The Equity Gap: Latin America , the Caribbean and the Social Summit

FOREWORD

 The World Summit for Social Development, held in Copenhagen, Denmark, from 6 to 12 March 1995, brought together a large number of heads of State and Government and official representatives from States Members of the United Nations and culminated in the adoption of the Copenhagen Declaration on Social Development and the Programme of Action of the World Summit for Social Development. These two documents --the first containing policy statements, the other dealing with their practical application-- imply commitments at the national, regional and international levels.

Barely two years have passed since this summit was held, too short a period to permit an evaluation of the impact of the actions that the Latin American and Caribbean Governments set out to undertake. On the other hand, most of the countries were already implementing a variety of official policies related to the great objectives of the World Summit for Social Development.

As States members of the Economic Commission for Latin America and the Caribbean (ECLAC) now gather for the first time to consider the progress achieved in implementing the outcomes of the Summit, the ECLAC secretariat submits for their consideration a study that focuses on three aspects. First, it analyses existing conditions of poverty, employment and social integration, the chief issues examined at the Summit, from a Latin American and Caribbean perspective. Second, at the policy level, it reports on the developments that have proven most relevant to the fulfilment of the afore-mentioned commitments. Third, it proposes a few additional guidelines on the content and scope of policies designed to facilitate the full realization of these commitments. The hope is that the document may serve as a basis for discussion by Governments and civil society in Latin America and the Caribbean on how the commitments of the Summit are being implemented in the region.

1. ¹ Paragraph 95(h) of the Programme of Action of the World Summit for Social Development.

SUMMARY AND CONCLUSIONS

 Although the World Summit for Social Development took place only recently, the guidelines that emerged from the Summit proved to be broadly consistent with the general thrust of the actions Governments in the region were taking in the economic and social spheres during the 1990s. This document attempts to summarize the situation in Latin America and the Caribbean in relation to the three main issues addressed at the Summit --poverty, employment and social integration-- within the wider context of economic change and social policy reform, and to formulate proposals on these issues that will help in fulfilling the commitments undertaken in Copenhagen.

The context of economic reform

1. Latin America and the Caribbean are presently undergoing a period of intensive change characterized by progress towards democratic pluralism and governability and by far-reaching economic reforms. Some of these reforms have brought significant advances in terms of macroeconomic stability, international linkages and regional integration. These advances have improved access to enhanced external financing, which, if administered appropriately, could provide an opportunity to boost growth in the next few years.

2. At the same time, however, recent economic trends have brought to light a number of major deficiencies. First, with very few exceptions, rates of growth have been only moderate (3% per year between 1990 and 1996), falling short of both past performance levels (5.5% per year between 1945 and 1980) and the levels ECLAC estimates are necessary (6% per year) in order for the region to be able to catch up in technological and social development. Second, the development of most economies in the region still rests on a shaky foundation; many countries have achieved macroeconomic stability by relying on large current-account deficits, sometimes financed with volatile capital, and this situation has tended to produce short cycles of growth and contraction, reflecting the movements of short-term capital flows. On a number of occasions the situation has been compounded by the fragility of financial systems, at high cost to the public purse. Third, the 1990s have seen only slow recovery from the sudden drop in the savings ratio and, even more importantly, in the investment ratio that occurred during the crisis of the 1980s. The great majority of countries still have not regained pre-crisis levels of saving and investment.

3. Moreover, the depth of economic restructuring has produced new winners and losers. The structural disparities characteristic of the region's systems of production have been exacerbated by the increasing productivity gap between large companies in the vanguard of the modernization process and the wide assortment of activities that have failed to keep pace, where the bulk of employment is concentrated. Not only does this situation provide a material basis for greater social inequities by emphasizing domestic disparities in productivity and income; it also affects the capacity for growth by restricting linkages between different sectors of production, the dissemination of technical progress and the momentum that exports could provide.

4. The most significant deficiency, and one that is closely related to the phenomena described above, is to be found in precisely the areas addressed by the Summit in Copenhagen. The great accumulation of social deficits that built up during the economic crisis of the 1980s is diminishing only slowly, particularly in three interrelated areas: employment, poverty and social exclusion.

Poverty and social integration

5. Poverty trends in the region vary considerably from country to country in terms of both extent and direction. On average, the incidence of poverty declined from 41% to 39% of all households during the first half of the 1990s, not enough to offset the increase in the 1980s (from 35% to 41%). In absolute terms, the number of people living in poverty --210 million-- in Latin America and the Caribbean is higher now than ever before.

6. Even so, a certain amount of progress has been made recently, particularly where there has been sustained economic recovery. Between 1990 and 1994 for example, out of 12 countries poverty declined in nine and increased in only one. This trend of gradual improvement was interrupted in 1995 --perhaps only temporarily-- by the slowdown in growth in a number of countries (notably Mexico and Argentina). The trend was greatly reinforced, however, when the incidence of poverty in Brazil fell sharply as a result of the country's stabilization programme. Less headway was made in reducing indigence, which dropped only from 18% of families to 17%, still two percentage points higher than the 1980 figure.

7. The chief determining factors in the reduction of poverty have been the level of economic growth and inflation reduction; the next most important has been the continuing effort to increase social expenditure and, more recently, to find more efficient ways to allocate it. The countries that have made most progress in reducing poverty are those that have successfully combined relatively high growth rates over a period of years with a reduction in unemployment rates and an increase in the number of persons employed among the poorest families. Cutting the inflation rate has also made it possible to improve earnings and in some cases pensions in real terms and ensured continuity of investment, with a favourable impact on the labour market.

8. It is not only macroeconomic equilibria per se that are critical for rapid and more equitable growth, but also the manner in which they are achieved. In addition to reducing the rate of inflation and strengthening fiscal equilibrium, it is also necessary to reduce the current account deficit to a sustainable level to maintain an appropriate real exchange rate and to achieve a domestic savings rate commensurate with the investment process and a level of domestic expenditure consistent with sustainable utilization of productive capacity. Moreover, growth does not in itself guarantee better income distribution. What is crucial is the quality of that growth, i.e., whether it can continue over time --which is a matter of macroeconomic management--, whether it translates into productive employment and wages and, lastly, how efficient social policy is and how social and economic policies interact.

Employment, wages and productivity

9. As mentioned above, the region's scant progress in combating poverty is associated with inadequate growth, the low impact of growth on the labour market and the almost total lack of improvement in average labour productivity, a problem that must be tackled to attain improved international competitiveness and higher sustainable growth rates.

10. Most of the employment created during the 1990s has been in the informal sector. According to International Labour Organization (ILO) estimates, out of every 100 new jobs created between 1990 and 1995, 84 were in the informal sector, and it is in this sector that 56% of all employed people in the region work. This explains the current sluggishness of average labour productivity levels (a figure which, nevertheless, conceals significant differences between countries).

11. The foregoing helps to explain why wage levels are below those of 1980 and also why wage differentials between occupational strata are widening. Real average wages, despite marked differences between countries, have increased almost across the board during the 1990s. Even so, wage levels are still lower than they were in 1980.

12. Except for a few countries where the upward trend continued, the wage recovery seemed to stall in 1996. This is explainable by the fact that the income effect of slowing inflation on real wages diminishes as the inflation rate falls, while lower inflation rates mean longer periods between wage adjustments. More generally, competitive retooling in modern enterprises favours productivity increases and labour flexibility, with a marked decline in job creation per unit of output.

13. The slow growth of real average wages reflects the counteracting tendencies of large wage increases among those employed in skilled work in more vigorous and modern sectors and moderate wage increases or declining pay in the remainder of the economy. The real minimum wage in 1995 in 13 out of 17 countries was lower than in 1980. Informal workers earn on average half what manual and non-manual workers in modern enterprises are paid. Since they also work longer hours, this inequality increases when the factorial distribution of informal and formal earnings is corrected for hours worked.

14. The gap between earnings of professional and technical workers and those of workers in low-productivity sectors grew by 40%-60% between 1990 and 1994. Constant or widening differentials in earned income reflect marked disparities in productivity among companies and sectors and are good indicators of the inelasticity of income distribution that has characterized recent economic growth, even where growth has been most vigorous.

15. In order to boost productivity in lagging sectors, it seems essential to complement general policies with some specific measures, including credit, marketing and technical assistance programmes and heavy investment in education and training. The push towards technological modernization is crucial, not only to cope with the demands of international competition, but also to meet the need for better-quality employment and higher wages. This objective ranks rather low on the agendas of most of the countries, however, since they lack both the requisite resources and institutional networks capable of coping with a challenge of this magnitude.

16. The impact of economic reforms on labour markets has been uneven, owing in large part to significant national differences in their scope and timing. Other factors that have contributed to the unevenness of labour market response are the differences between countries in their productive and technological bases and labour institutions, and in demographic and social characteristics.

17. At present, growth in the region is closely tied to the dynamism of natural resource-based activities. In order to heighten the impact of growth on employment, then, stronger linkages should be fostered between these activities and those of the other productive sectors. Such linkages not only create an intermediate demand for goods, services and labour, but also provide a stimulus for improvements in quality and the spread of technical progress and business and management practices: they foster the establishment of quality standards; they lead to the creation of institutions providing technical training and modern support services to productive activity; and they give rise to training activities and technical, financial and organizational support for small, medium-sized and micro-enterprises.

18. During the 1990s, a number of countries have amended their labour legislation, especially with regard to employment contracts, dismissals and collective bargaining. The direction of these reforms has been mixed, so that it is difficult to discern a uniform trend, but most of the recent changes have introduced more flexibility into hiring and firing procedures. Other legislation has been aimed at improving working conditions and minimum wages; protecting particular labour sectors (seasonal workers, wage earners in small and medium-sized firms, domestic workers); preventing discrimination against women; abolishing child labour and regulating youth labour.

19. Another new concern is that labour legislation should also address the issue of unemployment insurance or income protection for the unemployed. Consideration has been given to a number of alternatives that would allow unemployed workers' needs to be covered for a certain period of time without creating major administrative snarls or incurring the same microeconomic and budgetary inefficiencies that unemployment insurance has generated in other parts of the world.

20. The concern is to reconcile increased labour flexibility with minimum levels of social safeguards for the worker by protecting income rather than job security, i.e., encouraging labour mobility. For such measures to work properly, they need to be backed up by fuller training and redeployment programmes, and there should be a link between unemployment insurance and initiatives of that kind.

Social integration

21. In the space of a decade, the increase in poverty --already at high levels-- and the deterioration or stagnation of income distribution in the region have coincided with an explosion of access to communications that has tended to produce a common set of consumer aspirations. Whole sectors of society see their expectations frustrated, particularly urban youth, whose educational levels are greater than that of their parents but whose unemployment rates are higher. These young people are exposed to information and stimuli about a wide range of novel goods and services that are symbols of social mobility, but inaccessible for the majority of them.

22. The intensification of "hard-core poverty", ethnic discrimination and residential segregation, the proliferation of private urban security services and the rise of violence in the cities all seriously affect levels of social integration and governability. Strengthening governability under democracy requires above all --and urgently-- transparent, fair and effective judicial machinery that can restore citizens' confidence in their systems of justice, protection and security. It also demands perseverance in the search for pluralistic and participatory political systems capable of absorbing internal differences and mediating national agreements on broad lines of development.

23. Such national agreements might have greater appeal if they included more social safety-net mechanisms to reduce the social costs of economic transition and provide safeguards in the event of retooling or redeployment that could affect large segments of the population. Such mechanisms might include, for example, work training schemes for urban youth who have little formal education and are excluded from the social networks that furnish access to productive life. Other initiatives already under way to improve social integration are support programmes for female-headed low-income families, protection for children, young people and mothers exposed to domestic violence, and drug-abuse prevention programmes. There are also projects to support personal and community development, and public housing programmes designed to transform living spaces by providing communal equipment and areas for cultural and recreational activity.

Social reforms

24. In contrast to the 1980s, when social expenditure fell considerably as a result of financial constraints on Governments, during the 1990s the level of public spending allocated to social sectors has risen in most countries in the region. This is a clear indication of the political will of Governments to tackle the social deficit, and bodes well for social policy reform. In 7 out of the 11 countries that reported social spending increases, expenditure levels exceeded those at the beginning of the 1980s. Public social expenditure as a proportion of GDP rose on average by 1.8%, even in countries where the public expenditure ratio fell.

25. The greatest increase in social expenditure between 1990 and 1995 occurred in the education and social security sectors. In education, real per capita spending went up in 12 out of 15 countries; in social security, in 10 out of 15 countries; and in health, in 10 out of 13 countries. Spending on education expanded as a reflection not only of increased coverage, but also of improvements in quality, relevance and social equity thanks to a series of educational reforms that were the focus of lively national debates. Increases in spending on social security were chiefly due to adjustments in retirement and other pensions, payment of retirement pension liabilities and extensions of coverage.

26. The educational reforms currently under way, with variations from country to country, seek to correct the deficiencies of the region's educational systems in terms of quality, social equity and the relevance of what is taught. A number of countries are trying to change outdated curricula and teaching methods, alter the social segmentation of access to education, improve the quality of education available and reverse the decline of teaching as a profession. Towards the same ends, countries are making changes to educational financing and resource-allocation systems and expanding the scope for private input; they are also trying to decentralize educational administration, train teachers and improve the quality of education, gradually bringing it into line with the requirements of the labour market.

27. Clearly, new relationships need to be established between education, society and production. This will require qualitative changes in educational systems, aided by an ongoing assessment of performance, and closer ties with companies and the labour market. This could be accomplished by setting up a system of appropriate incentives, such as national scholastic achievement tests, support for innovative initiatives in schools, competitions with prizes for contributions that result in improved quality and financial incentives for schools and teachers who succeed in improving their students' performances.

28. ECLAC has estimated that, for the region as a whole, the additional cost of implementing a strategy to improve the quality of school and pre-school education would amount to 3.9% of gross domestic product (GDP). Since this is more than budgets can support, Governments will have to concentrate their spending on areas of education where the social and economic impact are greatest, while at the same time encouraging any private initiatives that could make a positive contribution to educational equity.

29. The technological change in education implies changing both methods and materials. In terms of methods, the key will be to adapt teaching practices by applying new technologies effectively to learning. In terms of materials the key will be to encourage broad-based networks for industrial-scale production of educational aids, drawing on the state-of-the-art educational technologies and creating new institutions to promote the technologies and adapt them to suit local needs. All this will require changes in school infrastructure, individual and institutional investment in equipment and materials, and training and redeployment of teachers. Private initiative could play an important part in such developments.

30. Health service coverage in the region varies widely. Coverage, however, is only a rough measure, concealing significant differences in the quality, efficiency and cost of care. The regional health reform agenda --with variations from country to country-- includes improving the equity of access to benefits and the efficiency and quality of care and raising sector productivity by reforming management, encouraging synergies between the public and private health systems, bringing escalating costs under control and regulating private medicine. A number of reforms that aim at a more integrated approach focus on aspects of financing, intersectoral competition, regulation and administration. Despite differences, national programmes have several points in common: promoting health campaigns, strengthening primary care, supporting decentralization of local health services and systems and dealing with inequities of access through basic universal care or targeted interventions.

31. Reforms in the health sector must also extend to the institutional framework and aim at increasing the efficiency, coverage and quality of care, targeting subsidies more accurately and strengthening regulatory and supervisory capacity. The public health system could benefit from a greater separation between the different functions: the regulatory and institutional frameworks; financial operations and procurement; and service providers and producers. The greater effort of coordination this entails might then require contractual undertakings specifying the resources needed to supply a service, the quality and type of service to be supplied and indicators enabling the service to be evaluated. Experience has shown the need for all the parties involved in public health to reach agreement from the start on performance indicators and their interpretation; and for new remuneration systems that include flexible components and incentives related to performance and quality of service.

32. Private health care provision can raise the efficiency of the sector if there is an improvement in the regulatory system regarding contract transparency, access by the private sector to subsidies, cost control (encouraging greater integration between service providers and insurance companies), the treatment of some categories of catastrophic illnesses and illnesses of the elderly and, in relation to risk insurance, the inclusion of some altruistic mechanisms.

33. The need for housing construction has diminished only marginally despite the recent easing of demographic pressures. Construction has also had to adapt to a greater variety of family structures, which in turn has brought new demands in terms of standards. The regional housing deficit is estimated at roughly 50 million dwellings; the figure includes both new construction and renovation of older stock. Out of every 100 households in the region, 60 have adequate housing, 22 need housing repairs and 18 need either new housing or reconstruction of their present dwelling. In view of the rate at which new households are forming, the deficit will expand by 2.7 million per year.

34. Government policy is gradually coming to grips with the reality of this situation, and public expenditure on housing has risen again in the 1990s. To deal with the housing deficit, the countries are trying, on the one hand, to bring in private-sector resources and, on the other, to adjust their programmes to improve efficiency and to allocate available resources more precisely. A number of countries are moving from the traditional system of specialized home-loan banks --operating separately from the rest of the financial system-- to open financing systems. Supply-side subsidies such as tax exemptions or preferential credits for the production of housing are being replaced by demand-side subsidies in the form of direct transfers to families. With adequate application and allocation procedures, this approach allows for more accurate targeting. Public housing policy makers are also trying to avoid increasing urban segregation despite the fact that they are forced to look for low-cost land.

35. Pension systems in the region are characterized in general by low coverage and a multiplicity of plans offering different benefits. This situation is not conducive to equity, either between members of different plans or between those who have a plan and those who do not. Costs are often excessive and funds poorly administered, so that they incur large actuarial or cash deficits. The challenge for reformers under these circumstances is to broaden coverage, improve benefits through more efficient fund management and establish an altruistic mechanism (with appropriate financing) for those who are unable to save for their old age. Hence, the reforms currently under way aim to administer fund finances efficiently without threatening macroeconomic stability, by separating risks and adjusting fund management to the likelihood of occurrence of given events and by increasing private-sector participation in fund management and service provision.

36. With current trends leaning towards fully funded (capitalization) schemes and private administration of social security contributions, it is essential to look closely at the fiscal cost such changes would entail, at ways of covering that cost and at how the funds accumulated through financial intermediation are to be used. By way of illustration, mention may be made of two policies that could be conducive to social equity: making social insurance contributions and taxes progressive; and using pension funds in such a way as to stimulate productive investment and help eliminate the obstacles in the way of achieving high, stable growth rates. Analysis of the pension system reforms being carried out in the region shows that they vary in two respects: i) in the design of the altruistic component and ii) in the institutional framework that is set up in order to ensure that workers' savings contribute to the vigour and efficiency of the economy.

37. Social policy reform puts special emphasis on more efficient resource management. It is therefore essential that such reforms should go hand in hand with institutional changes aimed at better service to the user, better targeting and greater decentralization and linking resources to performance and quality of service. The current fragmented institutional structure of State social services tends to scatter resources and duplicate functions. This situation needs to be changed in order to improve programme supervision and enable a standard set of criteria to be used in programme evaluation. Superfluous programmes could be discontinued and others updated in order to deal with enclaves of "hard-core poverty". On the other hand, links could be forged or strengthened between social programmes and productive development initiatives, i.e., training, dissemination of technology and support for small and medium-sized enterprises and micro-enterprises.

A vision of the whole

38. More effective progress in fulfilling the commitments made at the World Summit for Social Development demands an approach that integrates economic and social policy in a mutually supportive relationship and permits complementarity between measures to encourage competitiveness and measures to promote social cohesion. Although they may seem to conflict in the short run, public policy can benefit from the many points of complementarity between economic and social measures, chiefly in the areas of macroeconomic management capable of stimulating high, stable growth rates; promotion of competitiveness; and public policies that enhance the contribution of growth to employment. Investment in human resources and an approach that integrates the concepts of territory, business linkages and productive development offer the most promise for progress in these tasks. In addition, agricultural modernization can assist in overcoming rural poverty, provided there are public policies to grant access to land and regularize land tenure and provided an effort is made to improve the infrastructure of production and establish closer links between agro-industry and small-scale producers.

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