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Can Social Sector Reform Make Adjustment Sustainable and Equitable? Lessons from Chile and Venezuela-p*

Published online by Cambridge University Press:  05 February 2009

Alan Angell  and
Carol Graham
Alan Angell
Affiliation:
University Lecturer in Latin American Politics and a Fellow of St Antony's College, Oxford.
Carol Graham
Affiliation:
Visiting Fellow, Vice Presidency for Human Resources, The World Bank.
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Abstract

Adjustment in Latin America has largely been analysed in terms of macroeconomic policy. However, for reforms to be sustainable in the long term, there needs to be accompanying change in the social sectors. Such reform is difficult and costly. It is necessary, however, not simply to sustain the economic reforms, but also for an effective long-term strategy of poverty alleviation and for the consolidation of democracy. There are lessons to be learnt from successful and unsuccessful social sector reform.

Type
Commentary
Information
Journal of Latin American Studies , Volume 27 , Issue 1 , February 1995 , pp. 189 - 219
Copyright
Copyright © Cambridge University Press 1995

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References

1 For a comparative review of poverty alleviation measures during economic reform in six countries see Graham, Carol, Safety Nets, Politics and the Poor: Transitions to Market Economies, (Washington, DC, 1994)Google Scholar.

2 For a critical review of the Washington consensus see Pereira, Luis Carlos Bresser, ‘Economic reforms and economic growth: efficiency and politics in Latin America’, in Pereira, Luis Carlos Bresser, Maravaíl, José María and Przeworski, Adam, Economic Reform in New Democracies: a Social-Democratic Approach (Cambridge, 1993)Google Scholar. Bresser Pereira criticises this consensus for ignoring the effects of the debt crisis, and the problem of public savings, and for its inadequate historical understanding of the question of populism and state intervention.

3 The World Bank, Latin America and the Caribbean: a decade after the debt crisis (Washington, DC, 1993), p. 118Google Scholar. The first figure quotes Sheahan, John, Patterns of Development in Latin America (Princeton, 1987)Google Scholar.

4 Ibid., p. 122–3. For a description of the fate of the poor in Peru under García, for example, see Graham, Safety Nets, Chapter 4, and Glewwe, Paul and Hall, Gillette, ‘Unorthodox Adjustment and Poverty in Peru’, Finance and Development, vol. 29 (12 1992)Google Scholar. For the fate of the poor in Latin America in general, see Cardoso, Eliana and Helwegge, Ann, ‘Below the Line: Poverty in Latin America’, World Development, vol. 20, no. 1 (1992), pp. 19–37CrossRefGoogle Scholar.

5 Two recent examples of such reform programmes being de-railed in the absence of these conditions are Venezuela, where ‘populist’ Rafael Caldera was elected on an anti-reform platform in December 1993, and Poland, where an anti-reform coalition of former Communists and farmers defeated the incumbent reformist Suchocka government in September 1993. For details on Venezuela, see Angell, Alan and Graham, Carol, ‘Adjustment in Venezuela: The Political Costs of Neglecting Social Sector Reform’, ms 1994Google Scholar; and for Poland, Graham, Carole, ‘Safety Nets and Market Transitions: What Poland Can Learn from Latin America’, The Brookings Review, vol. 12, no. 1 (Winter 1994)Google Scholar.

6 For a detailed analysis of these conditions, as well as a series of cross-regional case studies, see Haggard, Stephan and Webb, Steven B., Voting for Reform: Democracy, Political Liberalisation and Economic Adjustment (New York, 1994)Google Scholar.

7 We examine the Venezuela case in detail in ‘Adjustment in Venezuela’. Maravall underlines the need to introduce reform measures when a government enjoys initial legitimacy after electoral victory. ‘The Spanish reform of the industrial sector, social security and education would have been much more difficult, even for a majority government, had measures not been taken in the first two years of the mandate’, Bresser Pereira et al., Economic Reform, p. 116.

8 For details on the Bolivian programme and the role of the Emergency Social Fund, see Graham, C., ‘The Politics of Protecting the Poor During Adjustment: Bolivia's Emergency Social Fund’, World Development, vol. 20, no. 9 (09 1992)CrossRefGoogle Scholar.

9 For detail, see Graham (1994), Safety Nets, chs. 4 and 6.

10 Przeworski puts this point well, ‘Market-oriented reforms are inevitably a protracted process – the period from stabilisation, trade liberalisation, and privatisation to resumption of growth is long. Political support for market-oriented reforms erodes to the point of threatening their continuation unless these reforms are accompanied by a social policy. The policy style typical of market-oriented reforms tends to debilitate nascent democratic institutions.’ Bresser Pereira et al., Economic Reform, p. 132.

11 This concentration of power and the absence of checks and balances to the executive can encourage abuses of presidential power. Two of these Presidents, Collor and Carlos Andrés Pérez, were impeached for corruption, and Menem faces increasing opposition based on accusations of corruption.

12 The argument of Bresser Pereira et al. is persuasive on this point: ‘If democracy is not to be under-mined as a consequence of economic reform, the representative organisations and institutions must participate actively in the formulation and implementation of the reform programme, even if this participation weakens the logic of the economic program or increases its costs. And it is precisely the strength of democratic institutions, not exhortations by technocrats, that reduces the political space for the pursuit of immediate particularistic interests: that is for populism. Populism is an endogenous product of technocratic policy styles’. Economic Reform, p. 10.

13 This is similar to the argument of Whitehead, Laurence: ‘Durable legitimacy will have to be founded on concretely negotiated social agreements, constructed with extensive participation by a variety of self-conscious and representative collective actors. Undoubtedly traditional liberal freedoms will have to figure prominently in such…social contracts, but they will surely have to coexist with other more interventionist, redistributivist and collectivist commitments’, ‘On “Reforms of the State” and “Regulation of the Market”’, World Development, vol. 21, no. 8 (1993), p. 1383Google Scholar.

14 For a similar line of reasoning see Przeworksi's analysis of Poland: ‘Radical reform was a project initiated from above and launched by surprise, independently of public opinion and without the participation of organised political forces…it was rammed through the legislature without modifications that would have reflected divergences of interests and opinions. The parliament's repeated response to any doubts about the reform process has been to propose decree powers for the government,.… As a result citizens were taught that they could vote but not choose, the legislature was trained to think that it had no role to play in the elaboration of policy, and the nascent political parties and trade unions were taught that their voices did not count,… The policy style with which reforms were introduced and continued had the effect of weakening democratic institutions.’ Bresser Pereira, Economic Reform, p. 180.

15 There is still some debate over the appropriateness of universal versus targeted social welfare spending. For an excellent critical view of targeting, see Cornia, Giovanni Andrea and Stewart, Frances, ‘Two Errors of Targeting’, Paper presented to the World Bank Conference on Public Expenditures and the Poor: Incidence and Targeting, Washington, DC, 17–19 06 1992Google Scholar.

16 Nelson, Joan discusses this point in detail in ‘Poverty, Equity, and the Politics of Adjustment’, in Haggard, Stephan and Kaufman, Robert (eds.), The Politics of Economic Adjustment (Princeton, 1992)Google Scholar. The cases of Poland and Venezuela, detailed above, are recent examples of such scenarios.

17 Peterson, Peter, ‘How to eliminate the deficit’, in The New York Review of Books, vol. XLI, no. 7, 7 04 1994, p. 39Google Scholar.

18 Figures from Infante, Ricardo (ed.), Deuda Social: Desafio de la Equidad (PREALC, Santiago, 1993), p. 145Google Scholar.

19 Birdsall, Nancy and James, Estelle, Efficiency and Equity in Social Spending: How and Why Governments Misbehave, The World Bank, Working Papers WPS 274 (05 1990) p. 13Google Scholar. This paper presents a powerful argument for seeing equity and efficiency in social welfare provision not as alternatives, but as complementary.

20 Ibid., p. 127, quoting a report by McGreevey, William, Social Security in Latin America, World Bank Discussion Paper 110 (1990)Google Scholar.

21 For an excellent description of the related political and social effects of hyperinflation, see Webb, Steven B., Inflation and Stabilisation in Weimar Germany (New York, 1989)Google Scholar; and for an account of the Fujimori regime's questionable ‘democratic’ tactics, see Graham, C., ‘Economic Austerity and the Peruvian Crisis: The Social Costs of Autocracy’, SAIS Review, vol. 13, no. 1 (1993)CrossRefGoogle Scholar.

22 Three examples of resistance to the radical educational reforms are described in Knight, Alan ‘Mexico c. 1930–46’, in Bethell, Leslie (ed.), The Cambridge History of Latin America (Cambridge, 1990)Google Scholar; Angell, Alan, ‘Classroom Maoists: the Politics of Peruvian Schoolteachers under Military Government’, Bulletin of Latin American Research, vol. 1, no. 2 (05 1982)CrossRefGoogle Scholar; and Farrell, Joseph, The National Unified School in Allende's Chile (Vancouver, 1986)Google Scholar.

23 There is relatively little, for example, on this topic in the comprehensive account of the left after the collapse of Communism by Castañeda, Jorge, Utopia Unarmed: the Latin American Left after the Cold War (New York, 1993)Google Scholar.

24 Maravall attributes part of the success of democratic consolidation in Spain to the increase in social sector spending. He estimates that public expenditure on labour policies increased by 45 % in real terms between 1982 and 1989, amounting to 9.1 % of the total expenditures of central and regional government, and 3.2% of GDP in Spain in 1988. These policies included income maintenance, jobs promotion and vocational training. In Bresser Pereira et al, Economic Reform, p. 96. It is doubtful if many Labour Ministries in Latin America would be capable of mounting such a programme. Even the Chilean Labour Ministry which could, is so committed to the market model of development that its efforts in this sphere have been modest. It is even more doubtful if any country in Latin America could afford expenditures on this scale. And social sector ministries in Spain were much less developed than those in Latin America, thus permitting the government in Spain greater freedom and flexibility to design adequate social sector policies.

25 As Peter Diamond and Salvador Valdes Prieto write, one feature of the Chilean reforms was that ‘Chile chose to retire the pension debt associated with the pre-existing pension system, which requires a large primary fiscal surplus for forty or more years. The surplus has been used to finance the pensions of the old system and th e promises associated with the transition.…Such a fiscal effort can be avoided, but then there is no increase in national saving: there can even be a fall in national saving if high interest rates imply a larger pension after privatisation and the government simply increases its debt to accommodate’. ‘Social Security Reforms’, in Bosworth, Barry P. et al. , The Chilean Economy: Policy Lessons and Challenges (Washington, DC, 1994), p. 257Google Scholar.

26 The fact that newly elected President Frei is serious about health reform in Chile was signalled by the widely commented decision for the first time in many years to appoint to the Ministry of Health not a doctor but an economist. The fact that two leading politicians turned down the Education Ministry which eventually went to an educationalist of little political weight, indicates the low political visibility of these ministries in the eyes of ambitious politicians.

27 Olson, Mancur describes the underlying causes of collective behaviour and their effects on economic growth in The Logic of Collective Action (Boston 1965)Google Scholar and The Rise and Decline of Nations (New Haven 1982).

28 For a description of the social fund approach, see Graham, C., ‘Mexico's Solidarity Program in Comparative Context: Demand-Based Poverty Alleviation Programs in Latin America, Africa, and Eastern Europe’, in Cornelius, Wayne et al. (eds.), Transforming State-Society Relations in Mexico: The National Solidarity Strategy (San Diego, 1994)Google Scholar.

29 Indeed, the Chilean pension reform is so well regarded that an article in The Financial Times examines the lessons that developed countries could learn from the Chilean experience. 11 April 1994, p. vii. However, Chile is the first country fully to replace an existing public pay-as-you-go pension scheme with a mandatory saving scheme, and its test is yet to come. At present it is receiving contributions but paying out very little, and it is not clear if it will be able to meet the promised 70 % level of retirement salary without some help from the central government as the population ages and the number of retirees increases. Yet the potential problems faced by the Chilean system are small in scale compared to the fiscal crises that under-funded pay-as-you-go systems are posing in both developed and developing countries. For detail, see ‘Averting the Old Age Crisis: Policy Options for a Graying World’, Draft Paper, Policy Research Department, The World Bank, May 1994.

30 Stephan Haggard and Steven Webb point to two mistaken theoretical assumptions about the efficacy of authoritarian governments – that it is, wrongly, assumed that authoritarian governments provide an enlightened leadership, and that such governments are immune to interest-group pressures. ‘What do we know about the political economy of economic policy reform?’, The World Bank Observer, vol. 8, no. 2 (1993), p. 146. Pinochet's dictatorship was rather unusual in that it was, if not enlightened, at least remarkably consistent in its pursuit of macroeconomic reform, and in enjoying the support of the business community.

31 While half a million workers in the regime's employment programmes received a state subsidy totalling 1.5 % of GDP, the bail-out of the bankers cost the regime 3 % of GDP. For detail, see Meller, Patricio, ‘Adjustment and Social Costs in Chile During the 1980s’, World Development, Vol. 19, No. 11 (1991), pp. 1545–61CrossRefGoogle Scholar.

32 For detail see Graham (1994), Safety Nets.

33 A considerable role in poverty alleviation was also played in Chile by non-government organisations and the Church which was able to mobilise considerable sums of money donated by international sympathisers. This additional cushion against the social costs of stabilisation in Chile were much less present in the case of Venezuela, where a long tradition of a benefactor state had made far less necessary local community organisation.

34 Figures from the Chilean Central Bank; and from the Mideplan CASEN surveys for 1987, 1990 and 1992.

35 From El Mercurio (Santiago), 17 March 1994.

36 Whitehead, Laurence, ‘On “Reform of the State” and “Regulation of the Market”’, World Development, vol. 21, no. 8 (1993), p. 1382CrossRefGoogle Scholar.

37 There may have been a contribution to economic growth from the privatisation of the pension system, but it is less clear that those in health and education have made any contribution – especially in the short run, whatever the long term effects are on the increase in human capital from extra spending on health and education.

38 The following discussion relies heavily on interviews conducted by one of the authors in Chile in late 1993. For general discussion of the Chilean reforms see Vergara, Pilar, Ruptura y Continuidad en la Político Social del Gobierno Democrático, Estudios Sociales 44, FLACSO (Santiago, 1993)Google Scholar; and Raczynski, Dagmar, Políticas Sociales en Chile: Origen, Transformaciones y Perspectivas, CIEPLAN (Santiago, 1993)Google Scholar.

39 From the Adimark survey published in El Mercurio, 26 March 1994.

40 There has been considerable financing of educational improvement of primary schools in poor areas, but the great proportion of the money has come from a World Bank loan.

41 For details on poverty in Venezuela, see ‘Venezuela Poverty Study: From Generalized Subsidies to Targeted Programs’, World Bank, Latin America and Caribbean Division, Washington, DC, (June 1991).

42 For a good account of the politics of reform in Venezuela, see Nairn, Moises, Paper Tigers and Minotaurs: The Politics of Venezuela's Economic Reforms (Washington, DC, 1993)Google Scholar.

43 For detail, see the case of Poland (ch. 7) in Graham (1994), Safety Nets.

44 World Bank (1991), ‘Venezuela Poverty Study’.

45 The PAMI (Maternal and Infant Nutrition Programme), for example, required health post visits prior to handling out food benefits, and was projected to reach over 2 million mothers and children by 1995. Only 3% of programme expenditures went to administration. (Bolivia's highly successful Emergency Social Fund spent approximately 5 % of its budget on administration.) The HCD programme (Day Care Centres), which was introduced in 1973 on a small scale and relied on community participation in setting up and running government-sponsored child-care centres, was substantially expanded by the government in 1989. A wide-scale feeding programme for primary and pre-school aged children was also introduced (Beca Alimentaria). [World Bank (1991), and authors' interviews with programme officials, Caracas, August 1993.]

46 The PAMI, for example, often waived the health post visit requirement for beneficiaries as the posts were inoperative due to ministerial level labour disputes.

47 For detail see de la Cruz, Rafael, ‘La Reforma del Estado: Democracia y Gobernabilidad’, America Latina Hoy, no. 5 (1992), pp. 21–30Google Scholar.

48 Steve Ellner writes of Venezuela that, ‘Although decentralization has encountered major stumbling blocks and made very uneven geographical and sectoral progress, the very fact of its initiation has served to transform the Venezuelan political scene. Citizens are encouraged to speak up and raise demands by the prospect that those who have both the resources and power to resolve pressing problems are closer at hand than they used to be. Furthermore, since elected officials, both local and regional, are now invested with greater authority, they are no longer so apt to be governed by the dictates of the small clique that dominates the national leadership of their respective parties.’ ‘The Deepening of Democracy in a Crisis Setting: Political Reform and the Electoral Process in Venezuela’, Journal of Inter-American Studies and World Affairs, vol. 35, no. 4 (Winter 1993/4), p. 20.

49 Figures taken from de la Cruz, Rafael, ‘La Reforma del Estado: democracia y gobernabilidad’, América Latina Hoy (1992), p. 28Google Scholar. For a general analysis of the process of decentralisation see de la Cruz, Rafael (ed.), Decentralizacion, Gobernabilidad, Democracia (Caracas, 1992)Google Scholar.

50 For detail, see Nickson, Andrew, ‘The Potential Contribution of Local Government to the Delivery of Social Services in Venezuela’, Unpublished paper, School of Public Policy, University of Birmingham (07 1992)Google Scholar.

51 Nickson (1993), ‘The Potential Contribution’, p. 3.

52 After the first wave of privatisations collapsed with the ‘crash’ of the early 1980s, the government took a much more active and regulatory approach to the privatisations once Buchi took the lead. The reform of the pension system in particular involved an active government campaign to sell the reforms to the public and to encourage workers to participate in the private schemes. For details, see Luders, Rolf J., ‘Massive Divestiture and Privatization: Lessons from Chile’, Contemporary Policy Issues, vol. IX (10, 1991)Google Scholar.

53 This point is discussed in detail in several cases in Graham, Safety Nets. The author is grateful to Joan Nelson for raising it in the initial phase of the study.