. That is real.”
The openness of the country’s economy through a plethora of free trade agreements with the US, Canada, South Korea and the EU, has resulted in over 65% of GDP coming from trade. The US free trade agreement came into force in January 2004. In the first nine months of the year, Chile has already exported the same amount to the US as in the whole of 2003.
Meanwhile, the trade agreements have also improved the mix of its export destinations: around 30% to Asia, 30% to Europe, 20% to the US and the rest to Latin America.
Although copper still accounts for over one-third of total export earnings – so far this year reaching 44% due to high prices – non-copper exports have been growing at more than 20% a year.
Higher value focus
Still, there is a need to increase the value-added component of Chilean exports. Spending on research and development is only 0.6% of GDP, compared with 2.7% in South Korea.
“I agree that in R&D we are way below [what some other countries spend], so we must improve. That is why we have increased it a lot in my government, but also why we need [to levy] royalties on mining. The amount raised will create a fund for R&D so that when copper is finished…’’ he says, tailing off. “I hope to send a proposal [to Parliament], which will mean a 3% [royalty] on sales after taking off the cost of those sales.”
The married father of three failed to achieve a Parliamentary majority for an earlier proposal of this type, but he believes the mining companies and politicians have now understood the need for a moderate royalty charge, as countries such as Canada and Australia have one.
Trade optimism
When asked about the outlook for the Doha Round in the World Trade Organisation negotiations, Mr Lagos appears relatively optimistic: “Talking with Lula [President Luiz Inacio Lula da Silva of Brazil] once, he said to me: ‘The easiest thing for a union leader is to go on strike. The most difficult is how it finishes.’ Then, I will tell you, the failure of [trade talks at] Cancún is the call to strike. Now, we must finish the strike and be constructive. I think that based on that failure we can start to advance.”
Chile was part of the G-20 group of countries that spoke out against the negotiating position of the developed group of countries. President Lagos justifies its participation in a grouping with which it appears to have little in common – after all, Chile’s average tariff is only 2.8% – by saying that there are issues that cannot be solved in free trade agreements, such as EU agricultural subsidies and US anti-dumping laws, but which might progress when a large group of countries, including India and Brazil, is involved.
He is also adamant that those who say Chile is isolated in Latin America are wrong. “I think that is not so. You practise foreign policy from where you are based. Chile practises its foreign policy from here in Latin America; we are associate members of [the] Mercosur [trade pact]. It is a different issue to understand that countries have different interests,” he points out.
However, in recent years, there have been disputes with Argentina over gas, with Peru over Chilean companies operating there, with Bolivia over a corridor to the sea and with Venezuela when President Hugo Chávez took Bolivia’s side.
President Lagos’ technocrat-with-a-heart regime sits uneasily with those of his more populist neighbours and their problematic economies, as underlined in Standard & Poor’s 2004 pointedly titled report, Chile: Highly rated but lonely.
Persistent image problems
Although Chile is the highest rated sovereign in Latin America and a comparative economic star, it is not without problems. Its squeaky clean reputation suffered a blow in 2003 when a few corruption scandals came to light, including one which resulted in the central bank president’s resignation.
It has the second most unequal income distribution in Latin America, although Mr Lagos defends his record by putting on his economist hat. The richest 20% of the population are 14 times wealthier than the 20% poorest, which is “brutal”, he says, but he adds: “If I add in the [government’s] social policies, the difference goes down drastically to seven times.”
He believes on a long-term basis, this problem can only be solved with education. As minister of education in an earlier government he began a series of reforms, which he has continued building on in his current role. He gets carried away on the topic of schooling. Although he says reform of the health system will be what history judges as one of the most significant in his presidency, his heart is obviously in education.
Pensions crisis
Chile also has a problem with pensions. Although it is upheld as a country that tackled the problem from 1981 by setting up private pension funds, the system is facing shortfalls in both the state and private sectors. On a comparative level, though, it is in a better position than a number of European countries. “I am pleased when talking to [German Chancellor] Gerhard Schröder or [UK Prime Minister Tony] Blair when they tell me their problems because I have at least part of the pension problem dealt with,” said Mr Lagos.
Another of Chile’s problems is unemployment, which at 9.9%, is far from negligible.
All in all President Lagos has benefited from the economic reforms and free trade negotiations instituted by his predecessors, something he does not deny. “In this activity, you always have to have a little bit of luck,” he concedes.
But he has taken them forward and is preparing Chile for a 21st-century world. He still calls himself a socialist, but says that socialism is a way of creating opportunities for all. “Three hundred years ago, socialism was about who owned the land. [Karl] Marx arrived and he said: ‘Socialism is the ownership of the means of production.’ And today? Today it is about knowledge. Today the richest man is Bill Gates, and he got there not through the means of production but through applied knowledge. Thus socialism today is about how you give access to knowledge to everyone. That is the challenge.”
As he walks me out through his relatively modest office, decorated with a traditional painting of Diego Portales, founder of the Republic of Chile, and an abstract work commemorating General Pinochet’s ousting, I reflected on the description of President Lagos by someone who knows him well on a professional basis: cordial y culto (cordial and cultured).
To that I would add: a zealot on a mission to ensure Chile’s competitiveness.
