By: Juan Pablo Rossi
The poorly timed austerity policies made by the two governments are causing strong dissatisfaction amongst the population. The ongoing protests also warn the rest of the world about the future economic climate.
Over the last few weeks, protests have erupted around the globe, resisting new policies and legislation pushed forward by local governments. While some of these demonstrations originated from ongoing political tensions (as we have seen in Hong Kong and Haiti), other countries such as Lebanon and Chile are amidst protests caused by new contractionary fiscal measures, which have spiraled into riots about class inequality and poor government spending. These growing worldwide tensions along with ongoing trade wars are continuously decreasing consumer confidence and international investments, signaling a bleak future for economic growth.
So what happened in Chile and Lebanon?
Earlier in October, the Chilean government announced a rise in the price of rush-hour metro prices to 830 pesos (equivalent to $1.14) from the previous 800 pesos ($1.10) fare. This 30 pesos increase is part of the many austerity measures the country has started to apply since March 2018. Many high school and college students, dissatisfied with this new fare, started to jump over turnstiles as a sign of protest. As a result, the Chilean police started to physically confront students breaking the law, escalating to many scattered confrontations on the streets. On October 19th, the government announced that the country was under a “State of Emergency”, deploying armed troops on the streets against protesters who were burning down subway stations and looting supermarkets. During the following week, demonstrations have spread out of the capital, Santiago, into the rest of the country, which is now under military curfew.
On October 17th, on the opposite side of the world, the Lebanese government agreed to impose a $0.20 daily tax on users who called others via VoIP (Voice-over-Internet-Protocol) on apps such as Facebook Messenger, FaceTime, and WhatsApp, the most popular in the country. Immediately after this announcement, various groups gathered in places such as Martyrs’ Square in Beirut and other popular locations to protest against new austerity measures. The demonstrations escalated at an incredibly fast rate, as the next day protestors started to block main streets with burning tires, which lead to confrontations against the police force. Even though the Lebanese government immediately took back its proposed tax after the protests started, these have not petered out, and have escalated into a massive movement against corruption and income inequality.
Both the increase of the subway ticket price in Chile and the VoIP tax in Lebanon are results of the austerity agendas of the respective governments. Austerity policies have the objective of reducing a nation’s budget deficit by either reducing government spending, increasing its tax revenue, or doing both at the same time. Of course, many of these measures are implied to affect the whole population but they can also be aimed at certain socioeconomic sectors. The increase of subway ticket prices could be considered to be a regressive measure, as it mostly targets the sector of the population that can’t afford private cars. Similarly, the VoIP tax can also be considered regressive, as it was proposed to have a flat rate that would have affected all users regardless of their income level or the type of phone plan they are paying for. The policies proposed by both countries have had a disproportionately bigger effect on people with lower incomes, who were the ones that initiated these movements which have escalated into violence and riots.
The Gini coefficient is a tool used to measure how unequal is the distribution of income in a country. It ranges from 0 (total equality, everyone owns equal proportions of the country’s income) to 1 (complete inequality, one person owns everything and the rest owns nothing). Chile has a Gini coefficient of 0.47, the 3rd highest in South America, and Lebanon’s is 0.32, being relatively low among middle eastern countries. The protests, however, seem to indicate the sentiment that the populations of both countries feel left behind by their governments: they are only increasing the costs of living in times when local education and healthcare, some of the most concerned sectors, receive poor funding.
As a result of all these protests happening around the world, economic uncertainty is on an all-time high. The uncertainty index measures how changes in government policy can cause price volatility, implied by equity options, firm-level investment rates, and employment growth rates. This year, the research team behind the index reported a value of 350.81, which is 1.5 times larger than the world uncertainty during the 2008 economic recession and triple the value at the beginning of 2018.
So what does this mean? Should we hopelessly hold on to our capital due to uncertainty? Should we wait for a recession to start before we implement austerity policies? The current protests in Chile and Lebanon, both happening in emerging economies, surely indicate that poor decision-making regarding policy timing and target population can lead to social movements similar to the demonstrations of the past week. However, the story is more complex for advanced economies. On October 27th, the White House reported the highest budget deficit since President Trump assumed office, and it is expected to only get larger as the declining interest rates of the past couple of months indicate that more government spending is required to boost aggregate demand.
The current economic projections that many developed nations are following allow for immense and long-running budget deficits which seem sustainable at the moment, with no signs of future austerity policies being required. However, some economists speculate that the current demographic transition of developed nations into countries with an aging population will eventually create a need for even greater government spending in the long run. It is expected that certain safeguards will be put in place to combat this potential problem, such as extensions to the current retirement age and better management of existing pension systems. However, even if these measures are put in place, they can only alleviate the effect of an aging population, and some sort of cuts in government spending or an increase in taxes will eventually be required.
Walsh, Declan (2019, October 23) From Chile to Lebanon, Protests Flare Over Wallet Issues. The New York Times Retrieved from https://www.nytimes.com/2019/10/23/world/middleeast/global-protests.html
McGowan, Charis (2019, October 23) Chile Protests: What prompted the unrest? Aljazeera Retrieved from https://www.aljazeera.com/news/2019/10/chile-protests-prompted-unrest-191022160029869.html?utm_source=website&utm_medium=article_page&utm_campaign=read_more_links
Larsson, Naomi (2019, October 25) Chile unrest: “These protests will last until Pinera resigns” Aljazeera Retrieved from https://www.aljazeera.com/news/2019/10/chile-unrest-protests-pinera-resigns-191025163738785.html
BBC News (2019, October 21) Cost of living protests in Chile take deadly toll. BBC News. Retrieved from https://www.bbc.com/news/world-latin-america-50119649
Aljazeera (2019, October 18) Lebanon reverses plans to tax WhatsApp calls. Aljazeera. Retrieved from: https://www.aljazeera.com/ajimpact/lebanon-reverses-plans-tax-whatsapp-calls-191018070117655.html
Russolillo, Steven (2019, October 20). Financial Markets Face Fresh Wave of Political Uncertainty: ‘There’s Literally Nowhere to Hide’. WSJ. Retrieved from https://www.wsj.com/articles/financial-markets-face-fresh-wave-of-political-uncertainty-theres-literally-nowhere-to-hide-11571575664?mod=hp_lead_pos6&utm_source=morning_brew
Baker Scott, Bloom Nicholas & Davis Steven (2015, October) MEASURING ECONOMIC POLICY UNCERTAINTY, National Bureau of Economic Research. Retrieved from https://www.policyuncertainty.com/media/BakerBloomDavis.pdf
World Bank Data (2011) GINI index (World Bank estimate) World Bank Data Retrieved from https://data.worldbank.org/indicator/SI.POV.GINI?locations=LB
Long, Heather (2019, October 25) The U.S. deficit hit $984 billion in 2019, soaring during Trump era. The Washington Post. Retrieved from: https://www.washingtonpost.com/business/2019/10/25/us-deficit-hit-billion-marking-nearly-percent-increase-during-trump-era/
Leeper, Eric & Walker, Todd (2011, April 11) Fiscal Limits in Advanced Economies The Economic Society of Australia Retrieved from https://onlinelibrary.wiley.com/doi/full/10.1111/j.1759-3441.2011.00111.x