The Future of Social Policy in Latin America

In an environment of slower growth and reduced fiscal space, implementing effective social policies will be a major challenge for countries in Latin America. The region’s high levels of labor market informality, persistent income inequality, and slow rates of productivity growth create strong pressures on governments to redesign existing social protection systems. On April 13, 2017, the Dialogue hosted the event “The Future of Social Policy in Latin America” to discuss this topic.  The panelists for this discussion were: Rodrigo Zarazaga S.J., Director and Principal Researcher at the Center for Research and Social Action (CIAS) in Argentina, Nora Lustig, Director of the Commitment to Equity Institute and Samuel Z. Stone Professor of Latin American Economics at Tulane University, and Matthew Carnes, Associate Professor and Director of the Center for Latin American Studies at Georgetown University.

Fr. Carnes and Fr. Zarazaga provided a historical perspective of social policy and a look towards the future of social spending in the region. Fr. Carnes explained that the region’s social protection systems were built on the assumption that with industrialization, countries would have full employment and regularly contributing taxpayers who would give governments sufficient resources to provide generous social benefits. It was a system meant to pay for itself, but this model never fully emerged, he explained. Many Latin Americans failed to enter the industrial sector, and instead entered the informal sector which, because it was not unionized, lacked the political power to demand the kind of benefits it needed. It was only until the 2000s that this group found ways to organize and make demands for spending geared towards it.

Thus, as Fr. Zarazaga explained, while Latin America has greatly increased social spending over the past 20 years, the fact that around half of the region’s workforce are informal workers, and thus do not have access to traditional contributory pension systems, has meant that spending has mostly taken the form of programs that serve to increase consumption and the participation of the poor in the labor market, such as subsidies, conditional cash transfers (CCTs), low-interest credit rates, and non-contributory pension systems, etc. This type of social spending greatly reduced inequality in the region during the 2000s. However, he said, this approach to social policy does not do enough to overcome poverty; what countries need now are greater investments in the quality of services such as health, education, and infrastructure, to tackle the root causes of poverty.

Moreover, as Dr. Nora Lustig explained, allocating resources to these programs was made possible by the commodity boom. But with the commodity boom now gone, countries have lost a great amount of their fiscal space, which now endangers the programs. In countries with large states like Argentina and Brazil, there is little space to continue raising revenues. Others, such as Guatemala and Colombia, are better able to expand the size of the state to use wealth re-distribution as a tool. As Fr. Zarazaga commented, this will require, among other things, improving the region’s tax systems to increase revenues. The issue is that in most countries, social programs – particularly subsidies on services—have come to be seen as “rights,” and reducing them would bring about massive social discontent.  The political challenge will revolve around how to introduce adjustments that might increase inequality in the short run, but be more sustainable in the long run. Fr. Carnes added that a possibility is to work with the informal middle class in finding ways to organize politically to voice demands.

Given current conditions and the political difficulties surrounding reforms, the two main takeaways from the event were: (1) going forward, having an agenda on how to improve the effectiveness and quality of government programs will be paramount. (2) In a context of slow economic growth, in order to advance the social policy debate it will be necessary to link social policy to the new growth agenda; that is, it is necessary to frame these reforms as preconditions to enhancing growth, both though their effects on informality and on the development of a workforce prepared to thrive in the 21st century economy.