1999 Fiscal Conference - Sustainable Public Sector Finance in Latin America - Comments: Ann Helwege: Prospects and Dilemmas for Sustainable Social and Sector Funding in Latin America
Prospects and Dilemmas for Sustainable Social Sector Funding in Latin America
ince 1990, there has been a change in the tenor of discussions about social policy in Latin America. Poverty and inequality are no longer relegated to the last chapter of the book. In fact, a vast literature has emerged on the causes of poverty, the virtuous circle between redistribution and growth, and the design of policies to target the poor effectively. The World Bank has adopted the banner “A World without Poverty” and has made its bailouts contingent on the funding of social programs. The impression one gets is that there is a consensus on the need to reduce poverty.
Does this consensus have a Latin American counterpart? Certainly the rhetoric has changed. And there are highly visible changes in policy: more money has been allocated to primary schools, innovative food and credit programs have replaced broad subsidies, expensive pension plans have been overhauled, and private firms now provide basic services like water supply. But do these changes reflect a significant shift in social sector priorities in favor of the poor?
The overall poverty rate remains above that which prevailed before the debt crisis, and roughly 150 million Latin Americans live on less than $2 per day. The task of overcoming poverty is now Herculean: strong macroeconomic growth has proven a feeble remedy, and we now no longer have that. Budgets are tight and governments that can articulate effective social agendas are not necessarily able to finance them. In most countries, the poor remain politically weak and unable to drive social agendas through the power of the vote. Has enthusiasm for more effective targeting faltered in the face of political reality?
Today I intend to share preliminary results of work with Eliana Cardoso on changes in social policy in Argentina, Brazil, and Mexico in the 1990s. We asked: How extensively have social policies actually changed? How have the overall level of spending and its composition changed? Do social policies now reflect the new paradigm of better targeting?
Trends in the 1990s
Social spending rose significantly in Latin America during the 1990s.2 According to the United Nations, per capita social expenditure rose from $331 in 1990–91 to $457 in 1996–97, an increase of 38 percent (United Nations 1999). Gains were evident in nearly every country in the region: in Peru, Paraguay, Bolivia, and Colombia, social spending nearly doubled. There has also been a regional trend toward increased social expenditure as a percent of government spending. For example, in Argentina, the share of social expenditures in total fiscal expenditures rose from 50 percent in 1980 to 65 percent in 1997.
That’s the good news. The bad news is that this positive trend reflects the highly procyclical nature of social spending.3 The relationship between growth and social expenditure is clear in the case of Argentina (see Chart 1). Not only does social spending tend to rise and fall with gross domestic product (GDP) but the amplitude of these swings is accentuated by the fact that social spending tends to fall proportionately more than GDP in a recession. Government spending may help to redress “social deficits” after a crisis, but the patterns observed here suggest it exacerbates the effect of the crisis itself on the poor. Thus the slowdown in regional growth observed in 1999 threatens to undermine progress achieved since 1990.
The Composition of Social Expenditure
By far the largest social expenditure category in all three countries is social security and pensions. It consumes nearly half of total social expenditures in Argentina and Brazil. Health and education are the other two large categories while housing and water and sanitation are minor.
The relative shares of the different categories have remained fairly constant in the past decade (see Tables 1 and 2). In other words, there has been no significant change in the focus of social expenditure policy. Rising overall expenditures have supported an absolute expansion of spending in most areas, but this should not be confused with a change in social sector priorities.
Thus we must ask: How well does the existing structure of social spending serve the needs of the poor? If Latin Americans are not changing the composition of social spending, are they doing a better job of targeting the resources within these sectors to the poor?
Social Security. In the United States, Social Security evolved as an antipoverty program, and its expansion has meant that the elderly are no longer so disproportionately poor. The distributional benefits of Latin American social security systems have been much more limited; they are typically regressive. In Brazil, for example, the poorest 37 percent of the nation’s population received only 9 percent of social security benefits in 1990 while the top 27 percent garnered 42 percent.4
Several countries in the region have undertaken pension reform, but the results vary greatly. Prior to reform, most Latin American countries relied on a pay-as-you-go system, with no connection between benefits and contributions. Moreover, entitlement rules encouraged evasion and fraud. Under conditions of high inflation, governments could easily make generous promises to future pensioners. With the end of inflation, the huge deficits proved unsustainable.
The old systems were inexcusably inefficient, and they did little to help the poor. They arguably offered a built-in system of implicit subsidies from high-earning workers to low-income workers in the formal sector, but they functioned ineptly even in this realm. Governments have undertaken social security reform not just for the fiscal payoff but as a signal to international financial markets that they can successfully tackle big problems. How good are the reforms?
A common model has been a shift toward privately managed individual accounts like those implemented in Chile more than a decade ago.5 These market-oriented, private pension schemes are typically complemented by a safety net for the lowest income workers and older workers who are close to retirement. Argentina, Mexico, and Peru have adopted variations on this theme. Brazil has made only minimal headway in its reforms.
So far, most workers are opting for individual accounts: two-thirds of contributors in Argentina shifted to individual accounts within the first three years. Since a reform was enacted in 1997, 15 million Mexicans have moved to private schemes despite the fact that the Mexican plan requires substantial investment in questionable government securities. The trend certainly extracts the government from part of its responsibility to care for the aging middle class. In the long run, this has the potential to save vast sums of money.
From a targeting point of view, the gains are less obvious. The new private schemes eliminate redistribution between high- and low-income workers in the formal sector, and the benefits offered to those who stay in the publicly funded schemes are minimal. In Argentina, for example, the minimum pension is just 27.5 percent of the average wage earned prior to retirement, provided contributions have been paid for thirty years. Women, who spend less time in the labor force, are unlikely to meet this requirement, as are those who frequently move between formal- and informal-sector work. Low-income workers who have spent their careers in the informal sector may be left out entirely (see Arenas de Mesa and Bertranou 1997). In short, we have gained efficiency and cut fiscal deficits, but the single largest component of social spending has an extremely weak redistributive impact.
Health. Health reform is following a similar pattern of improved efficiency through greater privatization and cost recovery. Here, the problem is compounded by dualism: in Argentina, 86 percent of care received by the upper two quintiles occurs in private clinics and hospitals while 62 percent of visits by the bottom quintile are to public clinics.
In the early 1990s, Argentina decentralized and transferred federal and provincial health care to the municipalities. To address the problem of deficits, some provinces created the concept of the fiscally autonomous hospital. The new autonomy includes the right to bill insurers directly and to retain a part of the earnings. (Most formal-sector workers are insured through occupationally based health plans known as Obras sociales.) Control over billing is, of course, essential to well-managed hospitals that can recover a larger share of expenditures from those who are insured or able to pay (see World Bank 1997).
The real challenge, however, lies in financing the care of the bottom quintile. Several provinces have avoided instituting hospital autonomy for fear of discrimination against the uninsured part of the population. The trend toward privatization and fiscal autonomy raises efficiency in the provision of services. To assure equity, a complementary program for the poor—such as a voucher scheme—needs further development and funding.
We also need to keep in mind that for the poorest Latin Americans, health policy can take many forms, including the provision of sanitation or the extension of public awareness campaigns to reduce infant mortality. Such policies have been credited with a 50 percent decrease in São Paulo’s infant mortality rate between 1980 and 1993 (Torres 1997). At the margin, the most efficient use of resources may lie in more preventive care, particularly in very poor communities. Yet regionally, access to safe water increased only from 75 percent to 77 percent between 1982 and 1995 (World Bank 1999c).
Education. In education, we see reforms that go beyond merely closing deficits and improving efficiency. Most countries in the region have increased their spending on education (as a percentage of GDP) as a means of raising the productivity of the poor.
Mexico stands out for its recent commitment to primary education: expenditures per primary student have risen from 4.4 percent of per capita GDP to 11.9 percent. The government’s new poverty program, Progresa, ties cash assistance to educational attendance; it also oversees an extensive school breakfast program that feeds 4.4 million children.6 As Progresa and comparable programs have taken hold, the primary school dropout rate has fallen from 5.3 percent of enrolled students in 1990 to just 2.9 percent, and the net enrollment ratio of secondary school students has risen to 51 percent. Strikingly, primary school enrollment among indigenous Mexican children rose 30 percent between 1990 and 1995, and the gap in primary school enrollment between extremely poor and nonpoor children is now negligible (see Table 3). The crucial inequities now lie at the secondary school level.
As impressive as this progress is, there is still much to be done to achieve equity in access to education, in Mexico and elsewhere. Progresa’s budget is less than a billion dollars. For every peso that the Mexican government spends on a student in the top two deciles, it spends fifty centavos on a student in the lowest decile. Universities still absorb a substantial amount of resources in education. In Argentina, public expenditures in 1996 per university student were $1887, compared with $808 per primary student. In Brazil, the 2 percent of students attending universities consume 60 percent of the federal education budget and 23 percent of all public educational expenditures. This heavy subsidization of tertiary education is widely regarded as regressive, for its beneficiaries include graduates of private secondary schools who can anticipate high future earnings. A system of tuition fees combined with scholarships for the lower-income quintiles would be much more equitable, but political opposition has hindered the transition to such a scheme.
The decentralization of education also threatens to undermine equity, even as it improves the efficiency of educational programs in middle-class communities by encouraging local participation. In Mexico, federal allocations to states continue to be based on historical practice rather than need, and thus the six states that account for 46 percent of the illiterate receive only 33 percent of federally funded state grants aimed at primary education.
Brazil’s constitution requires the federal government to spend 18 percent of its revenues on education, with at least 30 percent of this spending on primary education. In addition, a quarter of all state and municipal revenues must be applied to education. Municipalities and states manage the primary school system, largely with their own resources and shares of federal tax revenue. Although Congress created two funds to address inequalities in primary education, the National Education Development and Maintenance Fund (FUNDEF) and Dinheiro na Escola (Money to Schools), the size of these transfers is tiny and they have done little to alleviate regional disparities in expenditure level. As a result, the richest municipalities spend up to twenty-eight times that spent in the poorest communities on primary education (World Bank 1999b).7
The overdue improvements in education are bringing the region closer to educational outcomes typical of other middle-income regions. More is being done to promote primary education, but substantial inequities remain. Despite a well-established link between education and growth, the funding of education is overshadowed by the burden of social security. The numbers from Brazil are telling: between 1990 and 1995, spending on education rose by 9 percent while spending on social security rose by 90 percent.
There have been impressive strides in Latin America’s fight against poverty, particularly in efforts to raise primary school enrollment. But the overall picture suggests little evidence of a consensus to make poverty alleviation the central objective of social policy. The middle class demanded and got greater efficiency in the programs that it benefits from; the poor have not been equally effective in their political mobilization. The funding of targeted programs remains far too small, and the trend toward greater efficiency through privatization and decentralization has added few redistributive functions compared with the old social programs.
Latin America has long been recognized as the world’s most inequitable region: on average the richest 10 percent of Latin Americans receive 45 percent of income, and the poorest 20 percent receive 4 percent. Inequality increased during the 1980s, and growth in the 1990s has not been sufficient to correct that trend. Indeed, many of the poor believe that the past ten years have made them worse off.
In 1999, Latin America has seen its worst recession in ten years, casting doubt on both the benefits of economic reform and the prospects for growth as an antidote to poverty. In such an unequal region, high unemployment brings risks of political instability. So far, at least, the evidence is that the middle class refuses to give up its social welfare benefits. Yet if nothing is done to make voting booths more meaningful to the poor, economic progress and the development of civil society will falter. Where will the money come from for substantial programs to attack poverty? That is a challenge for the participants in this conference to address.
ARENAS DE MESA, ALBERTO, AND FABIO BERTRANOU. 1997. “Learning from Social Security Reforms: Two Different Cases, Chile and Argentina.” World Development 25, no. 3: 329–48.
CLEMENTS, BENEDICT. 1997. “Income Distribution and Social Expenditure in Brazil.” International Monetary Fund Working Paper WP/97/120.
COMINETTI, ROSELLA, AND GONZALO RUIZ. 1998. Evolución del Gasto Público Social en América Latina: 1980–1995. Cuadernos de la CEPAL 80, United Nations Economic Commission for Latin America, Santiago.
INTERNATIONAL MONETARY FUND. 1998. International Financial Statistics 1998 Yearbook. Washington, D.C.
KAY, STEPHEN J. 1997. “The Chile Con.” The American Prospect (July–August 1997): 48–51.
TORRES, HAROLDO G. 1997. “Social Policies in the ‘Lost Decade’: Evidence from the Case of São Paulo, Brazil.” Harvard University, Center for Population Studies, December.
UNITED NATIONS ECONOMIC COMMISSION FOR LATIN AMERICA AND THE CARIBBEAN. 1999. CEPAL News 19:6.
WORLD BANK. 1997. Argentina: Facing the Challenge of Health Insurance Reform, Report 16402-AR, Washington, D.C.
———. 1999a. “Earnings Inequality after Mexico’s Economic and Educational Reforms.” Mimeo. Washington, D.C.
———. 1999b. “Social Expenditure in Selected States: Brazil.” Mimeo. Washington, D.C.
———. 1999c. World Development Indicators 1999. CD-ROM. Washington, D.C.