Analysis | Why Chile’s Draft Constitution Has Come Under Attack

1. Why are Chileans writing a new constitution?

Though the current constitution has been amended several times since Chile returned to democracy, many have long viewed the document as illegitimate because of its origins during the reign of General Augusto Pinochet, a violent dictator whose rule featured arbitrary arrests and political executions. Critics have also argued that elements of the constitution have entrenched inequality. When mass street protests began on Oct. 18, 2019, triggered by an increase in Santiago subway fares, demonstrators expanded their grievances to include problems with the pension, health care and education systems. In an effort to diffuse tensions, then-President Sebastian Pinera agreed to the 2020 referendum to determine whether Chile would rewrite its charter and what type of body would be in charge of doing so.

Voters delivered a massive surprise in May 2021 by spurning traditional political parties and electing a Constitutional Convention marked by the presence of left-leaning independents. Rightist members failed even to secure the one-third of seats necessary to block articles. The body rushed to finish the draft after a year of work, writing and then re-writing clauses and going as far as holding weekend and late-night sessions.

3. What’s in the proposed constitution?

It lays out a much more progressive and inclusive legal framework than currently in place and takes steps to hold the private sector more accountable while still enshrining fundamentals such as private property rights. (A controversial proposal to nationalize the mining industry was rejected.) On social issues, the charter includes measures that boost indigenous community representation, establish a national health care system, require gender parity in public institutions and toughen environmental safeguards. It broadens the central bank’s considerations in its policy decisions, authorizes expropriations with the condition that the property owner is “fairly” compensated and makes permits for the use of water temporary and revocable. The constitution would set up a parallel justice system for indigenous communities and also replace the senate with a weaker, regional chamber, thus leaving much of the legislative power in the hands of the lower house.

4. What’s been the reaction?

The proposed new constitution’s detractors include members of a range of political parties and even prominent officials from previous center-left administrations, such as former Finance Minister Rodrigo Valdes and former central bank President Jose de Gregorio. Critics say the new text gives the government too much power and risks runaway public spending. Meanwhile, support for the document has come largely from the left, including from the influential ex-President Michelle Bachelet, who said in an interview that it offers a new “social contract.” While local rules prohibit the publication of polling figures during the two weeks prior to the referendum, in general, starting in late March, surveys showed public opinion moving against ratification. According to Cadem, which carries out polls and market research, some of the public lost trust in the Constitutional Convention members and disagree with the approved articles. Supporters of the proposed constitution praise the planned national health care system and social rights. People inclined to vote for the new constitution tend to be younger and live in Santiago, while detractors are older and live in other regions around the country.

5. Where do things stand?

Campaigns for and against the new constitution will wrap up on Sept. 1. Analysis on its main points feature prominently in local press, volunteers hand out pamphlets with information to passers-by on city streets and television ads have been running in August. Boric’s administration, which has expressed support for the new charter, is taking steps to inform voters about the proposal, even distributing free copies nationwide. Disseminating the new constitution’s main ideas is no easy task, as it has 388 articles, 178 pages and roughly 54,000 words including the preamble and transitory rules. By comparison, the US Constitution has about 4,500 words. 

On Sept. 4, all eligible residents will cast ballots in a mandatory vote where a simple majority will be needed to either approve or reject the document. If it is shot down, the current constitution will remain in force. Boric has said his administration will push for another constitutional re-write if the proposal is rejected. At the same time, a bill lowering the legislative majorities needed to reform the current constitution was approved by congress.  

7. How have investors reacted?

Local assets should rally if the vote goes against the proposed charter. In terms of fixed income, many say that the best way to profit from a rejection of the charter would be a move into lower rated corporate debt or long-dated sovereigns, according to a Bloomberg survey of local analysts. In general, investors and top policy makers such as central bank President Rosanna Costa have said the constitutional process has weighed on assets given the uncertainty it creates. There are disagreements as to how the new constitution would play out. In early August, Banco Bilbao Vizcaya Argentaria SA strategist Mario Castro wrote investor sentiment is “generally very pessimistic” over the political outlook and the proposed new charter. Earlier, Morgan Stanley economists wrote the draft constitution wouldn’t disrupt Chile’s macro policy framework, and the exclusion of extreme articles was initially positive for fixed-income assets. 

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