Tipping Points in the Southern Cone
The images from the streets of Chile have shocked the world over the last two weeks. This isn’t because people had a lot of money invested in Chile, but more because it is the wealthiest and until recently stablest country in the region. I tried my own explanation last week, and then published a follow-up after a lot of Chilean feedback.
Now, the question of exactly why Chile suddenly descended into disorder is gaining momentum. My colleague Tyler Cowen made his own attempt to explain what happened here, and greatly doubted that it could be attributed to inequality. As numerous Chileans have pointed out, inequality in the country has even been decreasing, albeit from excruciatingly high levels.
Explaining how this could happen becomes an urgent question for assessing risks almost everywhere else. And the more I look at it, the more it seems we need to invoke the nebulous Malcolm Gladwell concept of the “tipping point.” For whatever reason, Chilean opinion suddenly tipped. A rise in transport fares was the catalyst, but certainly not the underlying cause.
For a tipping point, just look at the president’s approval rating. It dropped steadily, and then collapsed. This is the latest poll from the Chilean pollster Plaza Publica. The purple line is for disapproval.
The same survey asked for opinions on the reasons for the disorder. The most popular response, mentioned by 41%, was “social discontent” — which begs many questions. “The cost of living” was next with 18%, while inequality was fifth, mentioned by only 12%. For even Chileans, then, it is unclear exactly why this trouble broke out, and why it broke out when it did.
I am planning to write more on this, and would greatly welcome feedback, particularly but not only from Chileans. Why exactly did this happen? The lack of a clear explanation is more unnerving for investors than anything else.
To close for now, I will mention one insight from Peter Atwater of Financial Insyghts, who makes a study of social mood and its effect on markets. He commented that neither the repo market meltdown of a few weeks ago, nor the sudden unrest in Chile, have yet been tagged with a clear explanation. “We don't like uncertainty to begin with, but uncertainty driven by unknown factors really makes us uncomfortable,” he said. “It raises randomness, which we abhor.”
The lack of narratives is alarming, and he suggests that another “event” without a clear explanation could set people even further on edge. So please, let us try to explain what happened in Chile.
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