Decentralizing Chile

Chileans are back in the streets. After a brief respite over the summer, Chile is again making headlines for social protests. But the venue has changed – last year’s student protests that captured the world’s attention were mostly in Santiago. This year, people are marching in the northern mining town of Calama and the southern region of Aysén, both thousands of miles from the capital.

The demands in each region differ – a greater share of copper mining profits in Antofagasta and lower fuel prices in Aysén – but underlying these protests is the call for greater decentralization.

In January, as firefighters battled to control forest fires raging in Aysén’s Torres del Paine National Park, the Mayor of Calama, Esteban Velásquez, warned that there would be “a hundred fires” to put out if the government did not address the issue of decentralization.

Since then, protests have flared up across the country. In March, Mayor Velásquez led a march through Calama calling for more profits from copper mining to be invested in the region. In Aysén, protesters burned police vehicles and blockaded roads and bridges preventing food supplies from reaching residents until the government agreed to declare the region a fuel tax-free area.

Such demands are not new. Social discontent in the regions outside Santiago has been brewing for decades. But today, perhaps inspired by recent protests in Santiago and other parts of the world, there is the feeling that change could be closer than ever.

The problem is that despite Chile’s economic success, it remains one of the region’s most highly centralized countries.

The Santiago Metropolitan Region is home to over 6 million people – about 40% of the population – and it generates about half of the country’s GDP (48.3% in 2009), according to Central Bank figures. Crucially, the city is also home to the country’s leading universities, business organizations and the headquarters of nearly all its largest companies.

The rest of the population is spread out to the north and south. Some 4,300km long and on average only 180km wide, the country’s mining resources are concentrated in the north while agriculture, forestry and fishing are the main sectors in the central and southern regions.

The result is a wide economic gap between Santiago and the relatively well-off mining-intensive northern regions such as Antofagasta and Atacama on the one hand, and the poorer agriculture-intensive regions of La Araucanía, Coquimbo and Maule on the other.

According to the OECD’s Territorial Review of Chile, published in 2009, territorial inequalities are much higher in Chile than in most OECD countries. Chile’s Gini index of inequality across regions (0.25) was fourth highest in the OECD (based on 2004 figures) – exceeded only by Mexico, the Slovak Republic and Belgium.

Some progress has been made in recent years, particularly in the earthquake-hit Bío Bío Region in the southern part of the country, but regional inequalities remain a key reason for Chile’s high level of social inequality compared to other OECD countries.

“The process of regionalization in Chile is progressing very slowly compared to other countries in the region,” says Mario Marcel, deputy director of the Public Governance and Territorial Development Directorate at the OECD.     

While Bolivia and Colombia have become much more decentralized in the last two decades, Chile remains very Santiago-centric, says Marcel.

“Even within Latin America where there is a history of centralization Chile is on the low-end of the decentralization scale,” he says.

Santiago rules

Centralization in Chile dates from the Spanish colonization in the 16th Century when Santiago was established as the country’s military, religious and economic center.

“Chile has always been a nation controlled from Santiago, that hasn’t changed since colonial times,” says Francisco Sabatini, a professor at the Catholic University’s Urban Studies Institute in Santiago.

In the past, the logic of industrialization meant that Chile’s resource-rich provinces were expected to sacrifice for the greater good of the country, which was controlled by the land-owning elite concentrated in Santiago.         

But this has changed with globalization and economic development. Today, Chileans around the country, connected by the Internet to groups around the world, are prepared to defend their rights and global values such as environmental protection and democracy.

At the same time, the demand for greater decentralization has increased. But this phenomenon is relatively recent. It was not until 1974 that the country’s 25 provinces (today there are 54) were formed into regions, each with their own government. This administrative structure was comprised of 13 regions from Tarapacá Region in the north to Magallanes Region in the south.

A constitutional reform passed in 2005 allowed two more regions – Los Ríos and Arica and Parinacota – to be created, which means that today there are 15. But while the number of regions has grown, their identities remain weak, says Sabatini.

“Centralization in Chile is so strong that until recently the regions were known by their numbers like prisoners,” he points out.

And, like prisoners, Chile’s regions depend on handouts. While regions in other OECD countries like Germany and Italy are focused on how to compete better in the global economy, Chile’s regions are more concerned about obtaining benefits from the central government, says the OECD’s Marcel.

“Decentralization is not just one-sided, it’s also about how the regions are able to develop their own identities,” he points out.

Funding the regions

The problem is not so much an issue of money. Chile’s regions receive funding through the National Regional Development Fund (FNDR), which has been increased to US$1.78 billion in 2012 from US$1.23 billion in 2009.

Moreover, the government has increased the share of FNDR funding not tied to specific projects to 63% from 50% in 2011, which means regional governments can decide whether to spend the money on roads, hospitals, schools or other infrastructure projects.

“Public expenditure has become more decentralized,” says the Interior Ministry’s undersecretary for regional development, Miguel Flores. “We need to level the playing field so everyone, wherever they live, has the same opportunities.” 

The regions can also apply for funding from the Innovation for Competitiveness Fund (FIC), administered by Chile’s Economic Development Agency (CORFO), which aims to promote innovation and highlight comparative advantages for potential investors.

However, according to OECD estimates, the total share of public expenditure administered by regions in Chile is still only about 15% compared to around 25% in developed countries.

“It’s not so much how much money each region gets, but who decides how the money is spent,” says the OECD’s Marcel.

Even though funding for the regions has been steadily increased, badly needed infrastructure projects must still be approved by the central government which means regions are often slow in responding to the needs of their inhabitants.

Governing the regions

Part of the problem is the way regional governments are organized. Each region has an Intendente, or governor, appointed by the President, who serves as the central government’s representative and oversees the Regional Council (CORE), comprised of up to 14 councillors chosen by local elected representatives.

“This is a hybrid structure that does not generate the synergies required for development in the regions,” says Marcel.

Its main weakness is that the central government often does not find out about troubles in the regions until people start protesting in the streets, says Patricio Navia, a Chilean political scientist and professor at New York University.

Under the current system, regional governors have an incentive to hide social problems in their regions from the central government because their jobs depend on it, says Navia. “The result is that they operate in a bubble which eventually bursts.”                

The government has moved to improve this system. A constitutional reform approved in 2009 allows regional councillors to be elected directly by the residents of each region and a bill to make this change into law is currently before Congress.

“This will empower the regional councils and increase the participation of local communities,” says Flores.

But while it would be a positive step the bill does not go far enough, says Navia.

In theory, the councillors will elect the president of the CORE while the governor serves in an executive role, but exactly how this arrangement will work is open to debate.

”In practice the political parties will name their own candidates and the president will end up being a de facto Intendente,” says Navia.

Still, other changes could have an impact on how decisions are made at the regional level. For example, a bill before the Senate will allow the central government to delegate responsibilities in areas such as road construction and maintenance to regional governments. The government is also working to strengthen the administrative capacity and human capital of regional governments.

“We are creating a model so responsibilities can be transferred to the regions without requiring a new law,” says Flores. “This is unprecedented in Chile.”

As Santiago loosens its grip on the regions, decentralization should accelerate across the country. But this is not happening fast enough for companies in regions that are struggling to attract skilled workers from Santiago.

Quality of life

Thanks to the mining boom, the northern Antofagasta Region has the highest GDP per capita (some US$26,000) of any region in Chile rivalling that of developed countries, but there is scant evidence of this prosperity in cities like Calama.

The lack of education and health services, combined with a shortage of housing and entertainment alternatives, is the main reason most mineworkers prefer to live with their families in Santiago and commute to the north when necessary.

“Infrastructure has not developed at the same pace as industry even though salaries have risen,” says Juan Carlos Villegas, president of Finning South America.       

Finning, which supplies heavy machinery to the mining and construction industries, employs around 5,500 people in Chile, half of whom work in Antofagasta.

But as demand for mining professionals grows, it is becoming more difficult to find qualified staff, says Villegas. “You just can’t get people trained in Santiago to move to the north,” he explains.

As a result, Finning is investing US$12 million in a new training center in Antofagasta city to be opened in November with US$1 million in funding from the Chilean Economic Development Agency (CORFO). The center will be able to train up to 650 workers in mining-related trades simultaneously.

“We will train them in the north to stay in the north, it’s the only way,” says Villegas.

Even the Chilean copper mining company Collahuasi, headquartered in the city of Iquique, is worried. Collahuasi is closely integrated with the local community through sustainable development and training programs, but there are not enough candidates to meet the demand.

“The main challenge of decentralization is to focus on issues important to families such as education and health which can attract people from Santiago,” says Collahuasi spokeswoman Bernardita Fernández.

This problem is not unique to the mining industry.

Finding enough skilled labor in regions with a competitive advantage in aquaculture is also a “serious challenge,” says Ricardo García, president of Camanchaca, one of Chile’s largest fisheries and aquaculture firms.

Poor infrastructure and the lack of basic services in these regions – Atacama, Los Lagos and Aysén – mean that workers refuse to live there. “This creates a vicious circle where people won’t go or they leave, which makes it even more difficult for these regions to develop,” says Garcia.

Camanchaca is working with local colleges, institutes and universities to promote education related to aquaculture, but the risk is that graduates will leave to seek a better life elsewhere.

Even Magallanes Region, which attracts 70% of Chile’s tourism with its picturesque landscapes, is struggling to attract workers. While the quality of life is better than in other regions, transport and heating costs are higher due to the poor weather.

Canadian methanol producer Methanex, which has created over 2,000 jobs directly and indirectly in the region, has a policy of hiring locally, but finding qualified staff in the oil and gas industry is difficult, says Paul Schiodtz, senior vice-president for Latin America at Methanex.

Regional development is key to the sustainability of the business, he says, which is why Methanex has focused on transferring best practices, especially in terms of safety and the environment, as well as supporting university programs aimed at meeting the needs of local industry.

“The saying that it is not possible to have a successful business in poor communities is very true,” says Schiodtz.

Integrating the local community into the production value chain benefits both the company and the inhabitants of the community, but public policies are needed that adapt to the reality of each region, he says.

Given the country’s regional diversity, this is an important challenge. “Chile’s economic development depends on its sensitivity to regional demands,” says Francisco Sabatini.

Increasing the share of public spending administered by the regions and strengthening regional governments are important steps, but decentralization is a gradual process.

Sending in more police and offering ad hoc packages of benefits may douse the flames of social unrest in regions like Aysén in the short term, but this is merely a band-aid solution.

A longer term solution requires policies that improve the quality of life in regions and empower them to play a greater role in their own development. Only then will Chile be able to fully tap its economic potential from north to south.

Julian Dowling is Editor of bUSiness CHILE