Not fare enough: Chile’s protests

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Hello and welcome to the intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. The Czech Republic, Slovakia, Poland and Hungary, the so called Vigrad 4 have been increasingly prosperous since the Iron curtain fell. But 30 years on, the flows of people and of European money are shifting and the Visigrad economies look precarious. And we take a look at how useful managers are. It's not all just breathing down your neck, making sure you're contributing to the company's bottom line. The best ones improve collaboration. And new research suggests they can be sneaky when they do it. First up, though, The usually tranquil capital of Chile has filled with huge crowds of demonstrators for nearly two weeks, chanting for equality. Hundreds of thousands of people have protested peacefully.

We all empowered ourselves. We do not need a government spokesperson.

We do not need anyone to accompany us or support us, because the public voice has already been heard.

It is obvious it is clear it is here.

But some of the civil unrest turned uncivil and violent, with metro stations burned and shops looted. The president, Sebastian Pinera, initially declared a state of emergency and sent troops onto the streets. But he's since changed his tone. We have all understood the message.

We have all changed.

Now we must join forces to give truthful, urgent and responsible answers. To these social demands, he spoke of moving toward a fairer and peaceful Chile. But protests continue undiminished.

Demonstrators in Chile have been set off initially by a rise in transport fares.

Brooke Unger is Our America's editor.

But the anger kind of quickly moved on to other issues that Chileans have long been concerned about. Very low pensions, that the high cost and low quality of education, ditto for health care. And a sort of sense that, you know, Chile, despite being one of South America's most successful economies, is really a pretty unequal place that's dominated by its elites.

But despite that inequality, Chile is not known for this kind of protest.

Well, I mean, certainly what we saw over the weekend, a million people out in the streets in Santiago, which is a huge number for a country of Chile's size. And the protests we had leading up to that, looting and arson and quite a number of deaths, I think around 20 deaths. These are not common in Chile. But you know, that said, there is precedent for protest in Chile. I mean, in the democratic era, we had a wave of protest about education several years ago. More recently we had a wave of protests about the pension system. So it's not as if protest is unprecedented in Chile.

And what is it that the protesters want?

I mean, I would say that in a way that the anger you're seeing in Chile is the kind of anger you're seeing in more developed countries rather than in poorer countries. You know, Chile has long been kind of a model country in South America. It's got among the highest levels of income per capita. It's well managed, stable economy, with pretty high levels of well being, life expectancy, human development. And so it's long been one of the region's most successful economies. But the Chilean model relies to a large extent on kind of private provision of what are normally seen to be public services. So, for example, with pensions, people rely not primarily on state pensions, but on pensions that they save up for themselves. With education, you have people paying top up fees to municipal schools. So there's a fairly heavy reliance on the market in providing public services. And this has led to a good deal of inequality in the provision of public services to a kind of two tier health system. So there's a real sense that the system that relies so heavily on private initiative is really not working for everybody in Chile.

And how has President Pineda responded to these protests?

Well, I mean, initially his response was very aggressive. I mean, he said the country was at war. The police response to the protests has been sort of fairly heavy handed. There are investigations of possible abuses by the police forces. But Pinera does seem to have woken up to the depth of people's anger, and he's kind of changed tack. He's sacked a large number of people in his cabinet, including the interior minister and the finance minister. And he's bowed to what he takes to be the protesters demands. At least some of the protesters demands. He's promised higher pensions. He's promised better provision for health care. He's promised a higher minimum wage. He's now trying to allay the grievances of people.

So do you think that those changes, that approach on the part of the president will be enough to quell the protests?

Well, I mean, it's hard to tell. We still had protests yesterday. One of the difficulties is that the leadership of this movement really isn't very clear. It's quite an amorphous movement and there's no real codified list of demands, and it's not entirely clear whom the president should be talking to. There's one school of thought that Chile needs much more change than the president is likely to give. There's a revival of a demand, for example, for a constituent assembly that would rewrite the constitution and basically reinvent the country. And I think a lot of people would be nervous about that. Even though people have justified grievances against the way the system works, the Chilean model doesn't need wholesale reinvention. And I think people would be worried about a new constitution writing process that sort of took the country to a destination that nobody can really foresee.

So if wholesale reinvention isn't what's needed, what do you think is? What would be the best way to tweak the Chilean model such that this kind of inequality, this kind of unrest goes away?

Well, I mean, I think the president has already started to address some of these things. I think, first of all, it's fairly clear that in some areas there does need to be more state spending on services like health and education. I think the rich in Chile are taxed at a lower rate than they are in most developed countries. So I think the rich have to pay more tax, and there has to be a sort of serious attempt to break up the oligopolies that dominate some areas of. Of Chilean business in general. Chile is a prosperous country where the fruits of that prosperity are very unevenly distributed. And what the government has to do now is to change that perception and to change that reality.

Brook, thank you very much for joining us.

My pleasure, Jason.

Thank you.

Thirty years ago, a revolutionary wave brought an end to Communist rule in Central and Eastern Europe. The Iron Curtain had fallen, and in 1991, a summit was held in the scenic Hungarian castle town of Vygrad. The meeting place alluded to a medieval congress attended by the kings of Bohemia, Poland and Hungary, who met in the year 1335 to resolve international disputes. The 1991 meeting echoed the medieval one in fostering friendship and cooperation between Czechoslovakia, Hungary and Poland. The leaders of the three countries formed the Vysegrad Group, and after Czechoslovakia dissolved in 1993, the Czech Republic and Slovakia became independent members, making it a group of four. The four the countries sought integration with Western Europe, joining the European Union at the same time in 2004. And in many respects, they followed similar paths today. Fifteen years on, all four have experienced substantial economic growth, albeit alongside democratic decline.

Fifteen years after the accession of the four Visegrad states to the European Union, the V4 can be much prouder of their economic achievements than their progress with political reform.

Wendelin von Bredo is our European business and finance correspondent.

Electoral democracy, as measured by a Swedish researcher, has regressed in each member of the club, and the decline has been especially steep in Hungary and in Poland. And so far, the European Union has been quite toothless in sanctioning them, although I think they're now applying a bit more pressure on Hungary. At the same time, the four countries have all significantly increased their levels of GDP per capita, and they all converged economically with Germany. So the Czech Republic is the richest of them. You can really feel it when you walk around in Prague. It seems a very prosperous place. And the Czech GDP per capita is equivalent of 73% of Germany's, followed by its neighbor Slovakia with 63%, and then Hungary and Poland with 57% each.

And so why do you think it is that these four countries have been so economically successful?

Well, in truth, they are very dependent on four external forces, and they are so dependent because they are extremely open economies. So the first is their reliance on transfer payments from the eu, whether they are Solidarity funds or cohesion funds. And these transfer payments account for a big chunk of their respective gdp. Second is the generous flow of remittances by millions of expat citizens who have emigrated and now live and work mostly in Germany and Britain, but also in other countries like Austria or Italy. Then there's a very benevolent economic cycle that is helping, especially the recent success of the German economy that just had basically 10 golden years. And Germany is by far the most important trading partner and the biggest or second biggest investor in each of these four countries. But the German boom seems to be coming to an end and that'll definitely affect all four of them, and particularly Hungary and Slovakia and a little less Poland, because Poland is a little bit more self sufficient than the others.

And what's the final force they depend on?

Last but not least, you mustn't forget that they started from a low base, they were very poor, but they might have reached a plateau now because their success in the Last sort of 10, 15 years was a lot due to being a fairly cheap place to produce compared with more developed economies, because of course now wages are catching up. So that is changing. They risk getting stuck in what economists call the middle income trap. So they are not quite the cheap workshop anymore, but they can't really take the next step and become a truly developed economy.

So it sounds as if, though things have been quite rosy since EU accession, these economies do have huge vulnerabilities. What do you think the countries are worried most about?

Well, the countries themselves, they are most concerned about losing a big chunk of EU funds, which will inevitably happen partly because they are richer now and so they need less help, so the subsidy payments will go down. But the second reason is that Brexit seems, if not imminent, at least it's coming in some shape or form. So the EU is losing a big net contributor. And thirdly, of course, the EU is very unhappy with democracy regressing, in particular in Hungary and Poland. So they feel far less generous towards these countries and they will make help conditional on democratic reform, or at least improvements of the democratic process in these countries.

Well, that democratic decline certainly closes the tap somewhat on EU funds. But do you think the populist policies of some of these governments have had more direct internal economic effects?

Well, yes. So another important issue in all four countries is immigration and labor shortages. They have a great lack of skilled labor, which has become a problem for the economy, because they can't produce as much as they would like to simply because they're lacking the staff. Now, you could say, well, immigration can help labour shortages, but all four are fiercely anti immigration. They don't allow immigrants from nearly all countries, maybe with the exception of close neighbors such as Ukraine. So they're trying to help this with policies, for instance, to increase fertility rates. They make it financially attractive for women to have children, which is a policy pursued particularly in Poland and Hungary, at great expense, but so far with little success. They're also making it easier for women to have children and to work, so there is easier access to free childcare that is actually helping, that is getting more women in the workforce, but not really enough to compensate for basically an aging population.

But there are also people from those countries moving abroad. All those remittances that you were talking about, do you think that that flow of people and of money will continue as well?

Yes, remittances will probably continue because the vast majority of emigrants from these countries don't show any inclination to return anytime soon. So that, I think will continue as long as the economy in Germany in particular is doing reasonably well. But the storm clouds are gathering and the German economy seems to be set for a downturn, which of course means that Poles and Hungarians, Slovaks working in Germany might lose their job or make far less money, which also then will impact the amount of money they can send home.

And so what's the solution here, if not the simple one of have less populist, self defeating governance?

Well, that would certainly help because, for instance, it would make it more attractive for V4 emigrants to return to their countries, but also it would make the EU happier again to help these countries because of course, they still do need help. They've made enormous progress, but I mean, there's still a pretty considerable gap between east and Western Europe.

Thank you very much for joining us, Vandelin.

It's been a pleasure.

Are you, are you listening to this podcast at work? Well, get back to work. In lots of jobs, managers monitor how productive their underlings are. The received wisdom is that without that oversight, some employees just wouldn't get any work done. But how to watch the watchers?

I think workers are puzzled as to what managers really do.

Philip Coggin writes Bartleby our column covering management and work.

Whether they're just inventing tasks for them to perform and filling up their day with mindless bureaucracy, or whether they're giving them proper direction. And it's very difficult, if you look at the day of the average manager, to work out by the time they go home, what they've actually achieved. Managers, I think, are in two minds really about their own role. If they didn't want to be managers, they wouldn't have taken on the task of organising their fellow workers. But there must be points at which they wonder what they themselves are doing. And there must be days in which they're immensely frustrated. It's quite difficult to for both workers and managers to work out exactly what the contribution is.

So how to do it then? How might you, if you wanted to measure such a thing, how could you do it?

So two academics tried to do a Test. Now, they used an experiment called the public goods game, and that involves giving people a number of tokens, then asking them to invest the tokens. You then double the contributions and then you split the returns among all the participants. That allows for people to be free riders, not to contribute, but it also means that if you do cooperate, then everybody ends up with more money. So they did a variant on this test where they split the people into managers and workers. And they also did two sort of twists to it. In one, the managers were allowed to contribute, in the others they weren't. And in another set, managers got a fixed rate, a portion of the return, and others they allowed to vary it themselves.

Splitting up this game into groups where the managers stand to directly benefit or not, and stand to directly participate or.

Not, they benefit in all the cases. They get a fixed rate of benefit in some cases and a varying benefit in others, but at their discretion. What they found in this experiment was that the mere presence of managers and workers and the feeling that managers were chipping in helped get a better return than if you had no hierarchy at all. But what they also found was that managers learned how to game the system. They were sneaky. So where they could vary their contributions, or where they could vary the returns they got, what they did was they contributed in the early rounds or gave the workers a big share in the early rounds, waited for the pot to build up and for workers to regularly contribute. And then the last minute they stopped contributing or they took more of the reward when it was too late for the workers to react. So any incentive system therefore has a potential for managers to game it well.

People take advantage of any opportunity to game the system. What does this tell you about the distinction between workers and managers?

Well, it shows that while we might need managers, while there's a need for coordination, you have to set up these incentive schemes as carefully as you can and make sure you're rewarding the right behavior. So the analogy here is with the overall economy where managers have been rewarded over the last 30, 35 years with share options and the pay. The overall remuneration of managers relative to that of workers has shot up enormously over that period thanks to this reward and share options. But share options are linked to the share price and the share price is linked to the ability to meet short term profit targets. That means that long term investment plans, which tend to dent short term profits, are not to the immediate advantage of managers. And sure enough, Andrew Smithers in his book Productivity and the Bonus Culture, found that the proportion of cash flows going to share buybacks and dividends has risen substantially, has doubled over the last 20 years.

So the upshot of all this is we do need managers. We just have to keep an eye on them in the way that they're keeping their eyes on us.

Yes, we have to make sure that the incentive system is right. And it's extremely difficult in all sorts of fields if you're bringing up your children. I remember a child that we did an Annie share with wouldn't eat his food. And when the parents found that he wouldn't eat his food, they were worried he'd be not getting enough nutrition, so they gave him an ice cream if he didn't eat his food. So naturally, the kid learned that if he resolutely failed to eat the cabbage, ice cream would arrive. That's the wrong sort of incentive system. We have to make sure managers aren't rewarded in the same way.

Phil, thank you very much for your time.

Thank you, Jason.

That's all for this episode of the Intelligence. If you like us, give us a rating on Apple Podcasts and you can subscribe to the economist@exterator.com radio. Offer 12 issues for $12 or 12 pounds. See you back here tomorrow.