How Chile's Unrest is Affecting the Economy

have turned that reputation on its head. Demonstrators demanding a more equal society have clashed with police, and the unrest has sometimes tipped over into looting and vandalism that more than twenty people have died, hundreds have been wounded, and thousands thrown into jail, and there have been plenty of accusations of human rights abuses. So the billionaire president Sebastian Pinera was caught off guard at the beginning and fumbled his response. He said that Chile was at war, which

enraged the protesters. Then he backtracked and has now promised lots of social projects to bring the demonstrators around. In a minute, I'm going to ask one of Bloomberg's Latin American economist, Philippi Hernandez, whether the protests have put Chile's long term stability at risk and whether they shed light on the challenges facing new governments in Argentina and Brazil. I'm also going to catch up with our trades are Brenda Murray on the latest truce in the US China

trade war. But first, here's Bloomberg Santiago Bureau chief Eduardo Thompson on the roots of the economics and social crisis in Chile and where the country goes from here. Understand Chile need to know about Plas Italia, a wide roundabout that marks the dividing line between the upscale neighborhood of Providencia in the district of Santiago Center, the home of government offices. Every time the national soccer team wins, crowds gather there to sing and celebrate. It's also a magnet

for political protests. In a way, it's a local version of Washington's National Mall, with wide avenues and parks along the border of the Mapucha River. It's also an invisible boundary the Place Italia Barria or on up from Place Italia is where the wealthy live in Santiago's northeastern districts.

Nail Italia. We're never gone down. Best place Italia means someone who has never seen the real world, and by real world we mean in downtown, where most of the people that feel left behind from Chile's economic progress live. Las Italia is the ground zero of the Protestant Chile that started in October. Layers and layers of graffiti now cover the statues honoring past wars, while metal or ward barriers surround the area's stores. A few brave shopkeepers have

put ups paper signs saying they're still open. Many have closed for good. On a sunny and hot Monday, I met with a twenty four year old woman named Tad Flories. All around, college age men their faces covered behind masks, directed traffic and set off fire extinguishers. Women near the main statues were doing a topless feminist performance against sexual violence. Police were nowhere to be seen ever since they started

be coming here to protest. But I get out of it, turns to violet and there's police repression and protest him because of the bad quality of public health and pensions. Pensions are just too like the addition, know about this, she works at a private clinic that attends to the rich those that live uptown from Plas Italia. This invisible boundary in Plas Italia also inspired David Vargas to protest.

Every Friday. After the thirty eight year old technician completes his shift working in the back office of a credit card company in the swanky neighborhood of Nova Las Condes, he heads out here to join the protests. I came to work one day at Glas Conges after it all began, and that is what angered me the most. The place was packed with soldiers. They were guarding everything when absolutely nothing had happened. But if it went downtown or rather

places in Santiago, it was pure chaos. They just guarded from Plas Italia to the rich neighborhoods. Very That's how it was, and you can still see that today and David are part of chillis rising middle class. Both have professional degrees. David, for example, comes from a poor family. His father, a former factory worker, collects a monthly disability pension equivalent to about hundred dollars. David's mother worked her whole life cleaning houses to put food on the table

for him and his family. I'm protesting mostly because of the pensions, and to emphasize because right now I have privileges that many don't have. I know what it is to live in a poor neighbor. I know what it is to wait for eight hours at public hospitals for service. I know what it means that the elderly received extremely low pensions and don't have enough to leave or to buy food. A few blocks down from plass Italian is where the whole mess started. In a subway station called Chile.

Early in October, students began to plot massive ticket evasions, first in New York City Chile and then in other stations, sparked by a fair increase of thirty vessels or four cents. Things got nasty fast. Police special forces clashed with the protesters. Acts of vandalism started and culminated on the night of October eighteen, when unidentified groups set stations on fire. Protests continued and morphed into the biggest social unrest since the

dictatorship of Augusto Pinochet. The message was clear. The neglected lower and middle class in South America's richest country was mad, very mad. Outside of the iconic station in downtown Santiago. I met with Claudiaquentis, a professor of political science from the New Year City, Diego Portalis. He has been following social protests for a long time, but the violence of

the protests took him by surprise. The people are very, very upset against political parties, against the business community abusing powers. So this is at two sides, a conflict related to social demands and the abuse of power of the lead. Although at the time of this recording, the intensity of the protests seems to have subsided, the damage to the social fabric of Chile and it's once growing economy is undeniable.

The Central Bank has warned that if the economy doesn't get back on track, unemployment can jump to more than ten pc. The bisto has had the worst performance of any emergent market currency in the period. Getting out of this will require lot of spending and a lot of soul searching around what led the country there. I think that also makes it extremely difficult to handle that this

is domestically created. Most of the crisis that we have had Asian crisis, the global finance crisis were extended crisis that is dean of the New Yar City, Chile School of Economics and former governor of Chile Central Bank during the financial crisis. He says that though income inequality figures have improved and poverty has fallen, it hasn't been enough.

All they the munity developments and poor people housing was down in the In the baphory of the of the city we create not get as well, but the extremely dissegregated city, so you are very high inca where if you have middle or low income living different helps. Getting out of this crisis won't be easy for President Pineta. He has promised the five point five billion package of social measures, and the country will issue more dead and

spend part of its savings. There's also a promise of a new constitution vote next April, but political parties have stalled discussing the details of the process, and for people such as David Vargas, it isn't the solution. He wants to see the video. I meant anything. The most important measure is that the president should resign because he has shown that he won't bring peace. Neither will political parties.

They set up a show and say we've signed a peace agreement, but they don't see that people are protesting because they don't believe in competitions that may be seen as too extreme. But political scientists Cloudy Afuentes says that a major change is long overdue, need to change forever, because the previous let's say CONSENSUV and its stabilty was artificial. It was like a time em bomb in which where

pressuring force certain issues. And I think that if we don't change the way society is set up, we might have another explosion in thirty years, in twenty years. It's a lesson that other Latin American countries are paying careful attention to. When similar protests began in Colombia, the government of Van Duke quickly set up talks with unions and social groups to diffuse the tention, While the government of Jai Bolsonado in Brazil has taken the foot off the

gas of its markets reform agenda. It remains to be seen if the reforms in Chile or elsewhere will be enough to avoid another flare up of the violence. For Bloomberg News, I'm Edward or Thompson. So I'm I'm joined now by Phelipp Fernandez in New York, who covers Mexico, Chile, and a bunch of other countries in Latin America for Bloomberg Economics. Philippe, thanks for coming on Stephonomics. Thank you

for inviting me, Stephanie. We just listened to that piece from Eduardo, and you know, I guess the question is does this does this unrest actually put Chile's really long reputation for economic and political stability at risk? I mean, is this is that the Chilean economic model, such as it is, is it is it fundamentally under threat now? Or are these protests something that are likely to fade.

The short answer to your question is that yes, indeed, all of these unrest has raised some risks for the for the Chilean economy and the view, the consensus view of a sterile Chile. What the policymakers have to understand is that in terms of what changes are REQUI fired, they must keep in mind or try to make sure that what has been working well for Chile is maintained.

Some good examples of this is that they you now have a very credible and independent central bank, which has helped to keep a low and stable inflation, responsible and sustainable fiscal policy and the overall conditions that have allowed Chile to enjoy relatively stable and positive economic growth. Now, there were some things that were not working in Chile. When you look at the different indicators, you find that despite all of these things that I mentioned before, there's

a still high income inequality in Chile. There were limited redistribution policies and low social mobility in part due to

limited taxes to high quality education. And any new arrangement that comes out as a result of the of these changes must be sustainable in the long term, and by this I mean at any any fiscal policy measures that result in higher public cector expenditure will have to be upset by the government finding news sources of of revenues, and for the economy as a whole, of course, this

probably will imply higher taxes. Any decisions in terms of increasing wages or pensions that could result in higher costs for the for the productive sector will all have to be carefully weighted against the negative impact that this could have on the competitiveness of Chile, especially when considering that Chile is a very highly opened economy and that it is it's a competitiveness relative to the world, to the rest of the world is a key component of the

positive growth in the economy. It's not just Chile. I mean, if you look around the region, there's protests bursting out all over. We've seen in Bolivia, Colombia, Ecuador. Venezuela obviously has been in meltdown for quite a while. And I noticed that you you took a look um with Adriana Jupiter, who's our Argentina and Brazil economists at the regional picture on protests and how to think about how one might assess the risk in different countries of protests breaking out

in the future. Can you can you tell us a bit about that? Sure? So there were in different countries different reasons for the protests, but what we saw is that they share a lot of the same problems. So in equality, it's not a problem only in Chile, it's also a problem in the rest of the region. The need for fiscal titaning measures. It's not just something that is now at the center of the debate in equal or.

It's also part of the debate economic debating the rest of the region, and the political noise in both Bolivia and Colombia. I think this is just evidence of the problems regarding governance that we continue to see again not only in these two fries, but in most of Latin America, which basically helps to explain why you have these UH these episodes of unrest and and the protest breaking up

pretty much at the same time everywhere. Now, all of these problems that I mentioned before, they are really not new, but have recently become more note noticeable. The main reason for this is that for almost fifteen years between two thousand and two thousand fifteen, you had very strong growth in the region, and that very strong growth in the region helped to achieve or deliver some progress in terms

of social indicators. That very strong economic growth but was written mainly by very favorable external conditions, bolstered by strong growth from China, high commodity prices, and a steady decline in global monetary policy interest rates sarvice. Alt of these favorable environment and strong economic growth, governments during these period had a significant amount of resources to expand government programs

to aid the lower and middle income classes. We saw very successful and the programs of cash transfers from the public sector to to to these UH minorities, and we did saw a red significant reduction in the levels of poverty and in some countries some improvement in inequality measures. However, over the last five years, the external environment has been less favorable. That has had a negative impact on economic

growth in the region. And what we have seen is that in the last five years, this progress in social indicators has pretty much stalled, and in some cases we have seen some deterioration. So the people in these countries, after fifteen years of progress, they are seeing no progress. In some cases, they are losing some of the progress made. And now that you have a bigger middle income class, this is uh people that are getting used to make more demands and want better services and and but there

better attention from from the government and under governors. And when people talk about South America and particularly people and thinking about the economic side of things, they tend to focus on Argentina, Brazil and Brazil. You know they face they face some of the same problems. They have both relatively recently had elections. Do you think there's a risk in either of those countries that even these quite new governments will face the kind of unrest we've seen, particularly

maybe in Argentina. Ah, the answer is yes, there's definitely a risk for it for Argentina, Brazil, and I will also say Mexico as well to be included, and we cannot rule out that they could eventually see some some of this unrest as well. The main reason is that, as I mentioned before, they pretty much share most of the problems that triggered the protests in Chile. They also are facing decelerating economic growth. Actually Mexico now in recession.

And this is something that we looked into in the piece that we wrote with Adriana, is that what why have we not seen protests in Argentina, Brazil and Mexico. And the main reason, at least one of the explanation that we could came up with, is that we recently saw elections in all of these In these three countries, the presidents that were elected or the results of these elections provided a significant political change from the from the

previous government. And in the case of Mexico and Brazil, the current presidents have been sitting in office for less than a year, so they are relatively new and they are still like in like a honeymoon period. That reduces the amount of pressure, that of political or popular pressure that they can under. So people think they've successfully voted for something different, and now they're going to wait and

see if they get it. Reminds me of somewhere else, not a million miles away from from where I am now. Philip Bernandez, thanks very much for joining us. Thank you for invading. So we just have time for the very latest on the trade wars to keep you happy as you go into the holiday season. Or is there still a trade war? Is it over? You could take a number of views on that on the basis of President Donald Trump's tweets in the last week. Brendan Murray, our

long suffering trades are is here? Brendan, what's going on? Well, I wouldn't say the trade wars are over, but let's just say both sides called a time out and agreed to go back to their corners and carry on, both sides being US and China exactly. So, what the US announced just a couple of days ago was was a deal in principle with China that consists of a couple of things. The Beijing has promised to purchase some two hundred billion dollars worth of American products over the next

couple of years. A lot of that agriculture and and President Trump conceded that he would roll back some tariffs. So we've got both sides kind of giving in but agreeing basically to put off the really tough issues where they couldn't come together for a later round, a phase two. They're calling this one phase one, and the next step where they would address some of the more the deeper

structural issues with Chinese economy down the road. Now, that could be a year from now, could be two years from now, who knows, but it's it's a pretty safe bet that the that the trade wars are going to kind of drag on for months, if night years. Well, I was going to say that I would miss talking to you about the trade wars, but I don't think

I have to worry about that anytime soon. I mean, we should say about the timing of this, that the announcement of the deal came just a couple of days before you would have had that imposition of the next round of of tariffs on China, which actually our economists had pointed out would be much much more damaging and affect a lot more US companies than the previous tariffs. So I guess there was a reason for Donald Trump

to come up with something um. But just to be clear, there's still going to be a lot of tariffs in place for the foreseeable future. There what are the other question marks about this phase one deal before we even get to the Phase two. Absolutely, there's there still remains tariff on two hundred and fifty billion dollars worth of Chinese products and and teariffs on another hundred and thirty billion or so. So we're still looking at, you know,

the US ex imposing a fair amount of leverage on China. UM. The big question then is whether the threat of those tariffs is wielded over China going into at the end of Phase one and inter phase two. Is this is it a threat that just could keep coming up over and over again as they try to work through those

tougher issues. So the tariffs that are currently in play aren't going anywhere for the foreseeable future, and you know, that will continue to put economic pressure on China to you know, to come back to the table again and again. As if the US it continues to press press these issues.

That's the economic prism that we're looking through. The political prism is Trump heading into his election next November, you know, wants to deliver the goods for the for the farmers in the Midwest to you know, many of them who will vote for him, And so there there are economic

costs and benefits and political costs and benefits here. And we've we've talked about in the past that it probably if your president Trump, your ideal is something that you can say is more than any other president would have achieved, but not so much that you have to stop complaining about China and you can still bang the drum. So I guess in that sense it's kind of perfect for him. But what I'm hearing is that we're not going to

get a Phase two anytime soon. It's really unlikely, at least the experts that we talked to to see, uh, you know, these bigger issues that they need to deal

with um being hashed out in an election year. Being tough on China is does sell well with the American public, both Democrats and Republicans, But the Chinese understand the political timetable as well, and so their their strategy has largely been to kind of stall, drag their feet and see, if you know, the political pressure outweighs the economic costs and and leaves Donald Trump trying to focus on these other issues we are speaking today when when he's the

House is taking up his impeachment. Uh, quite a distraction. And we have before you even think about that, we do have this other issue and that has been resolved. You know, we should say, if you like the other the other side of trade wars that was opened up when President Trump came in, which was the renegotiation of NAFTA. UM that has gone through in the in the same week or at least we've got agreement with the Democrats

on that new deal. You know, I guess the obvious question is if we've got if if the President would say that NAPA to the North American trade with Canada and Mexico that he complained about has been sorted and there's at least a truce on the situation with China. Is Europe next? According to the U S Trade Representative Bob Lighthouser, he's setting his sights on that big trade imbalance with with the European Union next year. It's you know something that um. You know, the President Trumps has

complained about a lot. He he calls Europe even worse than China when it comes to dealing with on with the trading relationship, and there are threats of tarrass on auto imports which would hit Germany very hard, France and the UK to a large extent as well. So the the ever present threat of tariffs pointed at China to date is you know, going to be pointed in the direction of Europe next coming to shows now you well, thank you very much. I'm sure we will be talking

about that in the new year. Brenda mind thanks for listening to Stephanomics. We'll be back next week with an extra special Christmas episode featuring yet another Nobel Prize winner in conversation and a particular take on the holiday season from Vietnam. In the meantime, you can find us on the Bloomberg Terminal website, app or wherever you get your podcasts, and we'd love it if you took the time to rate and review our show. For more news and analysis

from Bloomberg Economics, follow at Economics on Twitter. You can also find me on at my Stephanomics. The story in this episode was written and reported by Eduardo Thompson with assistance from Maria Jose Campagnion. It was edited by Bruce Douglas and produced by Magnus Hendrickson. Special thanks to Philippe Hernandez, Brendan Murray, Rodrigo Ramirez, and Solida Saldalla. Scott Lamman is the executive producer of Stephanomics and the head of Bloomberg Podcast is Francesca Levi.