SANTIAGO, CHILE — Long and narrow, Chile is shaped like a test tube, and for years it has been a laboratory for a running experiment in free-market capitalism.
With business-friendly policies and largely privatized education and health care, the “Chilean model” has helped build a stable country with little unemployment or corruption, and per capita incomes nearing $20,000, the highest in Latin America.
But it also has given Chile some of the highest levels of inequality in the developed world.
President Michelle Bachelet, who returned to the country’s top office in March after a landslide win, is tasked with fixing the model — in effect, rescuing Chilean capitalism from its excesses.
With her New Majority coalition in control of Congress, Bachelet is moving ahead on a tax overhaul aimed at softening the extremes of Chile’s economic outcomes. By closing loopholes for the wealthy and raising corporate taxes, her government plans to collect billions in new revenue and offer free, universal education. Bachelet told Chileans in a speech last month that the goal is a “more cohesive, democratic and just society.”
But Chile’s growth is slowing, and its captains of industry warn that her tax plans will be a dangerous drag.
Bachelet, who also held the presidency from 2006 to 2010 (Chile does not allow reelection to consecutive terms) said the country’s “only real adversary” is inequality.
The gap is not hard to see in this city of 6 million, which, like many of the world’s wealthiest capitals, is a showcase of opposites. Santiago has South America’s tallest skyscraper, glassy rows of foreign banks and wide boulevards jammed with late-model cars.
A few miles away from the shimmer, Irene Ubeda sleeps in a tent.
“Chile is a country that is very divided by class, and we’re lower class,” said Ubeda, who lives in a dusty roadside lot where 150 families have staged a protest to try to force the government to help them get housing.
Some were bivouacked in makeshift structures made from discarded political campaign posters, warming themselves around a scrap-wood bonfire. “The rich are rich. The poor are poor,” said Ubeda, an out-of-work secretary. “I don’t think Bachelet will be able to fix that.”
Her neighbor at the camp, Ruth Machuca, who works in a school cafeteria, joked that her husband fashioned her a “VIP tent” with a mattress on a frame of wood palettes. She said Chile has become a country with plenty of jobs, “but not enough that pay.”
Chile’s inequalities haven’t necessarily grown worse or more pronounced in recent years, said writer Arturo Fontaine, but the political pressure to address them has increased, fed by a powerful countercurrent to an otherwise sunny economic outlook.
“We’ve had economic growth,” he said, “with social malaise.”
The unease peaked with the presidency of Bachelet’s predecessor, conservative billionaire Sebastian Piñera, whose term marked a turning point in Chilean politics, said Fontaine, a novelist and former director of a public policy center.
Although Piñera was a successful steward of the economy, that was no longer good enough, and he was widely unpopular for much of his term.
Chileans, especially young people, have lashed out over ballooning student and consumer debt, on the one hand, and the sense, on the other, that wealthy elites and businesses are gaming the system at their expense.
The anger exploded into student-led street protests in 2011 and 2012 that rattled the country and won broad sympathy among Chile’s middle class. The biggest target of the protesters’ fury was one of the pillars of the Chilean model: the country’s top-rated but mostly private higher education system.
Chile’s universities are among the most expensive in the world, at least relative to average income, and a lack of financial aid leaves most of the costs on the shoulders of students’ families. Nearly one-third of students drop out before completing their degrees, but their loans — often from private banks that charge relatively high rates — don’t disappear.
Some of the students who led street demonstrations during the Piñera years are now serving in Congress and are aligned with Bachelet in her big-tent coalition. It includes centrists who are critical of her tax proposals, as well as communists and others who want her to put the country on the left-populist path of other nations in the region, such as Bolivia, Ecuador and Venezuela.
Bachelet, considered a close U.S. ally, doesn’t appear headed that way.
Her agenda is one of “reform, not rupture,” said Sergio Bitar, who was education minister during Bachelet’s first term.
Bachelet’s tax plan will pay for more than $8 billion in new education spending by raising corporate tax rates from 20 percent to 25 percent by 2017, while eliminating widely used — or abused — deductions that often allowed wealthy Chileans to write off consumer purchases as business expenses.
The overhaul, which is likely to face a congressional vote by August, would also end a tax break for corporate profits that are retained for investment, a change that business leaders consider especially inimical to job creation and growth.
New levies on alcoholic beverages and soft drinks mean that some of the tax pain would be evenly spread.
Recent polls show that criticism of Bachelet’s tax proposals has begun to cut into her popularity. Other measures she’s backing to reduce inequality, such as additional protections for workers trying to form unions, appear to have broader support.
Bitar, the former education minister, who remains an informal adviser, cautioned that the larger social goal — reducing inequality — can’t be achieved by additional funding alone.
But he and others agree that Bachelet cannot stand pat. The country and its development model appear to have come to a turning point nearly 25 years after the Pinochet dictatorship. A generation of Chileans has grown up with no memories of it, bringing new expectations and an acute sense — enabled by social media — of the power and passion of street protests.
“Chile has had a successful system, but maybe it began to lose its soul a bit,” said Genaro Arriagada, a former politician and ambassador to the United States, who led the plebiscite campaign that resulted in the end of military rule and the return of democracy in 1990.
Chile can’t keep growing with the same formula it has been following, Arriagada said, but he added that it would be a mistake to think the country was making a radical departure from its model.
“I don’t think young people want socialism,” he said. “But they do want more affordable education and relief from their credit card debt.”