McKinsey Quarterly

Managing crises and shaping the future of Chile: An interview with Sebastián Piñera

| Interview

Minutes before the inauguration of Sebastián Piñera as president of Chile, on March 11, 2010, an earthquake hit his country. While small relative to the magnitude-8.8 quake that had rocked Chile 12 days before, it still underscored a key theme of the president’s first year in office: crisis management, in response both to the earlier, massive earthquake and to the accident, later in 2010, that trapped 33 miners some 2,300 feet underground for 69 days. In an interview with McKinsey’s global managing director, Dominic Barton, and Alejandro Krell, a principal in the firm’s Santiago office, President Piñera described what he learned from those experiences, how his background as a business leader influences his governing approach, and some of his dreams for Chile and Latin America.

Editor’s note: this interview was conducted prior to the March 2011 earthquake and tsunami in Japan.

The Quarterly: What did you learn about crisis management from your experiences with the earthquake and the mining accident?

President Piñera: One thing I saw is that you cannot lose a second. Very often, especially in political settings, the first hours or days or even weeks are spent placing blame and dealing with internal conflicts. With the oil spill1 in the US, they lost two weeks arguing who was to blame. Also, in the Katrina2 case, they lost time arguing what to do.

Both in the earthquake and with the miners, we acted immediately, within the first few hours. The earthquake happened a few days before we took office, but when we did we had already designed a plan, which we of course enhanced later, since it was based mainly on an “outside-in” diagnostic, with incomplete information. In the case of the miners, we made a decision the very night of the accident: we were going to take full responsibility for the search-and-rescue effort for every single person. The private company that owned the mine was not able to do it. Therefore it was either us or nobody.

A second important factor for us was concentrating our efforts with the help of a clear, quick diagnostic and then assigning specific responsibilities for addressing different needs simultaneously, even though their urgency may have been different. In the case of the earthquake, one team dealt with the most urgent challenges; another team focused on providing, before the onset of winter, shelter for displaced people. A third team began designing reconstruction plans that required more time—for instance, changing the design of the regulation plans for cities. All these teams started working right away. In the case of the miners, we had several rescue plans working simultaneously, and well before finding them we had a team thinking about how to address their immediate needs if we did.

A third important factor was acknowledging our limitations and the complexity of the situation—and requesting external help when it might be useful and relevant. That was of utter importance in the rescuing of the miners. Contrast that with the case of the Russian submarine, the Kursk,3 where the Russian government didn’t ask for help until it was too late. The British and the Americans had the technology to rescue them alive, but the Russians didn’t ask for it.

The Quarterly: Could you speak a little about your career and how you wound up in this office?

President Piñera: In my life, I have had three vocations. My first was academic. I went to Harvard, got a PhD in economics, and was a professor in universities in Chile and abroad for many years.

One day in the late 1970s, I remember saying, “Enough is enough,” and decided to become an entrepreneur. I created a number of companies, including one that introduced credit cards to Chile. That was extremely successful and it gave me the resources to invest in other businesses—in construction, in airlines, in TV, for example.

Finally, in the late 1980s, as we recovered our democratic system, I decided to enter public service. I ran as an independent and was elected to be the senator representing Santiago. After eight years, I didn’t want to run again. For a time, I focused on some foundations—one that helps educate young women with low incomes, one oriented toward the environment, one seeking to promote Chile’s embrace of freedom and democracy—that I had created along the way. It wasn’t until 2005 that I got back into politics, first losing a very close race for president to Michelle Bachelet4 and then winning four years later.

The Quarterly: Did that background influence the way you shaped your team as you started governing?

President Piñera: We brought in a lot of people from the private sector and from universities. To some extent, that was because our party5 had been in opposition for 20 years, so our most experienced people were already in Congress, and we don’t have a parliamentary system, where members of the House or Senate can easily become ministers. In any event, just about all our cabinet members have PhDs from very well-known universities or were extremely successful in the private sector. Most didn’t have much experience in the public sector, so they had to learn rapidly.

Our foreign-affairs minister, Alfredo Moreno, is an interesting case in point; basically, he was an entrepreneur with strong interests in international relations. He’s learning rapidly, and he’s reforming our Ministry of Foreign Affairs, which was a very traditional one. He’s asking tough questions about the role of his office in advancing Chile’s interests and suggesting that “old diplomacy” doesn’t work now. One example would be saying, “Our exports have been stagnant for the last two or three years. We want our exports to grow by 10 or 15 percent this year. How do we support the process of looking for new markets?”

The Quarterly: Describe your broader economic goals for Chile.

President Piñera: Chile had 12 magnificent years from 1986 until 1997. Fat cows. GDP was growing more than 7 percent per year. We were opening up the country to the rest of the world, creating jobs, and strengthening our macroeconomic balances.

But something happened in 1998 with the Asian financial crisis, and starting then we lived through 12 years of lean cows. The growth rate and the rate of employment growth both went down by half. We went from the Chilean miracle to the Chilean nap.

Now we are trying to revive the Chilean miracle by striving to become, by the end of this decade, the first Latin American country able to overcome underdevelopment and defeat poverty. And this is feasible. Chile is a country with a $14,000 per capita income. If we can grow at 6 percent per year for the next eight years, we will achieve $24,000 by 2018. That’s basically the threshold between the underdeveloped and the developed world; today, the average per capita income of the OECD6 is $26,000. We want to become at least an average member7 of the OECD and, hopefully, to go beyond that.

To defeat poverty, we must attack its real causes. There are many, but the most important ones in Chile, according to our diagnosis, are the lack of equality in education, our weakness in creating good jobs, and weaknesses in the family.

We are working on those three areas, but that will take time. So we’ve also created what we call the ethical family income, which is something similar to what has been known as a negative income tax. Basically, we will transfer enough income to families to bring them up to the extreme poverty line. In order to not create perverse incentives, we will ask something from those families: their kids have to go to school; if they are working age, they have to be working or training—things like that, to help our people to help themselves.

The Quarterly: You’ve also set aggressive goals for creating jobs.

President Piñera: Yes. We need those jobs—because they will help us defeat poverty, because we have a very high unemployment rate, and because we are expecting a huge influx of women into the labor force. Labor force participation by women is currently very low, and it’s growing rapidly. So we have to create jobs for them—as many as one million over the next four years, to help us equal the level of female labor force participation in other OECD countries.

The Quarterly: How are you going to do that?

President Piñera: To answer that, I need to say a little more about my view of the role of government. For a long time, I thought there were three basic pillars for the government: to have a stable, legitimate, democratic system; to have a free, open market economy, unencumbered by fiscal imbalances; and to have a state that works. Those pillars were very scarce during the 20th century in Latin America. Chile was among the first to achieve them, which helped us outperform some of our neighbors.

But I don’t think that’s enough for what’s coming now. In the society of knowledge and information, we need at least four new pillars: to give a quality education to everyone, to invest in technology, to promote innovation and entrepreneurship, and to have a very flexible society and economy. This last one is important because the only constant, these days, is that the world is changing, and we have to be ready to adapt ourselves—to take advantage of the opportunities and to adjust to the changes that come from abroad.

Basically, our government’s program is designed to strengthen the three traditional pillars while creating these four new pillars. So we are undertaking a huge educational reform—trying to fix a system that hasn’t worked because it was caught up by all kinds of interest groups. We have a plan to triple our investment in technology as a percentage of GDP. We are promoting innovation and entrepreneurship everywhere, including within the public sector. And of course we are trying to have a more flexible and adaptive economy and society. All of these things should help with job creation over time. In the shorter term, boosting exports also will be a critical factor.

It’s challenging because we are doing all this while facing the huge costs of rebuilding what was destroyed by the February 2010 earthquake and the tsunami that came after. The earthquake devastated us. We lost more than 500 lives. We also lost one-third of our schools and hospitals and suffered enormous damage to bridges, airports, and ports—all adding up to $30 billion in losses, which is roughly 18 percent of our GDP. Just to give you a comparison, the total cost of Hurricane Katrina was less than one-tenth of 1 percent of the US GDP.

The Quarterly: Looking beyond Chile, to your region as a whole, could you share any thoughts about Latin America’s prospects?

President Piñera: Latin America is incredible; it has everything: huge natural resources, vast territory, a common culture and language. We haven’t had religious conflict or the kind of internal wars that the Europeans had into the 20th century. So everything was here for us to become a developed continent. This didn’t happen—but I think that now we are waking up and that this will be a century when many countries go in the right direction.

Mexico, Brazil, Colombia, Peru, Chile—we all have reached a strong consensus behind a real democracy with the rule of law, separation of powers, and freedom of the press. We all are creating open, free, competitive market economies. And we all are trying to achieve more equality of opportunity.

There’s nothing limiting us. Not only did the Iron Curtain and Berlin Wall fall but another wall that separated the developed countries in the Northern Hemisphere from the underdeveloped ones in the Southern Hemisphere has fallen away with globalization, the Internet, and more freely flowing knowledge. We have access to the same opportunities as any other person in any other part of the world. Now it’s up to us to work harder, be more innovative, invest more in technology, and reform our educational system. It’s our time. And it’s our responsibility—to history and to the future—to do what our parents and grandparents always wanted to do but never achieved.

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