Politics, Business & Culture in the Americas

Back to Basics

Universal welfare programs are returning to the social policy mix in the hemisphere. By their very nature, limited social assistance policies have limited impact.

The perennial argument over social policy—universalism versus targeted subsidies to the poor—is once again galvanizing policymakers and scholars across the region. In recent decades, Latin American governments have generally inclined toward limited social assistance programs, but that model is increasingly under attack in a continent where high levels of inequality continue to be endemic. Yet the alternative, a universal welfare system based on the principle of social citizenship—or social rights—is often regarded as having limited applicability in Latin America, where access to formal employment and a solid tax base—key elements of this model—are limited.

It’s time to re-think such assumptions. We need to return to the idea of universalism that inspired social policies around the world in the past. The best “targeting” for the poor is in fact a universal social policy. The targeted programs that have become the policy fashion in the region should be seen not as a substitute but as a complement and, indeed, as an instrument of universalism.

To be sure, social policies based on the principles of social citizenship demand more fiscal resources. Developing and implementing such broad programs require a new “Fiscal Covenant” in Latin America along the lines proposed by the United Nations Economic Commission for Latin America (ECLAC) nearly a decade ago. Sadly, the notion of social citizenship on which these entitlements is based too often has been ignored by policymakers in the region.

A Shift in Social Policy

The universal welfare state made some advances since the early part of the twentieth century but never found a comfortable home in Latin America. Even the countries which adopted the most progressive social welfare systems over the past century—Argentina, Chile, Costa Rica, and Uruguay—paled in comparison to the comprehensive tax and transfer systems administered by European industrial states. (Post-revolutionary Cuba must be considered separately.) In most Latin American countries, even the coverage of educational and health policies was low up to the mid-twentieth century, and security arrived late and was very restricted in scope, due to its association with formal employment and its corporatist tones. The result was a segmented and incomplete welfare state which extended its benefits to some middle sectors of society, but tended to marginalize the poor, particularly in rural areas.

The market reforms of the 1980s and 1990s placed social policy in a subordinate status. This was reflected, for example, in the lack of any specific mention of social policy in the ten principles of the “Washington Consensus,” except as a priority of public sector spending. Since the 1980s, the World Bank promoted three new instruments for social policy reform: targeting, demand subsidies to facilitate a more competitive system with private sector participation, and decentralization. The first aimed to balance limited fiscal resources with benefits to the poor. The remaining two instruments focused on the need to rationalize the state apparatus. In addition, the Bank funded multiple projects aimed at managing the social costs of structural reforms, the most important of which were perhaps the social emergency funds, which generally financed small-scale investment projects with high employment content.

The application of the new principles was uneven throughout the region. In educational policy, Chile focused on demand subsidies, but most other countries concentrated on reorganizing the public education system to achieve broader access. The reforms did encourage wider participation by the private sector in health care, and in some cases total privatization of the pension system. Targeting was most in evidence in the development of conditional cash transfer programs, developed as an emergency mechanism (Progresa in Mexico) or as an instrument to guarantee broader coverage of basic educational services (Bolsa Escola in Brazil). Eventually the targeting model evolved into systems with broader coverage, that envisioned broader access by the targeted population, and were renamed as Oportunidades and Bolsa Família and copied by other countries.

The result of such reforms is an unwieldy hodgepodge of social programs that mix different models of social policy, sometimes in the same country. The first is the strict universal system with public sector organization and different degrees of decentralization, which is the model that continues to characterize the educational systems. The second is the segmented and corporatist system inherited from the past that continues to prevail in several countries in social security in the broader sense (health, pensions and professional risks). The third model is based on strict targeting schemes, the best examples of which are the conditional transfer programs. To this we should add a series of specific initiatives that generate a “geological” pattern of programs—of strata layered upon strata of new programs from one government’s programs over another, with the previous ones never entirely dismantled or absorbed.

Some researchers have characterized the resulting offering of these mixed systems of social policy as “persistent corporativism mixed with liberal reforms.”1 These systems lack a pillar of clearly designed entitlements and perhaps, and most importantly, they lack the coherence and appeal of the old concepts of the welfare state—and thus the capacity to serve as central instruments of social cohesion.

Social Citizenship

The reviving appeal of universalism is related to the renewed interest in the concepts of social rights and social citizenship, which received their fullest intellectual development in the 1966 International Covenant on Economic, Social and Cultural Rights.2 Such rights are considered expressions of a broader concept of freedom—a concept that, as we know, goes back to U.S. President Franklin D. Roosevelt’s formulation of the New Deal. In the words of both the Charter and the preamble to the Universal Declaration of Human Rights, the basic objective is to “promote social progress and better standards of life in larger freedom.”

The implications of these declarative rights were best captured by the four principles of social policy formulated by ECLAC in its 2000 report Equity, Development and Citizenship. According to ECLAC, the first principle, universalism, indicates that entitlements associated with social policy are more than services or commodities: they are rights and should therefore be guaranteed to all citizens. Second, the guarantee of access of the poor to those entitlements should be based on the principles of solidarity and inclusivity—a seemingly self-evident point in highly unequal societies. Third, the resources available to society for its social welfare programs should be efficiently used. And fourth, societies are obligated to tackle simultaneously the multiple dimensions to poverty and inequality, defined not only as income but as access to social services and mitigation of economic and social risks.

The concept of social citizenship raises the question of what the relationship is between entitlements and the level of economic development. Indeed, labeling education, health, employment, and social protection as rights does not allow for the creation of wealth or for the distribution of what is non-existent. Therefore, the enactment of these rights must be compatible with the level of development and with the fiscal resources available, in order to avoid unfulfilled expectations or macroeconomic imbalances (which will adversely affect the poorest sectors of society). Equity, in this sense, must be understood as defining a series of targets which the society is in a position to effectively achieve, given its level of development, but nothing less, and therefore aims at maximizing the realizable.3 It is left, of course, to the democratic process to define what is the “maximum of the realizable” in the social domain.

Based on these ideas, the Inter-American Development Bank proposed in 2006 the concept of “basic universalism” aiming to focus social policies on the provision of a basic set of entitlements and risk mitigating instruments for the whole population, with homogenous quality standards.4 The determination of which goods and services are provided should also take into account today the insecurity that characterizes societies with high levels of competition and rapid change. The reason, according to Harvard economist Dani Rodrik: there is a positive association between economic openness and social spending in OECD.5 And, indeed, one of the traditional justifications of the Nordic welfare state was that social protection was the counterpart of more open economies and an alternative to other forms of protection based on trade policy.

The new emphasis also aims at overcoming the problems associated with targeting.6 The problems are legion and include: the age-old risk of political capture (already evident in many Latin American countries), the administrative costs and errors in targeting (such as denying benefits to those who deserve them and paying them out to those who don’t) and the stigmatization that is associated with targeting specific populations.

There is also the formidable challenge of segmentation. Just by its nature, targeting leads to segmentation and the creation of dual structures: systems of education and health for the rich which are different from those to which the poor have access, and multiple forms of spatial and other forms of segmentation that are particularly dangerous in societies that have high levels of inequality. It is a particular problem for education—the social benefit most often associated with improving income distribution. As an example, levels of educational segmentation in Latin America are much higher than those of OECD countries and highest in the country that has adopted a demand-based subsidy system: Chile.7

The Effects of Social Spending on Income Distribution

The evidence indicates indeed that social programs with universal or close-to-universal coverage make the best contribution to improving income distribution. Figure 1 summarizes the redistributive effect of social spending drawn from studies conducted by ECLAC in 2000, 2006 and 2007.8 This shows the quasi-gini coefficient of social spending, which fluctuates between -1 (perfect targeting of spending to the poor) and 1, with zero representing a situation in which spending is equally distributed among all social groups. While some programs have a more direct redistributive effect, measurement problems in several hid their progressiveness.

We can distinguish three categories of spending according to their effect on distribution. The first covers the more redistributive areas of spending, which include social assistance as well as those programs that have achieved universal or quasi-universal coverage, particularly primary education and some basic health programs. The second category includes services with an intermediate level of coverage, such as secondary education and housing (which includes water and sewage). In this case, spending is progressive in some countries and, on average, is not too far from equi-distribution among the whole population, as reflected in quasi-gini coefficients close to zero. Health spending lies between the first two categories. The third category includes tertiary education and pensions, where spending to a larger extent benefits high income groups.

Only social assistance programs confirm the view that targeting is the best instrument to enhance the redistributive effects of social spending; others can achieve close to the same level of redistribution. As we have seen, the best examples are the recent conditional cash transfer programs but there are also highly redistributive programs, such as nutrition programs and those that focus on early childhood development. However, the total redistributive effect of such spending is limited, given the fact that it concentrates only a small proportion of total social spending (less than a fifth).9 Thus, according to existing studies, the most important redistributive effect of social spending is associated with education and health programs that have universal or quasi-universal coverage. And increasing coverage can turn any social program into a highly redistributive one. One example: increased coverage of secondary education from 1974 to 1992 turned this spending from being a regressive into a highly progressive social spending program in Colombia.10

One implication of this is that the traditional estimates of the impact of universal programs, such as the estimates reproduced in figure 1, do not effectively capture the actual redistributive effects of additional social spending. So, an increase of spending to increase the coverage of secondary education and housing programs may be as redistributive as the targeted program. For the same reasons, additional spending on university education will also be much less regressive than it looks in figure 1.

Furthermore, in the case of pensions, there are significant measurement problems that tend to give a wrong indication of their distributive impact. Measurements of payouts on pensions are generally estimated on a gross basis; thereby they do not net out social security contributions (past and present). If contributions are made by high income groups, they are by definition progressive. Furthermore, such contributions should include those made by the state as an employer. If one were to measure the net payout by the state, also netting out the contributions made by the state as an employer, the distributive impact of pension payments would look much better than it does in figure 1.

Even here, though, there is a strong case to be made for expanding the coverage of pension systems. Retirement benefits in many Latin American countries are related to formal employment, thus severely limiting their progressiveness. A truly progressive pension system lies in the design of a program financed by the government that provides pensions for informal sector workers.11 Such a pillar would be highly progressive, as reflected already in those countries that have some basic pensions that are universal in character or some form of non-contributory pension system (Argentina, Bolivia and Brazil).

Compare the overall contribution of social spending to improving income distribution with the human development index of the United Nations Development Program and you see that the most effective form of targeting is, in fact—and, for some, perhaps ironically—a universal social policy. The two are highly correlated as demonstrated in figure 2 below. The largest redistributive effect of social spending is achieved in those countries that had an early development of more universal systems of social policy: Argentina, Chile, Costa Rica, and Uruguay (Cuba should be added to this list but is generally excluded from this type of estimates.) Countries with an intermediate level of development—Brazil, Colombia and Panama—have intermediate levels of redistribution associated with social spending, and the lowest level occurs in countries that have a lower level of development of their social policy instruments: Bolivia, El Salvador, Honduras, and Guatemala. In three countries—Ecuador, Mexico and Peru—the redistributive effects of social spending should be higher given their level of human development.

Targeting alone has a relatively limited impact. But it can play a subsidiary role in three specific areas. First, social assistance (conditional subsidies, nutrition programs, pension transfers for poor old people) can serve as a pillar of a broader universal system. But even in these cases these programs must aim for the eventual universal coverage of the targeted population. Second, targeting can also enhance the access of the poor to universal social programs. This is indeed a particular advantage of the recent conditional transfers; they tie the assistance to access of the population to universal programs of education and health. And third, targeting can also be used to differentiate the programs for specific groups of population, particularly indigenous peoples. In the last two cases, targeting must serve as an instrument of universalism and not as its substitute.

The Paradox of Redistribution

Universal systems are associated with a better primary distribution of income across the population. In the industrial countries of continental Europe more universal welfare systems have gone hand-in-hand with a better distribution of income compared to countries that use more means testing (targeting) in their social policy, such as the Anglo-Saxon countries.12 Causality goes both ways in this case: more equal societies demand more universal systems of social policy, but the latter contribute in turn to equality. In contrast, the extensive use of means testing has led to what Korpi and Palme have called the “paradox of redistribution:” the more we target, the less likely we are able to reduce poverty and inequality.13

The association between universal systems and better income distribution is not alien to Latin America. Until a few decades ago, the countries with more universal systems of social policy according to figure 2 were those with a better distribution of income. Costa Rica and Uruguay continue in that category, though the former has experienced a worsening income distribution in recent decades. Argentina is even more noticeable in this regard. Chile also experienced an adverse redistribution of income during the Pinochet dictatorship.

A further advantage of universal social policies is their political appeal, particularly to the middle classes, whose backing is essential for political enactment of these policies. The fact is that the “welfare state” is more politically attractive than the “targeting state.” Indeed, in this regard, the political fight of the middle classes for access to social benefits should not be seen in the negative light with which it is usually depicted in the literature on targeting. Many academics portray middle class access to social benefits as an example of the political distortions of the system, depriving the more deserving poor from access to social services. On the contrary, access by middle-income sectors has, in the most developed welfare states, served as the first step to universal policies rather than as a means for the middle classes to exclude the poor from access to social services. Furthermore, encouraging middle-class access to social benefits guarantees that such benefits are provided with uniform levels of quality.14

One added note: the true “middle classes” of Latin America (or, rather, middle segments of the income distribution) are still relatively poor. This is reflected in the fact that in countries with lower per capita income (say Bolivia, Honduras or Nicaragua), a part of the population of the third and fourth quintiles of the income distribution earns incomes below the poverty line and most earn incomes below two poverty lines. In turn, in countries with intermediate levels of income (say Colombia or the Dominican Republic), most of the households in those quintiles have incomes below three poverty lines.

The major constraint to a universal social policy is, of course, the demand for public sector resources that it entails. Since targeting requires fewer resources, it was tied to structural adjustment policies that sought to reduce public sector spending. But it was politically naïve to assume that it was possible to reduce spending aimed at middle-income groups in order to divert it to the poor. Similarly, charging for the use of public services was bound to be politically unpopular to middle-income groups. Democracy does not work by reducing the benefits to the middle sector of society but rather by extending the benefits that they receive to the poor.

The major demand is therefore on the fiscal regime. The “Fiscal Covenant” required by Latin America, as expressed by ECLAC a decade ago, still points the way forward. And the crucial issue in this regard is the low tax income of Latin America, particularly of income taxes. This essential insight has already been underscored recently by the World Bank and OECD.15

New tax policies aimed at redistributing national income are indeed the future battlegrounds of social policy. If the region is serious about living up to the new rhetoric of equity and social cohesion, the proof will be in whether Latin American governments are willing to use enlightened taxation to achieve more universal systems of social spending. Over the next decade, we’ll discover whether the dueling arguments over social policy have made a difference to the region’s poor.

Endnotes

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