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Lengthy charter would scale back mining, grant sweeping social rights and decentralize power, benefiting indigenous groups and local officials.

By Ryan Dube

Chile is on the verge of overhauling the economic and political structure of its free-market system with a new constitution that would scrap the Senate, scale back mining and give extensive power to indigenous groups.

A draft of the 499-article constitution, completed this month, would bury the current charter, grant sweeping social rights and change the economic course of a country considered a model of development in Latin America.

“Chile is not going to be the same country,” said Patricio Navia, a Chilean political scientist at New York University. “This is going to be a drastic change.”

The final version will be presented to the new leftist president, Gabriel Boric, in a July ceremony and voted on in a September referendum.

The constitution would grant indigenous groups autonomy over ancestral lands and allow them to create their own justice systems. Mining companies won’t be nationalized, but the long-term stability enshrined in the current constitution for foreign miners is phased out in the proposed constitution. The central bank would remain autonomous.

The new charter would require the same number of men and women in every public agency. Abortion would be legal. In one vague provision, nature is granted the right to be protected, with the constitution providing stronger safeguards for glaciers.

“We’re going to leave behind a constitution that installed a neoliberal model…and begin a new social and political era,” said Camila Zarate, a member of the assembly that wrote the constitution. “What we want now is to establish new rules so that this economy advances with social justice, with ecological justice.”

The drafting of a new constitution has been controversial in Chile. Conservatives say their ideas were never taken seriously in the assembly. Business groups assert that its policies would hurt the mining and forestry interests that made this country of 18 million the region’s most affluent country. Constitutional experts also say that the decentralization of government functions—with regional governments given the right to tax and borrow—could encourage corruption, as it has in other Latin American countries.

As the far-reaching nature of the draft became clear to Chileans, opposition has grown. Pollster Cadem said May 22 that 46% of voters would reject the new constitution in the referendum, with 37% approving and 17% undecided. If rejected, the current constitution would stay in place in a defeat for Mr. Boric, who supports changing the charter.

“We were never given space to participate,” said Bernardo Fontaine, a member of the constituent assembly from the center-right, which only had a minority of seats. “By excluding the right, this constitution isn’t a big tent for everyone.”

Chile embarked on replacing its current constitution after mass protests over a range of social grievances roiled the nation in 2019.

Supporters of a new constitution say the current one is illegitimate because it was put in place during Gen. Augusto Pinochet’s military dictatorship. Many Chileans credit the current charter, which was amended several times, for laying the foundation for years of robust economic growth. Poverty fell to 10% from 40% in 1990, when Chile returned to democracy, as strong protections for private property attracted foreign investors.

The drafting of a new constitution has stoked uncertainty over the future of the fundamental rules for governing the nation, leading companies like U.S. miner Freeport-McMoRan Inc. to put investments on hold. That is adding to risks to an economy facing a recession this year, analysts say, with inflation soaring to 10%.

Some Chileans remain hopeful the new constitution will create a more just society in a country grappling with inequality. Juan de Dios Paillafil, a member of the indigenous Mapuche and mayor of a small town, said it would strengthen the rights of historically marginalized native groups that have struggled to regain control of ancestral lands.

“All of our historic demands are in the new constitution, starting with the government recognizing us in a plurinational state,” said Mr. Paillafil.

Mr. Boric’s new government says the new constitution would be beneficial in a country where a poll by Santiago-based Latinobarómetro showed confidence in the government fell to 18% in 2020 from 65% in 2009.

Finance Minister Mario Marcel said he expects investor concerns to ease because the most radical economic proposals, such as nationalizing the mining industry, were rejected by the assembly.

“I think much of the uncertainty will be dispelled,” he told The Wall Street Journal. “On the economic side there are no negative surprises.”

But other economists say the constitution could discourage private investments, including in mining where the current charter provides strong legal protections to companies that would be expected to face tougher environmental oversight. Indigenous communities would be given greater say over investment projects near their land.

“I have no doubt that it is going to be much more difficult to do mining in Chile in the coming years,” said Juan Carlos Guajardo, executive director of Plusmining, a mining consulting firm.

The Senate would be replaced with a weaker chamber representing Chile’s outback, while a stronger lower house of Congress would be able to legislate on public spending, which is currently the role of the president. Rights to housing, healthcare and education in the new constitution would boost spending, raising concerns about Chile’s long-held fiscal discipline, said Sergio Urzua, a Chilean economist at the University of Maryland.

“It is hard for me to see how this won’t affect our chances of development,” said Mr. Urzua.

William Snead, a fixed-income strategist at BBVA in New York, said the new constitution risks weakening central bank independence through a provision allowing Congress to fire the bank’s directors. The charter would result in higher taxes that could affect private investments, Mr. Snead added.

“That could lead to a less-competitive economy in general,” he said. “Implementing all of these programs comes with a cost.”

Though investors say Chile would maintain its investment-grade status, its rating would likely be downgraded, resulting in higher borrowing costs for the nation. The private pension system, an important source of financing for companies but criticized by many retirees for low payouts, would be significantly weakened through the creation of a public pension fund.

“People will tend to choose the public or government-run system,” said Edgardo Sternberg, vice president and emerging markets debt portfolio manager at Boston-based Loomis Sayles. That, he said, would likely mean “a slow death of the private system.”

If voters approve the charter, Chile would become the latest country to replace its constitution in Latin America, a region scholars say has become the world’s laboratory for constitution-writing in recent years. At nearly 50,000 words—about the length of a short novel—Chile’s would closely resemble the lengthy constitutions common across Latin America by including reams of social rights, many which were never implemented because of the costs.

Brazil’s 1988 constitution saddled the government with mandatory expenses for retirement, healthcare and other expenses, which economists blame for long-running fiscal troubles. Venezuela’s 1999 constitution gave enormous powers to President Hugo Chávez, helping turn Venezuela into an authoritarian one-party state now led by Nicolás Maduro.

If Chilean voters approve the draft, a new 17-member council, nine of whom wouldn’t be judges, would appoint and discipline judges, potentially weakening the independence of courts, said Arturo Fermandois, a constitutional lawyer and Chile’s former ambassador to the U.S.

“The system of checks-and-balances is dismantled by the new constitution,” he said.

Andy Duehren and Patricia Garip contributed to this article.

Source: The Wall Street Journal